Taipei City Government Asia Business Letter The Swedish Trade Council

Taipei City Government Asia Business Letter The Swedish Trade Council’s newsletter about your business in Asia. The headlines of this issue are as below. Asia Business Letter, No 3 China: China’s cost-innovation challenge Vietnam: WTO or bust India: India - a hub for “frugal engineering” China: China’s design revolution Thailand/Taiwan/South Korea: East Asia Changes Costume Contact Are you interested in starting or developing your business in Asia? Please contact Mattias Bergman, Vice-President Asia, mattias.bergman@swedishtrade.se, +46 8 588 660 09. You can also find the contact details for all our Swedish Trade Council offices at www.swedishtrade.se Box 240, SE-101 24 Stockholm, Sweden (World Trade Center, Klarabergsviadukten 70) Tel: +46 8 588 660 00 Fax: +46 8 588 661 90 infocenter@swedishtrade.se www.swedishtrade.se www.swedishtrade.com China China’s cost-innovation challenge Author Peter J Williamson offers his opinions on how Chinese companies’ attitude of doing more with less are poised to shake up global markets. For Peter J Williamson, co-author (with Ming Zeng) of Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition, within five to 10 years globally expanding Chinese companies will have transformed the global playing field, and it will not be, as most people think to be the case, simply by offering more of the same at cheaper costs. Williamson argues the transforming factor will be cost innovation. “Most people think that cost advantage is just about lower prices,” says Williamson. “But what we have found is that many Chinese companies are looking at cost innovation, moving high technology to lower prices, achieving mass variety of products at lower costs, and taking niche markets and exploding them into mass markets.” One of the most striking examples of cost innovation through moving high technology to lower prices, says Williamson, is digital direct X-ray technology. Philips and GE, among other companies, applied this to heart scans that could be transferred to a computer network using machines that cost around US$400,000. “What the Chinese did - a company called Zhongxing - was to apply this technology to everyday applications such as chest X-rays at a much lower cost, with machines that cost around US$50,000.” Another area that Williamson thinks Chinese companies will use cost innovation is producing a huge variety of products through low-cost cost engineering, thus offering consumers or industries affordable and wide-ranging choices. “The third example of cost innovation,” says Williamson, “is taking a niche market and exploding it into a mass market.” Chinese white-goods manufacturer Haier Group provides a good example of how this can be done, he says. “Haier took specialist refrigerators designed to store wine and started selling them at US$790 versus prevailing prices of US$1,600. It gained 60% market share in the US and Korea within two years. In other words, because their break-even price is lower, Chinese companies can produce at higher volume, and the only reason you think your product is a niche is because your prices are so high.” For Williamson, this is an example of how Chinese companies, which have emerged in a fiercely competitive market, target what he calls the “loose bricks in the walls companies have built up in their markets”. Box 240, SE-101 24 Stockholm, Sweden (World Trade Center, Klarabergsviadukten 70) Tel: +46 8 588 660 00 Fax: +46 8 588 661 90 infocenter@swedishtrade.se www.swedishtrade.se www.swedishtrade.com Williamson is quick to point out that the claim in Dragons at Your Door is not that the Chinese companies that are gearing up to create tectonic shifts in the global economy are “superhuman”. Rather, he says, “they’re simply using their cost advantage in innovative ways.” Countering arguments that Chinese companies lose their cost advantages when they make foreign M&As and take their business abroad, Williamson maintains that Chinese business investment is following a unique trend. “One of things we found is that Chinese companies are keeping their manufacturing and even R&D in China,” he says, “so as to maintain cost competitiveness, and most of the money that they spend on foreign investment and acquisitions is spending on technology and brands. The difficulty for foreign companies is that they are often not in position to make that kind of investment on design centres and engineering and hiring in China, or that they do not have the local expertise to do so.” Williamson agrees that the China cost-innovation