[A-List] China: workshop of the world

["Michael Keaney" <michael.keaney@xxxxxx>]

Courtesy of Lou Proyect:


Wall Street Journal, Oct. 10, 2002

Surge in Exports From China
Gives a Jolt to Global Industry

By KARBY LEGGETT and PETER WONACOTT
Staff Reporters of THE WALL STREET JOURNAL

When Philips Electronics NV began prospecting for opportunities in China in
the early 1980s, the Dutch company adopted the hot strategy of the time:
produce and sell locally to the Chinese market.

Back then, China was seen as a land of unlimited demand, and Philips
dreamed of Chinese consumers snapping up its radios and electric irons by
the millions. But it soon turned out that one of the big reasons Philips
and other foreign companies loved China -- its low wages -- also meant that
few Chinese workers could afford to buy the stuff they were making.

So Philips and a host of other foreign manufacturers hit on a new strategy:
Keep the factories in China, but export most of the goods to the U.S. and
elsewhere. Philips now operates 23 factories in China and exports nearly
two-thirds of the roughly $5 billion in goods those plants produce each
year.

Today, there are few things in the global marketplace that aren't made in
China. Many foreign manufacturers find they must either produce in China or
expand their purchases from China. The country has become the world's
factory floor, with an output so massive and wide-ranging that it exerts
deflationary pressure around the globe on everything from textiles to TVs,
mobile phones to mushrooms.

"China's rise as a manufacturing base is going to have the same kind of
impact on the world that the industrialization of the U.S. had, perhaps
even bigger," says Andy Xie, an economist with Morgan Stanley in Hong Kong.

Half of China's exports, which totaled $266.2 billion in 2001 and are on
track to surpass that this year, now come from foreign manufacturers or
their joint ventures in China. China is the world's fourth-largest
industrial base, in terms of value of goods produced, behind the U.S.,
Japan and Germany. These days, China makes more than 50% of the cameras
sold world-wide, 30% of the air conditioners and televisions, 25% of the
washing machines, and nearly 20% of the refrigerators. A private Chinese
company, Guangdong Galanz Enterprise Group Co., now accounts for 40% of all
microwave ovens sold in Europe. The city of Wenzhou, in eastern China,
sells 70% of the world's metal cigarette lighters.

China's entry into the World Trade Organization late last year accelerated
the trend toward exports. By forcing down trade tariffs, WTO membership
cuts production costs and removes obstacles to selling overseas. That is
drawing more investment into China, funding new factories and leaving
industry after industry groaning with overcapacity.

What's more, as the Chinese government relaxes its export rules, a new
generation of nimble Chinese companies -- particularly private enterprises
-- is beginning to focus on overseas sales as well. (The investment boom
also is reviving an old economic nemesis: a real-estate bust. Please see
article.)

China's growth as a production base has followed a consistent pattern: A
new product is introduced, usually by a foreign company. Within months,
numerous local Chinese manufacturers also start cranking it out. Prices
slide and producers, both foreign and Chinese, start looking for new
markets, increasingly overseas.

Helping drive this competitive cycle is the flood of foreign investment
into China -- more than $600 billion during the past two decades -- and the
introduction of modern manufacturing techniques. Foreign technology has
powered productivity gains across the economy, and a nationwide
entrepreneurial zeal has sprouted from the shambles of central planning.
Low wages have slowed China's transition to a consumption-driven economy,
but the pool of cheap labor remains deep, allowing companies to control
costs and often to cut them dramatically.

Some of the foreign companies that have expanded their focus from the local
Chinese market to exports include: General Electric Co., Toshiba Corp. of
Japan, Siemens AG of Germany, Samsung Electronics Co. of South Korea and
personal-computer maker Acer Inc. of Taiwan. General Motors Corp. is
exporting family wagons from its $1.5 billion joint-venture factory in
Shanghai to the Philippines and says it may also begin exporting minivans
it makes in China to other areas in Asia.

