It’s fashionable to look at China’s manufacturing sector and just assume it sprung from nowhere. In fact, the story is really very different.
Dating back to the creation of the special free zones in the 1980s with Shanghai at the top of the pyramid, the conditions for growth have relied on governmental tax breaks, the sheer graft of the domestic manufacturing industry and a massive amount of foreign investment.
Perhaps surprisingly, the most significant investment has come from Taiwan. China’s neighbour has been in political limbo since 1949 when the nationalist party set up camp across the Formosa Straights and to all intents and purposes Beijing and Taipei have been at loggerheads since.
Yet, despite Beijing’s ‘One-China’ policy that has cast a permanent shadow over the island, and despite some tit-for-tat nationalist posturing in Taipei, business has continued to be business. And, although a myriad of rules make it tricky at least superficially to develop relations, the reality is that the economic fate of both seems inextricably linked with one another.
Indeed, in the first five months of 2003, the Taiwanese Ministry of Foreign Affairs put investment at $1.734 billion, up 43.69 per cent on 2002 figures, involving 797 projects.
That figure may actually be on the conservative side. All the evidence suggests that investment has only gathered pace, with Taiwanese speculation reckoned to be in the order of $70 billion in recent years. Furthermore, 24 per cent of Taiwanese exports already go to the voracious Chinese market and that will only grow. So much for politics as a barrier.
Naturally, Taiwanese manufacturers – and to a lesser but also significant extent Hong Kong manufacturers – have been in the vanguard of the Chinese OP manufacturing revolution. One that has been there since 1996 is Leos’, a manufacturer of PP and PVC filing products, which has its headquarters in Taichung in Taiwan.
CEO Michael Yeh says: "It’s not just a question of pouring money into China. Taiwanese companies have also brought technical know-how and management techniques which have helped the manufacturing sector develop modern methods of doing business."
Leos’ uses one primary 140,000 sq ft factory in Shenzhen close to Hong Kong which employs approximately 800 people. According to Yeh, the business is expanding at such a rate that he expects to triple the existing capacity by moving to a new site in the near future.
Naturally, Leos’, like many of its Taiwanese – and latterly global – counterparts, is there to take advantage of the relative disparities in wages.
Another is Polar Bear, also a Taiwanese company which manufactures adhesive products. President Robert Liu explains it succinctly. "We’re a traditional manufacturing company that requires intensive labour. In Taiwan, labour costs are relatively high and also scarce. Additionally, there is a further factor – land costs in China can be as much as ten times cheaper and that makes the investment relatively cheap."
James Huang is CEO of DataKing, a Tai chung-based manufacturer of filing products. It set up its first factory in 2000 before building another plant in 2004 in Ningbo. Huang offers an additional factor as to why Taiwan business is a natural partner for the mainland.
"Taiwan is now one of the major investors in China and that’s a direct result of knowing the culture and speaking the language. China’s been growing at 8 per cent plus rates for the last few years and Taiwan has benefited directly from that. We are natural beneficiaries of the Chinese boom and they too get the benefits of our knowledge."
Many other Taiwanese companies such as Beautone, SDI Corporation and Simbalion have also made the move while further south, Hong Kong manufacturers such as Lee Tack Stationery Manufactory and Keep Keen have been equally quick to build on the mainland.
And the legacy left behind by Taiwanese and Hong Kong investment is a massive one. It has enabled Chinese manufacturers to leapfrog a generation by crafting foreign know-how onto cheap Chinese costs.
Inevitably, that has led to the development of a relatively powerful and independent segment within the Chinese manufacturing sector, eager to develop their own brands and muscle in on the action. The likes of Ningbo Beifa, Wenzhou AIHAO and Shenzhen Comix Stationery have all emerged with well recognised brands and products, while others such as UTec have created tremendous businesses on the back of the manufacturing boom.
