Crossroads: Crisis or Opportunity: Molding in Asia: Logistical considerations

China’s east coast presents the greatest opportunity for locating molding operations in that country.

Thinking of setting up shop in Asia? What’s the best way to do it? Where should you go? What about the cultural, geographic, and political landscape? Here’s what a knowledgeable globetrotting pro has to say.

International currency exchange-rate inequities and the ensuing problems domestic tier-level suppliers have helping customers meet their market requirements are key reasons why U.S. OEMs are migrating to Asia. One way molders can compete is to follow the money overseas. But how?

IMM tapped a source we’ve drawn on since 1994 for the answer: Michael L. Hetzel. Until 1999, Hetzel was president of a midsized custom molding, metal stamping, and assembly house, Broadview Injection Molding (Broadview, IL). Today he is VP/Americas for Pro QC International (McHenry, IL), a third-party supplier of global engineering and quality services.

Pro QC’s services include local guidance on travel plans; escort, driver, and translator services; turnkey sourcing; and direct supplier negotiation. It offers supplier qualification, order management, source inspection, product testing, and project management services, and has offices staffed with local personnel in more than 30 countries, including the U.S.

IMM also contacted government agencies and both custom and captive molders to prepare this report. Regarding the latter, those who returned our calls—including Nypro, Pitney Bowes, Delta Faucet, and a major U.S. toymaker who asked not to be named—largely corroborated Hetzel’s views.

So where’s the best place in Asia to go? Go ahead; take a wild guess as to Hetzel’s answer.

China
Hetzel says the three major industrial metroplexes where injection molding is growing in China are the following:
1. Shenzhen/Guangzhou
2. Shanghai/Ningbo/Suzhou
3. Qingdao/Dalian

The Shenzhen/Guangzhou area is number one in most regards, although the area is already a bit crowded with molders. It has a mature infrastructure. It is home to a large number of very competitive molders, and is also home to many good moldmakers that can support a molding operation. Even before Hong Kong’s repatriation, this area was the center of most of the manufacturing activity in China. Since unification, its industrial density has grown significantly. Business equipment, telecom, electronics, and consumer retail (such as housewares and toys) are among the major markets being served from this region.

However, Hetzel says that the Shanghai area is developing fast. A number of factors, including the Yangtze River Valley development project and China’s entry into the WTO, are precipitating an increase in the migration of rural Western folk into Shanghai. This is expected to help repress wage growth there. IT, automotive, electronics, and telecom products manufacturing are just a few of Shanghai’s leading activities.

The Qingdao/Dalian areas to the north are noted for hardware, power tools, and metal products.

“If I were running a molding company today and looking to select a manufacturing site in Asia, I would go straight into the Shanghai/Ningbo area,” says Hetzel. “And not just for selling into the China market. I would leverage the Chinese plant to increase my U.S. capacity, as well as export from Shanghai to other markets. The U.S. can compete in some areas on timing and market proximity. No currency translation can defeat that edge. But we also have to lower some costs.”

He continues, “Strategic sourcing from China—either through a strategic alliance, a joint venture, or a wholly owned subsidiary—is one way domestic shops can strengthen their position. We grew 480 percent in five years at Broadview after establishing an Asian mold sourcing alliance in Singapore.”

Other Asian Possibilities
Speaking of Singapore, what about the rest of Asia? Singapore isn’t very high on Hetzel’s list of possibilities as an Asian manufacturing site. It’s near parity with the U.S. on a price level. But he does believe that Singapore is a good place to establish a trade alliance for sourcing from other Asian manufacturing areas.

“Malaysia is populated by Singaporean companies, much like Canada is our ‘factory country.’ Malaysia does have a very good currency differential, and there are companies going there. We preferred creating an alliance with a company that had its head offices in Singapore to serve a customer in Malaysia when I was at Broadview.”

Taiwan and Japan are too expensive for possible manufacturing sites. Also, both countries have already moved much of their molding capacity to mainland China, and most of what was left behind may soon be on the boat. South Korean OEMs and suppliers also are China-bound.

Then there’s Thailand. Its manufacturing base is growing, but not necessarily in molding. It’s a lot lower-cost than China and other countries in Asia, but molds sourced from China exhibit better craftsmanship than those few seen coming from Thailand.

