"The rise of the mainland Chinese market presents huge business opportunities to Taiwan's machinery makers"

Jan 24, 2005 Ι Industry In-Focus Ι Machinery & Machine Tools Ι By , CENS
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Interview with Fred P.C. Huang, chairman of the Taiwan Association of Machinery Industry

Machinery makers in Taiwan have been more conservative than their counterparts in other industries about moving production facilities to mainland China to take advantage of the cheap labor and materials costs there, as well as to establish a foothold in the vast Chinese market. Instead, they have been striving to boost their research and development capability and upgrade their production skills.

With the sharp rise in the price of raw materials that has afflicted the island's machinery manufacturers over the past two years, however, some producers are seriously thinking about relocating to the mainland. Some, in fact, have already moved some of their less-competitive production lines to the other side of the Taiwan Strait, while keeping their R&D and marketing operations on the island.

CENS staff reporter Ben Shen recently talked with Fred P.C. Huang, chairman of the Taiwan Association of Machinery Industry (TAMI), about the status of investment in the mainland by Taiwanese machinery manufacturers. Excerpts of the interview follow:

Q. What impact will the rapid economic development of mainland China have on Taiwan's machinery manufacturers?

A. If we neglect the political impact and solely address the economic aspects, the impact of the rise of mainland China on the domestic machinery industry should be more positive than negative. The mainland is strengthening its international competitiveness, and this should force our domestic machinery manufacturers to step up the pace of their R&D and boost their production of high-added-value products that they can distinguish from those of the mainland.

As Taiwan has a similar cultural and linguistic background with the mainland, it's naturally easier for our machinery manufactures to enter the mainland market—whether selling products or investing there. So the rise of the mainland market presents a good chance for our machinery makers to further develop their production and sales.

According to customs statistics compiled by TAMI, Taiwan exported US$3.76 billion worth of machinery to mainland China in the first 10 months of 2004, up 19% from the same period of the previous year and accounting for 36.8% of our total machinery exports. Sales to the mainland of machine tools, which make up the biggest export sector of Taiwan's machinery industry, amounted to US$830 million in the first 10 months of last year, up 29% from the previous year and accounting for 46.1% of our total machine-tool exports. But our growth of machinery exports to the mainland in the January-October period of 2004 was less than that of South Korea and Japan, and this is a situation that bears watching.

Q. How much progress have mainland Chinese manufacturers made in upgrading their manufacturing skills and strengthening their international competitiveness?

A. In some sectors of the machinery industry they're really enhancing their manufacturing skills, and this will improve their international competitiveness. I don't think they can threaten the existence of Taiwanese machinery makers in the international arena, but our suppliers should be on the alert because of the continuous efforts of their mainland counterparts to elevate their international competitiveness.

For instance, last year the Haitian Machinery Group, the biggest maker of plastic-injection molding machines in the mainland, went into cooperation with a German firm specializing in the same type of machinery to supply the German company on an OEM (original equipment manufacturer) basis. The alliance has helped Haitian to greatly boost its production capacity and to learn the advanced manufacturing skills developed by the German producer. Currently, Haitian can roll out 1,500 plastic injecting molding machines a year, making it the world's third largest producer in the field. This poses a real threat to Taiwan's manufacturers of the same products.

Q. The mainland has been working hard to improve its investment environment and move toward a free-trade system over the past several years to attract foreign investors. Do you think that Taiwan's machinery manufacturers will respond by increasing investment there?

A. The economic and trade reforms that the mainland has carried out have really had a magnetic effect on investors worldwide, and they are also attracting Taiwanese machinery makers to set up production facilities there. But I don't think our producers will move across the strait on a large scale, because Taiwan's domestic demand is still growing. Basically, machinery manufacturers who want to relocate production facilities to the mainland are just extending production there while keeping their core manufacturing operations and R&D work in Taiwan in order to further develop high-value-added products. They know how to adjust their operations to boost their international competitiveness.

Our surveys show that only 8% to 10% of TAMI's members had set up production facilities on the mainland by the end of 2004. But most of them rely heavily on the huge mainland market. About 45% of all exports of Taiwan-made machinery go to the mainland, and the ratio for machine tools is 50%.

Something worth watching is the liberalization of rights to trade in the mainland's domestic market at the beginning of this year. This will encourage Taiwan's machinery manufacturers and traders to set up trading companies there, and I believe that this will give us a better chance to further develop the mainland market in the next few years.

Q. Which product sectors of Taiwan's machinery industry are most eager to invest in the mainland?

A. Our surveys show that the sectors that have made the most investment in the mainland are machine tools, plastic and rubber processing machines, textile machines, shoemaking machines, and woodworking machines. Those that focus on mass production have a stronger desire to relocate to the mainland, while those that concentrate on small-quantity, large-variety production have less desire to do so.

