Robotic Industries Association China Presentation

An Expert's View about Machinery and Robotics in China

Posted on: 10 Mar 2010

Dr. James Chan delivered a custom-made presentation on China at the 2006 annual conference of the Robotic Industries Association (RIA) including Q&A with leaders of the RIA.

Taking the China Market by the Horns James Chan, Ph.D., President Asia Marketing and Management (AMM) th 14 Annual Robotics Industry Forum Robotic Industries Association (RIA) Portofino Bay Hotel, Orlando, FL ? Friday, November 10, 2006 ? 8:30 a.m. - 9:30 a.m. This pre-conference report is prepared for a closed-door presentation on the new opportunities and challenges as China emerges as a new player in the global robotic industries. China is at once a significant importer of robotic products and technologies, a potential new source of robots, and a new global competitor in the making. Many forward-looking companies in the robotics industries want to keep track of new developments in China because it is poised to be a force in the future. I?m thankful to Donald Vincent, Executive Vice President of RIA, for obtaining the following questions from RIA members and for giving me the opportunity to speak with you. I?d like to thank Ms. Saroj Motwani, Administrator of Member Services, for her help in forwarding this pre-conference report to you via e-mail before we meet on November 10. I hope my answers will pique your imagination and lead to more specific questions that will surely make our discussion interactive, lively and rewarding. I?ve grouped the questions under the following headings: I. The rise of China: opportunities and challenges. II. The robotic industries in China. III. Trade and investment. IV. Intellectual property rights issues. V. How to succeed in the China market. In addition to this pre-conference report, I?d like to include a paper, ?18 Practical Tips? to facilitate better business communications between Western and Chinese businesspeople. 1 RoboCup, October 7-9, 2006, Suzhou City, China I. The Rise of China: Opportunities and Challenges 1. RIA member: ?What are the current industrial indicators that confirm the longevity and permanence of the industrial boom in China over the last 10 years?? James Chan: China?s industrial boom will continue for many more years. Foreign companies have invested more than $45 billion in the China market each year over the past 5 years. The opening of China?s banking, finance, retail and distribution industries to Western investment will guarantee this ongoing trend (see chart from The Wall Street Journal, March 31, 2006, p. A1). 2. RIA member: ?When do you expect China to join the G-8 and create the ?G-9? (The Group of 9) countries?? James Chan: It is tough to predict the winds of politics. China contributes 12% of the global economic output. We?ll be in self denial not to admit that China will soon become one of the world?s key industrialized nations. I?ll guess within 5 years. 3. RIA member: ?What will be the relationship between the U.S. and China within the next 25 years? How big will China become as a producer and consumer? Will it become the wealthiest country in the world?? James Chan: I predict that the relationship between the U.S. and China will continue for many, many years even though we will have trade disputes and political skirmishes all the time. China will not close its doors as it did between 1949 and 1978, and America has become increasingly dependent on China. China will be more of a producer than a consumer for some more years to come. China?s middle class (households with annual income from $5,000 to $25,000) is growing in large, coastal metropolitan areas. But this middle class is not going to be growing fast enough 2 for American-style consumerism to take hold within the next 10 years. Goldman Sachs, quoted in The New York Times on December 6, 2004, p. C4, predicted that the size of China?s economy would surpass that of the U.S. by 2040 (see figure). But, even by 2040, China will not be richer than America on a per capital basis. I don?t foresee China becoming the wealthiest country in the world. 4. RIA member: ?What value can the U.S. provide to China when it becomes a large economy? Is there sufficient research and development (R&D) activity in China beyond just a labor resource? What will be the advantage of the U.S.?? James Chan: China will look up to America as the source of technical, marketing and managerial know-how even when it becomes a large economy. There are already 750 foreign-funded research and development (R&D) centers in China, an increase from 200 in 2002. To maintain an edge over China, American industry must continue to innovate and create new products and services. My personal view is that America?s ultimate advantage is our democratic political system and our belief in giving the individual free rein. As long as America continues to attract talented people who thrive in our society, we?ll have an advantage. 5. RIA member: ?How long will China continue to be a source of low-cost labor? Will it stop when wages in China rise to equal those of Japan and the U.S.? Or, will out-sourcing stop until we find other low-cost regions?? James Chan: China as a low-cost manufacturing center will continue for a long time. Even though wages are rising in large cities along the coast, wages in inland cities, towns and villages are so much lower that there is a lot of room for low-cost manufacturing to expand within China. American companies have been expanding their outsourcing activities in other low-cost countries. This trend is not new. Currently, Vietnam is a favorite destination. Even Chinese companies, such as those in the furniture industry, are relocating their factories in Vietnam. I don?t see outsourcing or offshore manufacturing stopping either in China or in other developing nations. 6. RIA member: ?What are the trade obstacles put up by both the Chinese and the U.S. governments that we have to overcome in order to do business in China?? James Chan: It depends on the industry. Some industry groups complain that China puts up trade barriers to protect their home industries. Other trade groups complain that the existing U.S. export-control regulations deprive them of lucrative export opportunities. They are partially right. But, if you look at cross-border trade between China and America as a whole, you?ll get a different point of view. Both the Chinese and the U.S. governments are very much pro-trade in allowing business activities to thrive in China. Western multinationals, many of them American-owned, are responsible for generating more than half of China?s exports (see chart in The Wall Street 3 Journal, August 30, 2006, p. A7). This fact alone is an indication of government support. The U.S. Government wants to restrict export of sensitive technologies to China. The Chinese government is actively pursuing an export-led strategy to enrich its economy while setting policies to protect its domestic industries. This is why we?ll continue to have trade disputes. 