17-Nov-09 3:00 AM AWST

2009 Catalyst for Change China's Chance in the Sun

A strong presence in Asia is now synonymous with intelligent strategy for the future. Blueprints that existed before to build and expand in Asia quickly transformed into strategic moves. What once were only ideas, 2009 made realities. A strong presence in Asia is now synonymous with intelligent strategy for survival in the future--and the chance for strong growth. As the remnants of the global auto industry continues to look to China for salvation, so do many other sectors.

TREND 1: Building a strong base in high growth markets

Contrary to most of the worlds, across Asia, investments and expansions are accelerating, spurred on by the lure of high growth. Global companies have seen sales plummet in developed markets, but not so in Asia. "China will remain a major driver of our growth in Asia," says Franz Fehrenbach, chairman of the Bosch board of management. Bosch opened its first office in China in 1909. Today the company has a workforce in China of 20,000 staff - the largest outside of Bosch in Germany. While Bosch's global sales have taken a 15 percent year on year hit, sales in China are up 15 percent and so investments in China continue. In 2009 Bosch invested EUR160 million in China. Infotainment maker Harman International, which has its hands in the auto and mass consumer electronics market, is also expanding across Asia, cutting numbers in developed markets with new facilities and expansions in Bangalore, India and Shanghai and Suzhou in China. "We lost almost 30 percent sales last year. So yes, Harman was also affected [by the global downturn]," says Dinesh Paliwal, chairman and CEO of Harman International Industries Inc. But Palliwal is adamant that Harman will grow in Asia. "Right now China accounts for under five percent of global revenue, but we want to make US$1 billion in five years time so by then it will be 20 to 25 percent," says Paliwal. Similar growth, which might have stalled this year, is continuing now in other sectors such as travel and tourism. Anticipating demand for their services, hotel groups are also expanding in Asia. "To get through these challenging times and strengthen our company for the future it is important to adapt our business strategy. One way to do this is to take advantage of the potential for economic growth by expanding in markets such as the Asia-Pacific region," says Mel Kaneshige of the Outrigger Group. "Not stopping with the hotels we have signed up thus far, we are currently in discussions for more in Koh Samui and Phuket and also in Vietnam." This year Outrigger has opened one new hotel in Thailand and signed up for three more across Asia.
Le Meridian already has 26 hotels in Asia but chose 2009 to add a hotel in Hoh Chi Minh City, Vietnam. Over the next three years, Le Meridian will open five more hotels across Asia.

TREND 2: Optimization of R&D and Human Resources

What global companies are realizing is that markets in Asia are different. Goods have to be targeted for the Asian consumer and have to be designed and engineered with the end market in mind. Simultaneously the developed world is also demanding affordable options. "In the next decade the automotive industry will focus on so-called "affordable" cars. Accordingly, we are intensifying our R&D localization strategy to develop tailor-made products for the Asian market," says Jay Kunkell, Continental AG's Asia president.

No longer is it possible for companies to build and design products thousands of miles away from the intended market. As China's consumer tastes develop unique demands, localization of R&D is a requisite to winning business. "German engineers focus on Mercedes and BMW, they have built in standards. It's very difficult to develop low cost products in a market like that [in Germany]," says Rolf Gall, head of ZF Friedrichshafen's engineering division in China. So ZF plans to push for more localized R&D specifically tailored for China. This means building up a strong local team of Chinese ZF engineers. In China the company has added 500 new positions.

This example is evident in many other industries which are utilizing the large pool of fresh graduates, where they can take their pick of the best and brightest and train them up. This trend is evident in multiple sectors and is geared at products and services designed for both export and import.

In line with this trend is the localization of more upper management functions that accelerated in the past year as companies looked to quick cost cutting to improve their bottom line. "Localization and having a formal policy in place was increasingly on the agenda at companies where international assignments have been the norm in the past. This is being driven by both cost cutting and the need to streamline international assignment processes and the accompanying administrative burdens," noted a survey by KPMG on International Assignments Policies and Practices 2009.

Asia as an export hub

Intense focus on quality control now means that parts that are made in Asia meet the quality requirements for sale back in developed markets in Europe and North America. Even Mercedes cars made here could potentially be sold back in Germany.

For example: Mercedes Benz will launch local production of the new E class in China in 2010, following record sales of Mercedes- Benz cars in China. Once parts reach Daimler Benz requirements, these parts are also then ready for global sourcing, says Guenter Butschek, president and CEO of Beijing Benz Daimler Chyrsler. Parts from China are currently exported to the United States and Europe.

"For the new E class more than 500 parts have been locally sourced with local content significantly more than 40 percent," said Butschek. So as affordability is key, production in low cost countries is on the rise.

India as small car production hub

Hyundai and Nissan are now using India as a small car production hub. "Hyundai made a conscious decision to make India an export base for its small cars, starting with the production of the i10 mini car," says Ammar Master, senior market analyst for India and Korea at J.D. Power."Most of these exports are going to Europe and some to other Asia Pacific markets," he says. In addition, Nissan is shifting the production of its Micra from the United Kingdom to India, says Master.

