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China Reshaping Global Manufacturing Industry

Companies must combine strategies to compete against Asian giant


June 10, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

China’s insertion into the global market has reshaped the manufacturing industry worldwide, said Ben Vickery, senior analyst with the National Institute of Standards & Technology’s Manufacturing Futures Group.

Vickery and Kristin Stehouwer, director of the Michigan Manufacturing Technology Center Northwest (MMTCN), recently visited Puerto Rico at the invitation of Puerto Rico Manufacturing Extension Inc. (Primex) and the Puerto Rico Products Association to discuss China’s market and the competitive advantages the country has achieved in recent years.

"China is a formidable competitor," said Vickery. "Three advantages drive the migration of the manufacturing industry to China. One is ready access to low-cost labor, fueled by China’s almost inexhaustible labor supply. U.S. businesses are also being lured to China’s domestic market with its nearly 1.3 billion inhabitants. In 2002, China’s gross domestic product grew 7.3% to $1.2 trillion. Finally, there is the domino effect of U.S. suppliers following original equipment manufacturers to China as factories move their production overseas."

Since 2001, Puerto Rico’s manufacturing industry has lost about 8,000 jobs, some to China, primarily in labor-intensive sectors such as apparel, leather products, food preparation, petroleum, and technology. Companies have closed and production has been transferred to countries paying lower wages.

However, major global events such as 9/11 and the war on Iraq have forced multinational companies doing business in the western hemisphere to revise their production strategies, particularly those with manufacturing plants outside the U.S. The pharmaceutical industry in Puerto Rico, for example, has benefited from corporate decisions to transfer product lines or assign new products to U.S. based facilities.

From 2002 to 2003, the value of direct exports to China from Puerto Rico increased from $41.8 million to $64.7 million, representing a 55% gain. The value of direct imports also grew, from $248.8 million in 2002 to $330.4 million in 2003, up 33%. As with trade with other countries, official statistics don’t register the value of Puerto Rico’s exports to or imports from China through intermediate points such as ports on the U.S. mainland or in foreign countries.

China leads in foreign direct investment

Foreign direct investment (FDI) in China has been growing steadily in recent years. In 2000, its FDI was some $40 billion, compared with $314 billion for the U.S. By 2002, however, the FDI in the U.S. had taken a precipitous 90% dive to $30 billion, while the FDI in China had risen 33% to $53 billion. Preliminary data indicates that in 2003, the FDI in the U.S. rebounded to $72 billion; the FDI in China, meanwhile, grew to an estimated $57 billion.

"China’s manufacturing capabilities also are increasing," said Vickery. "The country is moving from low- to high-technology production by educating and training its work force, particularly in the life sciences, pharmaceutical, information technology, and semiconductor industries. The number of doctoral science and engineering degrees in China increased from barely 1,000 in 1983 to close to 6,500 in 1999, equaling Japan’s number of doctoral degrees."

China has had to address a number of problems during its accelerated growth. These include the illegal acquisition of intellectual property and high rates of software piracy. In addition, production in China may not always be economical given logistical and other hidden costs.

"Manufacturers must consider cost penalties such as overseas-freight charges; logistics within China; duties, fees, and taxes; additional inventory costs; sales lost due to unreliable delivery; cost of quality; and costs related to communication and management oversight," said Vickery. "There are also risk factors to consider, such as business ethics, legal hassles, corruption, intellectual-property theft, currency shifts, and political instability."

Combine strategies to compete effectively

Stehouwer of the MMTCN advised, "To compete effectively [against China], companies must employ a combination of strategies to strengthen their competitive advantage and offer a higher value to customers compared with low-cost competitors. Companies must become adaptive for their continued survival and growth."

According to Stehouwer, companies’ primary strategy should target a niche that is difficult for low-cost competitors to serve. They could concentrate on high-tolerance, difficult-to-manufacture goods that require critical reliability. Companies also could develop patented high-technology or research & development processes that can’t be copied. In addition, quick turnaround times or just-in-time logistics can become an asset to businesses where proximity is an advantage.

China’s 2004 growth could surpass 7% estimate

Ming Men, a visiting Fulbright scholar who spoke before the Puerto Rico Chamber of Commerce, said China’s target economic growth rate for 2004 is 7%. However, it could exceed expectations.

"Statistical data shows it grew 9.7% during the first quarter of 2004 and fixed-asset investment jumped 43% to $106.3 billion," said Men. "China’s fast growth can be attributed mainly to a rapid increase in capital investment and improved productivity. The key to continuing such rapid economic growth is the continuation of the strategic restructuring of the economy."

According to Men, China’s private economy has risen from 0.2% to 33% in the past 25 years. Today, almost half of the country’s principal businesses are in areas such as retail / wholesale trade (20.4%), textile (5.1%), restaurants (4.9%), construction (4.5%), machine building (4.5%), food processing / beverages (4%), furniture (2.2%), and chemicals (2.1%).

Still, exporting to China won’t be easy for foreign companies, said Men. It wasn’t until 1998 that the first foreign private enterprise was granted rights to operate in China, and the obstacles between the two business cultures are many.

"[China’s] private enterprises have little experience with foreigners and usually no foreign-language skills," said Men. "There are cultural and linguistic differences, unique quality and training of local contacts and employees, and political and economic issues to conquer. Still, Chinese businesses prefer buying imported equipment, have efficient distribution networks, and are eager to include foreign products. The best way to enter the Chinese market is through exporting, licensing, equity joint ventures, and wholly owned foreign enterprises."

Kristin Stehouwer’s Behaviors of Adaptive Companies

  • Keep the finger on the pulse of customers to identify risks, emerging trends, and new applications.
  • Evaluate viability of current customers, shift to more defensible segments, and identify new market opportunities.
  • Maintain a diversified customer base, spreading risk.
  • Aggressively sell and market—always look for growth and higher margins.
  • Aggressively develop new product offerings.
  • Take risks—invest in the future, ahead of the pack, to support and maintain or shift competitive advantages.

This Caribbean Business article appears courtesy of Casiano Communications.
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