GBC managing director of Asia Fred Moh has watched with interest. He says: "The Chinese have closed the gap although I think it will be ten years before they can equal the standards of the Taiwanese. But one thing is for sure, the Chinese are hungry to learn and this is evident in their zest for learning the English language which they see as the bridge to taking their business to the next level."
GBC – a global producer of shredders, laminators, visual communications and binding products – moved into the Chinese market early in 2001. It is one of many global manufacturers such as Henkel, Shachihata and Hewlett-Packard that have set up shop there.
Moh says: "Our being there now gives us credentials as an international brand and an edge as an ‘early bird’ who gets the worm. It must also be recognised that the WTO agreement will bring about more refined international business practices, lower tariffs/import duties and speed up the process of intellectual property rights.
"And with the build-up to the Olympic Games, there will be significant shifts in consumer mindsets as they are exposed to international brands, expanded purchasing options and better consumer-directed information."
The debate on brand in China has serious ramifications. While many of the international brands will no doubt jump onto the Olympic bandwagon and hope to penetrate the market via the Games, getting into the Chinese market is not quite as easy as throwing dollars at the problem.
Firstly, it’s important not to get carried away here. Huge swathes of the Chinese population remain below the poverty line and survive on less than $100 a month. Nevertheless, according to the Chinese Academy of Social Sciences, the middle class in China already accounts for 18 per cent of the overall population or approximately 200 million – roughly half the size of the expanded European Union market. Other estimates are more conservative, putting the figure at 60 million.
But one fact is indisputable: a significant proportion of Chinese are spending, be it on holidays abroad, houses and other items that ten years ago would have been off the Richter scale. Yet, though the average disposable income of Chinese urban consumers may have risen by 40 per cent in the last four years, they remain canny spenders.
Hans Fuchs, managing director of German consultancy Chinabrand, says: "There are some specific problems that anyone looking to win some Chinese market share must know. First, most western brands are too expensive for the average consumer. Even in Shanghai, most of the western shops are empty, but those with Chinese brands are crowded." (brandingchannel.com, 17 January 2005)
Market research, limited though it is, tends to show the Chinese are nationalistic in their purchasing decisions, helped of course by the fact that Chinese brands are cheaper.
Chinese car maker Geely for example saw sales in January rise 29.2 per cent on December 2004 figures, while the foreign-dominated luxury Sedan market – artificially boosted by concerns over SARS in the last 18 months – has slumped in recent months.
There are important lessons for both foreign and domestic brands in the Chinese OP market. Being there for the long term is a prerequisite. Establishing a brand that touches a chord linguistically and emotionally with those Chinese that have money to spend is also key.
Swedish manufacturer of staplers Isaberg Rapid has had a factory in Shanghai since 1998. It employs 420 people and enjoyed sales of RMB60 million ($7.25 million) in the last financial year. Managing director Frank Shi says: "Research and development and marketing are increasingly vital, and that is all about developing a brand. Citizens in a major city like Shanghai, Beijing and so on, now care about the brand very much. We already have a brand-oriented market now."
Moh agrees although he feels brand awareness is yet to really penetrate the OP market. He says: "Brand awareness is evident especially among consumable products’ manufacturers intending to market their local brands out of China. Chinese brands such as Lenovo, China’s largest PC manufacturer (formerly known as Legend), and Haier, China’s consumer electronics manufacturer, have reported big plans on their branding campaign during the coming Olympics to create global brand recall and brand recognition.
"But as for binding, laminating and shredder products, they still belong to the low interest level category of products where branding is usually secondary to consumers as compared to price. We are educating our distributors to overcome this consumer mentality by selling to the market differently from local players, such as the adoption of innovative marketing tools and focusing on the right products."
And he expects that the relative lack of interest in brand that still prevails today will change. "Chinese manufacturers helped initially directly or indirectly by the overseas Chinese have been able to leapfrog the time line of progress. Driven also by their vast domestic markets, they will soon evolve to become quality driven and brand conscious businesses."
The march to brand is on. And as that develops the channels available will also multiply. In fact, that process is already underway.