At the recent Automotive News World Congress, positive outlooks for OEMs and suppliers in China were heard at almost every formal session and in the Hyatt Regency corridors and bars before and after.
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But when a 10-year veteran of component production in China flies in from Beijing to share his experiences, it’s worth paying attention.
Jack Perkowski, a former head of investment banking at Paine Webber, is now chairman and CEO of ASIMCO, a supplier of machined castings, brake systems and components, diesel fuel injection systems, camshafts and piston rings. The supplier has sales of around $US330 million.
ASIMCO has 11 operating units in nine Chinese provinces as well as two manufacturing facilities in Grand Haven, Michigan in the US. These US camshaft facilities were acquired from Federal-Mogul in April 2003.
Seventy percent of sales go to customers in China. Thirty percent is exported, primarily to the US.
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By GlobalDataSo what is Perkowski’s view from Beijing?
Like most, he takes a rosy view of new growth prospects in the Pacific Rim, primarily China. He believes that by 2010 assemblers in the region will produce more vehicles than assemblers in Japan and western Europe, while the gap between NAFTA and the Pacific Rim will be cut to 1.5 million units, down from over six million in 2003.
Perkowski says: “Given all the underlying factors, it is not unrealistic to expect the China auto industry to grow by 10% per annum for the foreseeable future, with passenger car sales accounting for an increasingly larger proportion of the overall industry.”
Perkowski believes the evolving supplier base will have the twin benefits of low cost and mass production. The base is currently in an embryonic stage, but as it matures it is likely to include the China operations of the traditional Tier 1 suppliers headquartered in Europe, Japan and North America, as well as purely local suppliers.
In Perkowski’s view, these new players will not be satisfied with merely selling their products in China. They will also seek to sell outside to the traditional auto markets. Perkowski summed up what appeared to be a widespread view at the Congress:
“Every single company attending the Congress should consider the rapidly growing China economy and automotive market as its most important expansion opportunity.”
Legacies of state ownership
But ASIMCO’s CEO also offered some homespun advice on the challenges to doing business in China. Among them are: the lack of a familiar legal framework; China’s chaotic distribution system; accounts receivable issues; and absence of a functioning capital market.
However, Perkowski believes the most difficult problem to overcome is China’s so-called ‘management gap,’ a legacy of state ownership and unbridled entrepreneurialism.
Put simply, most managers in China are either too bureaucratic and very resistant to change, or entrepreneurial to the point of recklessness.
Business schools evolved in China during the 1990s and foreign multinationals introduced management development programmes at the same time. But a real ‘gap’ persists.
ASIMCO created its own program in 1997 to create what it calls ‘New China’ managers, a step that Perkowski believes was the supplier’s most important undertaking since its founding.
Perkowski also cites a number of other common problems faced by companies either sourcing for export or selling within China. They include the country’s sheer geographical size and fragmented industrial base; inconsistent quality systems; time differences (12-16 hours with the US and 6-7 hours for Europe); long supply chains (28-day sea transportation times); and language barrier, which becomes severe with suppliers outside major cities.
Suppliers located in China’s inner provinces have the lowest cost bases and can offer lowest prices, but are the most challenging to access in terms of communication.
Perkowski’s tip sheet for those seeking to develop a supply chain in China is a valuable one:
1) Heavy reliance on pricing as a way to screen potential suppliers and to develop a China sourcing strategy can be dangerous and lead to bad decisions. Setting very aggressive target pricing can lead to local suppliers setting initial high prices in the belief that price negotiations will go through several rounds (the ‘silk alley’ approach). High prices may also reflect suppliers’ inexperience with a component. Conversely, very low quoted prices may suggest the supplier misunderstands the spec required. With supplier selection in China, you tend to get what you pay for.
2) Investment in supplier development will be required to ensure quality and that intellectual property and other contractual commitments will be honoured. It is important to make sure that a China sourcing effort is not creating future competition. Outside specialists offer very specific supplier development programmes when sourcing from companies in emerging markets such as China.
Perkowski sums up his 10 years in China as follows: “We have faced countless hurdles and obstacles in building our business. Through this experience, I have learned that there is only one universal rule in China and that is — in China, everything is possible, but nothing is easy.”
SupplierBusiness.com
