China Connection for auto suppliers, topic of seminar

By Mike Scott

Legal News

When Daniel Malone spoke at the 2010 Center for Automotive Research Management Briefing Seminar (MBS) in Traverse City in early August about the opportunities for automotive suppliers in China, he did so with an important caveat.

Making a profit in China isn't as easy as it may appear.

With the automotive industry continuing to evolve both domestically and overseas, automotive legal experts are in high demand. So Malone, Of Counsel with the Detroit office of Dykema and director of its Asian Client Initiatives, is someone that industry leaders are listening to in this time of uncertainty and change.

In general, the Chinese market is very attractive to not just OEMs (Original Equipment Manufacturers), but also suppliers who want to partner with many of the more than 100 automakers in the Asian country. And the projected growth of automobile sales in China far surpasses that of any other market by any measurement in the next five to 10 years. With a population of more than 1 billion, China offers room for American and Michigan-based companies to increase their footprint in the world's fastest growing economy, one that recently passed Japan as the second largest in the world behind only the United States.

Yet for a supplier to succeed in China, it should have a well thought-out plan for how it can best make a profit, according to Malone.

''China can be highly profitable, but turning a profit there is not as easy as it may appear,'' Malone said.

Malone made the presentation in Traverse City along with executives from JD Power and Associates, Amherst Partners, Federal-Mogul Corp., and Key Safety Systems.

For one, the manufacturing costs in China are not as low as they have been in past years, Malone indicated. A 2008 national statute has given laborers in the country more rights, leading to higher wages. In addition, the statute assesses this even more strictly for foreign-based companies wanting to do business in China, according to Malone. The average manufacturing employee in China may cost more for U.S.-based suppliers than they did just a few years ago, Malone said.

The Chinese government is heavily regulating the automobile industry as it does other ''pillar'' industries as defined by the country's leaders. It limits foreign ownership of an OEM or engine manufacturer in China to 50 percent, which is why the Big Three have had to partner with Chinese-based companies to engage in operations there, such as General Motors has done with Shanghai Automotive.

''That's part of the government's efforts to own the automotive industry in China,'' Malone said, a message he shared at the MBS seminar. ''Any automotive projects in China require scope and investment approval. The Chinese model is authoritarian, single-party government.''

In other words, China can selectively enforce laws to see fit so that it enhances its own automotive industry efforts. And the rest of the world has little choice but to adapt because of the sheer numbers of target consumers the country offers. In addition, change continues to occur on an almost daily basis in China as the economy and government are in a state of ''continual transition,'' Malone said.

He referred to a recent report developed by the U.S. Chamber of Commerce that suggested American-based companies wanting to do business in China must balance today's profits with tomorrow's survival.

This refers to a government plan aimed at transferring cutting edge technology, also referred to as ''indigenous technology'', from foreign-based companies to Chinese companies.

One of the biggest questions is where to move in, Malone said. In addition to the national laws and rules established by the central Chinese government, there are local laws and regulations ''much like our system of government here in the United States,'' according to Malone. Every province in China is determined to grow economically, but there are pros and cons to each region, he added.

With approximately 120 cities in China having at least one million residents, the options are seemingly limitless for suppliers to locate facilities. However, the more accessible and industrially established cities will cost more to invest and build in, Malone said. Even cities such as Chongqing, boasting a population of several million residents and nearly exponential manufacturing growth, is more expensive now than two or three years ago.

Other cities such as Taiyuan on the north side of the country may not be as costly to invest in from a labor and construction standpoint, but the city is less accessible by sea and travel costs are much higher.

''Many of the emerging cities offer lower costs to run your business but you have higher landed costs because of accessibility,'' Malone said.

Some of these cities may also have a population that is not as educated from a productivity standpoint.

''And there are many local laws that differ from city to city,'' Malone said. ''But in China, it's not just about laws but how to get things accomplished legally. There is an aspect of the Chinese business culture that needs to be understood and appreciated.''

As Malone told MBS attendees, China also has a number of domestic challenges that impact its society, from evolving labor and safety laws to environmental concerns, an overused health care system, and more.

He concluded his speech at MBS suggesting that suppliers use a strategy of collaboration with Chinese businesses to help improve chances of profitability and success.

''The best thing you could do might be to promote an era of 'made with China,''' Malone said. ''Whether you're looking at partnering in research and development facilities or other business efforts, doing so may help you to position your company (for success in China) five or 10 years down the road and beyond.''

Malone is a graduate of Cornell University and earned his law degree from the University of Detroit Mercy. He also is an expert in helping companies to do business in South Korea, working extensively in Asia over the past 15 years.

Published: Thu, Sep 9, 2010