Thinking Globally, Acting Regionally

June 6, 2005
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GRAND RAPIDS — China has become synonymous with the loss of the nation’s manufacturing jobs and India with the outsourcing of the service sector. However, in the coming years, the two neighboring economies will likely not be regarded for their cheap labor but as the world economy’s largest growth opportunity in a lifetime.

“The part most people miss is that you’re creating a consumer class that hasn’t existed for the last 50 years,” said Jeff Meyer, executive director of Grand Valley State University’s Van Andel Global Trade Center. “We will increase consumers — by definition those people that are able to buy — by 33 percent in the next 15 years; there are going to be plenty of people to buy and produce for. That can only go one way.”

During a 40-minute Q&A session at last month’s Seventh Annual Automotive Suppliers Symposium in Grand Rapids, Jeffrey Engel, executive director of Ford Motor Co. Americas Product Purchasing Operations, did little to alleviate the concerns of its supply base.

However, he did make it clear where Ford’s suppliers stood as the Big Three automakers sought growth opportunities in China.

“We’d like to expand with our core set of suppliers,” he said. “I don’t want to go to China to invest in a new supplier. I’d rather invest with some of the people in this room.

“But we are dealing with local (Chinese) suppliers for that market and there is some opportunity for export of those parts to the U.S. At this time we don’t see opportunity for the export of U.S. parts to China.”

Grand Rapids-based RoMan Manufacturing, the world’s largest manufacturer of resistance welding transformers, frequency converters and DC power supplies, doesn’t plan on being left out of that market.

“We saw an opportunity in the growing Chinese automobile market,” said RoMan President and CEO Bob Roth. “As that market is growing and they are building capacities to produce cars, somebody has got to be building the equipment to build those cars.”

But for the same reasons that General Motors and Ford have built plants in Asia, and Mercedes Benz, Toyota and Nissan in the U.S., RoMan has found that exporting that equipment, namely resistance welding transformers, from Grand Rapids was not cost effective.

“The logistics costs become prohibitive,” Roth said. “The decision was either stand on the sideline or figure out somehow to get grounded there. Either choose to participate in the market or not to — and we thought it was in our best long-term interest to participate.”

According to the Ministry of Commerce of the People’s Republic of China, there were 45,265 U.S.-funded companies in China at the end of 2004, a contractual investment of $98.61 billion. Last year alone, the U.S. invested $12 billion in 3,925 projects.

The oldest of these companies began as joint venture enterprises (JVEs) with a Chinese partner. A decade ago, the only way to enter into the Chinese market was through a JVE. The Chinese partner was always a government entity and held the JVE’s controlling interest. As China began privatizing industry, the government began pulling out of its JVEs.

As it turned out, the world’s largest manufacturer of weld controls had established a JVE in 1993. RoMan worked with the North American partner domestically and was tapped to become its new partner in the JVE.

With its new Shanghai facility, RoMan has the ability to service the entirety of the Pacific Rim. China is the primary target, but RoMan already is in discussions with Korean and Taiwanese equipment manufacturers. India presents growth potential, as well.

“You need to think globally and act regionally,” Roth said.

The JVE has even brought incremental growth to the Grand Rapids operation, as it proved more cost effective to export one component to China.

Also, in the world’s other major automobile markets, equipment suppliers in the Chinese market are not mature or well established.

“We’re facing some of the same folks from Europe and Japan, but they’re coming in at the same position we are,” Roth said. “And it’s a growth market. Everyone is emoting because over the last two years they’ve had a 50 percent growth rate, and this year it’s going to grow only 12 percent. Tell me the last time the North American market grew at 12 percent.”

“This gets confused with the offshoring bit all the time,” said Chuck Hadden, vice president of government affairs for the Michigan Manufacturers Association.

“What many manufacturers are doing is going to China so that they can be by their customers. Talking with Whirlpool about a year or so ago, they were talking about how being in China was really a license to lose money, because they knew down the way they were going to be selling refrigerators, stoves and appliances to the Chinese.”

Whirlpool now has double-digit shares in China’s richer provinces, but has been beat up by low-cost domestic providers in other markets. It finally began turning operating profits in 1999 and broke even on its $60 million washing machine investment last year, following three straight years of 35 percent annual revenue growth.