7. RIA member: ?How fast and broad the China market will grow and what will be its impact on the global economy?? James Chan: From a negligible trading nation in 1981 with a few billions worth of merchandise trade, China has grown over the last 25 years to become the third largest trading nation. In 2005, China?s merchandise trade exceeded $1.4 trillion, just behind the U.S. ($2.6 trillion) and Germany ($1.7 trillion) but ahead of Japan ($1.1 trillion). The media in China are predicting that the two-digit annual growth rates in the Chinese economy will fall into single-digit growth rates. The government is trying to prevent overheating of the economy, especially after the 2008 Beijing Olympics. Even with only single-digit growth rates, the Chinese economy will continue to grow broadly and the government?s export-led growth strategy will maintain a strong momentum. The ?rise? of China will be felt not only in the U.S. but also in Europe and in other developing countries. 8. RIA member: ?What are the pros and cons for companies that choose not to do business in China?? James Chan: Not all businesses find that the China market is relevant to their needs and interests. On the other hand, more than 80% of the world?s largest 2,000 corporations are doing business in China. If China has an impact on your industry, to choose not to travel to China and keep an eye on the trends that are developing there is risky. Many small to midsize American companies chose to go into the China market only after they had been ?forced? to do so. They either ?followed? their U.S. customers to China or the size of their U.S. market shrank so much so that they must find new markets overseas. Pro-active companies have an edge over those that decide to wait it out. 9. RIA member: ?What are the Chinese labor laws that apply to U.S.-owned company employees? Is it employment-at-will as in the United States or is it more similar to the German model of once you hire a person you have a tough time ever releasing them from your employment?? James Chan: Unless you?ve signed a contract with a Chinese state-owned company that explicitly forbids you to lay off workers, hiring and firing of workers in China is very much like what happens in the U.S. Chinese state-owned companies have laid off millions of workers over the past many years in the name of raising productivity (see chart in The Wall Street Journal, September 18, 2006, p. A4). It is rare that a Chinese company requires you to keep any employee against your will. The average tenure of mid- to high-level Chinese employees at Western companies in 4 China is about two years. The headache nowadays in China lies in recruiting and keeping good, talented employees. 10. RIA member: ?In the next 10 years, will wages rise fast enough in China so that the argument proposed in the book, The World is Flat, (which hypothesizes that globalization will lead to substantially equal wages in all nations) will come true?? James Chan: Wages in China have been rising ever since the early 1990s. I was involved in the Christmas products industry at that time. We sourced our products in China and imported them into this country. Even at that time, our Chinese suppliers started going into China?s interior provinces in search of cheaper labor. But China is vast. There are 400 million people in China?s who can use more work. Urban wages in China are more than 3 times higher than those in the countryside. As to the hypothesis proposed in The World Is Flat, it is easy to feel that income and wealth will spread worldwide as globalization proceeds. But equalization of wealth in real life, in any country let alone globally, goes only so far. Even in America, the percentage of people who were poor in the 1920s has remained the same as it is today. The richest 1% of Americans controls 33% of U.S. assets. The richest 1% of Chinese controls 60% of the country?s assets. China was more ?flat? when I first went there in 1982. Everyone had the same salary. No one felt poor because everyone was poor. Over the last 25 years, as more Chinese are ?lifted? out of poverty due to globalization, people have witnessed more income disparity. 11. RIA member: ?As the gap between lower and middle classes is growing at an alarming rate in China, what actions do you see are needed to head off negative economic effects in the near term?? James Chan: You?ve hit the nail on the head. This is one of the most worrisome problems facing the Chinese government. Land grabbing by officials and real estate speculations by developers with whom the officials are connected have created a super wealthy class of Chinese whose income far exceeds those of ordinary citizens. This is why the Chinese government?s latest social exhortation is to build a ?Harmonious Society.? The worry is that Chinese society is being ripped apart by economic inequities. In 1993, the Chinese government recorded 10,000 incidents of social unrest. In 2005, the number of protests rose to 87,000. The actions needed include: tax reduction for farmers in the countryside, improvement on the environment, better healthcare and pension programs, and improvement on how talent is recruited and paid to join the Chinese bureaucracy. The Chinese government needs to at least make the majority of citizens feel that it is trying its best to create a more fair society. The Chinese people are a very obedient breed. They can endure great hardship and injustice, until they explode and go on a stampede. 12. RIA member: ?I?ve heard that the ?one-child policy? will start to have negative repercussions in terms of demographics. Will China get rich before it gets old?? 5 James Chan: Currently, three Chinese workers support one retiree. By 2010, only two Chinese workers will support one retiree. By 2030, one worker will support one retiree. This is the result of the ?one- child policy? and the shrinking of urban birth rates. Urban Chinese parents love to have children as much as their rural counterparts, but they are sorely aware of the high costs of bringing up and educating children. If you?re lucky to be part of the upper pyramid of rich Chinese officials, entrepreneurs, the professional and educated elite who work for Western firms and large state-owned companies, you?ll get rich before you get old. The majority of wage-earning citizens and rural workers will get old before they get rich (see chart in The Wall Street Journal, September 18, 2006, p. A4). 13. RIA member: ?What measures can be taken to deal with a shortage of management staff and the high turnover rate in China?? James Chan: The high turnover rate among Chinese management ranks is endemic. It is common to witness management-level employees working for foreign-funded companies for a couple of years and then they get recruited by state-owned companies at very high salaries. The Chinese-owned companies probably feel that these new hires have received great training where they worked, in addition to having ?inside knowledge? of value to them. There is no easy solution to this problem. The best you can do is to recruit people more carefully, recruit them when they?re younger, treat them in the proper ?Confucian? style where they look up to your as their mentors, teachers and benefactors. It will help if they have a share of the company?s assets. Chinese people are loyal if you make them feel that you?ve accepted them as part of your ?inner circle.? II. The Robotic Industries in China Market size $367 million in 2005 Number of robot units 7,600 Percent imported 80% Growth rate more than 30% per year Projected growth 17,300 units in 2010 and 100,000 units in 2015 Industries using robots More than 50% of robots in automotive industries; other industries include electronics, household appliances, electrical machinery, petrochemical, underwater operations, medical devices, space exploration, and entertainment. Geographical distribution Guangdong, Jiangsu, Shanghai, Beijing, Shenyang Current technical sophistication 1980s compared to advanced Western nations Share of global robot market 3% based on global robot output of $11 billion 6 14. RIA member: ?What are the latest figures for sales into the Chinese market?? James Chan: In 2002, China had 3,500 robots valued at 700 million renminbi (or $88 million). About 80% of these robots were imported from as many as 40 countries including Japan, the United States, Sweden, and Russia. In 2005, China imported and manufactured a total of 7,600 robots at an estimated value of 2,900 million renminbi ($367 million). The robotic market in China has been growing at more than 30% per year for the past few years. We estimate that sales of robots in China will be about $500 million by year-end 2006. 