China Under Construction

March 10, 2005
As manufacturers expand operations in China, many face challenges in the basic building of supply chains. These three companies used novel approaches to find reliable suppliers, develop dedicated distribution networks and partner for growth.

When IBM announced plans to sell its personal computing business to Beijing-based manufacturer Lenovo last December, the business world let out a collective gasp. The move not only marked Big Blue's exit from an industry it had help found, but ushered in an era in which China could very well dominate the Darwinian computer industry. To any manufacturing company contemplating global expansion, China never looked better.

China, with its ability to produce high-quality items at roughly half the cost and the promise of the world's largest consumer market wafting in its future, certainly has a lot to offer manufacturers. However, the rewards of China will come only to those that carefully construct an efficient supply chain -- the network of vendors, producers and distributors that keep a company's business cycle flowing. After all, there's little point to cutting production expenses if a company fails to fulfill customers' orders on time or squanders its savings on building a supply chain.

Surprisingly enough, many companies have fallen victim to both traps. In a survey of 117 global companies with a presence in China, consultants Aberdeen Group discovered that nearly 90% of the respondents with the highest costs also had the longest delivery times. Or as Donald Bowersox, professor of supply-chain management at the Eli Broad College of Business at Michigan State University, explains it: "[Many multinationals entered China] with the belief that relative differential and labor costs will be sufficient to offset logistics cost, but it does introduce a whole new level of complexity."

Complexity indeed. Newcomers to China will discover quickly that the task of building a supply chain falls primarily into their laps. Only 18,000 licensed logistics professionals reside in Mainland China according to management and IT consultancy Accenture, as opposed to 500,000 in the United States. They also will be inundated with rules and regulations from the World Trade Organization, the U.S. and Chinese governments, not mention every principality into which employees set foot. Not everyone will follow the rules so carefully. "Truckers will show up to tow 20 tons with licenses for 10 tons," says Tommy Mann, a partner for chemicals at Accenture, who visits China about every six weeks. "You'll see trucks leaning to one side because they are so heavily loaded."

And finally, receiving updates on inventories or shipping cycles can take days because few Chinese companies have the technology to provide information electronically. As Mann of Accenture puts it: "China still has a Third World feeling."

Luckily, IndustryWeek has tracked down three different corporations to help show newcomers the ropes. Bosch Rexroth, which produces drive, motion and control technologies, has invested nearly 30 years into China and boasts of an impressive network of suppliers. Another automation specialist, Rockwell Automation, has applied innovative new hiring and training techniques to create a top-rate sales channel. And Infor Global Solutions, which makes supply-chain management and ERP software, found an experienced partner to facilitate its introduction to China.

Bosch Rexroth:
Building A Supply Base Takes Time

When it comes to China, Bosch Rexroth sits in an enviable position. The $800 million manufacturer already sells 95% of its Chinese-produced products within the country. In fact, China ranks as its fourth-largest market. And with 30 years experience, the company has slowly knitted together a supply-chain network able to support procurement, manufacturing and sales almost entirely within local markets. Bosch built its first sales office in 1979, when China opened its borders to foreign businesses, and expanded into manufacturing by 1996. Because the $5 billion, Germany-based company did not initially know any local vendors, President and CEO Wolfgang Dangel had to ship materials from Germany to plants in China. He then warehoused the raw goods in Hong Kong, assembled everything within China and distributed the finished goods throughout the country.

With a temporary procurement system in place, Dangel set about searching for local suppliers. He relied on the connections of two corporate partners picked up in 1996 and studied how to cultivate quanxi -- mutual respect and loyalty between two businesses. He also increased the company's profile by becoming an active player in such high-profile civil projects as the Three Gorges, a hydraulics dam that stands to be the largest in the world. After 10 years of hard work, Bosch is reaping the benefits of using local vendors. For instance, the company pays 20% less today for locally acquired forged parts compared with imports. "Building a supplier base is a long process," cautions Dangel. "Manufacturers must be very patient."

Down the road, Bosch expects the growth to continue. The company recently pledged to invest 83 million euros to improve its production capacity in China, starting with building a new factory in Beijing later this year. The plan: To cater to China's exploding demand for the latest in technology that will make machines better, smarter and faster. Or as Dangel puts it: "Whatever we produce in China, we want to sell to China."