challenge is not an absolutely new phenomenon. The so-called Asian economic miracle that began in the 1950s in Japan and gathered momentum through to the crisis of the late ‘90s through the combined industriousness of Taiwan, South Korea, Hong Kong and Singapore was achieved by similar strategies. However, Williamson maintains that while there is no substantial difference between the current threat from China and what the previous emergent dragons in Asia achieved, he says the scale and speed of what is happening is unprecedented. He notes that in the car industry, for example, companies such as Toyota and Honda were able to create huge shifts in the landscape, but they did so at a relatively slow pace, starting from the 1960s on their domestic market, and not penetrating foreign markets in a wrenching way until the 1990s. “The point is that globalization is allowing Chinese companies to effect cost innovation at a much faster rate,” he says. “It took countries like Japan and Taiwan a long time move away from being the producers of cheap products, but in a globalised market the Chinese are able to move much more quickly.” For Williamson, the scale of China’s cost-innovation challenge to the global economy is something that has never been seen before. With its 1.3-billion strong population supplying a near endless supply of low-cost labour for the foreseeable future and its vast geography, among other factors, Chinese companies’ attitude of “how can I do more with less” will create a far greater shake up than the “little dragons” did in the 1980s and 1990s. “China has a much bigger resource base, so the shifts it causes will be much bigger,” says Williamson. Swedish Trade Council Box 240, SE-101 24 Stockholm, Sweden (World Trade Center, Klarabergsviadukten 70) Tel: +46 8 588 660 00 Fax: +46 8 588 661 90 infocenter@swedishtrade.se www.swedishtrade.se www.swedishtrade.com Vietnam WTO or bust It may not be happening tomorrow, but there is no turning back for Vietnam now it has joined the WTO, and Vietnam will allow wholly foreign-owned enterprises to control their own sales and distribution from early 2009, says Håkan Ottosson. It took some 11 years of negotiations, and protracted bargaining with the United States, but in January of last year Vietnam finally became the 150th member of the World Trade Organisation (WTO), offering the promise to foreign businesses that the Communist Southeast Asian country will open its markets to wholly foreign owned companies. Håkan Ottosson, head of Swedish Trade Council in Vietnam, for one is confident that that is exactly what is going to happen, even if he cautions that some patience is required. Vietnam is not poised to immediately fling open its doors, particularly when it comes to allowing foreignowned subsidiaries operate their own sales and distribution within the country. “What’s happening here is that with Vietnam’s accession to the WTO, we expect the market to open up by early 2009,” says Ottosson. “I’ve talked to a lot of companies, and at the moment they’re sitting around waiting, but we want to let them know that it’s happening.” The main hurdle to Vietnam’s WTO accession was the US, which put strong pressure on Vietnam to provide deep market access for US businesses, and also pressure on issues such as subsidies, intellectual property rights, trading rights, with some observers suggesting that the US played hardball after learning from its experience of having welcomed China into the WTO with insufficient pressure on it to make binding commitments on certain trade issues. All the same, despite its formerly tightly state-controlled economy, the interest in Vietnam is understandable. The country has seen average economic growth of 7.25 per cent over the past half decade, and while that lags behind China’s double-digit growth rates, some analysts are predicting that when Vietnam fully implements its WTO commitments, foreign trade and capital inflows will boost its growth to a faster clip than the world’s fastest-growing economy. Also attractive to foreign businesses is an industrious workforce in a country with lower average monthly wages than in southern China and the Yangzi River region, China’s much-touted “factory of the world”. But the transition from a state-controlled economy to a free-market economy will bring a host of challenges, and will likely be a wrenching affair, posing a serious threat to the majority of Vietnam’s state-owned industries, which account for nearly 40 per cent of the country’s gross domestic product (GDP). Box 240, SE-101 24 Stockholm, Sweden (World Trade