15. RIA member: ?Where does the robotic industry stand within China? How does it compare to that of Japan, Europe, and the United States?? James Chan: Industry insiders in China estimate the worldwide robotic market to be worth $11 billion. This puts China?s share at 3% of the global market. One China specialist said that the current state of Chinese robotic technology is only at the level reached by developed countries in the 1980s. On the other hand, the Chinese government has designated the robotic industry as a key strategic industry. Both the government and industry leaders view advancement in robotics as a step toward greater modernization in manufacturing and other industries. The photograph shows China?s first human-like robot. The size of China?s automation industry (of which the use of robots is only a part) is estimated at $33 billion growing at an average annual rate of 10 percent. In 2005, an estimated 600 automation assembly lines in the automobile, electronics, household appliances, tobacco and new energy industries alone needed to have new robots and robotic systems. China predicts that it needs 100,000 robots each year by 2015. China aspires to be the third-ranking nation in the global robotic industry within 20 years in terms of its technical sophistication and market size. 16. RIA member: ?How does the Chinese manufacturing sector accept robotic automation given that China has such a large labor force? Aren?t robots considered a threat to the Chinese workforce? Does the abundance of cheap labor precludes China from becoming a major user of robotic technology for material handling and machine load and unload applications?? James Chan: The Chinese are embracing robots and robotic systems for both practical and strategic reasons. Robots help reduce the quantity of defective products. One source quoted the use of robots in the manufacturing of iPods as an example of their superiority. By using a laser-based welding function offered by robots imported from ABB, a Chinese factory raised its productivity by becoming able to produce 120,000 units of an iPod component per day. The quality was higher than work performed previously by human workers, let alone an increase in quantity produced. Without the robots, the factory used to discard 12,000 parts that were not made up to specifications (or a 10% reject rate) every day. Not all factories consider robots a threat. 7 17. RIA member: ?Given the low cost of labor, what are the major forces driving process automation in China?? James Chan: Chinese workers work very hard. But they are human and they get tired. Robots don?t get tired. Robots can perform precision work that Chinese workers cannot do. A hospital in Shenzhen in South China imported a $1.5 million medical robot called ?Zeus? from the United States to perform surgery on patients. The Shanghai Jiaotong University developed a robot that can operate underwater at 3,500 meters (11,483 feet) below sea level, a task that cannot be done by humans. Half of all robots in China are used in the automotive industries. China wants to become a leading global automotive parts and components manufacturing base. This is perhaps the main force that will propel Chinese robotics. Other forces include motivation to raise Chinese science and technology and for space and high tech research and development. The Chinese Academy of Space Technology has created a robotic arm as part of an effort to seek participation in the International Space Station (ISS) projects. Chinese companies have started using robots to replace retail service personnel. One such female robot, placed at the Sichuan Science Museum, even speaks a Sichuan dialect to charm her customers (see photograph). 18. RIA member: ?When will China have a domestic robot manufacturing base?? James Chan: China?s domestic robot manufacturing base has already started to appear. At the moment, it is concentrated in major metropolitan centers along the coast such as Guangdong Province, Shanghai, Jiangsu Province, Beijing and Shenyang in Northeast China. Robots are used to perform a wide range of tasks including arc welding, spot welding, assembly, material handling, painting, sealing, plastic molding and other functions. 19. RIA member: ?In what ways is China's market for robots different from that found in North America and other countries? What issues arise in supporting robotics applications in China?? James Chan: China?s needs for robots will not differ greatly from other world markets. However, there are a number of issues in supporting robotics applications. Chinese customers complain that foreign-made robots have problems ?functioning? in the Chinese industrial environment. In 2000, more than 50% of 1,000 robots imported from Sweden and Japan for installation on automated production lines did not work properly. About 33% ran into serious operational problems. Some 16% of the units could not be used at all. The situation has ameliorated over the years. But fundamental issues remain. 8 The main issues include incompatibility with the domestic manufacturing technology, lack of adequate training for repair and maintenance staff, bad selection of robot models, poor installation, lack of customer education, and inadequate after-sales service. Chinese customers complain that foreign robots cost too much while not achieving anticipated results. Not surprisingly, a number of domestic Chinese robot manufacturers are seizing upon these complaints to toot their own horns and persuade customers to use domestically-made robots. 20. RIA member: ?What are the projected Chinese exports for automobiles and robots and robotic automation over the next 10 years? If China becomes a net exporter of automobiles, the auto industry in the U.S. will contract and it will impact negatively on North American robot sales.? James Chan: I have not been able to find Chinese projected export figures for automobiles or robots. I can only confirm that the Chinese government is very serious about turning China into a net exporter of autos and auto parts. So far, China has exported buses to the Middle East and other developing regions. Exports to North America are very limited at the present time. It is very possible that in 15 years China will impact on North American robot sales the same it has impacted the textile or furniture industries over the past five years, causing the layoff of tens of thousands of workers and plant closings. This is perhaps one reason why certain Western and Japanese robot manufacturers have begun forming joint ventures to make robots in China. 