Your China Strategy 2014

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REV 2014-03-28; All rights reserved,
errors and omissions excepted.
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REV 2014-03-28; All rights reserved, errors and omissions excepted.www.incoe.com
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What is your China Strategy?
Understanding is critical to success
for SMB looking East
Co-operation-with-China.ppts│ 2014-04-30 │ Roy Wang

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China Strategy
Market Analysis
Due Diligence
Expectations & Negotiations
Culture & Communication
How INCOE can help

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China Strategy
Market Analysis
Due Diligence
How INCOE can help


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China Economy
Recent news suggests caution, not worry
 7.5% growth targets missed, real estate
deflating, infrastructure spending still ~40%
share. Real growth difficult to estimate
 Currency allowed to float and devalue
 Credit drying up fast. IOU and banker’s notes increasingly popular.
Be cautious of worthless bank notes
 ‘Crash’ difficult to time or estimate impact.
 As a pillar industry, automotive and their key supply chain would be ‘safe’

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China Economy
Because the macro data still tell the story
2015-2020 GDP outlook
2013 Light Auto units,
growth outlook
3%
4%
3%
8%
8%
2%
3-6%
15.6 M, 3%
3.8 M, 3%
11.9 M, 1-4%
1.4 M, ?%
2.8 M, -1-3%
1.8 M, -2-5%
22 M, 9.5%
8%
2.3 M, 5-10%
5.4 M, -3-10%
1%

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China Big 4 Auto
• 3.6 M units.
• VW, Audi. PQ34, PQ35, PQ46
• GM. Domestic light truck Jiefang
• Toyota Prius, Land Cruiser
• 3.76 M units
• Honda. Civic, CRV
• Nissan
• PSA-Puegot-Citroën
• 4.5 M units
• GM. Buick, Chevrolet, Cadillac SLS, XTS
• VW, Skoda. Incl. Santana Taxi
• 2.7 M units
• Ford-Suzuki (Mazda)
• PSA-Puegot-Citroën

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China Other Auto
• 3.1 M units.
• Daimler Benz. C-Class, E-Class, GLK-
Class. Foton Truck
• Hyundai
• 807,000 units. Exports to Australia
• Mainly SUVs. Private company with R&D
• 728,000 units. Trumpchi
• Honda, Toyota, Mitsubishi.
• Japanese base in S. China
• Fiat

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China Other Auto
• 1.2 M units
• Large exporter of Knock-down kits.
• Factory in Brazil
• Jaguar, Land Rover, Qoros (Israel)
• 1.2 M units
• Batteries & Electric cars.
• Sales mainly ICE/elec. buses
• 480,000 units
• Motorcycle maker
• Volvo, Drivetrain Systems International
• Private

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China Capability – Not to be underestimated
Example: Xin Point Corporation
VW Door Handle
-PA, 3Q7 Satin Chrome
PA/Nylon Plating
– PA Plated
– Satin and Black Chrome
Double Injection & Chrome Plating
- Cluster Ring
- 1st PC, and 2nd ABS, Chrome Plating
Water-based, High Gloss Paint, Laser
PVD/NCVM Process
XTS Center
Control Panel
(Plating, Piano
Black Paint)

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Vertical Integration
• Owned by SAIC (through co-investments)
• JV’s allowed it to expand to a Global Tier 1
• Quiet expansion. Strong control from Shanghai HQ
• Factories in Warren, MI; Harrison Twp, MI
• Rüsselsheim, DE; Gujarat, IN
• Building in Riverside, MO to supply Fairfax Assembly
(KS)
• Yanfeng Visteon Tooling in Shanghai builds most tools

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Automotive Mold Market Commentary
 Vertically integrated capability, financing,
etc… may provide strong advantage and lead
to a thinning out of suppliers
 Remember knowledge transfer is largely one
directional. Critical tools still imported,
however, they expect to learn as much as
make money. And they will likely not share
advances in turn.