With its manufacturing strongholds in Shanghai and Australia, GM Asia-Pacific is the only profitable region for the world’s largest automobile maker. Chris Gubbey, executive vice president of Shanghai GM, told Forbes recently that he expects double-digit growth again this year. General Motors Corp.’s Indian unit sales for the month of April were up 58 percent. GM India has doubled production at its plant in the western state of Gujarat to 60,000 vehicles a year.

“India is becoming a hub for automobile investment,” said Grand Valley State University finance professor and Indian native Yatin Bhagwat. “We have a lot of Asian investors and Europeans. Ford and General Motors have established companies and there are plenty of local manufacturers. As the big companies increase their production capacity, suppliers can set up shops in India just as they do here.”

Unlike China, which had exports of nearly $600 billion last year, India’s economy relies little on exports. Most of its industries produce for indigenous markets.

“There is going to be a growing demand for services,” Bhagwat said. “The trend is that standards of living are rising, there will be a greater and greater demand for products. U.S. companies will get an increasingly higher percentage of their revenues from China and India in the next decade.”

Bhagwat expects a tremendous demand for service providers like real estate companies, financial institutions, mortgage companies, banks, brokerage houses and financial analysts. Within the service sector is the one sector reliant on foreign investment: technology. With its incessant supply of educated, English-speaking workers, India has attracted U.S. outsourcing from software developers and call centers. It hosts companies like American Express, Boeing, Fidelity Investments, Microsoft and Motorola.

It is this business that has Haworth Inc. building a 65,000-square-foot manufacturing facility in the Indian city of Pune and showrooms in New Delhi, Mumbai and Bangalore. Operating in India since 1997, Haworth has installed 30,000 workstations and 50,000 ergonomic chairs in the country.

Steelcase Inc.’s 35 manufacturing facilities are spread across the globe. Recently, it acquired full ownership of its two-year-old joint venture facility in Puchong, Malaysia, Steelcase Artwright Manufacturing.

The remaining Big Three office furniture maker, Herman Miller Inc., experienced double-digit growth in its international markets last year, aided by a favorable currency exchange rate. Some quarters saw certain divisions’ revenue jump 30 percent.

“Both India and China are very price sensitive, not terribly sophisticated in terms of quality expectations,” said Herman Miller spokesman Mark Schurman. “Those markets are beginning to emerge with a higher level of sophistication, but it’s still the exception.”

Herman Miller was in Beijing last month as a sponsor for The Fortune Global Forum. The event offers an opportunity for global business leaders to meet members of China’s new government, including President Hu Jintao.

“We are starting to see more opportunity there, and when you’re talking about markets of that size, even if there is a small percentage of buyers with higher expectations, it is still a decent market,” Schurman said.

Unlike Haworth and Steelcase, Herman Miller has only limited assembly capabilities in Asia. All components and most finished products for that market will be exported from West Michigan.

“Haworth is making sure they have a facility to serve Asia, so when those high rises go up in Singapore, Shanghai or whatever, they can bid on it without worrying about shipping it all over the world,” said Hadden.

“Herman Miller is a different company altogether; they’re stylized and sell at a higher price. They look to see where the future is going to be and try be there first and with style and grace,” Hadden said. “They fill different niches.”

“If you want to be in that market, there are different strategies based on the circumstances,” Meyer said. “But if you’re going to set up shop in a country, your strategy better be to sell to foreign customers.”

Meyer and Hadden agreed that sourcing for cheaper labor is a risky strategy.

“There is a lot of irrational sourcing going on,” Meyer said. “If you’re sourcing for a cheaper product tomorrow, then your strategy is flawed. A cheaper product is only one day away from being an expensive product.

“If you’re sourcing as part of a global strategy to access the marketplace in the future, then I think you’ve got something.”

Hadden believes that despite its job losses, Michigan is in position to capitalize on the global marketplace.

“Michigan needs to understand that China is just a symptom,” he said. “The next problem is going to be India, and then South Africa. We can probably count on this every five to 10 years. Right now, we know how to manufacture things on an assembly line better than anyone else in the world — we should be selling that knowledge.

“Those are the jobs of the future. We need to think about manufacturing, style and design, research and development.”    

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