21. RIA member: ?If supply and demand in the Chinese domestic auto and robotics industries is in balance, the effects on world markets will be small. If China grows a large export industry for cars and robots, world markets will face negative impacts.? James Chan: It is a foregone conclusion that China will grow a large export industry for cars and, given the right market conditions, will grow a robot export industry also. 22. RIA member: ?Are there currently Chinese manufacturers of industrial robots and robotic automation?? James Chan: There are more than 200 manufacturers and designers of industrial robots and robotic automation products in China including about 100 laboratories. The Beijing Research Institute of Automation for Machinery Industry (RIAMB) is a leading designer and manufacturer. It is a state-owned organization and a key institute in the National 863 Program for strategic science and engineering projects. Its website contains a lot of information on the robotics industries in China. Go to http://www.robotschina.com. The Shenyang Xing Song (Siasun) Robot & Automation Co., Ltd. is a leading domestic commercial manufacturer (see photograph). In 2004, Siasun?s sales grew 40% to 230 million renminbi ($29 million). Among Siasun?s customers are the First Automotive Works (FAW), Shanghai Automotive Industry Corporation (SAIC) and Jialing Industrial Co. Ltd. 9 Other significant domestic designers and manufacturers of robots include the First Automotive Works (FAW), Harbin University?s Automation Institute, the Institute of Automation of the Chinese Academy of Sciences, Shanghai Jiaotong University, China University of Science and Technology, Zhejiang University, Tsinghua University, and the No. 502 Research Institute of the Chinese Academy of Space Technology. Joint ventures with foreign capital are among the most significant robot and robotic systems manufacturers in China. 23. RIA member: ?Most international companies follow the RIA or European standards for robots being purchased or installed in the Asia-Pacific Region and China. Is there some requirement under WTO for local Chinese firms that use robots to follow the standards? If so, what is the enforcement body?? James Chan: The organization that can answer this question with authority is the Chinese Association for Standardization (CAS) in Beijing. Please contact the Chinese Association for Standardization, No. 33 Zengguang Road, Haidian District, Beijing, Beijing 100037, CHINA. Go to http://www.china-cas.com/english/index.htm. 24. RIA member: ?Is Dr. Chan planning to start a Chinese robot association and what factors does he think will lie behind such an association being started? Will the RIA use its experience in forming a Chinese association and assist a local group to start it.? James Chan: No individual is permitted to start an association in China. Unlike trade and professional associations in the United States, Chinese associations are government agencies and closely related to their industries. Some of them are found in the same buildings housing large, state-owned enterprises. Chinese associations, however, are eager to form joint ventures with their Western counterparts. Since 1988, I have been working with ASTM International to jointly publish a magazine with the China Association of Standardization (CAS). Our purpose is to disseminate industry news and ASTM standards in China. Twice each year, we distribute 18,000 copies of a Chinese-language standardization magazine through CAS in China. About 30,000 Chinese standards professionals and workers read this magazine (see photograph). ASTM International is holding its first ever board meeting in Beijing in October to signify the importance of the China market in the global standards industry. To view ASTM International?s Chinese- language publications, go to http://www.astm.org. 25. RIA member: ?Of the total robot sales in China, what percentage is being used by the auto industry?? 10 James Chan: More than 50%. 26. RIA member: ?Do manufacturers such as ABB, SGS and Motoman use local component content? What is the Chinese government?s position on supporting local sales when the import of robots from overseas avoids local value-added tax (VAT) being levied against the sale?? James Chan: On April 24, 2006, the Economic Daily Online ran a Chinese-language article on ABB?s activities in China. According to the article, ABB began selling robots in the China market in 1994. The company set up a robotic research and development center in 2005 to adapt to the needs of the domestic China market and to use it as a base to serve ABB?s global sales network. The manufacturing facility of ABB in Shanghai has an area of 140,000 square meters. It plans to manufacture 1,000 robotic units per year. The site will have 300 employees by the end of 2006. According to the article, ABB personnel said: ?Because we?ll be manufacturing (robots) in Shanghai, we?ll increase sourcing of parts and components from domestic Chinese suppliers in the machinery, electronics and paint industries. We?ll ship these parts and components to other factories where we manufacture robots.? Chinese importers of raw materials and foreign-made parts can get their VAT (17% of declared value) reimbursed by the government if they turn them into exports. 27. RIA member: ?Are local robot sales in China being made at lower prices than elsewhere in the world?? James Chan: It costs 9 million renminbi ($1.14 million) to buy a specific robot system made in Japan. The same system can be made in China for only 4 million renminbi ($506,000). The cost for the design and manufacture of the Sichuanese-speaking female robot that stands guard at the Sichuan Science Museum was $37,500. The cost could be reduced to $12,500 if someone orders 100 units. Shenyang Siasun Co. can manufacture robots at half of the price of imported ones. Industry insiders claim that Chinese-made robots cost only one-third of the price of imported robots. Similarly, the cost of an automated assembly line installed with Chinese-made robots is one-third of the price of imported units. 28. RIA member: ?Which industries are early adopters of robotic automation? James Chan: The automobile, motorcycle, entertainment, educational, electronics, medical, household appliances and the petrochemical industries. 29. RIA member: ?What is the competitive advantage for a robot supplier in China in the next 3 to 5 years? What are the most emerging segments?? James Chan: Lower costs, no import duties or VAT and other taxes (which together can add 50% to the cost of the unit), more compatible with domestic industrial technology and practices, 11 faster customer service, and Chinese sales people who know better how to sell to local suppliers. In terms of emerging segments, a good way?and an entertaining one?to gauge the development of robotic technologies in China is to attend the RoboCup events in China. The recent RoboCup international competition took place in Suzhou (two hours by car west of Shanghai) from October 7-9, 2006. More than 100 Chinese robotics organizations competed with 30 foreign firms. While the show is billed as entertainment, China views it as a means to determine where it stands in global robotics advancement. 