Foreign investment in China is on pace to hit a record $50 billion this
year. Motorola Inc. says its total investment in China will reach $10
billion within four years, up from $3.7 billion now. Toshiba is building
one of the world's biggest laptop factories outside Hangzhou, with output
next year projected at 750,000 units and growing to 2.4 million in 2004.
The bulk of that is destined for export.

Feeling Effects

The U.S., the world's biggest market, feels the effects more than most.
Since May, America's monthly imports from China have consistently
outstripped those from Japan. After decades of exporting mostly low-end
products, such as textiles and toys, China has moved into more
sophisticated goods, such as computers and DVD players. In July, exports to
the U.S. of China-made electronic products hit $1.2 billion, up 12.5% from
the month before. China's high-tech exports to the U.S. are now growing
faster than any other category of Chinese export, up 47% in the first seven
months of this year from a year earlier.


Exports from China to the U.S. affect most industries. Televisions and
audio equipment rose at a 13% annualized rate between 1998 and 2001 to $6
billion in 2001; tools and hardware were up at a 23% annual rate to more
than $1.5 billion in 2001; sporting goods rose at a 16% rate to $2 billion.
And as imports from China are rising, U.S. retail prices in many of these
categories are falling. TV-set prices have declined on average by 9% each
year since 1998, according to Labor Department data; tool prices have
fallen 1% each year on average; sports-equipment prices have dropped at a
3% annual rate.

To be sure, other big changes in the global economy are driving prices
down. The North American Free Trade Agreement and European economic
integration have boosted the flow of goods around the world. Gains in
technology have spurred productivity, helping damp prices. The slowdown in
the U.S. economy has added to the global glut of goods. But China's export
juggernaut is a leading source of deflationary pressure.

Maryjo Cohen, president of National Presto Industries, a manufacturer of
pressure cookers, griddles and other kitchen appliances, feels China's
deflationary forces firsthand at her office in Eau Claire, Wis. Between
1998 and 2001, total U.S. imports of household cooking appliances from
China more than doubled to $640 million. In the process, retail prices for
National Presto griddles have dropped to $29.99 from $49.99 in just three
years. To keep costs low, Ms. Cohen decided last year to shut down plants
in Mississippi and New Mexico and expand production in China. "We've had
these plants for a very long time," she says. "It really hurts to say
goodbye to them."

Boon for Consumers

Though the flood of cheap Chinese imports has translated into some lost
jobs for U.S. workers who compete against Chinese manufacturers, it has
been a boon for American consumers. Amatsia Salomon, who operates a New
York limousine service, spent $48 at Home Depot on a combination ceiling
fan and light fixture made in China. Mr. Salomon, 63 years old, says:
"Years ago, we would say, 'Made in China, we don't want to buy it, because
it's very cheap quality.' " Then he adds, "Today, this looks good ... and
it's inexpensive."

In Japan, China's low-price exports are reinforcing deflation that has
plagued Japan in recent years. Matsutake mushrooms, prized for their
delicate aroma, used to be considered such a luxury that they appeared only
in minuscule quantities in Japan, either sliced in soup or cooked in rice.
But matsutake mushrooms grown in China under contract with Japanese
companies for export cost a tenth of the price of Japanese-grown mushrooms
and account for almost two-thirds of the matsutake mushrooms sold in
Tokyo's biggest wholesale markets.

Competitive prices also forced Xerox and its Asian joint venture, Fuji
Xerox Co., to refocus their energies on China's export market. In the
mid-1980s, Xerox set up a factory in Shanghai to produce low-end
photocopiers for sale in China. But it soon realized it had overestimated
the market's potential and began exporting the machines. So attractive was
the export market that in 1995 Fuji Xerox set up a new export-only factory
in Shenzhen and struck deals to manufacture laser printers for giants such
as International Business Machines Corp., Dell Corp. and Apple Computer Inc.