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China Plastics Industry
 Statistical Data in China are difficult to verify
 Informal polling suggests flat mold-making market.
Fierce competition will separate winners and losers
 Some data for 2014:
100,000 injection machine unit sales
(compared to 3,500 in US, 14,500 in EU)
126 € B in plastic molds likely produced
23 B € exported, likely over 1 B € imported
80% of Chinese tools stay in Asia

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China Plastics & Mold Making Market
中華人民共和國

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▲ North China:
Tianjin, Beijing, Shenyang
Many Auto JV Molds. 15 %

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► Jiangsu (Suzhou, Kunshan), Shanghai
Molders with mold capacity, 20%
▲ North China:
Tianjin, Beijing, Shenyang)

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◄ Zhejiang (Ningbo, Huangyan, Taizhou)
2nd Tier mold Disctrict, 20%
▲ North China:

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▼ Guangdong “Pearl River Delta”:
Shenzhen, Dongguan, Guangdong
Premier mold District, 30%
▲ North China:

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▲ North China:
 Wuhan, Changsha, Sichuan
Major industrial,
developing mold base. 15%

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▲ North China:
 Wuhan, Changsha, Sichuan
Major industrial,
developing mold base. 15%
 Xiamen
Electronics.

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China is the future
Who can ignore it?
 China has the largest automotive
production and customer base.
 A permanent global pillar together
with US and Germany
 Technology & Quality already being
achieved and constantly climbing
 Economic hegemony coupled with
geopolitical might

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What is your future?
Possible evolution of tooling strategy
Short Term
 Cost cutting
 Customer demand

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Short Term
 Cost cutting
 Customer demand
Medium Term
 Turn-key partner to molders for all builds
 Low cost in China, apply high-value
local content as needed

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Short Term
 Cost cutting
 Customer demand
Medium Term
 Turn-key partner to molders for all builds
 Low cost in China, apply high-value
local content as needed
Long Term
 Strategic to OEM/Tier 1 programs
 This may mean going even beyond China

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China Short Term
Main reasons to go
 China Molds still yield about 30%
savings for established operations.
You can just as easily lose 30%
 Speed. 100 molds in 3 weeks?
 Customer demand
 Customer base,
particularly global programs such as
GM D2XX, VW MQB

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Chinese Supply Chain
Market Commentary
Due Diligence
How INCOE can help


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Due Diligence
Supplier Selection
Go to China to review:
 Machine capability, degree of hand finishing
 Design and Project Management. Language
 Quality
 Profitability
 References
 Tryout capability
 Warranty & Service

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Due Diligence
Supplier Selection
Or you might get this:
• Factory doesn’t exist
• Factory not as advertised
• Work is given to another shop

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Due Diligence
Design Freeze
Go to or stay in China for:
 Face to face ‘final’ design review
 Address last minute negotiations
 Inspect mold base if ordered
 Visit supply chain

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Due Diligence
Manufacturing
Go to China to:
 Ensure your mold is made on the
machines advertised
 Timing is inline with reporting
 Address in-process issues

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Due Diligence
Trial
Go to China for:
 T0 and/or T1, depending on critical path
 Film anything you don’t attend
 Mold makers and even try-out shops lack
molding expertise
 Material drying, other basic trouble shooting
not common
 Hot runner supplier, while able to report,
not often able to influence.