Center, Klarabergsviadukten 70) Tel: +46 8 588 660 00 Fax: +46 8 588 661 90 infocenter@swedishtrade.se www.swedishtrade.se www.swedishtrade.com Some major foreign companies had already taken the plunge and set up shop in Vietnam before the country’s WTO accession, notably US technology colossus Intel, which is building one of the biggest chip foundries in the world in southern Vietnam. Ford Motor already has an autoassembly plant in northern Vietnam, while Canon decided last year to build the world’s largest laser- and bubble-jet printer factory in Vietnam. However, while the WTO accession and the presence of major international players is sure to raise confidence in Vietnam as an investment destination, infrastructure remains creaky, and as Ottosson concedes, companies investing in Vietnam are best served by exercising as much control as they possibly can over sales and distribution. “If you really want to control marketing,” says Ottosson, “you need to control it yourself. The same applies for after-sales service. You need to have your own technicians, and if you don’t control your own stock there will likely be problems with the availability of spare parts. Outsourcing is not an option, because Vietnamese companies are unprofessional when it comes to after-sales and marketing.” Ottosson also points out that control is important when it comes to logistics. “If you use local distributors,” he warns, “you will probably have problems with payments and meeting delivery deadlines. There are many fly-by-night operators in Vietnam, but if you control your own stock, you can control its flow.” But Ottosson is confident that by early 2009, “in the great majority of industries, foreign businesses will be able to set up their own enterprises for distribution and sales.” After all, according to its fiercely negotiated WTO agreements, Vietnam has committed itself to even allow foreign organizations and individuals with no investment or business registration in Vietnam to apply for trading rights, though Decree 23 of the WTO agreement does require that foreign investors apply for a separate sales/distribution license. This, according to analysts, will create a host of opportunities for sales of industrial products as well as consumer goods. “Basically, with the WTO accession,” says Ottosson, “for Vietnam, there’s no turning back, or at least that going back is not an option. The timeline is the beginning of 2009, and even though there may be some delays, it’s time to get the word out.” Swedish Trade Council Box 240, SE-101 24 Stockholm, Sweden (World Trade Center, Klarabergsviadukten 70) Tel: +46 8 588 660 00 Fax: +46 8 588 661 90 infocenter@swedishtrade.se www.swedishtrade.se www.swedishtrade.com India India - a hub for “frugal engineering” “Frugal Engineering” is a concept of how to engineer cheap products. Business developers from industries all over the world have their eyes set on the rapidly growing automotive industry in China and India, where the masters of frugal engineering make their home. The Tata Nano is here! The world’s cheapest car, developed and produced by Indian car manufacturer Tata Motors, was launched in early January 2008 at Asia’s largest car show, “AutoExpo”, in New Delhi. The Tata Nano will cost less than US$2,500 and is predicted to have the same profound effect on the world as Henry Ford’s Model “T” did almost 100 years ago. Both cars are excellent examples of “frugal engineering”, a sector in which India has proven to be the frontrunner. “We’re here to learn about ‘frugal engineering’,” said Carlos Ghosn, president and chief executive of Renault and Nissan, when they launched their new model, the “Logan”, to the rapidly growing automotive market in India in April 2007. Once again, it is in the mature, global and highly competitive automotive industry that a new business development concept has been initiated. The industry is the same, but the geography has changed. Concepts such as “Industrial Design” and “Business Process Reengineering” have their origin in the US, while “Total Quality Management” and “Lean Production” were developed in Japan. Now, business developers from industries all over the world have their eyes set on the rapidly growing automotive industry in China and India, where the masters of “Frugal Engineering” make their home. “Frugal Engineering” is the practical concept of how to engineer cheap products that nevertheless have sufficient functionality. The use of frugal engineering has often allowed a product to target new markets, thus boosting a company’s growth. A few examples of frugal engineering over