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April 1, 2002

11 Min Read
International Molding Report: China: Threat or Opportunity?  The dragon mystery

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Chinese markets can be divided into at least six major regions: the South (Guangdong), the East (Shanghai), the Beijing-Tianjin region, Central China, the Northeast, and the Southwest (Chengdu).

Editor's note: This article was prepared by Agostino von Hassell of The Repton Group as part of IMM's International Molding Report series.

China is a significant mystery. In the past months two major books were published, one predicting the imminent collapse of China and descent into chaos, while the other says China will emerge as the most important economic power of this new century. Which will it be?

The U.S. military views China as a major potential threat to the United States. The U.S. business community views China as the single best bet for investments and markets. Who is right?

Injection molders face similar questions. Over the past 15 years China has become the largest exporter of often low-cost injection molded plastics parts into the U.S. Today, with a population of 1 billion-plus and a burgeoning middle class, China is seen as a prime market for molders looking for locations in low-labor-cost countries.

There is also a moral issue. China's human rights record is rotten and shows few signs of improvement. The argument has been that close economic cooperation will foster democracy and human rights in China. There is little evidence of this to date. So, the question each molder or moldmaker has to face is if he is willing to support a regime that executed more people in 2001 than the entire world has in the past five years.

This is an acute issue. For instance, China now supplies 75 percent of all imported toys to the United States. And during the annual toy fair this past February in New York City, demonstrations were held claiming that such toys are manufactured under conditions of "misery."


Major Growth Seen
Few disagree that China's economy—which has expanded at an annual rate of 8 percent for seven years now—will undergo drastic changes in the next decade. The entry of China into the World Trade Organization (WTO) is bound to create wrenching change, possibly opening the Chinese market to more imports.

At the same time, the export-driven injection molding market in China may become subject to trade challenges—antidumping petitions and U.S. government action for trademark or patent infringement. The rules of the WTO simplify this. What creates uncertainty is how observance of WTO rules will change China. Some project a collapse of the many state-owned enterprises and massive unemployment, leading to social unrest. Others believe that China will be able to overcome all these obstacles and grow even faster.

U.S. molders active in exports could anticipate selling parts and finished products to China in an ever-growing volume. U.S. sources estimate that China now has a relatively wealthy middle class of about 80 million people—a sizable market for appliances, mobile phones, television sets, and all types of electronics.

The WTO entry forces China to dismantle most of the import barriers. And for precision products such as medical diagnostic machinery, electronics, and other high-value-added products, U.S. molders could find attractive markets in China. Just how well China will comply with the new rules remains to be seen.

BOOKS TO READ
Molders interested in learning more could read some of these recently published books that analyze the impact of the WTO on China:

  1. China and the WTO: Changing China, Changing World Trade by Supachai Panitchpakdi, Mark Clifford 

  2. New China Rising: A Social Economic Assessment of WTO Entry by Yikluen Hoong (paperback) 

  3. China's WTO Accession and the Impact on Its Large Manufacturing Enterprises (East Asian Institute Contemporary C by Guy Liu Shaojia (paperback) 

  4. China Rising or Just Turning in Its Sleep?: A Telecom Perspective on the WTO Negotiations by Yankee 

  5. U.S. China Trade Issues After the WTO and PNTR Deal : A Chinese Perspective (Essays in Public Policy, No. 103) (August 2000) by Jialin Zhang (paperback) 

  6. Beginning the Journey: China, the United States and the WTO (December 2001) by Robert D. Hormats, et al (paperback) 

  7. China's WTO Accession and the Impact on Its Large Manufacturing Enterprises (East Asian Institute Contemporary China Series, 30) by Guy Liu Shaojia (paperback) 

  8. China WTO—Shaping The Future by David Packer (paperback) 

  9. China, the WTO, and Human Rights: Hearing Before the Committee on International Relations, U.S. House of Representatives (May 1999) edited by Christopher H. Smith (paperback)