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Co-operation with China
Market Commentary
Due Diligence
How INCOE can help


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Expectations
Do you want to be right or do you want to make money?
 Fight the critical battles first. Leave your ego at home.
 Getting 100% of the details right at the price you want is a
very active process. Nothing is truly turn-key.
 Specifications on details such as steel selection can be
misunderstood as suggestions, with subsequent cost or
performance impact
 Non-compliance or resistance to instruction have reasons.
You have to draw them out.
 Obfuscation works in their favour; clarity difficult, and has
other costs

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Expectations
You may have to choose
 Delays in both design and delivery are common. Some
due to capacity, some due to supply chain
 A common reason for design changes being refused is
because they’ve already cut or ordered steel.
(Machines cut at the same speed in China too. You
must use your own sense and resist the urge for
wishful thinking)
 If performance was nominal, strategize to continue
developing relationship rather than find a new supplier.
Even short-term results will improve if relationship is
strategic rather than transactional

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A word on VAT & Duties
• No VAT on direct export or to
HK
• No tax to free trade zones, but
not generally used in our
industry (difficult)
• China Tool Maker can get up
to 13% VAT Export rebate on
Components. Customers often
don’t know. Tool maker often
can’t process. Can be delicate.
~8-10% Import on Parts + VAT
4.5% Import to EU

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Negotiation
General comments
 A contract in China, while not meaningless, is a
flexible document.
 Renegotiate in good faith, but be firm. Chinese
disdain business weakness
 Penalty clauses can encourage supplier to tell ‘the
truth’, but generally should not be enforced unless
conditions are extreme
 Give expectation of multiple contact and surprise
inspection
 Suppliers are starting to accept PPAP-like terms
 Do not ignore signs of financial stress
 Think about who owns who late in the game

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Negotiation
Preparations
 Hire someone on the ground in China to
represent your interests. Pay them well.
Zhaopin, 51jobs, Linkedin all good sources
 Monitor closely and train.
 Develop your China network of professionals.
Attorneys, government connections, Chamber
of Commerce, logistics, bankers. Hold them in
reserve. You pay in cash what you didn’t pay
for in dinners
 Have direct contact to sub-suppliers. Respect
their delicate political position.
 No matter what they say, you must project
manage all critical path

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Negotiation
Design & Technical Details
 Engineering responsibilities should be clearly
delineated
 Be aware your prime contact person may not be
technical
 Always explain reasons for changes, or risk them
not being done
 Most change from their norms have to be strongly
driven by customer.
 Make them say it back to you during meetings

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Co-operation with China
Market Commentary
Due Diligence
How INCOE can help


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 The desire to form long-term relationships is genuine
This may backfire on you if they perceive prospects are low
You can’t buy importance. Develop guanxi as you ramp up
 Face, especially of the owner and bosses, can be more
important than your business.
Get consensus both from authority and those responsible
for execution separately.
 They may want to talk business at dinner.
Do not make any statements more than the most vague.
Keep it social ‘relationship building’
 Most of the cultural sensitivity details, while appreciated,
don’t outweigh good intentions backed with firm resolve
上
有
政
策
下
有
对
策

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 Chinese like constant contact. Be wary if they seem to be
avoiding you.
 Do not refuse them face time. The important stuff always
comes out in the last 5 minutes of a 1-hour meeting.
 If possible, let your assistant arrange travel logistics
rather than your supplier. It reduces potential faux-pas,
and helps control social engagements
 Language is contextual, imprecise, and not nearly as
definitive in intent as in the West
上
有
政
策
下
有
对
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 Silence or deflection is a weapon to be wielded against you.
Be patient while hinting you have other options. Have
other options.
 Never get angry. They know they have you when you are
frustrated. But strategize which points not to give in on.
 Remember the phrase, ‘no problem’ and ‘yes’ often mean the
exact opposite.
 Chinese are uncomfortable refusing. Aggressive upfront
negotiating may just lead to deadlock late in the process
 Norms are changing. Young & old switch mindset to their
advantage.
上
有
政
策
下
有
对
策

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INCOE in China
Market Commentary
Due Diligence
How INCOE can help

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We are in China, we understand China
 Local staff with ex-pat oversight
 Liaise on the ground for clarity and co-
ordination
 Provide value-add technical support with
sufficient political backing
 Provide a back channel for information
 Just ask
自
1958
我
们
家
族
式
公
司
是
热
流
道
行
业
的
先
锋

Your China Strategy 2014

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