'Cheap Chinese' Tag Disappearing

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EDITOR'S NOTE: Joe Delmont spent nearly four weeks late last year traveling in China and Taiwan to visit powersports manufacturers and talk with business and government executives. The trip was sponsored by Power Products Marketing, a Minneapolis research firm that specializes in the powersports industry. This is one of a series of reports for Dealernews.

When i made my first visit to China in January 2007 for Dealernews, I was surprised by the energy of the country's entrepreneurial middle class; the scope of its ATV, motorcycle and scooter production; and the small degree of interest by most Chinese factories in building an international brand — back then they were more interested in quickly assembling and selling large volumes of low-cost machines for export. Two years later the picture is much different. Now there are several trends developing in China that could affect the powersports industry in North America and other markets.

There is an increasing emphasis by China and leading Chinese companies to improve the quality of their exports. This push is being handled in several ways. The government is providing financial and technical assistance to select companies, it's developing industrial parks for qualified factories and component makers, it's assisting companies to construct new factories, and it's providing tax credits/rebates for exporters meeting quality standards. At the same time, companies are developing their R&D capabilities, hiring experienced engineers from OEMs outside China, and acquiring non-Chinese technology and brands. As a result, many inefficient, underperforming factories are closing. The surviving companies can be strong, viable competitors in this market, if they choose to make the effort.

There is decreasing interest in the U.S. market by many Chinese factories due to tighter U.S. regulations, the weak economy, changing exchange rates, bad experiences with U.S. importers/distributors, and the factories' lack of knowledge about the U.S. market. Many factories are unwilling to make a major commitment to the U.S. market, given that growing markets in South America, Asia, Mexico and South Africa provide comfortable profit margins with lower costs.

Increased costs of doing business for Chinese factories are driving up their prices and narrowing the gap between the Chinese and other powersports OEMs. The Chinese face increased expenses in not only changing exchange rates and stricter U.S. safety regulations, but in labor, health care and commodities. The deterioration in their former pricing advantage is another reason the Chinese factories are increasing quality.

THEY'RE JUST NOT THAT INTO US

After meeting with nearly two dozen companies, I know that several Chinese companies have the production capability, financial resources, management skill and technical capability to make a major impact on the U.S. powersports market within the next three to five years. But it's unlikely that we'll see them make a move here because most companies don't see the U.S. market as a near-term opportunity. Again, the United States presents a tough regulatory environment, a weak economy, strong competition, and large marketing/distribution expenses. More profitable opportunities exist in the regions mentioned earlier and China's domestic market.

Chinese exports have declined sharply due to the worldwide economic slowdown. Total Chinese exports (all markets) in November dropped 2.2 percent, according to government reports, compared to an increase of 19.2 percent the previous month. Chinese exports to the U.S. in November dropped 6.1 percent, compared to a strong October during which they climbed 12.4 percent. By one estimate, Chinese exports could fall as much as 19 percent in the first quarter of 2009. There is no reason to believe that Chinese exports of powersports products would be stronger than the country's overall export activity; in fact, powersports exports may be lower than country's overall export figures.

Many leading Chinese factories are working on engines in the 400cc, 600cc, 800cc categories, even up to 1000cc. The U.S. market won't see many of these in 2009, but we could start to see them in 2010. When the U.S. market turns positive, expect to see many well-built, large-displacement machines coming across the Pacific. The Chinese also are putting major resources behind the development of electric vehicles that are expected to be produced in large volumes as early as 2010.

Watch for Chinese companies to acquire U.S. specialty component manufacturers and machine builders this year. Ford reportedly has been in negotiations with two Chinese auto companies for the sale of its Volvo business. And there have been reports that Chery intends to buy assets from Chrysler, with the help of a loan from the Export-Import Bank of China. Dongfeng Motor Corp., China's third-biggest carmaker, is reported to be considering asset buys from GM.

Joe Delmont can be reached at jdelmont@dealernews.com or 952-893-6876.