More efforts needed for firms to go global
(Wang Xu and Yin Ping)
2005-11-29


SHANGHAI: The manufacturing industry is at an important juncture as the country will soon face a new round of development in the next five years.

Problems, policies and future trends of the sector were discussed last Sunday at the 19th China Daily CEO Roundtable in Shanghai.

More than 30 top-level managers in the manufacturing sector attended the forum themed "Made-in-China Under Globalization".

"Today's forum is of great significance as it is designed to promote the rapid development of China's manufacturing industry and help smooth communication of manufacturers and government and media," said Larry Lee, Executive President of China Daily East China Bureau in Shanghai.

Manufacturing sector

China's manufacturing industry will enter a critical stage as the nation enters its 11th Five-Year Plan (2006-10), a new transitional period for the nation's economy, said Gao Huiqing, Director of the Strategic Planning Division of the Development Research Department of the State Information Centre, a think-tank for the State Council.

"In the process of China opening up, the manufacturing sector has played an important role by creating one-third of the nation's gross domestic product (GDP) and contributing one-third of the government's fiscal income," Gao said.

At present, China's manufacturing industry ranks fourth in the world, behind the United States, Japan and Germany.

Nowadays, more than 100 categories of products made in China rank first in the world in terms of output. For example, China makes 40 per cent of toys in the world each year, 50 per cent of the shoes and 40 per cent of personal computers.

Galanz Group Co Ltd, a Guangdong-based home appliance company, produces almost 35 per cent of the microwave ovens in the world. And East China's Jiangsu Province makes 65 per cent of the mice used with personal computers.

"Although China is regarded as the world factory, its manufacturing industry is confronted with four major problems," said Gao. By this he means trade protectionism, rising business costs, environmental pressure, and the lack of efficiency in research and development (R&D) of its domestic enterprises.

In recent years, more anti-dumping cases are being filed against Chinese products, most of which are targeted at manufacturing industries such as machinery and textiles.

Gao said the technological standard of China's manufacturing industry is still very low compared with its production scale.

"Previously, the Chinese Government adopted a market-oriented technology strategy, opening its market in hope of technology transfer from foreign companies. But in fact, the strategy didn't work, as little technology was transferred to Chinese companies over the years," Gao said.

Moreover, Chinese enterprises are not putting enough investment in R&D, he said.

"China's manufacturing industry is also facing serious pressure because it pollutes the environment," says Gao.

Latest available statistics show that about 178,000 people die of pollution in China each year.

According to official statistics, the manufacturing industry produces more than 6.2 billion tons of industrial waste each year, accounting for more than 70 per cent of China's environmental pollution.

Rising business costs are another challenge for China's manufacturing industry. Labour costs, which remained virtually unchanged for a decade, have risen since last year as many local governments have raised the minimum wage.

In addition, energy and environmental protection costs for businesses will also rise in the coming years, Gao said.

The central government said earlier this year that it will carry out reforms in the public utilities' pricing mechanism such as oil, gas, water and electricity.

Moreover, land prices will be more market-sensitive in the coming years, Gao said.

New strategy

Assessing the situation, the government has introduced a new strategy for the manufacturing industry, said Gao.

According to Gao, the central government will continue to support the development of heavy and chemical industries.

In addition, it will advocate a new type of development, which is to use information technology to drive industrial growth. To promote widespread usage of information technology, the government will increase its subsidies to e-commerce, e-government, e-infrastructure and e-medical service in the coming years.

In addition, the government will also encourage innovation in domestic enterprises and launch major projects to help improve their technology level.

Moreover, the threshold for foreign investment will be raised, with more focus on quality than on quantity.

Energy-saving technological advances will also be encouraged. According to government plan, the country's energy consumption will be reduced by 20 per cent at the end of 2010 compared with that of 2005. And China's per-capita GDP will double by the end of 2010.

The government will spend more efforts encouraging enterprises to use energy efficiently and restrict the development of industries that consume high volumes of energy.

"In the short term, the growth of China's manufacturing industry will slow down next year with the slow-down of investment, consumption and exports," Gao said.

"In my personal view, GDP growth will stand at 8.5 per cent next year, down 0.7 or 0.8 percentage points from this year."

According to Gao, the prospect of China's manufacturing industry still looks promising as its heavy and chemical industries will continue to grow for at least another 20 years. And China's urbanization will continue during the same period.

IPR protection

With more foreign companies coming to China and Chinese companies going abroad, intellectual property rights (IPR) protection is becoming a hot topic in the manufacturing sector.

Paul Hussey, Vice-President of Danaher Motion Asia, said China has shown a stronger commitment to IPR protection in recent years.

Liu Jiarui, a registered foreign lawyer with Baker & McKenzie LLP, said China has established a legal regime for IPR protection with many legal weapons for foreign investors to use.

When a foreign investor faces an IPR case, there are three places where he can go: to the court, the most common choice; to the local administration for industry and commerce; or to the police station.

"The biggest benefit for China's economy and technological development is to show commitment in protecting and enforcing IPR on behalf of firms that bring technology here," Liu says.

"There is no greater truth than the market itself - only when we see new technologies arriving do we know there is sufficient enforcement."