the past century are the PC, bringing industrial computers into our homes; the Volkswagen Beetle, allowing European middle-class families to own a car; and Skype, giving anyone with a broadband connection free international telephone calls. Two of the latest frugal engineering projects are MIT’s “US$100 laptop”, which will be produced by Taiwan-based Quata Computer, and now Tata Motors’ “1 lakh car”. A “lakh” is Hindi for 100,000 and indicates the Rp100,000 price of the car, which is equivalent to US$2,500. This is 50% less than the QQ3 model by Chinese car manufacturer Chery, which, until recently, was the cheapest car in the world. To be able to achieve this price, the engineers at Tata Motors have had to radically challenge the conventional way of engineering a car. In the process, Tata Motors filed 34 new patents for the car itself and about 200 other patents for various other innovations to create the cost-efficient new technology. Box 240, SE-101 24 Stockholm, Sweden (World Trade Center, Klarabergsviadukten 70) Tel: +46 8 588 660 00 Fax: +46 8 588 661 90 infocenter@swedishtrade.se www.swedishtrade.se www.swedishtrade.com India has three factors that make it interesting from a frugal engineering perspective. First, it has a strong tradition of producing highly skilled engineers. The world’s first university was started in Takshila in India about 700BC, and India is where the number system, the zero (0), and the value of “pi” were invented. In 2006, about 450,000 engineers graduated from India’s 250 universities. Secondly, the size and characteristics of the Indian domestic market make it interesting to develop products for; these products can then be taken global. Thirdly, India’s manufacturing sector has grown in size and capacity to be able to cater to the global market. During the period 2000-2006, the sector grew by 13% and the number of high-quality manufacturers is growing concurrently. For example, Indian manufacturers have earned 15 Deming awards and two Japan Quality Medals. Today, more than 100 companies on the Fortune 500 list have R&D facilities in India. In addition to Swedish companies with such facilities in India, including AstraZeneca, Ericsson, ABB and Sony Ericsson, are such companies as General Motors, Honeywell and Microsoft. It is interesting to note that Chinese companies have also set up R&D facilities in India, among them Huawei and ZTE, two of the world’s largest telecom network producers. Thanks to the increasing number of R&D facilities in India, the country’s importance as a home for patents is growing. In 2005, India was the 11th largest patent filing country in the world and, during the period 2000-2005, was the 6th largest filing country of origin for multiple patents from the same invention. Nokia’s successful model “1100” shows that frugal engineering does not always have to include cutting-edge research and development, but rather that smaller product modifications that cut costs can provide sufficient functionality. The low-cost model features an anti-dust keypad for dirty roads, anti-slip grips for use in the heat and a one-button flashlight in case of power cuts. With this model, Nokia built its unquestionable market leadership as the world’s fastest-growing telecom company, with over 8 million new subscribers each month. In the same manner, Tata Motors is now targeting the fast-growing automotive market of global emerging markets. “We have simply designed the cheapest possible car to meet the demands of the people,” said Ratan Tata, Chairman of the Tata Group, at the launch of the US$2,500 Tata Nano. “We don’t even know how to design and manufacture a US$5,000 car,” says Ghosn, who continues: “Indian companies are doing a great engineering job, and why should we reinvent the wheel when we can simply partner with and learn from companies that have already done so.” Box 240, SE-101 24 Stockholm, Sweden (World Trade Center, Klarabergsviadukten 70) Tel: +46 8 588 660 00 Fax: +46 8 588 661 90 infocenter@swedishtrade.se www.swedishtrade.se www.swedishtrade.com The five cheapest cars in the world 1. Nano. Produced by Tata Motors in India. Price: US$2,500 (£1,250) 2. QQ3. Produced by Chery Automobiles in China. Price: US$5,000 (£2,500) 3. M800. Produced by Suzuki-Maruti in India. Price: US$5,200 (£2,600) 4. Merrie Star. Produced by Geely Automobiles in China. Price: US$5,500 (£2,750) 5. S-RV mini SUV. Produced by Geely Automobiles in China. Price: US$5,780 (£2,890) Sources: Reuters; Business Standard Motoring (India); Chinese auto websites (US$1=Rp39.3) Fredrik Fexe Swedish Trade Council in India