GENERAL KEY CONTACTS
The U.S. & Foreign Commercial Service (US&FCS) offers U.S. firms a wide range of cost-effective and highly efficient business development services in China, including market research, agent/distributor searches, corporate matchmaking:

KEY CONTACTS IN CHINA
Shanghai Society of Plastics Industry 42 Rui Jin Er Rd. Shanghai, 200020 China +86 (21) 6437 6893, ext.112 Fax: +86 (21) 6433 0937

Shanghai Petrochemical Co. Ltd. International Department Jinshanwei, Shanghai, 200540 China +86 (21) 5794-1068 Fax: +86 (21) 5794-1741

International Cooperation Department State Petrochemical Industry Bureau Building No.16, Section 4, Anhuili Caoyang District, Beijing China 100723 +86 (10) 6492 0165 Fax: +86 (10) 6492 0162

China Plastics Processing Industry Assn. 6 East Chang An Avenue, Beijing China 100740 +86 (10) 6526 7869 / 6522 5256 Fax: +86 (10) 6527 8590 / 6522 5254

National Engineering Plastics Industry Assn. Mail Box2653, Beijing 100084 +86 (10) 6252 5392 / 6256 3332, ext. 268 Fax: +86 (10) 6252 5392

Guangdong Plastic Industry Assn. Room 807, No.703-29 Dongfeng Road East, Guangzhou Guangdong, 510080 +86 (20) 8775 2002 Fax: +86 (20) 8776 5969

Guangdong Plastics & Leather Industry General Corp. 8/F, No.703-29 Dongfeng Road East, Guangzhou Guangdong 510080 +86 (20) 8776 4729 Fax: +86 (20) 8776 5969

China National Chemical Information Center No.53, Xiaoguanjie, Andingmenwai Beijing China, 100029 +86 (10) 6443 7125 / 6444 4038 Fax: +86 (10) 6441 5052 [email protected] (Publisher of China Chemical Industry Yearbook)

China Chemical Industry News 1 Liupukang Zhong Jie, Xicheng District, Beijing 100011 +86 (10) 6207 6843 Fax: +86 (10) 6238 5327

China Plastics 11 Fubei Lu, Beijing, 100037 +86 (10) 6845 7902 Fax: +86 (10) 6842 4051



Should You Locate In China?
China will be one of the world's largest consumers of plastic products this century, if only because of its huge population. The U.S. Dept. of Commerce says that China has been ranked second behind the United States in the volume of plastic products produced since 1997. But, despite a population of 1.2 billion, China's per capita plastic products consumption is less than 10 percent of that of the U.S.

China's government recently decided to try to stimulate domestic demand by encouraging consumption of consumer goods—a perfect opportunity for molders that provide small and large appliances, electronics, office machinery, and even medical devices.

Growth in the demand for plastic products in China is about 7 percent per year, well above the 4 percent annual growth rate in the world at large. Further, it's estimated that China will maintain its 7 percent growth rate until 2010. In short, China's market potential for plastic products is substantial.

Commerce Dept. data, as well as information from a host of other sources, also anticipate that growth for injection molded plastic parts in China will exceed 9 percent over the next decade. Prime growth markets will be electronics, automotive parts, and consumer goods, along with the old standby—toys.

Keep in mind that today China is the preferred location for Taiwanese computer makers who source almost 90 percent of all computer components in China. It is similar for Japan and other Asian economies. This is increasingly the case with U.S. computer and office machinery OEMs who are abandoning suppliers in Singapore and Malaysia. Other molders, such as Tessy Plastics Corp., in 2001 moved molding machines from U.S. plants to China. In Tessy's case it was to make parts for Xerox.

Despite these shifts, however, U.S. firms are not yet very reliant on Chinese molding shops. And U.S. molders and OEMs trail far behind companies from the European Union, Japan, Taiwan, Australia, and Singapore, which are setting up manufacturing facilities in China in greater numbers.

Still, we believe that more than 500 injection molding plants operate in China that are either directly owned by U.S. firms or are part of a joint venture. The pace of such investment should increase; overall, all foreign investment in China grew by about 21 percent in 2001.