30. RIA member: ?Is it possible that one or more independent Chinese brand can emerge? Is robotics seen as a strategic sector in China to be developed with national champions (like it happened for example in Korea)?? James Chan: I think a successful ?independent? Chinese brand may happen if a Chinese company teams up with a Western robot manufacturer. Back in 1986, robotics was one of the projects in the ?National 863 Program,? a comprehensive, government-backed science, technology and industrial program to propel China into the ranks of Western, th industrialized nations. In the current 11 Five-Year-Plan (2006-2010), the Chinese Government has repeated vows to beef up on the development of robotic technology. 31. RIA member: ?Are there mobile robots for law enforcement and if so, who are the manufacturers and distributors?? James Chan: In March 2004, the Shenyang Institute of Automation developed its first ?Spirit Lizard? (Chinese word: ?Ling Xi?) law enforcement robot. This robot fulfills anti-terrorism and explosion-prevention functions. In July 2005, a new model, ?Spirit Lizard-H? came out. These robots are used by Chinese law enforcement agencies in large cities. They cost only a third the price of imported robots. The picture shows a person adjusting the arm of ?Ling Xi-B? mobile robot. 32. RIA member: ?Are robots used in nuclear power plants?? James Chan: The Institute of Optics and Electronics of the Chinese Academy of Sciences in Chengdu, Sichuan Province, succeeded in the design and manufacture of an underwater search and retrieval robot used at nuclear power plants. This robot (see photograph) is currently used at the Guangdong Daya Bay Nuclear Power Station to the northeast of Hong Kong. The robot system includes an underwater crawler, a two-dimensional pan and tilt, a camera, an image storage system, a mechanical gripper, a cleaner, a vacuum pump and a remote-controller. The robot can pick up objects up to one kilogram in weight. Its cost is 20% of an equivalent, imported robot. China claims that it is a leader in the design and manufacture of underwater robots. 12 33. RIA member: ?Who is buying robots: government, private industry, academia, law enforcement?? James Chan: There are no publicly available records on where the money comes from for such high and new technology imports. In my personal experience, with the exception of those used in Western-funded enterprises, buyers of state-of-the-art technologies and products (robots included) come mostly from the government, including the state-owned conglomerates and government-funded scientific laboratories. III. Trade and Investment 34. RIA member: ?How is the Chinese government involved in the structure of the business or in the transactions that occur?? James Chan: The Chinese government controls?and has direct influence on?many commercial activities. If you do business with a state-owned company, you are doing business with the Chinese government. If a Communist Party Secretary is involved in the decision-making process, you?re doing business with the government. If the letter-of- credit is opened by a national or provincial level ?import export-corporation,? or if you?re doing business with a ?national key laboratory,? you?re doing business with the Chinese government. If you form a joint venture with a Chinese association, you are doing business with the Chinese government. Even mergers and acquisitions of midsize enterprises are orchestrated under the auspices of the Chinese government. Before 1949, this type of government-influenced commercial activities was called ?bureaucratic capitalism.? Nowadays, we can call it ?capitalism with Chinese characteristics.? 35. RIA member: ?When will China be exporting cars back to the U.S. in large enough quantities to have an impact on American suppliers? What will be the first auto parts that will be imported into the U.S. that will be supplied to American original equipment manufacturers and when will that be?? James Chan: Beginning on January 1, 2007, the Chinese government will allow any of the recently ?approved? 160 automotive companies to export autos and auto parts to all world markets. Of these 160 firms, 61 are China-Western joint ventures and 99 are Chinese-owned companies. China now ranks as the fourth largest auto-making nation after the U.S., Japan and Germany. China made 5.71 million vehicles in 2005 and it expects to make 7 million by the end of 2006. The country now has 5,800 auto and auto parts manufacturers. China?s auto and auto parts exports rose 34% to $11 billion in 2005 compared to 2004. The number of vehicles exported doubled during the period to 173,000 units in 2005, exceeding imported vehicles for the first time. Currently, autos and auto parts exports 13 account for only 7% of the total output value of the Chinese automotive industry. My guess is that it won?t take more than five years to see Chinese-made cars and auto parts to become visible in the American market. 36. RIA member: ?We did quite a bit of business selling in China in the late 1990?s. We heard a lot of stories about corruption and kickbacks but were never exposed directly because we dealt through Chinese ?agents? who handled many of the commercial issues. What is the current state of affairs with respect to corrupt business practices in China?? James Chan: The media in China broadcast stories of corrupt officials and kickback schemes almost everyday. Corruption is still a chronic malady. The central government understands that it is a serious social problem. In your case, the right thing to do is not to engage in any such practices, as you wisely avoided them in the past. 37. RIA member: ?Until recently, almost all foreign businesses operating in China were via joint ventures with Chinese companies. Now we see an explosion of totally foreign- owned enterprises being established in China. What are the advantages and disadvantages of each of these types of structure?? James Chan: For companies that are new to the China market, forming a joint venture with a Chinese company makes sense. It allows you to learn the lay of the land, how things work and how best to become wholly-owned when and if the time is ripe. The disadvantage of a joint venture is that your partner may not have the same agenda as you do. The advantage of a wholly-owned company is that you have complete control over hiring and firing of personnel and better protection of proprietary secrets. However, you will be legally liable for whatever that might happen at the company. 38. RIA member: ?What are the three biggest dangers to foreign companies establishing operations to manufacture, to purchase or to sell in China today?? James Chan: I would say that the three significant risks will be: (1) piracy, (2) recruiting and grooming the wrong people and (3) rule of law issues. 