Entry Into the Chinese Machine-Building Market Might Be Explained by Elephant Jokes

The Chinese Machine-Building Market Is Like the Giant Elephant in the Middle of the Room; Entering That Market Is No Joke

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Mike BacidoreBy Mike Bacidore

What did Tarzan say when he saw the elephant coming over the hill?

He said, "Here comes the elephant over the hill," of course. Often, the most profound truths are the simplest. And few platitudes are simpler than elephant jokes, even when they're used as metaphors for the largest emerging economy on the planet.

As we all walk around the giant elephant in the middle of the room, commenting periodically on its existence and its size, no one in the western hemisphere seems to know quite what to do with it.

OK, just to make sure we're all on the same page here, how do you know if an elephant has been in your refrigerator?

The labels on everything in it read: "Made in China." Ever since President Richard Nixon visited the People's Republic of China in 1972 and the world got a glimpse of the nation behind the Great Wall, we all have waited and watched its population swell to more than 1.3 billion. That is one very big market, requiring lots of machines to supply it with the products it demands. A recent report from IMS Research (www.imsresearch.com) predicts that China will become the world's largest machine builder by 2011, largely due to its own needs. As the rest of the manufacturing world struggles through this global recession, Chinese machine builders can't keep up with domestic demand.

So, how does the rest of the world figure into those needs for engineered equipment? What do we do with this mammoth economy? The solution just might lie in the answers to elephant jokes.

For example, what weighs 6,000 lb and wears glass slippers?

Like Cinderelephant, the Chinese market is very attractive, but when the clock strikes midnight, you'd better have your relationships intact.

"The Chinese machine-building industry is an attractive market with huge opportunity," says Felicity Wang, director of market research, Gongkong (china.gongkong.com), a Chinese company that facilitates industrial-control relationships between foreign and domestic organizations. "And it is far from mature. Chinese machine building is facing many challenges, such as low quality, low added value, low efficiency and high energy consumption." China might be a mere child, in terms of its engineering skills and advanced automation, but the opportunity won't last forever. "It is even harder now than it was 10 years ago to enter into China because of fierce competition from all over the world," says Wang. "Many excellent companies have entered the Chinese market. Some have been successful, and some have not."

Localization is the key to success in China, says Wang. "The days of just selling products to China and earning money have passed," says Wang. "For a big and fast-growing market, you have to hire more local people, set up more local plants and even construct R&D centers to provide better service and products at lower cost."

Low price is one of the most important advantages of Chinese products in the international market. "With the appreciation of the renminbi and the increase of costs such as labor, machines designed and built in China are facing big challenges in international markets," says Wang, which leads us to our next riddle.

Why do elephants lie on their backs with their feet in the air? Elephants obviously assume this position to trip low-flying birds. Similarly, China is content to pick the low-hanging fruit and do what it does best—high-volume production.

"Chinese machine builders may take the lower-end volume market, but the high-end market still belongs to the well-established branded companies," says Chaney Ho, managing director for Greater China at Advantech (www.advantech.com), whose quarter-over-quarter growth has marked 4%, 8% and a forecasted 15% since the first calendar quarter of 2009. Advantech's global reach has continued to diversify, with the U.S. and Chinese markets each now accounting for 26% of revenues. "China's machine builders still lag far behind developed countries in technical competence, business management and go-to-market ability," he says. "Opportunities for foreign companies are in high-precision, multiple-axis CNC machines, semiconductor manufacturing and testing machines and military-grade systems. The Chinese government has set machine building as the priority industry by offering tax incentives and monetary support in research."

While the Chinese are financially dedicated to improving their machine quality, they appear content to lie on their backs, stick to their strengths and let the rest of the world speak the higher-level machine languages, which bring us to our next riddle: What did the cat say to the elephant?

"Meow." That is what cats say, after all, and western machine builders confidently speak their own languages and allow software like E-CAD to translate. Art Sawall, vice president of global electrical business, Bentley Systems (www.bentley.com), opened an office in China almost 10 years ago, when he owned ECT and one of his employees, a Chinese native, wanted to return home and open an office in Beijing. "I've been there 30 times since then," says Sawall. "We were one of the early entries in the market. I wondered why companies would want to buy our product when they could have a Chinese engineer. Then I realized it's the quality of work."

Where the Chinese excel at producing things, it's no secret that the quality is horrendous. "Their acceptable standards aren't the same as those in western countries," says Sawall. "For every three Chinese developers, you'd need one American developer. The smart Chinese companies who want to export their goods figured out they need the right tools and engineers to make their machines acceptable in foreigners' eyes." When Chinese companies collaborate with European and American companies, they use E-CAD, explains Sawall. "The Chinese are clamoring to be accepted," he explains. "They send their engineers abroad to be trained. In the long-term, the Chinese will learn to produce quality goods, but I'm 100% of the opinion that they won't learn to do it themselves in my lifetime. I don't see them being successful without strong western intervention in the years to come."

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