The auto industry is one of the best examples of the growing focus on new
export industries. Honda Motor Co. is setting up the country's first
export-focused auto factory as a joint venture with Guangzhou Auto Corp.
and Dongfeng Motor Corp., China's second-largest auto maker. Nissan Motor
Co. announced last month that it plans to spend about $1 billion to buy a
50% stake in Dongfeng Motor and begin mass production of a wide range of
cars and trucks. The Japanese company said recently that the joint venture
could be exporting in one to two years.

Ford Motor Co. announced last month that it plans to boost it purchases of
auto parts in China to as much as $1 billion annually starting in mid-2003.
GM has already purchased more than $1 billion in Chinese spare parts in the
past five years, and says it plans to increase that figure in the years
ahead.

Some of those orders are expected to go to Delphi Corp., GM's former parts
unit, and Visteon Corp., Ford's former parts supplier, which both have huge
operations in China. Delphi, since setting up in China in 1993, has
invested about $400 million in nine joint ventures and two wholly owned
operations making everything from car radios to air-conditioning systems
and catalytic converters. Though it now exports about a third of what it
produces in China, Delphi says it plans to raise that to 50%.

A rising player in auto parts is China-based Asian Strategic Investments
Corp., a U.S.-funded investment company headed by former Wall Street banker
Jack Perkowski. In the past decade, Asimco has acquired and revamped 15
auto-parts plants across China that now bid for manufacturing business
around the world through Internet auctions. They often win contracts from
U.S. auto-parts companies desperate to pare costs. Though exports accounted
for just 20% of Asimco's $200 million in sales last year, Mr. Perkowski is
convinced that will expand, as more auto-parts companies shift low-margin
production to China and car manufacturers themselves buy parts from China
to save money.

Spigot of Supply

For large U.S. retailers such as Target Corp. and Wal-Mart Stores Inc.,
China has become a huge spigot of supply. Wal-Mart has been buying goods in
China to stock its stores for more than 20 years. About $10 billion in
Chinese-made merchandise makes it to Wal-Mart stores every year, either
directly from manufacturers in China or from other suppliers that tap
sources in the country. In February, Wal-Mart set up a new independent
sourcing unit, based in the southern city of Shenzhen, to buy directly from
Chinese factories, with most of the goods going to the U.S., executives say.

General Electric, which posted sales in the local market of $1.6 billion
last year, expects purchases from China -- both parts and finished goods --
to hit $5 billion annually within the next three years. The goods include
GE-brand refrigerators made by independent Chinese manufacturers, and parts
for GE's gas-turbine engines, used to generate electricity.

Philips has witnessed the unfolding of this massive factory floor since the
company made the switch from local to overseas targets. Of 23 factories it
operates, six are wholly owned and 17 are joint ventures.

The company still pursues the local market, where competition has forced
Philips to adjust its strategy. Several years ago, David Chang, the
54-year-old head of Philips's China operations, was strolling through an
electronics exhibition in Shenzhen when he was shocked by yet another round
of price cuts in color TV sets. Growing numbers of these sets also were
being exported. The result was a new partnership Philips formed with a
major competitor, TCL Ltd., one of China's biggest TV makers, mainly for
domestic sales.

But Philips still seeks to wring more exports from its China interests.
Last month, the company broke ground on a $77 million factory that will
make module displays, or screens, for notebook computers, monitors and
televisions. The majority of the displays will be exported overseas --
inside a Philips electronics product. If the factory is successful, Philips
says it may set up other such display plants in China and gradually shift
the industry away from South Korea, where the screens are now made.

Ultimately, Philips says the goal is to turn China into a global supply
base from which the company's products will be exported around the world.
Last year, 20% of everything Philips made world-wide came from China, and
executives say the figure is rising quickly. Several products, such as the
drivers for CD and DVD players, are now made only in China.

-- Jon E. Hilsenrath and Miho Inada contributed to this article.