39. RIA member: ?Can you give some insight on Chinese auto manufactures setting up facilities in the U.S.? Is this a possibility and if so where would be the target markets?? James Chan: Daimler-Chrysler has a plan to work with Chery Automobile of China to set up a joint venture to export cars to the United States. Meanwhile, Chery has a distribution agreement with Malcolm Bricklin to bring low-cost cars to the American consumers. Another target market will be U.S. auto parts manufacturers that have special technologies that are not available in China. Chinese enterprises have become interested in acquiring U.S. and other Western companies in the automotive industries. Executives of 400 Chinese midsize industrial enterprises (which contribute to 55% of nd China?s gross domestic product) will convene at ?The 2 Annual Z Park International 14 Financing Forum? on November 16, 2006 in Beijing to discuss cross-border investment and mergers and acquisitions (M&A). The event represents the growing wave of interest in M&A as a step to overseas commercial expansion. The Chairman of The Association for Corporate Growth (ACG)?an association with more than 10,000 members in investment banking advisory and M&A services?will be delivering a paper on how M&A works in the United States (see http://www.mmadvisors.com ). The Beijing-based international consultancy, Diebold Associates, works with the International Financing Magazine (a government-approved publisher) to host this event. For details on how to participate in this event, go to http://www.dieboldassoc.com. 40. RIA member: ?What synergies or opportunities exist between us and the Chinese in the area of manufacturing instead of just ?competing? with each other?? James Chan: There are several ways by which America and China can co-exist in a beneficial way that does not smack of mutual competition. America is a source of advanced technology that China needs and wants. This is especially true of niche parts and components manufacturers, such as a specialized bearing for nuclear power generation plants. American companies have brand recognition and global marketing savvy. U.S. companies can work with Chinese companies to market products made in China to other world markets. I know of a battery company that took a branded battery product to China. It showed its Chinese partner how to make a better battery. The battery has worldwide brand recognition. Together, they generate great profits by selling the branded product both within China and in other developing countries. Not everything made-in-China has to be sold only in the U.S. 41. RIA member: ?Is there an organization in China like the Japan External Trade Organization (JETRO)?? James Chan: That?ll be the China Council for the Promotion of International Trade (CCPIT). Go to http://www.ccpitbj.org/english/site/siteindex. 42. RIA member: ?What are the import tariffs if any on manufactured units made in China and shipped into the U.S.? Is there a value added tax?? James Chan: The U.S. Customs has elaborate import duties for different types of merchandise being imported into this country. Consult the ?Import Specialist? in charge of your category of products at the U.S. Department of Commerce. The U.S. does not levy a value-added tax (VAT) on imports. The Chinese government levies a 17% VAT on all imported merchandise. 43. RIA member: ?What are the prospects for the abolition of the preferential taxation for foreign-invested enterprises?? James Chan: Any sort of rule or regulation in China is subject to change without notice. It pays to stay tuned to what is happening at the very local level and keep talking with local government leaders. 15 44. RIA member: ?If China is still blossoming as a manufacturing site known for high quality, how would automation assist in improving this reputation for quality? Is China looking to be recognized as a low-cost, high-quality manufacturing area in our worldwide market?? James Chan: The Chinese automation market was valued at $21 billion in 2001. Growing at 10% or more each year, this market will increasingly adopt robots and robotic systems to raise the quality and productivity of Chinese-made products. Witness how the Chinese semiconductor business has grown with infusion of capital and expertise from Taiwan, the U.S., Japan and Europe. China not only wants to be a low-cost, high-quality manufacturing center for the world. It also wants to be a manufacturer of high-end products too. 45. RIA member: ?What's the current state of China's domestic automation system integration supplier capability? What are some of the barriers that limit this capability for expansion?? James Chan: Domestic automation, even among industries that are capital-intensive, is estimated to be less than 10% of its full capability. Automation system integration suppliers are primarily Western companies. Their domination of the China market is expected to last for quite a few years. Chinese domestic suppliers are limited by their lesser research and development capabilities. Some complain that they don?t get adequate capital or financing to help domestic suppliers ?take it to the next level.? 46. RIA member: ?What are the key parameters that drive capital asset purchase decisions for joint ventures operating in China? How do the Chinese and foreign joint venture partners participate in that decision?? James Chan: It depends on the mindset and motivation of the Chinese partner concerned. If the Chinese partner is looking at a joint venture as a short-term cash cow, he may hold back on making capital asset purchase decisions. 47. RIA member: ?What business structure (100% ownership, joint venture, sales representative or other) options exist in China and which best provides a US-based company opportunity to control the management of the company and provides the ability to achieve profit that can be brought back to the U.S.? What are the pros and cons of the different structures that can be established?? James Chan: There is no formula for which type of business structure will be appropriate because it varies with company. Normally, a company new to the China market will set up a small sales or China representative office to begin exporting its products there or to use it as a procurement office. As the company becomes more comfortable and knowledgeable about the marketplace, it may form a joint venture with a local partner to expand its reach, either in setting up factories or to gain access to the distribution and retail systems. Over time, companies with deep pockets and new technologies want to have their wholly-owned subsidiaries to exert complete control and autonomy. 16 48. RIA member: ?What percentage of the business can a U.S. company own in China?? James Chan: Up to 100 percent, except in industries which are still government monopolies or government-controlled (such as broadcasting, publishing or insurance). Since January 2005, China has relaxed its restrictions on foreign ownership in the retail, banking and financial sectors. But restrictions still apply. For example, no foreign company can own 100% of a bank in China. A single foreign investor can own no more than 20% in a single bank, while the total foreign investment in each domestic bank may not exceed 25%. These restrictions vary with industries. V. Intellectual Property Rights Issues in the China Market 49. RIA member: ?What is China doing to protect intellectual property rights of those doing business in China when it has been painfully obvious that the Chinese people and government place little, if any, value on the intellectual property rights of others and why should we trust China with our ?know how? when their track record has been and, in my opinion, continues to be poor at best?? James Chan: The Chinese government understands that this is one of the ongoing sore points in doing business with the West. It has taken measures, such as increasing financial penalties and destroying counterfeit products. But all measures taken so far are inadequate by our standards. Western governments have been putting pressure on the Chinese Government to address this issue but no one seems to feel satisfied. I began my China career selling very high-level, English-language scientific, technical and medical books and journals to China in 1982. I was the China Area Manager at a Fortune 500 company at that time. It didn?t take me long to know that our publications were being reprinted at a tiny fraction of our price and sold within China in renminbi without our permission. But, this painfully shocking experience taught me how to come up with a way to sell our products there and turn a handsome profit. On November 10, when we meet, I?d like to share our experiences and how you can still generate profits despite daunting difficulties. 