Vietnam, he says, appears to be more concentrated on serving the global textile market and has severe infrastructure disadvantages. Indonesia presently is too politically unstable, as are the Philippines. North Korea? Hetzel calls that a political hornet’s nest. How about India?

Hetzel says his Singaporean ally has set up a business there, importing molds from China to India—mostly to southern India, cities like Bangalore and Madras. Apparently his old friend found that he can’t sell his high-priced, made-in-Singapore products in India.

India is consuming molds. It frequently sprouts new molders, molding everything up to and including washing machine tubs. “Because of India’s trade regulations, it’s a good place to sell into, but I wouldn’t recommend it as a place to consider starting a small molding venture,” Hetzel says.

On the plus side, India has a vast internal market and a largely English-speaking and well-educated labor force when compared to China. However, he says India’s infrastructure is far behind China’s, and its federal government structure makes the process of launching an enterprise take much longer. Subsequently, costs are higher and timing to ROI is protracted. “Another difficulty with India is the very high cost to shut down an unsuccessful venture, making India viable mainly for larger companies with substantial cash available to manage these elements.”

While China’s not the only country in Asia, it presents better opportunities for overseas ventures than its neighbors, including Singapore, Malaysia, Thailand, Vietnam, and India.

Politics, Geography
Moving back to China, all three of the major molding metroplexes mentioned have well-developed infrastructures, are easily accessible by boat and air, and share similar services and cost.

The weather up north in Qingdao/Dalian gets as cold as New England in wintertime. Shanghai’s climate is more like Chicago’s. Shenzhen, farther south, is warmer year-round.

All three areas are very open and supportive of bringing work in, politically speaking. “Remember that old saying,” says Hetzel. “People don’t kill their customers. Each of these three primary nodes is getting more and more reliant on American manufacturing.” In fact, he says, virtually all of the Asian nations are very favorable to FDI (foreign direct investment).

Cultural Considerations
Regarding China’s culture, Hetzel believes an entire feature article should be devoted to that topic alone. Americans have a lot to learn.

“After all, there are cultural differences even for a guy from New York selling in Alabama. The Chinese are tied to rituals and disciplines of their culture. This is a core issue, a very real issue all over Asia.”

He says you have to take the time to understand how they do things—even where you should sit at a banquet, where you should place your chopsticks when you have finished eating, and how much food to leave on your plate. Building mutually respectful relations is important, and a sincere effort to understand their cultural and business practices is essential.

There are a number of companies providing cultural consulting and training services, but he’s found many to be pedestrian and often misleading. He recommends libraries and the Internet as better initial places to learn about business practices in China.

“I’d start by studying the language [Mandarin]—learn a few greetings, how to find things, and how to get around. It makes them feel that you respect their culture, as you should.”

Learn How to Haggle
As far as speaking English goes, Hetzel stresses the importance of having an English-speaking ally on your side to translate. Your ally should be fluent not only in conversational English, but should also know “molder-ese,”—terms like “wear plate,” “mold balancing,” and “suck back.”

Learning their negotiating tactics is equally important. China has a barter culture. “Don’t accept the first price for anything, or they’ll think you’re just another dumb American. A general rule of thumb is that you can arrive at a good price by round three.”

“Yes” doesn’t necessarily mean yes in China. Based on his experience and research, Hetzel says most Chinese will initially agree with anything you propose, as they don’t want to lose face.

One last point: Compared to many other Asian countries, China has far fewer holidays, most of them national. Hetzel advises that you plan carefully for the holidays, since the entire country shuts down.

Setting Up Shop
When it comes to capital equipment, Hetzel says that with the exception of certain U.S.-made machinery that has been banned from being sold there for strategic reasons, everything available in the U.S. is available in China.

He says China is building with today’s technology. Many of the newer plants are running lights out. The cost of facility construction is much less—as low as $7/sq ft vs. $80/sq ft in some areas stateside, for instance. And everyone knows about the labor rates there. So, ready to go? Hold on a minute.

No one contacted for this report recommended that a custom molder build a wholly owned, all-American plant there without first having a landed and established client base. “What if an all-Chinese molder were to suddenly appear in your industrial park?” Hetzel asks.

