This year it was cheap
shoes; last year it was "bra wars". Media reports
on China's export economy focus on its competitive
advantage in churning out millions of low-value
goods. But as China pulls its way up the value
chain, the real threat to developed manufacturing
economies will come not from the production of
cheap apparel, but from
higher-value industries - in particular, China's
machinery and transport sectors.
For the
past five years, growth in the machinery and
transport sectors has consistently outpaced other
export categories. China may not be ready to
export advanced fighter aircraft, but it is
gearing up to be a world leader in the production
of low-voltage electrical-measuring equipment and,
dare we whisper it, cheap cars. At its best,
China's manufacturing model today is characterized
by highly efficient, low-cost workers assembling
mid-value products with mid-level technology.
Set amid rolling green hills on the
outskirts of Chongqing, yet smothered by the
polluted mists that roll off the Yangtze River and
shroud the city's skyscrapers, Zongshen Motorcycle
is a useful gauge of China's current position in
the world economy. Inside five cavernous
factories, each the size of six soccer pitches,
young men and women in smart brown uniforms work
diligently at automated assembly lines, bolting
together thousands of glistening motorcycles and
testing engines and acceleration speeds with
computerized equipment.
Like its more
famous neighbor and competitor Lifan Motorcycle,
Zongshen is the creation of a self-made
entrepreneur, Zuo Zongshen, who turned to business
after losing his education to the Cultural
Revolution. From a motorcycle-repair shop in 1982,
Zuo built Zongshen into one of China's three
largest motorcycle manufacturers, employing more
than 20,000 people.
Today the company has
diversified into marine and minivan engines,
lawnmowers and small generators, and supplies
completed bikes for such international brands as
Piaggio (Italy), Vento (Mexico) and United Motor
(US). Zongshen is finalizing an agreement with
Harley-Davidson to make mid-weight motorcycles for
sale within China.
Last year, Zongshen
churned out 400,000 motorbikes for export, in
addition to 700,000 general-purpose engines. Zhou
Jianchuan, general manger of parent company
Zongshen Industrial Group, says export sales have
consistently risen over the past few years.
Exports in 2005 were worth $120 million and should
hit US$200 million this year; by 2007, Zhou expects
earnings from exports to outstrip domestic
takings. The company has struggled in Southeast
Asia where, Zhou says, locals "only trust the
Japanese brand", but has been much more successful
in Europe and Latin America, where combined
revenues in 2006 should be about $130 million.
The key to cracking Europe has been a
clever marketing campaign that defies the common
belief that Chinese companies are incapable of
matching their manufacturing and engineering
prowess with soft business skills.
In
1999, a Zongshen-sponsored team began competing in
Europe's premier Motor Grand Prix racing
competition. At the Le Mans endurance race in
2000, Team Zongshen finished in last place, 197
laps behind the winners and 100 laps behind the
second-last placed team. But in 2002, Team
Zongshen hired two European riders and brought the
World Endurance Championship trophy back to
Chongqing. Although the winning bikes were
actually Suzukis, they were branded with the Team
Zongshen logo. By 2008, Zhou promises, Zongshen
will race its own world-class bikes.
Team
Zongshen was primarily designed as a marketing and
advertising tool to lend the Zongshen brand some
credibility in Europe. That sales in the US are
less than a third of those in Europe, Zhou says,
owes much to the fact that motorcycle racing is
not as popular in North America.
Ben
Purvis, chief reporter at UK-based Motorcycle
News, one of the world's biggest motorcycling
magazines, says Zongshen's participation in the
Motor GP shows why the brand may succeed where
other Chinese bike manufacturers will not:
"Zongshen are making bigger strides than any of
the other Chinese brands. They're building their
own bikes rather than just making ripoffs of
Japanese scooters. And unlike many of the other
Chinese bike makers, they don't seem to be in it
just for the money. They actually care about
bikes."
Chinese manufacturers now supply
30-40% of the world market for finished
motorcycles, competing primarily on price. Entry
into foreign markets is vital because the constant
price-cutting in the domestic market means that
new bikes, priced at about 2,500 yuan (less than
$320), are sold for little more than their value
in scrap. Said Zhou: "We want to look abroad and
create something different, avoiding the headache
in China of everyone competing on price and making
the same products - no quality, low price. We want
higher quality, higher price."
The problem
for Zongshen is that low margins abroad and even
lower margins at home mean there is little money
for investing in technical innovation. Materials
account for 90% of the cost of a Chinese bike,
Zhou says, while only about 10% is spent on labor,
marketing, transport, and research and
development. In comparison, Japanese manufacturers
spend much more on marketing, quality control and
R&D, which allows them to charge higher prices
and translates into healthier margins. Zongshen
invests just 1% of its sales income in R&D,
which Zhou insists is "a high figure in China".