50. RIA member: ?Many stories have been circulated that the Chinese manufacturing companies are ?stealing?, ?copying? and ?infringing? on U.S. patented product designs and engineering. This enables China to sell the same product back to the U.S. at extremely low cost. Is this a common practice in China? Can you please explain the Chinese manufacturing sector?s thinking on why and how this happens?? James Chan: During the 30 years from 1949 to 1978, China lived under a totally planned economy in which all factories were encouraged to learn and ?copy? from one another. The concept of intellectual property was non-existent. The majority of Chinese people understand the concept of ?selling things? (they know how to do transactions). But the idea of ?selling value? is still not obvious, even to some educated people I?ve met. On top of these ?reasons,? the penalties in China are low (less than $20,000 even for high-profile violation cases). Jail sentences are rare. Violators may be hardwired with 17 local officials. Local officials may be the protector of pirates because piracy brings in enormous profits. The central government cannot control hundreds of thousands of pirates all over China. All of the above make some ?pirates? feel that they can ?get away with murder.? Chinese state-owned automobile manufacturers ?improve on? the models introduced by their foreign partners so that they don?t need to reinvent the wheel and spend enormous expenses on research and development costs. Over the last 20 years, Chinese automakers filed 15,686 patent applications in the hope of ?creating their own intellectual property.? th But these China patents are only 1/40 of those filed by Western auto makers. China will respect intellectual property rights more strongly if other people start copying their products. 51. RIA member: ?What steps can international companies take to protect intellectual property embodied in systems installed in China?? James Chan: The first step is to know which elements in your product or technology the pirate wants to copy. Then come up with an internal company procedure by which you safeguard your trade and technical secrets. How you protect your own secrets should itself be a secret. 52. RIA member: ?What intellectual properties are ?proven? to have been compromised, stolen or copied? What does the China legal system offer by way of restitution through the courts or other means?? James Chan: You can get very detailed information by viewing the website of the U.S. Embassy in Beijing, China (http://beijing.usembassy-china.org.cn/ipr.html) and the website created by the U.S. Department of Commerce (http://www.export.gov/china). The best thing to do is call your local ?International Trade Specialist? of the U.S. Department of Commerce. Your International Trade Specialist will look up this information for you, often at no charge as part of their service to encourage American companies to export their products. 53. RIA member: ?What are the risks in collecting accounts receivable and an infringement of intellectual property rights?? James Chan: The risks of customers not paying are high. There is a great deal of ?triangular debt? among Chinese companies which owe one another payments that are long overdue. It can take months to get paid. Pre-payment is by far the best method in selling to China. Payment via letter-of-credit is reliable. Within China, it is customary for a supplier to be paid one-third the amount of an order by the buyer upon signing of a sales contract. The supplier delivers the order to the customer?s door and gets paid the balance on the spot. If you?re doing business with a large import-export corporation that is well established in your industry, you may get paid within 90 to 120 days (those are the terms they demand). Consignment sales are very risky. The risks of infringement of intellectual property rights are even higher. 18 I saw on the bulletin board in the reception hall of one of Shanghai?s largest original equipment manufacturers a most memorable photograph. The bulletin board shows the ?Best Salesman of the Year? at that company. Next to him and of equal importance is a photograph of the ?Best Collector of the Year? person. I was very tempted to take a picture; but decided not to take the risk. 54. RIA member: ?What is China doing to investors bringing in the large capital investment to China to protect against loss of trade secrets and protecting industrial knowledge?? James Chan: When China first opened up, you could count the number of lawyers on one hand. By now, there must be close to 200,000 lawyers in China. People are getting litigious and lawyers are among the most sought-after professions among the younger generation. But, even with the help of lawyers, a company must take the right precautions against possible loss of trade and technical secrets. Remember that how you keep your own secrets should be a secret itself. This is how Chinese companies ward off pirates. Remember, espionage and theft has no national, racial, religious or transgender sensitivity. On a positive note, over the last 10 years, 70% China?s annual merchandise export is the result of joint venture between the Chinese subsidiaries of multinational corporations headquartered in Japan, the U.S. and Europe and their Chinese partners. About 80% of the world?s 2,000 largest corporations have procurement programs in China. It is obvious that enough companies made a calculated risk and they?ve found the China market to be irresistible. V. How to Succeed in the China Market 55. RIA member: ?In the past year, we experienced a $47 billion trade deficit in technology products with China alone. I don't believe high tariffs on imports alone will solve this problem. What is the answer to balancing our trade with China?? James Chan: I agree with you that high tariffs alone will not stop our trade deficits with China. I personally also believe that a slight rise of the yuan will not do it either. I think that the underlying causes of our trade deficit with the rest of the world are too complex to ?blame it? on China. Remember that we used to ?blame? the Japanese in the 1980s? America did not have a trade deficit before 1975 (see the graph from The Wall Street Journal, September 25, 2006, p. A1). Somehow, things started to change in 1980. Our trade deficits have ballooned since that time to the tune of $200 billion and more each year. China is only one of many global factors that lead to our trade deficit picture. I don?t see the possibility of a quick fix to this problem, which has been decades in the making. 19 The answer I see to balancing trade with China is to encourage U.S. companies to strengthen their resolve in targeting the China market as an ?export? market versus China as an outsourcing or manufacturing market. For robots and robotic systems, China is going to be a lucrative export market. The Chinese have acknowledged this as a fact. The U.S. Government?s pressure on the Chinese government to revalue the yuan, making it ultimately a convertible currency, will help toward balancing the trade deficit. Finally, if all Western nations tell the Chinese that they too should start consuming rather than try to save every single penny. China should also be told that trade is a two-way street for traffic to continue running. America cannot export its wealth and make everyone on earth rich, however lofty and ego-pleasing it feels. China needs to know that it now has $1 trillion in foreign currency reserves and that it can afford to start spending and consuming. 