Automotive Parts
One of the major opportunities for U.S. injection molding firms is automotive parts—both for newly assembled cars and trucks and for the aftermarket. Here is one example.

Thanks to weak development of production technology for automotive components, Guangdong, a province in southern China (see map), relies heavily on imports for such things as engines, chassis, large diecast molds, and many plastic components.

As recently as 1999 Guangdong claimed to have as many as 49 automobile manufacturers (six vehicle makers and 43 auto reproducers or assemblers) and another 80 auto parts and components suppliers. But annual production was just 20,000 to 30,000 units. However, according to U.S. and World Bank projections, by 2010 annual vehicle production in Guangdong alone will exceed 500,000 units; total Chinese production is expected to reach 4.4 million units.

To support such output, the Automotive Affairs Office of the Guangdong Provincial Economic & Trade Development Commission is pushing for new components firms—domestic or foreign—to set up in the province. The goal is to reduce reliance on imports and to build a solid domestic infrastructure. During the 10th Five Year Plan (2000-2005), Guangdong plans to spend $1.28 billion on its automotive manufacturing industry. The policy is to have a minimum of 40 percent local content by 2005, and increase this to 80 percent by 2010.

Does this mean an open door for U.S. injection molders? Yes and no. The opportunities are there, yet restrictions can be severe. The province may limit foreign ownership to less than 50 percent, as well as demand the wholesale transfer of technology and know-how, with little control conferred to the investing (foreign) company.

Also encouraging molders to come in China are import taxes. Although China imposes stiff tariffs of 15 to 50 percent on many imported parts and products, foreign companies operating in China can import production-related capital equipment free of duty and value-added tax.

China's Molding Technology
The opportunities for U.S. molders in China can be summed up with a simple statement: China is in desperate need of advanced molding technology to boost production of all types of molded parts, from relatively crude toy components to precision molded parts for electronics and medical devices. Without access to advanced machinery and know-how, China will take far longer to be an effective producer of molded parts.

This opens the door for U.S. molders to sell know-how or set up joint ventures where they supply technology and machinery, while benefiting from low labor rates.

Major plastics processing companies have emerged in China in recent years, all of which, to varying degrees, work with processors from Japan, Europe, and the United States. These include Foshan Plastics Co. Ltd., Dalian Shengdao Packaging Co., Changzhou Plastics Group, Hebei Baoding Plastics Co., Hefei Anli Co., Fujian Sanming Plastics Co., Yantai Wanhua Synthetic Co., Jilin Xifeng Plastics Co. Ltd., and Huaya Plastics Co. Ltd.

The Outlook
U.S. molders considering or looking for joint ventures in China have several market opportunities. There are a few principal ones to consider:

  • Agriculture. All types of molded containers, pots, and the like are a major growth market, according to China's State Development Planning Commission. 

  • Packaging. High-speed production of plastic drinking cups, paint pails, packaging items for electronics or toys, and preforms for bottles are all likely to see growth of more than 12 percent annually over the next decade. 

  • Construction and furnishings. According to China's Ministry of Construction, by the year 2010, approximately 4 billion sq m of new urban housing will be built. This creates enormous markets for products such as pipe fittings, light fixtures, appliances, and window components.


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How To Go To China
U.S. molders can invest in Chinese manufacturing plants—either through joint ventures, direct ownerships, or partial ownerships—to serve a rapidly expanding domestic Chinese market, as well as mold parts and products for export back to North America.

Partnering with a Chinese firm may be the best route for U.S. molders, particularly for smaller firms, which can use a partnership to reduce capital investment and gain easier access to the internal Chinese market.

Based on most of the actual investment examples, it appears that outright purchase of a plant, or starting a new plant, is best suited for molders with annual sales of more than $60 million. Smaller injection molders probably are best off going the joint venture route.


Contact information
The Repton Group, New York, NY
Agostino von Hassell
(212) 750-0824
[email protected]

 

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