“Consider all the disadvantages—all the cultural and language problems. Wouldn’t a customer here wonder whether that molder would understand his company and his business? It could create any number of biases.”

Even if a U.S. molder were to start an operation in China and have local people run it, Hetzel says it would still be considered a U.S. company. “‘Who owns it?’ they would ask. There would immediately be a rise in the level of discomfort. That’s true anywhere.”

He thinks it would be a bad move to go there without riding on the coattails of a big customer. Perhaps some large custom molders can afford to go it alone and make a mistake. Smaller molders can’t. Joint ventures, strategic alliances, and outsourcing through traders or buyers’ agents are more sound approaches to begin molding in Asia.

Asian logistical links IMM and Pro QC International’s Michael L. Hetzel have compiled the following list of websites to help molders who are interested in molding in China research the political, cultural, and geographic logistics. The OPIC site is a good source of logistical information on Asian countries other than the PRC. www.opic.gov The Overseas Private Investment Corps, a government agency that sells political risk insurance and loans to help U.S. businesses invest and compete in more than 150 emerging markets and developing nations. www.exim.gov The Export-Import Bank of the United States, which supports financing of U.S. goods and services; assumes credit and country risks the private sector is unable or unwilling to accept. www.uschamber.com The U.S. Chamber of Commerce site contains links to Chambers in Asia that can offer assistance in relocation. www.export.gov/commercialservice/ The U.S. Commercial Service has export/import specialists in more than 80 cities in the U.S. to assist small and midsized U.S. businesses export their products and services, and in more than 80 countries to assist foreign buyers. www.amcham-guangdong.org The American Chamber of Commerce in Guangdong. www.amcham.org.hk The American Chamber of Commerce in Hong Kong. www.amcham-china.org.cn The American Chamber of Commerce in China, which contains useful links to Chambers throughout the PRC. www.chinaonline.com Overviews of China’s technology, economy, and society. Contains an online bookstore. www.chinamarket.com/service.html Directory of business services in China. www.fita.org The Federation of International Trade Assns. www.terracognita.com/WJ_China.html Tips on doing business in China, e.g., business protocols, banquet etiquette, and gift giving. www.worldbiz.com/bizchina.html Business practices and protocols in China. www.chinagate.com.cn Business news from China. www.chinasite.com General purpose China/Chinese website reference. http://usinfo.state.gov/regional/ea/uschina/bars0322.htm U.S. Trade Representative Charlene Barshefsky’s statements regarding American trade policy and China’s WTO accession. www.asia-pacific.com/links.htm Links to information sources for researching Asia-Pacific businesses. www.loc.gov/rr/international/portals.html Links to in-depth global resources from the U.S. Library of Congress. www.executiveplanet.com International business culture guides. http://lcweb2.loc.gov/frd/cs/cshome.html Online versions of comprehensive country studies books published by the Federal Research Div. of the Library of Congress. www.weforum.org The World Economic Forum. www.photius.com/rankings/economy.html Economic rankings of countries sourced from the 1999 CIA World Factbook. www.infotoday.com/ibidirectory.htm International Business Directory. www.philb.com/countryse.htm Country-based search engines. www.webofculture.com Professional guidance and certification to U.S. corporations seeking to globalize their Internet presence. www.export.gov Access to all export-related information offered by the federal government. www.buyusa.com Online trade leads and business opportunities (part of the U.S. government’s www.export.gov trade portal). http://travel.state.gov/travel_warnings.html U.S. Dept. of State’s travel warnings, consular information sheets, and public announcements. www.taacenters.org Trade adjustment assistance information sponsored by the U.S. Dept. of Commerce for manufacturing firms affected by imports. www.trade.gov/exportamerica/ U.S. Dept. of Commerce’s source for global business opportunities. www.indiaadvisorypartners.com A consultancy that helps companies harness the business potential of India.

Editor’s note: Next month the Crossroads series takes a hard nuts-and-bolts, how-to look at what it takes to set up overseas. Starting in September, we’ll look at strategies for staying put and staying competitive.

Contact information Pro QC International North America Inc. McHenry, IL Michael L. Hetzel; (815) 578-4100 www.proqc.com