Compared with other manufacturing sectors, machinery making relies more on the domestic market and focuses less on mass production. That's why our machinery makers are not moving offshore very rapidly. Most of our machinery makers that have gone to the mainland have done so to secure raw materials and access the market there. Those that have moved to other countries have done so for the same reasons. But I've advised them not to go offshore to reduce production costs; they have to elevate their production efficiency, because the low wages they find overseas will disappear some time.

As I understand it, domestic machinery manufacturers that have relocated their production to the mainland have done so to boost their sales in that vast market, and not to make cheaper products for export.

Q. Could you elaborate on the status of investment in the mainland by Taiwanese machinery manufacturers?

A. The Taiwan Machine Tool Foundation, a TAMI sister organization, recently completed a survey of mainland investment by domestic machinery manufacturers. The survey shows that more than 50 of our machine-tool makers have set up plants in the mainland, and that they have enjoyed a growth in sales there over the past several years. Some of them report that they have plans to expand production in the mainland within the next few years.

By tracing the history of relocation by domestic machine-tool manufacturers, we find that they have carried out their mainland Chinese investment in two stages. The first stage began in 1994 when C.S. Lu, then chairman of TAMI and president of Kent Industrial Co., one of Taiwan's largest makers of surface grinding machines, took some domestic manufacturers of machine tools and key components to establish an industrial zone in Xiaoshan, near Hangzhou in Zhejiang Province. But those early birds had to bear the burden of too much redundant labor, because some 40% of their workers had no productivity.

The second stage of the exodus of machine-tool manufacturers from Taiwan began in the past two or three years, and our surveys show that about 90% of the machine-tool makers that have set up plants in the mainland have done so within that time. Most of them have sited their production facilities around the Yangzi River delta, in such locations as Hangzhou, Ningbo, Shanghai, Suzhou, and Kunshan. All of our top-10 machine-tool manufacturers have now set up production facilities in the mainland.

Most of our makers of plastic injection molding machines that have moved to the mainland have set up in Ningbo, Zhejiang Province, or in Guangdong Province. The relocation of our machinery manufacturers is having a cluster effect in the mainland.

Q. Faced with the rising threat from mainland Chinese manufacturers, will machinery makers in Taiwan have to readjust their operating strategy?

A. Taiwan is still in the midst of a long period of transition from a developing economy to a fully developed one. However great the external threat, domestic manufacturers must quickly adjust their operational approach and seek to upgrade their manufacturing skills and product lines. They must not wait until their rival manufacturers have grown too big and strong. As I said, domestic machinery makers should keep their R&D and marketing forces in Taiwan, so as to develop more high-added-value products here. I'm happy with the efforts that our machinery manufacturers have made to enhance their R&D capability and upgrade their manufacturing skills over the past several years because of the increased threat from mainland Chinese competitors.

In the area of marketing, they have to beef up their after-sales services and enhance their brand recognition. In fact some local machinery makers have laid a good foundation in branding over the past few decades, but few consumers recognize our brands because our target customers are factory operators and not massive numbers of end users.

In addition to R&D and marketing, domestic machinery manufactures also have to pay attention to the establishment of a remote maintenance competence. Thanks to the rapid growth of the global information technology industry, many CNC (computerized numerically controlled) machines can be repaired and maintained online through the Internet. Only by establishing a remote maintenance competence can our machinery makers increase the added value of their products and boost their international competitiveness at the same time.

In general, our machinery manufacturers in Taiwan well know that they have to carry out a division of labor and adjust their operations in the face of the mainland's rapidly growing machinery industry. Most of them realize that they have to keep the production of high-end products in Taiwan even as they relocate the production of some of their less-competitive products to the mainland.

The island's manufacturers of key mechanical parts and components have also made great progress in elevating their manufacturing skills and developing sophisticated products. High-end made-in-Taiwan components that have penetrated the markets in Japan, the U.S., and some industrialized European countries include ball screws, linear guides, high-speed spindles, automatic tool-changing systems, bearings, gears, industrial cooling systems, telescopic steel-slideway covers, and rotary tables.

The most pressing problem facing machinery manufacturers in Taiwan today, I think, is the acquisition of raw materials such as cast-iron. Our machinery industry as a whole consumes 1.5 million to 2 million metric tons of cast iron per year, and at present we have to pay 30% more for cast-iron in Taiwan than our rivals pay in the mainland. That's why machinery makers here that depend too heavily on cast iron have to consider relocating to the mainland.
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