Rockwell Automation:
Tap Into Top Talent

Rockwell Automation knew emerging economies such as China would need new roads, safe drinking water and reliable electricity to keep trade flowing freely. So in the late '90s, the $4.4 billion company increased efforts to sell the software, control systems and automation solutions needed to support such mammoth infrastructure projects. Shortly after arriving, Rockwell hit upon a wall: "We couldn't find sophisticated distribution in China," says Scott Summerville, president of Rockwell Automation Asia-Pacific.

Summerville cherry-picked the best distributors of the bunch and formed a limited distribution network, assigning each product category its own distributor. This way, he figured, the sales channels would not need to worry about competing with each other. Also, distributors would find more time to attend the various training programs that Rockwell offered. For example, this past February, Summerville lectured employees at Hangzhou Huazhang Electric on his management philosophy. And each fall, Rockwell hosts its Automation Fair, the largest free educational forum for manufacturing technology. It invites Chinese distributors to attend so that they can meet their U.S. counterparts to compare sales numbers and techniques.

Prior to setting up the distribution network, however, Rockwell went into recruitment overdrive, drawing sales talent from the millions of engineering students coming out of university. This sales force also sells to end users. "Most of these graduates expect to work with engineering companies," explains Summerville. "To them, sales is novel. We can attract innovative people." Besides, the way Summerville sees it, employees at local automation companies might have more experience but will be quicker to leave the company. But by plucking someone right out of university, Rockwell can develop sales skills and, better yet, a sense of loyalty.

Once hired, the graduates go through a training program that serves as a sort of pep rally for Rockwell. "We are really gregarious in training," say Summerville, "We try to rile them up about their jobs." Later on, employees also can enjoy further training in subjects such project management and general management style. The idea is to find smart people and retain them for the length of their careers. The approach seems to work: Four out of the five college hires from last year have gone on to become top sales people, and no one has quit.

For its legal needs, Rockwell has a team of global business lawyers but only one legal professional for Asia-Pacific. So the company hires outside professionals to translate Chinese law. "You really want good legal advice because the law can be ambiguous at times," says Summerville. When all else fails, the president draws from his stockpile of quanxi. "In Chinese law, there is a lot of gray area," says Summerville. "That's why it's important to establish relationships. Not so that you can get away with anything, but when the law is a bit gray to help navigate those waters."

Rockwell has built three training centers in China. A worthy expense, considering Rockwell's business in China grew by more than 30% last year. Rockwell intends to maintain the same growth over the next five years. The trick is to keep the quanxi flowing.

Reduce Risks With Partnerships

Other companies might expound upon the virtues of a global economy, but for Infor Global Solutions, the reason boiled down to a single maxim: Be where your customers are. The supplier of ERP and supply-chain software noticed that many of its clients -- primarily automotive and discrete manufacturers -- were setting up offices such as Beijing and Shanghai. Chances are those customers would need software to help manage their new supply chains. And, as far as Infor was concerned, its SupplyWeb system, which can link various ERP systems to other businesses, offered the perfect solution.

Infor needed someone to help navigate the Chinese landscape. So the software suppliers paired up with Grape City, an international software and services company with 17 years of experience in China. "From our standpoint we get the best of both worlds," says Rick Parker, vice president of global marketing for Infor's discrete group. "We have an organization that's easy to communicate with and knows the area."

Acting a bit like a skilled tour guide, Grape City gives Infor insider's access to many of the local vendors and suppliers. The consultants also have cut through the miles of red tape required to sell software in China. However, the partnership especially appeals to Infor as a form of insurance against the uncertainty of operating in an emerging market. If the Chinese market contracts, Infor can simply terminate its relationship with Grape City and escape with little financial damage -- a key aspect for a company with only $600 million in sales.

Working with a partner hardly comes risk-free. As a software company, Infor must protect its intellectual property with particular zeal. China can be notorious for intellectual property theft. Throw a partner into the mix, and one never knows who can obtain access to classified information. Infor's solution: Keep all of its source code out of China. "You have to physically set yourself up so that others don't have access to your information and in our case code," says Parker. "Where we might provide someone else with source code, we must be careful to protect our jewels."

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