Q&A: Exporting Pro on Selling U.S. Industrial Goods to China
November 13, 2012
In an interview with IMT, James Chan, president of Asia Marketing and Management, explains the ins and outs of selling U.S.-made goods to the Chinese market and how American manufacturers can grow their overseas business. China has become one of the most profitable destinations for U.S.-made goods, but some manufacturers remain reluctant to venture into the Chinese market. In a recent interview, James Chan, exporting expert and president of Asia Marketing and Management Chan founded AMM, a Philadelphia-based consultancy, in 1983, after serving as the China area manager and international promotion manager of Academic Press, a subsidiary of HBJ, a Fortune 500 publishing firm in New York. He has since advised more than 100 U.S. industrial equipment manufacturers, technology firms and professional services organizations. His clients include Westinghouse Electric Company, Kingsbury, Kodak, 3 Com, Nationwide Insurance, Monitor Aerospace, Glenayre, American Management Association (AMA), Vulcan Spring Mfg. Co., Lucent Technologies and ASTM. He is a frequent keynote speaker at annual events of professional associations. In addition to teaching an MBA course titled "Global Exporting: Asia Focus" at Villanova School of Business, Chan has also authored the book Spare Room Tycoon and produced the DVD "Secrets of Business Success in China What are the markets like for U.S. manufactured goods in China? Are they being affected by the slowdown in the Chinese economy? The media in general reports that China's GDP is dropping, but in my experience, in terms of exporting 100 percent American-made products and engineering services, the drop is not significant. I would even predict there will be a rise in activity instead. Based on my daily experience exporting to China, the country only imports things that it doesn't have, like raw materials, including minerals, certain agricultural products and scrap metals. China also needs lumber to feed its furniture-making industry. But the key category for imports is products that China can't make on its own, especially precision-engineered parts and components. Has China's rapid growth and development in recent decades changed demand for U.S. goods? When China first opened up in 1979, both its heavy and light manufacturing industries were weak. China was unable to make turbines, gearboxes or any other type of heavy equipment or parts, and this continued through the '80s. As China began exporting sets of capital equipment, it became determined to learn how to make these complete sets of equipment on its own. The Chinese have succeeded considerably. However, even though they've been able to make their own turbines, for example, there are many parts and components they are not good at making, such as valves, seals, specialized bearings and the full range of precision-engineered products. They are still unable to make these parts up to good quality levels. If the quality is not up to par, it affects the stability and performance of a machine. This is why China buys U.S. goods. But each year we hear about the increasing sophistication of Chinese production capabilities. Can U.S. firms continue to be competitive in the export market given China's mounting expertise? There is a major lack of understanding on the American side because U.S. manufacturers think China is "rising," but its growth is by and large due to U.S., European and Japanese manufacturers who have gone in to develop China's manufacturing base. About 62 percent of China's inbound industrial and consumer products to the U.S. are actually made outside of China - they are either European, American or Japanese-made products. In a way, our manufacturers are like tourists: they go to China, assemble products there with lower-cost components, then come back to their home markets with these products. What about pricing? Aren't Chinese components generally cheaper than their American-made counterparts? I have a company I've been working with for 28 years, and they make specialized bearings. Most Chinese OEMs place a high value on these bearings because if you don't make the part well you have to shut down your power-making machinery and lose huge amounts of money. The best market for U.S. exports is high-tech, high-end, high-touch. For example, China buys a lot of computer components and aircraft components. In fact, they'll buy a whole plane because they lack the ability to make the high-quality components that would go into producing one themselves. They have to import seals, o-rings, bearings, valves-all these little metal parts. A lot of these things have intellectual property attached to them. When I first went there in 1982, China only graduated 19 PhD students in the entire country, whereas America graduated close to 30,000. But right now, China has more than 50,000 PhD graduates each year. In 1982, less than 1 percent of the world's published scientific and engineering articles were written by Chinese scientists and engineers. Now it's closer to 10 percent. As China produces more knowledge-sector workers-people with a good understanding of science and technology-they increasingly understand the value of intellectual property. They therefore understand why they have to pay more for high-quality, high-tech products and services. As the Chinese become better educated, they understand why it's so important to specialize and pay more for that expertise. The Chinese market is highly lucrative for U.S. manufacturers. Does it make sense for companies looking to increase their China sales to open facilities there? Companies that export to China are quite leery of setting up facilities on Chinese soil because if they are to establish a factory and start hiring and training employees, engineers and technical people, they might be creating competition. This happens often enough: you train someone to repair a product and after he or she learns as much as possible they set up shop right next to you. Of course, not all manufacturers are avoiding setting up overseas facilities, but that has to happen under