TREND 3 Increase in contract manufacturing

Until a recent suicide of a worker accused of leaking trade secrets, most people had never heard of Foxconn, the company that makes most of the world's iPods and iPhones for Apple. As the world looks for more affordable parts that still deliver on the high standards of quality, specialist part makers are able to offer cheaper prices as they produce for huge volumes across every industry. Martin Lockstrom of the China European International Business School says the long term trend is a higher degree of outsourcing. "Take BMW X3 as an example, which was developed and produced by Magna Steyr in Austria," he says. "The auto industry is taking a similar path as the apparel and consumer electronics industry." Nearly every computer and mobile phone has a component made in China. "China is definitely number one for electronics,
consumer products etc. For textiles I'd say countries like India, Vietnam, Bangladesh etc," says Lockstrom. Contract manufacturing is a win-win situation for all players. "I think all supply chain players do [benefit] - final assemblers can optimize their balance sheets, the contract manufacturers can gain more economies of scale, and an overall degree of specialization. However, risks increase as transparency and communication becomes harder to facilitate," he says.

Philips is another company that has made a similar shift, focusing on R&D and utilizing its brand value, while outsourcing manufacturing as a non core competency. With a higher value in the requirements for manufacturing, it will be interesting to see if the auto industry can make the shift that FMCG brands such as Nike and adidas have made, focusing on their core competency of branding and retail distribution, over actually making the products.

TREND 4: Governments in Asia push consumer spending

Markets in Asia, such as China and India are responding well to government stimulus packages. In China auto financing schemes usually penetrate close to five percent of car buyers. But the Chinese government’s push to boost spending and increase demand has changed the situation.

"In the past few years less than five percent of car buyers in China used loans to buy cars," says Songlin Mei, China general manager for think tank J.D. Power that studies consumer trends in China.
"This year, 15 percent of car buyers are expected to use loans."

"In the past credit financing was not considered important in China," says Mei. "However with the current financial crisis the situation is changing. Now, both OEM dealerships and the Chinese government
are promoting financing schemes to kick start sales. Government loans for car buyers are currently being offered with zero interest rates, for repayment between one and two years." Schemes to increase spending are also being mobilised across industries. One way retailers are doing this is via an increase in the voucher system. "With the effects of the global economic crisis now felt in most Asian markets, a number of governments in the region are looking to jump-start growth by encouraging consumer spending through the distribution of consumption vouchers," says Mr. Robert Gregory, a retail analyst with Planet Retail. Governments across Asia in Thailand, Japan, China and Vietnam encouraged such schemes and boosting sales.

TREND 5: Technology Acquisitions

Domestic companies in Asia need expertise. They need technology and know-how. Rather than re-invent the wheel, an easier option is to buy existing technology, which sometimes can be going cheap. For example, India's Tata Motors has been acquiring technology for years, with joint ventures and technology sharing agreements. The Nano is the outcome of years of collaboration between Tata Motors and its various foreign joint venture partners.

"Our teams have been working closely with Tata Motors right since the inception of the project, to design and engineer various components, keeping the cost, superior quality and performance parameters in mind which required design and process optimization," says R S Thakur, chief operating officer at Tata AutoComp Systems.

But automakers want more. And 2009 has been that catalyst, pushing them to buy assets faster. This year alone, 12 of China's top 20 automakers have taken their companies through initial public offerings (IPO) of their stock in Shanghai, Hongkong or Shenzen, with four more planning to do so to raise cash for quick buys, says senior market analyst Tim Dunne in a report from J.D. Power and Associates.

If Asian automakers already have joint ventures, why would they need to acquire more technology? "In China there is a trend of foreign companies to take full control of their operations," says Ivo Naumann, Asia general manager of global restructuring firm AlixPartners Asia LLC. Why? "So Chinese companies will find it more difficult to access technology," he says.

The future?

Global manufacturers, retailers and investors caught in the sudden downsizing of markets in the developed world are looking for quick answers. Fast expansion in Asia and talk of high growth numbers is appetizing when other markets have gone sour. But, the future has yet to be seen and analysts predict a slowdown in the acceleration of growth in Asia which in some cases has been prompted by government and artificial growth stimulations.

"It's uncertain whether the government will extend the tax incentive policy to next year or carry out new stimulus measures," says analyst group J.D. Power in its China Automotive report. "We do believe a payback is in order to compensate for the stimulated growth in 2009."

In fact the report states that expectations for 2010 for light vehicle sales in China will match this year's. "We maintain a cautious outlook for 2010 with growth decelerating to a rate of 25-3%," says the report. And as the auto market is linked to the amount of money the growing Asian middle classes have in their pockets, it is indicative of the scenario expected across the supply chain.

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