Nevertheless, both Zongshen and Lifan are
aping their Japanese counterparts and looking to
leverage motorcycle experience into automobile
production. Zongshen recently acquired a minivan
factory in the Yangtze River town of Wuhu in Anhui
province, where Chery Automobile has its
headquarters, and plans to export once quality and
management are up to scratch.
This year
Lifan will make its first exports of mid-size
sedans with imported engines, said Yale Zhang, a
Shanghai-based analyst at auto consultancy CSM
Worldwide. "There are definitely similarities with
Honda's business model," he said. "It's a natural
progression from motorbikes to small cars: they've
accumulated a lot of experience making engines and
exporting bikes, and now they want to move to the
next stage. But it's too early to say if they will
become the new Honda."
The Japanese
example is instructive. "When the Japanese bikes
first appeared in the 1950s and '60s, they were
seen as a joke - cheap, nasty, not real
motorbikes," said Motorcycle News' Purvis. "But
within 10 or 15 years they were destroying the
Western motorcycle industry - faster, cheaper,
more reliable."
The same can be said for
Japanese car makers, now the world's most
successful. And since China became a net exporter
of vehicles for the first time last year, with
exports of 172,800, up 27% on 2004, doom-laden
foreign media reports have spoken of a new Chinese
invasion of higher-value goods.
The two
automotive brands that look best placed in the
export market are Chery, maker of the popular QQ
minicar, and Geely Auto, based near Hangzhou. Both
car makers already export to developing markets in
Southeast Asia, Latin America, the Middle East and
North Africa, where they aim to gain experience
before moving on to potentially more lucrative,
but far more competitive, markets in Europe and
the US.
Chery plans to export
50,000-100,000 units to the US in 2008, while
Geely's chairman has set a 2015 output target of 2
million cars, of which 1.3 million will be
exported. According to Zhang: "Chery is better
placed than Geely or Shanghai Auto to make it as
an exporter. This year they will produce 300,000
units, their product line is complete, and in two
years' time they will have a lot of new models
which look pretty good. I believe they will get
their market share."
Yet fears that
Chinese manufacturers are about to swamp the US
and Europe with cut-price cars are premature.
Aside from the challenge of selling a Chinese
brand to Western consumers, Chinese cars still
lack two essential attributes: quality and
reliability.
Moreover, said Zhang: "Ten
years is not enough time for a Chinese car brand
to become internationally recognized. I think they
will become really well established domestic
brands in this period, but they will need 15-20
years minimum to make it in the international
market. Look at how long it took Toyota and Honda.
It took Hyundai nearly 30 years to get where it is
now."
One of the problems for Chinese
firms dependent on China for manufacturing but
venturing out into the big bad world for the first
time is establishing distribution and retail
chains. One company that has been effective at
meeting that challenge is car-components maker
Wanxiang Group, the second-largest private company
in China with revenues of $2.5 billion in 2004.
Wanxiang has 18 subsidiaries in North
America and Europe, most of them dedicated to
managing its sales overseas. Wanxiang America,
based in Chicago since 1995 and run by the
son-in-law of group chairman Lu Guanqiu, is
responsible for logistics, quality assurance,
sales and marketing across the US, and is a major
supplier to both General Motors and Ford.
Zongshen has a handful of foreign
distribution subsidiaries, owning offices and
warehouses in the US, Thailand, Nigeria and Iran.
But it has no component-distribution supplier of
its own in Europe, which means that dealers must
order parts to be shipped from China when,
ideally, they would like them within 24 hours.
Zhou says Zongshen will establish a
components-distribution center in Europe next
summer, probably in Germany, with a minimum $5
million inventory. This is crucial, he says, if
the company is serious about succeeding in Europe.
Good after-sales support is essential for
Chinese brands hoping to establish themselves in
international markets. SVA Group, China's biggest
technology exporter by value in 2004, has joint
ventures with Panasonic, NEC, Sharp, JV, Siemens,
LG and Samsung, for which it works as an original
equipment manufacturer. But SVA, which made
China's first domestic-brand color television more
than 20 years ago, also sells its own-brand
products in foreign markets, including the US.
As a largely China-based exporter with
only a limited footprint overseas, however, SVA
struggles to offer the sort of customer service
demanded by consumers. This posting on Amazon from
a furious customer in New York who could not get
his SVA television fixed shows the challenge: "Do
not buy anything from SVA unless you enjoy paying
for products that don't work and being treated as
if you are the one in error. I'm buying a Sony
tomorrow."
A recent report by IBM's
Institute for Business Value argues that for
Chinese companies, going global is about far more
than simply exporting: "Companies need to possess
the right combination of management capabilities,
innovation, market savvy and an overseas footprint
to compete on a worldwide scale and extend their
presence across industry value chains."
Many of China's best-known consumer brands
- appliance and electronics makers such as Haier,
Midea, HiSense, Changhong and TCL - have been
trying to do this for the better part of a decade.