China China’s design revolution China’s sizzling economy, growing consumer market and the global aspirations of its biggest companies is resulting in a design boom, says Charlotte Rylme. Fuelled by China’s double-digit-growth economy, ahead of the Beijing Olympics, some of the world’s coolest architectural firms are transforming China’s formerly drab city skylines. Just take Beijing, where Dutch architect Rem Koolhaas is bringing the unique loop-like 230-metre CCTV Tower into existence, and French architect Paul Andreu is responsible for the egg-like titanium- and glass-girded National Theatre. For Charlotte Rylme, who as head of Swedish Trade Council in East China helps Swedish architects compete in the bidding for new architectural projects in China, architecture is not the only area in which China is witnessing a design boom. Apart from a surge in the numbers of Chinese students graduating in design, she also points to China’s fast-growing consumer market and the push by homegrown Chinese companies to take their products global. “There are around 400 schools and universities in China offering design, and together they are producing around 10,000 graduates annually compared to about 1,500 in 2000,” says Rylme. She points out that these graduates will play a role in both taking Chinese products to foreign markets and also help foreign companies that are setting up design centres aimed at adjusting their products to the Chinese market. From a relatively recent start in 1982, when Hunan University opened China’s first school of design in Changsha, says Rylme, design has now become one of China’s most popular majors. She also notes that Chinese designers are even starting to win prizes abroad. “A Chinese student from Hunan won the top prize in the biennial Nagoya Design Do! competition, and a graduate from the Tianjin Academy of Fine Arts studying in Germany was one of the finalists for the prestigious Braun Prize.” Box 240, SE-101 24 Stockholm, Sweden (World Trade Center, Klarabergsviadukten 70) Tel: +46 8 588 660 00 Fax: +46 8 588 661 90 infocenter@swedishtrade.se www.swedishtrade.se www.swedishtrade.com Many such students will likely find themselves working with foreign companies that are looking to adjust their products to the Chinese consumer market. “The Electrolux Design Centre, which was inaugurated in November last year, for example, is staffed with people who have close contact with the local market,” says Rylme, who thinks this is growing trend. “More and more Swedish companies have been setting up design centres in China, so as to adjust their products [to local market needs]”, she says, also noting how some foreign automobile makers are modifying their vehicles for the China market. “BMW, for example,” she says, “has extended their car to give more space for people sitting in the back seat of the car, and Volkswagen, has used artificial wood in their cars for first time ever in China because Chinese consumers want them to stand out.” Rylme explains that, when designing products in China, it is essential to bear in mind that the Chinese consumer likes to appear rich, and have products that stand out and impress. “Some luxury brands, such as clothes and bags,” says Rylme, “have for example developed special product lines for the Chinese market, where the brand and the logo is more visible compared to other markets, where people want to hide the brand logo.” With its surging middle class, Rylme calls China “probably the most dynamic consumer market in the world,” and points out that a growing number of Swedish businesses are coming to China to participate in the boom. “We support Swedish companies to set up in China, and there are currently around one every four days doing so. Between the summer of 2006 and the summer of 2007, 92 Swedish companies set up in China, and an important thing to note is that around 40 per cent of them are not only following old customers from Europe, but are also looking for new customers in China. “ To highlight Sweden’s growing influence, the Swedish Consulate General has produced a catalogue of Swedish design in China. Rylme calls it “a good marketing tool for showing people what Sweden is good at, and also a way of sending a signal back to Sweden that shows people there what is going on in China.” An additional argument that China is undergoing a design boom, according to Rylme, is the recent launch in Shanghai of Shenet, a female network started in Stockholm in 1999. One of the core Shanghai Shenet members, says Rylme, is Ewa Kumlin, who founded Tokyo Style and Swedish Style in Tokyo, and who