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International Focus: The Chinese puzzle for U.S. molders







Heard enough yet about the competition? We didn’t think so. Here’s the update on China’s current manufacturing abilities, currency policy, and business practices.

China is perceived by many U.S. molders as a significant threat to their operations and, at the same time, as a major source of opportunity as a growing market and as a choice location for offshore manufacturing. DaimlerChrysler’s decision to start importing Chinese cars later this year is only the latest development that highlights the risks and possibilities of China.

What can China do for you? What threat does China pose?

More imports are a given

The amount of injection molded parts imported from China will continue to increase in the next few years. None of the efforts to address the gross trade imbalance or force a change in the valuation of China’s undervalued yuan will make much difference. Note that China has made recent public statements to deal with this issue.

It is not clear if this is just public relations or a real effort. In early March, central bank governor Zhou Xiaochuan said that his country would address a $177 billion trade surplus and may let the yuan float upwards by an additional 5%.

The demand from the U.S., Canadian, and (increasingly so) Mexican consumers for low-cost Chinese goods will continue to force growth in imports. But there is more. We are not only talking about Wal-Mart and K-Mart products. In the past few years Chinese injection molding plants have started to produce much higher-quality goods. We see imports increasing in areas thought previously immune to the Chinese “import threat” such as medical devices and sophisticated subassemblies for cars and trucks.

Although the data are difficult to verify, the Chinese molding economy is estimated to be growing at about 16% a year. In some segments, China is turning into a world-class supplier of molded parts with a quality equal to what some of the best molding plants in North America and Western and Eastern Europe can produce.

Much of the know-how and the technology for these plants originates with U.S. molding companies (as well as Canadian and European). And a solid number of these superb molding plants in China are owned, at least in part, by U.S. multinationals or smaller molding companies. To some extent we are doing it to ourselves.

China will keep growing fast

According to a new Goldman Sachs report, the United States’ share of global gross domestic product fell to 27.7% in 2006 from 31% in 2000. In the same period, market shares for Brazil, Russia, India, and China rose to 11% from 7.8%. China alone accounts for 5.4%. In 20 years China may rival the United States if the current growth rate continues.

But this is not all bad. As China’s economy matures, a growing middle class—now about 270 million people—will start consuming more of their products and reduce the need to export to sustain growth. For instance, China’s domestic production of cars, trucks, and buses, according to the German VDA, jumped from 2.3 million units in 2003 to 5.9 million units in 2006. In 2015 most of the world’s car production will be in China.

With China and, to a lesser extent, India emerging as major manufacturing centers and ever more influential exporters, where will it leave North America’s molders? These molders must adapt since the imports will keep coming. The United States’ core strength remains technological innovation (badly guarded, as discussed later). This will generate profits for molders as they sell know-how instead of machine hours.

From 2002-2005, the United States accounted for 35-40% of the world’s economic growth, according to Goldman Sachs. But in 2007, the investment banking powerhouse from New York projects the United States will account for just 20% of global growth. Much of this growth—still dramatic—comes from financial services and enhances the evolution and development of novel technologies, including areas highly attractive to molders (yet hardly explored) such as nano devices.

Some issues won’t go away

China represents a radically different culture and political system. This affects all commercial activity and should be kept in mind when dealing with China. Here are key trouble spots:

• Theft of intellectual property. Trade secrets, know-how, and business secrets are routinely stolen in China and the most innovative molders from North America are very much at risk. They have the technology that China wants to grow its own economy. But Chinese culture and tradition regards stealing business secrets as an acceptable aspect of competition. While the Chinese government tries to appease the United States and others through an occasional dramatic crackdown on blatant theft or production of fakes, the problem is actually getting worse. The theft of core technologies is rapid and common. Set up a world-class molding plant anywhere in China and do not be surprised to see a competing plant spring up quickly using identical manufacturing methods. The author’s firm regularly assists companies in implementing safeguards that sometimes actually do work.

• No confidentiality. Keep in mind that in China, you are required to basically share your secrets. For instance, China requires CCC safety certification; all electronic components (and that is where the core technology for advanced molding resides) and related items must first be submitted to the Chinese government for “review.” This means complete access to engineering information, drawings, and manuals. Continued rapid growth of Chinese manufacturing depends on its ability to achieve such “technology transfers.”

• Corruption. The Chinese occasionally execute somebody in a case of egregious corruption. This is mostly for public relations so the government can say it is serious about eliminating corruption. But corruption exists, so be prepared for demands for extra fees, incentives, or just plain bribes.

• Human rights violations. These are well known within the Chinese regime, yet business people from around the globe who hope to profit in China eagerly overlook them. China has severe internal problems, with about 90 million unemployed or underemployed workers who are often homeless and crowding the cities. China brutally oppresses freedom of the press and freedom of minorities such as Tibetans and Muslims in the center of the country. This is a fact of life and is part of the accepted business culture. Few companies have taken the high road and quit China to go to the much more tolerant and truly democratic India (where you find solid legal protection and relatively little corruption); but India’s economy grows about 6-8%/year compared to 12-14%/year in China.

Agostino von Hassell from The Repton Group LLC (New York, NY) can be reached at [email protected].
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