Most Chinese exporters with foreign subsidiaries
simply ship finished products from China to their
overseas bases for distribution, relying on low
Chinese manufacturing costs to make their goods
competitive. But China's more ambitious companies
have set up limited production facilities abroad
where they can be closer to end users and
aggressively market themselves as a local brand.
The first to establish such operations was
Qingdao-based Haier, with a joint venture in
Indonesia in 1996. Haier now has subsidiaries all
over the world, including Pakistan, Jordan,
Turkey, Iran, Italy and Russia, as well as a small
factory in the US state of South Carolina that
assembles air-conditioners and mini-fridges
popular among US college and university students.
For Haier, setting up production overseas
was part of its strategy to create a worldwide
brand, which is now paying dividends. It was also
practical, as refrigerators are easily damaged
when transported over long distances. Most
factories only do final assembly, piecing together
parts shipped from China, and are located in
developing countries where labor costs are low.
Haier's factory in the US, on the other
hand, says the regional manager of a European firm
that makes testing equipment for many of China's
leading appliance makers, was established mainly
for marketing and political reasons. After the
protectionist tariffs recently slapped on Chinese
textiles and apparel, he says, both Haier and
HiSense anticipate further quotas on other kinds
of Chinese exports. Foreign manufacturing bases
provide a safety net against political instability
and growing protectionism: if the European Union
places quotas on Chinese-made fridges, for
example, Haier can ship from Jordan or Turkey.
Setting up foreign assembly plants is not
prohibitively expensive, even for Chinese
manufacturers working on thin margins, because all
the equipment and machinery needed are shipped
cheaply from China. The greater challenge is
cultural and managerial.
"The problem is
they set up Chinese factories abroad but they
still think Chinese," said the manager of the
testing-equipment company. "They find it hard to
meld into local cultures, which is why they have
to hire locals for business, sales and marketing.
They want to go big but they don't know how to do
it; they still have to make that cultural leap."
According to IBM's survey of Chinese
manufacturers, overcoming the lack of qualified
personnel and building global brands are the two
key challenges for companies wishing to move
beyond the simple export model and set up
subsidiaries overseas. Without a strong global
management team, the report says, "failure is
virtually assured".
As Chinese companies
begin to invest more overseas, management skills
will largely determine whether investment costs
are recouped. Outward direct investment (ODI) grew
from $2.9 billion in 2003 to just under $10
billion in 2005, and is expected to hit $23
billion this year, according to the Chinese
Ministry of Commerce (Mofcom). As the central
government continues to relax restrictions on
outward capital flows and more Chinese companies
look abroad for growth, Mofcom predicts that
annual ODI flows will exceed $60 billion by 2010.
Chinese companies looking to succeed in
the global marketplace could do worse than follow
the example set by their Taiwanese cousins. Taiwan
has few companies that are household names -
consumer brands - but has grown rich on the back
of highly successful industrial brands. Hon Hai
Precision Industry, for example, is highly
respected within the electronics and computer
industry and was China's biggest exporter in 2004
- yet few consumers have heard of it. The first
step for Chinese manufacturers, most of which
remain anonymous contract manufacturers with
little branding power, is to move up the value
chain to become innovative industrial brands.
China's current industrial cheerleader is
telecommunications-equipment maker Huawei
Technologies. In 2001, when Huawei first dipped
its toe in the foreign market, it won contracts
worth $244 million. Last year the figure was $4.8
billion, accounting for an impressive 58% of total
contracted revenues. Despite problems with
branding and an intellectual-property infringement
case with Cisco in the US, Huawei recently won
several impressive contracts in Europe, most
notably becoming one of British
Telecommunications' eight preferred vendors to
supply equipment for its $18 billion 21st Century
Network project, under which Huawei will help BT
converge its existing service-specific UK networks
into a single, multi-service and internal-based
network.
Although Huawei is not well known
for innovation, it has moved beyond the Chinese
copy model, successfully filing 800 patents in
Europe and the US. Of 37,000 employees spread
across 40 countries, 18,000 work in R&D, and
some reports suggest that Huawei spent as much as
$1.1 billion on research last year. Like Haier and
Lenovo, two other national champions emerging on
the international scene, it is competing with the
established global players, recently taking market
share in the lucrative wireless infrastructure
market from Ericsson and Nokia (although most of
its contracts came in developing countries where
financial rewards are small).
According to
Deutsche Bank analyst William Bao Bean, "Chinese
telecoms-equipment makers are putting real
pressure on the traditional global leaders."
Huawei is now an established international
industrial brand, he says, while its domestic
competitor ZTE soon will be.
What
differentiates Huawei from China's myriad faceless
exporters is that it is establishing a real global
presence, regularly advertising in the
international press and doing much of its work
overseas. Becoming an international player, as
Huawei's experience shows, is about much more than
exports alone.
This is the conclusion
of a two-part report.
Tom
Miller is the Beijing-based deputy editor of
the China Economic Quarterly.
(Copyright 2006 Asia Times Online Ltd.
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