the right combination of circumstances. The export companies I work with would rather spend resources and time making their products better understood by Chinese consumers. And how do U.S. manufacturers go about making Chinese businesses aware of their products? We call it "educational marketing." Some people think that if they only need to spend $5,000 to go to a community college, why should they spend $50,000 to go to Harvard? Our job is to illustrate the quality differences that money can buy. Manufacturers here have to spend time at trade shows, perform market outreach and travel to China with experts. They strive to educate their customers to help them see the difference between low-cost goods and high-cost, higher-quality products. Manufacturers have to be willing to spend time traveling in China, meeting people and having discussions to prove how their products are actually better in terms of engineering design and quality. They should also have a Chinese language website. No one expects a printed catalogue. Normally, Chinese engineers and technicians will go online to look up a company's information and products. U.S. companies may be worried about security issues, as many products have been pirated or counterfeited in China. Should manufacturers be concerned about their intellectual property, and what can they do to protect themselves? Export warriors understand how pirates and intellectual property thieves cannot possibly compete with U.S.-made products and services. But if you don't spend time on the ground in China, you don't know. You think that the Chinese can do anything, but no, they are unable to do many things, as a matter of fact. For example, in 1984 we first went to China to sell our specialized bearings for turbines. A potential customer would tell our sales rep, "Your bearing is so expensive, we'll just buy one set and reverse-engineer them. We'll pirate them." They're very bold and believe they can reverse-engineer any Western product adroitly and then sell it at one-third the price. For the first-time visitor to China this can be scary. But guess what? You can't stop them from trying to reverse-engineer-it's too expensive to fight them in courts. However, since 1984 we ignored the pirates' bullying and threats and we continued to do educational marketing to tell people why using our bearings can keep their machines from malfunctioning, and over the years we've seen sales rise dramatically. Chinese users don't even argue with our prices anymore because they know buying our components for specific applications gets them the value they need. Companies should not be paralyzed by fear. It's a matter of proving to Chinese consumers that U.S. products have a benefit. Moving them from unknowing customers to enlightened customers is the solution. What are some things manufacturers need to know about the unique aspects of doing business in China and dealing with the Chinese regulatory environment? The Chinese market by definition is a black box. In 5,000 years, China has never been a transparent society. If you're an outsider, you're not privileged to know what's going on inside. The first thing any company that wants to export American-made products or professional services to China must have is reliable agents or a representative who acts as the mouthpiece of the company. You need to have a person on the ground you can trust and who also trusts you. The role of a good agent is to be an insider and to know all the people he needs to know. There are certain subjects or areas that you simply cannot discuss with Chinese businesspeople. Though both parties might know the reality of the situation, you cannot openly mention or discuss certain things. You need an agent to help navigate this type of environment. Are there any tariffs or levies on American imports that manufacturers should be concerned about? When a product leaves the factory and crosses the Chinese border, the customer will pay three categories of costs: a value-added tax (VAT), which only China has, that averages 17 percent. The second category is a 10 percent average import duty. The final category is transport costs, plus miscellaneous freight charges and fees. When everything is said and done, you add 35 percent to the factory price. But exporters shouldn't be nervous-their customers will pay this amount. The price is elastic because customers need these products and have already budgeted for these amounts. The costs are built into their business operations, and exporters shouldn't worry about them. There are numerous trade tensions between the U.S. and China. Are there any problems that might arise from escalating trade conflicts? Right now it's a tit-for-tat culture, with the U.S. and China going back and forth to appear tough to one another, and that's just a matter of pride. In the near-term, tariffs will decrease in China. Chinese companies will continue to buy American products in large quantities because they understand they need them and it's in their own interests to keep trade channels open. Bottom line, China absolutely needs U.S. goods much more than most Americans know. For the long haul, U.S. exporters shouldn't be concerned about trade restrictions-they won't get in the way of business in any meaningful way. What's the key piece of advice you'd like manufacturers to remember when trying to build business in China? You can't expect to go to China for a trip and come back with an order. It's a journey, it takes time and commitment to establish yourself and you can't expect China to be a huge revenue source right off the bat. You can't go there and allow yourself to become distracted-establishing yourself in the Chinese market shouldn't be one of 50 things you need to do, it needs to be one of only two or three projects you spend your time on. What manufacturers should remember is that they need to commit time and effort to educating China about their companies, to illustrate their value and build that market. We're not selling fast food, we're selling fine dining. That's what American manufactured goods are and the Chinese know it. Don't be paralyzed.