TRAVERSE CITY – “China is more like a world than a country; there is everything in China,” says Dan Malone, a lawyer whose Detroit law-firm Dykema Gossett Plc. has worked for years with the automotive industry.
His advice to anyone wanting to do business there is simple: “You must have a plan to make money before you go into China,” he says at the annual CAR Management Briefing Seminars.
Malone makes his remarks as part of a panel discussion on prospects for North American suppliers in China.
The anticipated growth in China is a magnet for smaller automotive suppliers wanting to grow, and the difficulties and risks are barbed-wire warning signs telling them to stay at home, panel members agree.
China may be a world onto itself, but “China is just part of the world,” says Jason Luo, president and CEO of Key Safety Systems Inc., a Sterling Heights, MI, supplier of airbags and seatbelts. “Your China strategy has to be part of your global strategy.”
Ramzi Hermiz, senior vice president-vehicle safety and protection group at Federal-Mogul Corp. agrees. “The conversation you would have in America (with an OE) is the same you would have in China,” he says. “Everybody in China has low-cost labor, so that is no differentiator. Differentiators are speed to market, quality and technology.”
The collective advice from panel members, consisting of suppliers and consultants with experience in law, mergers and Chinese industrial growth includes:
Bring your best technology to China. And make sure the top management of the parent company visits China and Chinese customers at least as often as the Chinese business is proportionally to the parent’s global business.
“The corporate executive team must support the China strategy,” says Luo, who was born in China and has lived in the U.S for 30 years, since receiving a master of science degree from the University of Toledo.
“There is no option for executive teams spending time in China. You have to know the people and know the culture.”
Hire the best Chinese people you can find to run things. Make it worth their while to stay and make your presentations in Chinese.
“When we entered China, between 2000 and 2004, we had 10 ex-patriots,” Luo says. “But in every country, we need local people. We pay more, because we need the best. Today, we have one ex-pat (in China), a technical man.”
Relationships are critical. “Finding and developing the right network of people is essential to success,” says Malone. “It is time-consuming and requires great patience, but it is worth the effort. If you are aligned with the wrong group of people, the operation is at risk.”
Labor cost is not very important because everyone has it. “We’re not in China for labor when we make a piston ring,” says Hermiz, noting his division’s defect rate is 4 parts per million. “We’re not doing that by introducing tons of labor in the process.
“Anybody can buy a machine. It’s about relationships, about how you can launch in four weeks and not 16 weeks. It’s not always technology, but how you serve your customer.”
Even if your technology is old, there will be opportunities. “Whether it is low technology or high technology, the key is customer service,” says Luo. “If the customer accepts that you have technology, you have it.”
Second tier cities in China are the growth engine for the next five years. Customers there will be cost conscious, an opportunity for older technology. With 32 cities as big as New York, China is quite different from the U.S.
Residents of big cities far from the Beijing-Shanghai corridor “are not as educated, cosmopolitan or worldly, and they are more frugal and value conscious,” says Tim Dunne, director-global automotive operations for J.D. Power and Associates.
“They present an opportunity to sell older technologies or de-contented product where investment has been amortized.”
The Chinese industry will consolidate in the future. Capacity utilization could drop below 60% in a few years, but provincial governments will defend their local auto makers.
“There will be no major consolidation while the market is growing, because local owners want to protect employment,” says Ling Wu, managing director for merger-and-acquisition specialists Amherst Partners LLC.
Chinese auto makers not only need technology, but also quality, styling and business acumen. “Quality is something they need going forward,” says Dunne.
J.D. Power studies show none of the Chinese domestic auto makers score above the industry average in terms of quality, and the international brands average about 30% more problems than the industry average in the U.S.
Until the industry reaches Western quality standards, Chinese makers will not be able to export to Europe and North America.
According to J.D. Power surveys, price remains the most important consideration for Chinese car buyers, but it is half as important as it was 10 years ago. Roominess, styling and quality all are more important today.