I've got an oped in this morning's Wall Street Journal Asia about China's export advantage. I spoke to a lot of people whose insights didn't make it into the piece, so I'm going to include a couple here. The first is an email interview with Lou Longo, practice head of global services at Chicago-based advisory group Plante & Moran (pictured on the left). He advises mid-sized mid-Western firms in American's industrial heartland. With his approval, I include his comments below verbatim. My questions in italics.
1. In your practice, what sectors have you seen the Chinese gaining market share in over the last year? (This can be very specific.)
Machine tooling industry specifically stamping dies and plastic injection molds. Durable medical devices including hospital and home care machines, hospital med components, diagnostic equipment and surgical tools. Automotive machined components such as castings machines into body frame components and structural members. Aircraft components especially large body components such as aircraft door and nose assemblies.
2. What reasons can you find for this expansion of market share? If the answer is simply that the Chinese are cheaper, perhaps you can be specific about how cheap, and why the customers weren't buying from the Chinese (who have obviously been cheap for years, and are more expensive in some categories now than they were two years ago). Do you see any reasons beyond them simply being cheap?
In the case of machine tools, it is the significant labor savings and lack of work rules which allow the manufacturing time to produce a tool to be as much as 30% less in time (meaning customers can shorten their manufacturing lead times ) than what it takes U.S. and EU tooling shops to produce a tool. In medical device, it is a combination of the industry being late to follow an off-shoring production strategy as well as the belief that China has a huge, undeveloped market for the use of such products in the future. In automotive, it has shifted from an export, low-cost country expansion into China being the most significant vehicle market with the strongest growth prospects in the world. As a result, automotive companies and their suppliers are investing in world class technology in China allowing the quality of production to be the best as well as cheaper based on labor and input savings. In aerospace and aircraft, it is specifically a function of cost but mostly it is in negotiation by the aircraft manufacturers in competition to serve the growing airline business in China the Chinese government is expecting if not requiring that a certain amount of content be China sourced. For example, if Boeing hopes to beat Airbus, one method is to show it has a higher China content in the airplanes it wishes to sell to the China airlines. A critical difference in the China low-cost model to other low-cost locations (e.g., Vietnam, Thailand, Sub Sahara Africa) is that China is the only one with strong manufacturing infrastructure (transportation, education, raw materials, etc.) and the world’s largest potential domestic market. I am seeing sourcing decisions being made where China is a lower cost than the U.S. but not the lowest cost yet the sourcing decision is made for China since it gives the added perceived benefit of learning the domestic market for future sales and growth.
3. Have you dealt with any cases of Chinese companies which previously exported to the US setting up manufacturing operations in the US? Can you tell us more about whether that is helping these companies gain market share?
Yes – in machine tools and automotive components. The financial distress that the U.S. automotive market has gone through has allowed Chinese companies to buy market share in the U.S. and a beach head through acquisition of suppliers and manufacturers of vehicles. Three years ago I was involved in assisting several clients in looking for target Chinese acquirers as the U.S. companies were starting to face financial difficulties and they weren’t successful in attracting U.S. or EU buyers for the companies. In several discussions I had in China with the Chairman of China automotive companies, they listened to the opportunity I presented and respectfully told me they would be interested only at liquidation pricing. In effect, what they told me was there was no reason to pay a fair on-going value for the business since eventually they would be able to acquire it or a similar company when it was liquidated through bankruptcy or a last ditch sale. We are seeing that come true today.
4. What sectors do you expect to see Chinese market share gain in the future and why?
Life sciences, agriculture, medical device, aerospace and heavy equipment both off highway construction and farm-related. Life sciences because the cost of educated scientist is low and the Chinese have little external pressure on western morality based matters such as animal testing, stem cell research and the like. Agriculture because as the economic influence of China increases, more people will want to eat better and will demand local availability of meat, dairy and produce which is expensive and is currently leading to eventual export capacity of these items. Medical device and aerospace because these industries are behind consumer goods and automotive in the development of a low cost sourcing base so this will drive some growth regardless of China’s direct efforts. Heavy equipment since labor is cheap and most of the development in terms of mechanizing construction and agriculture will occur outside of the U.S. and EU driving local or more regional supply chains offering China base to grow this sector.