Asia Intelligence Briefing : February 2008

World's largest two nations – China and India – advance bilateral relations in 2008

In the past, many Western businesses have concentrated on India and China as sources for low-priced parts or finished products to import into their economies; however, this is changing. More and more we see businesses focusing on China and India as marketplaces in which to sell their technologies or products that are manufactured locally and sold locally. Businesses following this strategy must have something right because now the prime minister of India, Mammohan Singh, and China's president, Hu Jintao, have been meeting to discuss direct-trade collaboration between the nations.

While the level of trade today is relatively small, India already is complaining about the trade imbalance, with China selling more to India than India can export to China. And it's a familiar story. India exports raw materials and partially finished materials, to China, while China, with its more developed manufacturing base, exports expensive value-add finished goods, such as electronics, to India.

Along with trade, the discussions between the two countries this past week centered on other very significant topics; mainly the development of electricity-generating capacity (China plans to build 30 new nuclear power stations over the next 20 years), which would require trade in coal, much of it very dirty and polluting, but nevertheless essential to the power-generating capabilities of both countries.

Another point of discussion has been the establishment of a free-trade relationship between the two nations. Free trade would be a little more challenging because India imposes fairly significance tariffs on Chinese imports to protect their local manufacturing capability, and because of India's reluctance to allow Chinese companies to open up shop there due to the lingering anger over the war fought between the two countries in the 1960s.

If the tone of these meetings and the topics under discussion sound more like the venue for Western nations than these two emerging nations, then let it be a warning to us that the rate of organization and growth is indeed rapid. For those companies seeking new markets, the strategy of designing in the United States and manufacturing in either China or India (and then having two markets to sell to), integrating China and India into a single manufacturing solution with two alternate destinations for their finished products could hold considerable allure.

As it is still difficult to truly understand how large the emerging middle class of either country actually is, we should forget about the middle class. Instead, the focus should be on the 'purchasing class,' the people who have sufficient discretionary income left over at the end of the month to allow them to purchase these manufactured products to increase their quality of life, after they have paid for life's basics.

That is where so much of the United States' business opportunities actually lie. The fact that today you can sell into a growing economy while also bringing the same products back into the United States makes going global even more compelling.

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Now is the time for suppliers to ante up and get a piece of the action in China

Depending on whom you listen to, Chinese-made vehicles may, or may not, be coming to U.S. show rooms in the immediate future. We Americans are well known for our propensity to "Buy Cheap-----then Demand even Cheaper," yet we automatically expect high quality along with cheap prices. Those in the press who claim that Chinese-built vehicles will not be showing up any time soon reassure themselves that demand in China will consume all of the local Chinese production capacity. They also frequently draw solace from the fact that to date Chinese companies appear to be making little effort to export vehicles over here. But in reality, they are not exporting because China's automobile products just do not meet the stringent emissions and safety standards required in our market.

Do not doubt that there is ample capacity in China and that capacity is growing daily. Additionally, that overcapacity is generating fierce local price competition, low-sell prices and low margins for the Chinese companies. Once the Chinese automotive industry is able to build a car that can meet U.S. emissions and safety standards, they will begin shipping cars by the thousands to meet our demand for Cheap, Cheap, Cheap! Furthermore, Chinese automakers will be eager to sell here because their high-end vehicles will not be affordable to the Chinese population, but their products will sell here at a low U.S. price point at a much bigger profit margin. In a mature market like the United States, where we are accustomed to paying somewhere between $16,000 and $23,000 for a vehicle, a comparable Chinese vehicle, with all the "bells and whistles," would probably sell for $10,000 or less.

Initially, the most likely Chinese vehicle to enter the U.S. market will not be a pure Chinese-designed and -manufactured vehicle, but rather a foreign-designed vehicle that already meets our requirements and has been manufactured at a Chinese plant. This is exactly what Chrysler Corp. is attempting to do in an alliance with Chery. Assuming this alliance goes ahead, Chrysler-designed vehicles meeting U.S. specifications, but manufactured at Chery prices, can then be sold in the United States at somewhere in the $11,000 to $12,000 range.

However, the Chinese understand that to be a player in the global automotive industry they need to dramatically improve quality, as well as their design, and to build to modern environmental and safety specifications. At the present time, most Chinese auto manufacturers use enormous numbers of workers to move parts around and to link together row upon row of stamping presses. This causes Chinese manufacturers several problems. First, the material and parts wastage rate of such a manufacturing approach is too high to be sustainable in a competitive automotive industry. For that reason alone, China will be forced to automate their production lines, using progressive dies and large stamping presses.

Additionally, and just as importantly, the standards of surface finish and quality that are essential in the automotive industry cannot be easily achieved with manual handling systems that damage parts as they are man-handled from press to press. Finally, the production rate of a manually driven system is far too low to yield the numbers that need to be built to address demand in the market.

Those companies in China that learn to automate (and it's coming) will in one move increase production rates, reduce waste and improve quality – all three factors being essential to successfully compete in the international marketplace. What may well hold China back initially is the lack of easy Chinese capital with which to purchase these expensive automated production lines.

If in the immediate future, a quality vehicle meeting U.S. standards hits our shores priced at around $11,000, that would immediately impact the overall market share of U.S. local and foreign- and domestic-manufactured vehicles. And, in due time, Chinese vehicle manufacturers will build their own home-designed cars that meet U.S. emission and safety standards, and will adopt widespread automation in their factories. When might these capabilities and resources converge? In all likelihood, it will not be accomplished for at least five years. That is suppliers' window of opportunity to enter the Chinese market themselves!

So, while the Chinese automotive manufacturers have a ways to go before achieving a quality, home-grown low-priced, U.S. emission-friendly vehicle to export to our shores and compete with the established world car manufacturers, both domestic and foreign, don't underestimate China's long-term objectives or potential. Ten years ago we scoffed at Korean cars, and, before that, 30 years ago turned up our noses at Japanese cars. Take note because as I write these words, Toyota is about to overtake General Motors as the largest automaker in the world.

How can you, as a supplier, benefit by moving into the Chinese market yourself? There is an unbelievable number of new opportunities for U.S. 2nd and 3rd Tiers to export their skill set. ..If you believe your company's future can be enhanced by accessing the China market, get yourself knowledgeable and educated and go and grab a piece of the action. It is still not too late to prosper in this new and evolving 'opportunity rich' business environment.

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Valerie Kozikowski Named Head of Pacific Rim Alliance U.S. Operations

GRAND RAPIDS, MICH. – Valerie Kozikowski has been named managing director of the U.S. Operations of Pacific Rim Alliance (PRA).

Kozikowski will be responsible for the management of PRA's client-facing functions, including the development of Asia Business Road Maps and strategic sourcing plans in support of client needs, project management of the resulting initiatives, and ongoing client support. "Ms. Kozikowski joins PRA in a period of significant growth, not only in China, but also as PRA expands into India and Vietnam," said PRA CEO David Hemmings.

Kozikowski was a former national partner with BDO Seidman, LLP, where she most recently led their Business Resource Network Program, providing a wide range of business consulting services to privately held clients. She attended the Owner President Manager post-graduate program at Harvard University and received her bachelor's degrees in accounting and management information systems from Central Michigan University. She is also a member of the American Institute of Certified Public Accountants and the Michigan Association of Certified Public Accountants.

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