With China joining the World Trade Organization (WTO), Hussey said IPR protection will be the biggest issue for China if it intends to compete globally.

"China should allow competitors to come here with confidence and provide benchmarks for local companies not only to meet but also to exceed," he said.

As for Chinese companies' going abroad, Hussey said many are beginning to face issues they did not face at home., And IPR is just one of them.

To prevent these issues from affecting their business, Hussey said some Chinese companies, such as TCL, have made the right move in acquiring businesses overseas.

TCL, a major household electrical appliances and communications technology company, acquired Alcatel's mobile phone business and Thomason's television business last year.

Hussey said that through the acquisitions, TCL not only inherited overseas production capacity, but brought its own strength to the overseas operation to avoid controversial IPR issues.

As for China's medium-sized companies - who are most often charged with IPR violation, Hussey said they need to enhance their design ability, which involves long-term investments and years of expertise and know-how.

These Chinese companies, not multinationals, are his company's major clients, Hussey said.

"We realized that our progress is fuelled not by the multinationals coming to China, but by these indigenous companies," he said.

These smaller companies have a strong market presence and good engineering skills, but lack fundamental design on the motion-control integrated systems that Danaher considers one of its strengths.

Recognizing that these indigenous companies are winners in the Chinese market, Hussey said his company had focused its efforts on co-operating with them.

Take textile companies as an example. Hussey believes that Chinese textile companies need more efficient machinery to compete globally.

By offering motion-control technology to these textiles companies and partnering with them, said Hussey, Danaher was able to avoid IPR disputes.

Apart from textiles, Danaherapplies the same technologies to other fields such as electronic assembly and automobile automation.

Zhang Danian, Partner and Chief Representative of Baker & McKenzie LLP, said that China has been busy improving the legal system regarding the Made-in-China concept.

In environmental legislation, Zhang said the key is to balance economic elements with sustainable development.

Also, many Chinese companies are diversifying their ownership, be they State-owned, collectively owned or private enterprises.

And the country has recently improved its company and property Laws.

Improving Corporate governance has also been emphasized.

"We believe that with better corporate governance, enterprises will behave better - not just in IPR protection, but in many other areas," he said.

Zhang also pinned high hopes on the standardization of the tax system for foreign and domestic companies.

"In one or two years, foreign companies and domestic companies will enjoy the same tax benefits," he said.

He predicts that the tax incentives will not be determined geographically, but on whether companies are using the highest available technology.

According to Liu Jiarui, fewer than 40 per cent of Chinese companies enjoy their own trademarks, and fewer than 10 per cent have patent rights.

Logistics

Although logistics contributes to 21.3 per cent of China's GDP, Gary Wu, president and CEO of Volvo Trucks in China, said China still does not have an integrated logistics system. Water, air, road and train transport in China are not integrated.

Wu said water transport accounts for 70 per cent of the country's total, of which train takes up 15 per cent and road 5 per cent.

"If you set up a manufacturing centre in Chengdu in western China, the costs of transporting goods from Chengdu to Shanghai are even higher than from Shanghai to New York," Wu exclaims..

Because of such an ineffective logistics system, companies end up scattering their material, manufacturing and distribution centres in many different locations.

That adds up to another 20 per cent of the GDP, Wu said.

"In China, 40 per cent of GDP goes to logistics, but nobody benefits from it, not manufacturers nor consumers," he says.

Each year, Wu said, 1.5 trillion hours are wasted on logistics in China, so improving logistical efficiency should become a priority.

Raymond Brady, Vice-President and General Manager of Siemens Logistics and Assembly System Ltd, said the low efficacy and the high cost of logistics have forced companies to set up their manufacturing plants in coastal sites.

The production of mobile phones, he said, could be cited as an example.

"If you produce mobile phones in the west, say, in Sichuan Province," says Brady, "By the time you transport them to Shanghai, they would already have become outdated."

China is improving its roads and railways, but there is no standout professional logistics company, he said.

And even if there are some, they are not doing very well, he said. So many international players are trying to get into the business. Besides, with the country adopting a go-west strategy, many manufacturers are confronted with problems such as workforce, said Brady.

Many companies bring their experts and new technologies with them to western China where they are setting up their manufacturing centres, Brady said, so good logistics have to be in place to ensure smooth flow of personnel.

Quality

Talking about the future of the manufacturing sector amid globalization, Hussey said there has been a dramatic transformation of quality in China.

Ten years ago but even more recently, China was reputed for mass-produced low-quality products, which Hussey stated was an unfair label.

He reminded people of the example of Japan.

"Forty years ago, Japan had the same reputation for low-quality goods," he said. "But now Japan leads the world in high-quality products and set standards for the rest of world to follow."

There is no reason why China cannot go the same way, he said.

To him, China's biggest challenge is notjust to produce high-quality domestic goods, but to produce high-quality goods for the global market.

"China's biggest challenge is to compete overseas," Hussey said, using Haier Group, a big enterprise with worldwide presence and manufacturing sites in the United States, Europe and Japan as an example.

Hussey said Haier is capable of designing products to suit the Japanese market while adhering to the highest environmental standards.

He said, "These top-end companies really show China's ability to go global, or to the Chinese multinational level."

(China Daily 11/29/2005 page 7)

 
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