Specialised manufacturers find niches in China
Back to Action Asia insights
Julian Nixon reports that it's New Zealand's commodity producers are not the only exporters enjoying the fruits of China's boom - Kiwi companies selling value-added products are also enjoying success.
Commodity exporters are not the only New Zealand enterprises benefiting from China’s economic boom. Although the 43 percent increase in New Zealand exports to China in the year to December 2009 can largely be attributed to dairy products, meat, wool timber and other commodities, Kiwi companies selling value-added products are also enjoying success.
Business success in China, measured by increasing revenue and profitability, is a relatively new trend for companies operating in niche sectors such as food and beverage, information and communication technology (ICT), agricultural biotechnology and specialised manufacturing.
Of particular note are the inroads being made by specialised manufacturers including Fisher & Paykel Healthcare, Teknatool, Actronic Technologies and NDA Engineering.
Fisher & Paykel’s products comprise medical products for use in hospitals and the home including a respiratory humidifier system. Teknatool manufactures electric motors and power tools. Actronic Technologies manufacturers weighing systems for wheel loaders and other heavy machinery used for tasks such as moving coal on and off containers at China’s deep water ports. NDA Engineering designs and fabricates steel vessels and heat exchangers for a range of industries including dairy, wine, food and beverage, pharmaceutical and petro-chemicals.
Pat English, New Zealand Trade & Enterprise, Trade Commissioner, Guangzhou, said “China has a population more than 300 times the size of New Zealand’s and an economy that grew 8.7 percent in 2009, but the size of the population and speed of growth doesn’t mean that opportunities sit like low-hanging fruit. China is a tough place to do business.
“To do well, companies must get the basics right. This involves finding a market niche, integrating manufacturing with marketing, sales and training, and developing realistic business plans,” Mr English said.
“New Zealand manufacturers are small by global standards and are wise to identify micro markets that are right for them before committing investment. For example, second-tier cities such as Qingdao, Chengdu and Shenzhen may have advantages over Beijing, Shanghai or Guangzhou.
“It’s better to ‘under promise and over deliver’ rather than to disappoint big customers in the large metropolitan areas when you can’t meet demand,” he said.
“Also, reliable company representatives who are comfortable working with Chinese need to be based in China. It’s not enough to just rely on business partners and hope that arrangements will work. Operations in China need to be deeply integrated with the market,” Mr English said.
“An integrated, well-connected company that learns from experience will be able to adapt quickly to changes in market conditions,” he said.
“At the end of the day, companies must sell the right products, at the right time, at the right price.”
Fisher & Paykel Healthcare, Teknatool, Actronic Technologies and NDA Engineering each took different approaches to establishing viable businesses in China.
Fisher & Paykel operates through a sales office in Guangzhou in the south east of China while Actronic Technologies’ products are distributed in China by Mettler Toledo, a Switzerland-based precision-mechanics company.
NDA Engineering, 40 percent owned by the management team, entered China supplying a multinational company but in 2006 acquired a majority share of an existing stainless steel fabrication workshop in Shanghai. After a subsequent capital restructure, NDA acquired 100 percent of its Shanghai operations while manufacturing products from a new purpose-built 8,000 square metre workshop.
Teknatool, which is 100 percent New Zealand owned, bought out its Chinese partner four years ago. The Auckland-based firm has a manufacturing plant in Qingdao in the north east of China and is phasing out low-end manufacturing in New Zealand.
The New Zealand Council of Trade Unions views Teknatool’s move as bad news for New Zealand workers if jobs are lost, but Teknatool Managing Director, Roger Latimer, said “manufacturing in China makes business sense because it enables the company to be closer to customers, achieve economies of scale and be more competitive.
Mr Latimer said “Teknatool’s focus in New Zealand will be on high-value activities such as research and development (R&D) and design and in this way the company will contribute to the development of a knowledge economy in New Zealand centered around innovation and technology.”
Fisher & Paykel also undertakes R&D, design and high-end manufacturing in New Zealand.
However, Fisher & Paykel, which is listed on the New Zealand Stock Exchange and employs 2,200 people, has no plans to establish a manufacturing plant in China. Instead, the company is building a plant in Mexico on the doorstep of its largest market, the United States.
Fisher & Paykel Chief Executive Officer, Michael Daniell (pictured left, with Zhiping Hou, General Manager in China) said “revenue from China is approaching one percent of the company’s total revenue, but we will continue using regional distributors supported by our Guangzhou office. This is what works for us.”
The company reported a 31 percent rise in net profit to $37 million for the half year to September 2009, on the back of strong revenue growth in the obstructive sleep apnea (OSA) product group, continuing strong demand for respiratory products and favourable results from foreign exchange hedging arrangements.
Asked what advice they would give to New Zealand companies considering the viability of conducting business in China, spokespeople for the four specialised manufacturers said there is no time like the present.
NDA, Teknatool and Actronic spokespeople said in hindsight they were “too cautious” about investing in China and could have moved “more quickly”. But at the time, what they were doing was considered “risky”.
NZTE’s Mr English said “a window of opportunity exists for New Zealand companies to move into or expand their presence in China because it’s only a matter of time before tariff reductions under New Zealand’s Free Trade Agreement with China become available to other countries.
NDA Engineering, Chief Executive Officer, Mark Eglinton, said “NDA’s focus was global rather than just on China but the market was becoming significant for the company with almost ten percent of revenue generated there.
“Most of our clients in China are multinational companies but we also have Chinese clients,” Mr Eglinton said.
“In China, protection of intellectual property rights is a major issue and for this reason we are reluctant to include our full IP in China operations,” he said.
“There are costs involved in preventing people from ‘going to school’ on our technology and using that knowledge to create competing products,” he said.
“Protecting IP is a responsibility of everyone in the company.
“Another challenge is to implement training courses to ensure that staff in China have the knowledge, skills and motivation to work efficiently and effectively. Clear lines of communication must be established and this can be difficult to achieve with people who instinctively understand that knowledge is power.”
Actronic Chief Executive Officer Mark Templeton (pictured) said “it is important to learn how to act in a culture that's quite different from our own. In China, building business relationships requires more than just getting on with people. It requires empathy. Successful business relationships in China are underpinned by mutual obligation rather than contractual arrangements.
“Actronic, which generates about five percent of revenue in China, had an issue where a customer had damaged a wheel loader. Actronic was not liable to fix the loader but agreed to contribute to its repair in the interests of maintaining a good relationship with a Chinese business partner,” Mr Templeton said.
“In a situation like this, it’s not about liability, it’s about relationship building, long-term commitment and ‘win-win’ results. We had to learn this in China,” he said.
- By Julian Nixon
Photographs courtesy of Actronic and Fisher & Paykel are:
1) an operator using Actronic's Chinese interface, 2) Fisher & Paykel Chief Executive Officer, Michael Daniell, with Zhiping Hou, General Manager in China displaying one of F&P's respiratory humidifier systems, and 3) Actronic's CEO Mark Templeton.