56. RIA member: ?Please analyze the success formula of companies that are doing successful business in China such as GM, Microsoft, Coca-Cola.? James Chan: There are three key ingredients that make any company?large or small? successful in the China market. First, the company has a proprietary product, a unique process, a well-known brand or a special management system that cannot easily be duplicated. This assumes that the company knows how to keep its own proprietary secrets. Secondly, the company takes time and effort to build a team of both Chinese and non-Chinese management-level staff who can work together to make the company thrive rather than fighting among themselves. Thirdly, the company continues to innovate or create new technologies, products and systems that keep it a step or two ahead of its competition. 57. RIA member: ?Can you confirm our impression that more confidence is put in foreign (robotics) companies and their distribution over local manufacturers and that the presence as a local company has even a counter-productive effect?? James Chan: The robots and robotic systems industries are still at a formative stage in China, even though the Chinese have made great strides. China claimed that it started making robots as early as 1972. But serious research and development on robots did not take place until 1986 under the program, ?Project 863 Intelligent Robots? funded by the government. For a long time, there was a lack of adequate capital infusion for robotic development aimed at commercial applications. Chinese enterprises were able to generate more income engaging in other export-oriented industries. For this reason, I can confirm that Chinese end customers are much more enamored with the capabilities of Western suppliers. The Chinese people can be brutal to their own kind. Chinese companies often compete tooth-and-nail among themselves. They don?t feel that they need to be ?nice? to one another. I can see why Chinese end customers make a bee-line to your trade show booth and rudely ignore the booths of domestic manufacturers. End customers think that they can learn more from you in this industry because they know that Western suppliers are clearly more advanced technologically. However, I must stress that the above behavior between Chinese end-customers and Chinese manufacturers should not mislead you into believing that having a local 20 company in China to represent your interest is ?counter-productive.? Nothing can be farther from the truth. It is crucial to have a local presence in the China market if you want to succeed in selling your products and services there. Chinese people need to rely on your local staff to help them communicate with you. Negotiation in China is like pulling teeth. You and your local people must wine, dine and woo potential and existing customers. You need to show up giving technical and sales seminars and repeat your messages many times until the end customers finally ?get it.? Your end customers want to see Westerners actually showing up to do the presentations. But they also want to talk with your local Chinese staff to confirm that they understand your points. They?ll for sure rely on your local staff to get you to come down on price. The whole selling process in China is an unending opera. Without the smart and adept agents working with you, you?ll never go far in selling anything in China. You must have local representation. 58. RIA member: ?What are the main errors of American or European engineering companies concerning marketing in China? How do Chinese customers find an engineering company?? James Chan: The first common error is the inability to identify and groom the right China sales representative who knows how to ?work? the Chinese system and close deals with the right people. Often, Western companies hire people who look on the surface to have the right technical background. Successful sales in China depend on a number of factors beyond technical understanding. Your sales representative should know how to read people?s character. He or she should be socially adept and be able to connect with different personalities. The other common error is for Western companies to engage many different distributors who start fighting among themselves and undercutting one another. A third and key error is to have recruited people who learn how you run your business and then start their own companies to compete with you. In terms of promoting engineering services, I don?t believe going to trade shows will be the right medium. Giving technical and sales seminars, publishing articles in Chinese in the right journals and attending association activities will be beneficial. 59. RIA member: ?Are there big differences regarding the expectations on service and customer support in the business-to-business sector in comparison to North America or Europe?? James Chan: In 25 years of selling American-made products in China in a wide range of industries, the only difference I?ve seen is the amount of eating, drinking, wining, singing, and meeting that must transpire before sales are consummated. Chinese customers are extremely high maintenance. They need a lot of ?baby-sitting? and at the same time they must be made to feel that you?re putting them on a pedestal. I?ve also learned to make Chinese customers feel that their buying a Western-made product is not an indication of ?failure.? If you can make your customer feel that they?ve done the right and best thing for themselves by spending a lot of money on you, you?ll succeed again and again in that marketplace. Contrary to what some people feel in terms of the Chinese 21 people being ?logical? and ?intellectual? and ?discerning,? I should add that they buy based on how well they?re treated as what they perceive as ?rational.? 60. RIA member: ?What requirements are there to import equipment into China? How does a U.S. company get clear answers to questions that are specific to their type of equipment for import into China?? James Chan: Not all enterprises in China have the permission to conduct export or import activities. A government license is mandatory for import-export privileges. If you?re dealing with a middleman who does not put you in touch with the end customer, chances are you?ll never get to the bottom of the issue. If you?re dealing with the end customers, and they are serious about buying your products, they?ll tell you what is needed. Ask for prepayment. You?ll get all the right answers. * * * Joint China-Italy Space Robot Research About James Chan: James Chan, Ph.D., is president of Asia Marketing and Management (AMM), a Philadelphia-based international business consultancy that advises companies on doing business in China and Asia. To view his profile online, go to: http://www.AsiaMarketingManagement.com. Contact information: 2014 Naudain Street, Philadelphia, PA 19146-1317. Tel: (215) 735-7670. Fax: (215) 735-9661. E-mail: JamesChan@AsiaMarketingManagement.com. 22
Posted: 10 March 2010

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