The easy-money era in China is over, Magna exec cautions

Bradford Wernle, Automotive News

Detroit, Michigan -- Keith Lomason has some advice for auto suppliers thinking about entering the Chinese market now: "The easy money is over."

Lomason, executive director of Magna International's China operations, told the Automotive News World Congress on Tuesday,17 Jan., that China beyond all the hype "is a difficult market to do business in."

Lomason was given Chinese-language training while in the US Marine Corps and has worked in the country for more than nine years. He coined a new phrase for his Congress audience - the Ten Recommandments - which he offered as guideposts for companies looking at going into China.

Magna ranks 3 on the Automotive News list of the top 100 global suppliers to the auto industry with worldwide original-equipment automotive parts sales of $20 000 million in 2004.

The supplier has prospered in China and will have 19 facilities there by the end of the year, he said. But the reasons for doing business in China have changed since the 1990s, when low costs ranked as the top reason to set up shop there, he said.

Low costs were followed closely by the huge potential of the market.

"Low cost is not what it was, and margins on products are not what they were," he said. "Every year it's harder to be profitable."

Labour rates and other costs of doing business have grown in China's prime coastal areas. Companies looking for low cost opportunities now have to go inland, he said.

Lomason urged any company going into China now to go in alone rather than setting up a joint venture.

"Most of the good partners are already gone," he pointed out. "The companies that the Chinese government offered up (earlier) were the stronger ones. By choosing a partner today, you're setting yourself up with one that's weaker than the one your competitor already has."

But if a joint venture cannot be avoided, he advised, use one partner for all of China. "If you have only one partner, they'll be as concerned for your success as you are," he said.

He cautioned companies to find the best legal advice possible when entering a partnership because the Chinese view a contract differently than Western companies do.

"Negotiations with the Chinese partner begin after the contract is signed," he said. "It's not a ploy, just a difference in culture."

Companies entering China also should expect to quadruple their normal training intensity because of China's "huge" worker turnover, he said.

"If you expect 3 to 10 percent annual turnover at home, expect 20, 30 or 40 percent turnover in China," he said.

Asked to handicap the Chinese vehicle manufacturers and their chances of success outside the Chinese home market, Lomason said he expects Chery to become the most successful exporter.

The nine-year-old company, based in Wuhu, hopes to begin exporting to Europe and North America by the end of the decade.

"They've got the money and the government backing. They're paying for engineering and design they can't do today," he said.

Lomason cautioned that companies not already in China should think long and hard about the timing of their entry.

"If you're not in China and don't have an imminent contract, you may want to sit back and wait until after 2010," he advised. "China represents the most complex and difficult market to enter today. If you're there, you're already concerned."

From Automotive News (A Crain publication)