October 2014

Tiptoeing into the big leagues

Manufacturing in China is economically competitive but must overcome stigma

By Kelsey Rolfe

Special Report: ChinaMade-in-China pieces make up a small portion of the economic pie for Wajax Equipment’s Prairie region, roughly one per cent of whole good sales, says Lee McMartin, the company’s general manager for the Prairies. But there is a tangible benefit: the pieces cost far less to make and they are the same quality as those manufactured elsewhere.

Wajax Equipment’s Prairie region switched to using a Chinese manufacturer to produce smaller accessories in 2013. Clients buy the made-in-China pieces to customize their current machinery for specific applications, for which Wajax Equipment is a Canadian distributor (they represent companies that produce equipment for construction, forestry, material handling and mining). The company’s Prairie region includes Manitoba, Saskatchewan and Alberta, and previously used various manufacturers across Canada and the United States; it is the only one of Wajax Equipment’s four regions to source manufacturing in China at this time.

As pleased as he is with the present arrangement, McMartin admits he hesitates to talk publicly about Wajax’s work in China. “I preach it,” he says. “I’ve been there, I see what they do, I believe in what they do.” But “people really aren’t accepting of China yet. I think that the North American manufacturers have done a great job of disconnecting themselves from China although they’re using them in a very large capacity.”

McMartin says his is a common concern, and he knows of several other companies that do not like to say they are using Chinese manufacturers because of the perception of inferior quality. “The competitors try to bash them,” he says. “So they tell their customers [that they import from China], but not the general public.”

Gordon Houlden, director of the China Institute at the University of Alberta, says western companies like Wajax using Chinese manufacturers is fairly new and he thinks it is a trend that will continue to grow. “I think that the cost factors are significant,” he explains. “[Chinese] manufacturing continues to get more sophisticated every day. If you’re a producer, you may find excellent, serviceable equipment at a very competitive price from exporters in China.”

Risks can be worth the reward

“I would have to say that there is probably trepidation around [using Chinese manufacturers],” says Spencer Ramshaw, director of information and com­munication at the Canadian Association of Mining Equipment and Services for Export (CAMESE). But, “it’s a situation where you need to produce a safe product that is the best design and best value, and you don’t ignore certain areas of the world simply because you might have heard there’s a problem.”

Chris Twigge-Molecey, a senior advisor at Hatch, agrees, saying he would advise those involved in procuring equipment or parts to overcome their prejudices: “As I often have told people, you fly on an Airbus, and at least a third of every Airbus is made in China. So what are you concerned about? You committed your life to it already.”

Hatch has four lines of business in China, including procuring products from Chinese manufacturers for its clients. After 10 years, the company has established a list of pre-approved manufacturers that Twigge-Molecey says runs into the hundreds, depending on the item that needs to be produced.

A 2013 McKinsey & Company report on China listed the “breakneck development” of China’s manufacturing sector as something that became a problem for achieving operational excellence: with so many new workers entering the manufacturing industry, they were ill-trained and unable to do a thorough job. Hatch got around this problem, Twigge-Molecey says, by taking the time to train Chinese workers: “There’s a lot of turnover in staff in these fabrication shops, so they’re always training new people.”

A large part of Hatch’s procurement group in China is made up of professional inspectors, who evaluate any manufacturers that apply to work as a vendor for the company, and work with existing vendors to make sure they understand Hatch’s specifications, which Twigge-Molecey says allows them to get the best results.

And if quality can be controlled, Chinese manufacturing may be the only logical choice in a tough economy. “How do you compete in a market today when everybody is squeezing every last nickel of profit out of you?” McMartin asks. “As a dealer, we buy from the manufacturers, and so the only way we can try to improve our margins is to look at alternative sources for bits and pieces.”

That level of quality, Twigge-Molecey notes, “has been steadily improving over the years as they deal more and more with western folks.”

McMartin says the only issue the Prairie division faced when it started work in China was a long lead time. “We’ve had a few back and forths, but otherwise it’s been no different than dealing with any manufacturer that’s 2,000 miles away.”

Intellectual property an evolving understanding

China’s insufficient intellectual property laws were named in a 2011 Deloitte report as a factor that worked against the growth of the country’s manufacturing industry. Houlden says this is something Canadian companies entering joint ventures with Chinese partners should be especially aware of, and gives the example of a Canadian company working in China that learned its ore treatment process had been patented by a Chinese third party.

“China’s in the early stages – well, medium stages – of developing their own more robust and more effective intellectual property system,” Houlden says. He also cites the Canada-China foreign investment promotion and protection agreement, which came into effect October 1, as an improvement. It would allow for international arbitration of disputes in either country, giving Canadian companies a better chance of resolving patent disputes in their favour, rather than in a Chinese court where they would be at a disadvantage.

Ramshaw, Houlden and McMartin all suggest companies looking to do business in China perform proper due diligence, such as getting advice from other western companies working in the country and talking to the trade commissioner service, consulates or embassies. “Having nothing to do with China is probably not a winning strategy,” Houlden says. “But have your eyes wide open and get advice.”

Next: Exchange rate
China insider and mining investment mastermind Keith Spence
on how that country went from an investee to investor

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