is now manager of Svensk Form. “The launch was attended by a lot of Shanghai’s elite, brand consultants, designers and so on, and there was a fashion show with Chinese models wearing Swedish and Chinese-designed clothes,” says Rylme, adding that “Swedish and Chinese designers got to meet and exchange ideas through seminars and discussion groups.” Box 240, SE-101 24 Stockholm, Sweden (World Trade Center, Klarabergsviadukten 70) Tel: +46 8 588 660 00 Fax: +46 8 588 661 90 infocenter@swedishtrade.se www.swedishtrade.se www.swedishtrade.com But, if China’s sizzling economy is creating a growing swell of consumers with money to spend on smart design, and both local and foreign designers are seizing the opportunities that are arising, the other equally significant aspect of China’s design boom is that Chinese companies are looking to take their products abroad. “The best companies know design is crucial, and they all want to be the next Samsung,” says Rylme. “More than a decade ago, this Korean company was a second-tier brand, but then they focused on design and today they win a lot of design awards and is one of the world’s most valuable brands.” Swedish Trade Council Thailand/Taiwan/South Korea East Asia Changes Costume Over the past month, there have been three interesting elections in East Asia, each of them indicating movement towards becoming more open and investment-friendly countries. Samak Sundaravej, Ma Ying-jeou and Lee Myung Bak were the three winners in the recent elections in Thailand, Taiwan and South Korea even though neither Mr Thaksin nor Mr Ma were themselves on the ticket and they have more than a winning attitude in common. In December, Thailand held its first election since the military took over in September 2006. The reincarnation of the disbanded Thai Rak Thai (TRT), the People’s Power Party (PPP), led by Samak Sundaravej, is once again taking steps towards democracy. Analysts expects that the new government will strengthen investors’ confidence and that Thailand will get back on track, reinstating the strong annual economic growth of 5% that the country experienced before the military took over. “The PPP has announced a more investment-friendly approach compared to the military government and changes to the Foreign Business Act (FBA) are expected to increase foreign direct investments,” says Tomas Dahl, head of Swedish Trade Council in ASEAN region. Henrik Byström at the Swedish Trade Council in Taiwan continues “the same goes for Taiwan, there could be many new business opportunities arising in the near future as there will undoubtedly be several important changes”. With its election to the Legislative Yuan, the Koumintang (KMT) enjoyed a landslide victory, securing 81 seats in the 113-seat chamber. The ruling DPP, or Democratic People’s Party, won only 27 seats. Box 240, SE-101 24 Stockholm, Sweden (World Trade Center, Klarabergsviadukten 70) Tel: +46 8 588 660 00 Fax: +46 8 588 661 90 infocenter@swedishtrade.se www.swedishtrade.se www.swedishtrade.com The KMT advocates better relations with mainland China, including direct flights and tourism from the mainland. It also advocates massive investment in infrastructure, such as rail and mass transit systems. In March, Taiwan will hold presidential elections and, if the KMT candidate Ma Ying-jeou wins, this will mean that the same party will control both the legislature and the executive branches of the government, which has not had a majority in the legislature since 2000, hampering many reforms. In South Korea, Lee Myung Bak is the first president with a background in business. He was previously vice president for a construction business in the Hyundai Group and said during the elections that he plans to run South Korea like a business. The new conservative president won with the biggest margins seen since South Korea became a democracy. It is not yet said that he is becoming the next president since corruption accusations is still following him. “The worries about the economy dominated the election campaign and Lee’s promise to broker faster growth, reduce regulations and create better conditions for foreign investors made him the winning candidate” says Tarras Delin at the Swedish Trade Council in South Korea. The new president is also bringing an end to 10 years of a liberal government that has given large amounts of aid to neighboring North Korea. Swedish Trade Council Box 240, SE-101 24 Stockholm, Sweden (World Trade Center, Klarabergsviadukten 70) Tel: +46 8 588 660 00 Fax: +46 8 588 661 90 infocenter@swedishtrade.se www.swedishtrade.se www.swedishtrade.com