China and India – What have you got to offer?

Posted on 27 Jul 2009 by The Manufacturer

Finding a niche or point of difference is essential both in the local market and overseas.

The many trade opportunities for British manufacturers in China and India can be obscured by the inability of companies to identify their unique selling points – their place in the value chain. A local rep can help with this, to position the UK firm in the value chain and exploit real local Asian needs, says UK Trade & Investment’s Paul Calver.

Kinky Boots. That’s what first came to mind when I thought about UK engineering and manufacturing value chain opportunities in China and India. Strange you may think but those of you who have seen the British comedy film should know what I am referring to.

Kinky Boots – the story of the Northants bootmaker which rescues its business by identifying its true place in the value chain.

There is no need to present the statistics as you will all be familiar with the rise of the Chinese and Indian economies and the market opportunities they present. The question is how you capture business in these markets and protect your position from future Chinese and Indian competition.

It is worth commenting on the effects of the downturn on the Chinese and Indian markets. Latest figures from forecasting consultancy company Oxford Economics indicate that while Chinese manufacturing growth fell in both Q3 and Q4 (+6.4%) last year it increased in Q1 this year and is forecast to increase in Q2. This is heavily influenced by domestic demand as the impact of the large fiscal boost and a surge in bank lending has started to come through. The RMB 4 trillion stimulus package from the Chinese government provides additional market opportunity particularly in the areas of airport developments; automotive; alternative energy vehicle technology; industry restructuring; innovative products; non-ferrous metal development; aircraft and manned space vehicle development; textile industry restructuring; and improving the steel industry. In India external trade remains very weak suggesting that domestic demand remains relatively subdued but there is still growth particularly in the defence sector where the Union Defence Budget 2009-10 has been increased by 34%.

In order to enter these markets you cannot compete on cost unless your manufacturing cost base is in a low cost economy. The labour cost difference between China and the UK is still very significant although labour costs in China are increasing. Closing this gap by increasing productivity would be a challenge especially if you have already implemented many of the productivity improvement tools.

What is important is to be in a position to offer something unique and something China and India lack. And, if necessary, you may have to be in the market place in order to establish a market based cost structure. So, what do you have to offer?

Many companies will look at their final deliverable services or products when considering what they have to offer. The problem with this is that they may miss their real opportunity which could well be a strength or unique capability embedded within their manufacturing and business processes, value chain or knowledge base. Finding these strengths is an important first step when looking at the Chinese and Indian markets both in terms of deciding an offering and protecting your company’s position as you enter the market.

The Cambridge University Institute for Manufacturing (IfM) has developed a number of tools to help companies identify manufacturing opportunities in the Chinese manufacturing value chain, following a study it has undertaken on the impact of globalisation on China’s industrial sector. The IfM’s report shows that the total value chain should be considered when looking at what to offer. For example, in the white goods sector, China’s R&D and design capabilities do not match the country’s traditional strengths in production, presenting potential opportunities for UK firms (see figure below).

In China specific programmes have been developed to encourage joint development of high potential ideas by entrepreneurs and scientists. Design capabilities are seen as a major weakness in many sectors and importing high value components is seen as an important step to secure and develop manufacturing in general. There are manufacturing capability gaps in sectors such as aerospace and energy and there are big projects to improve capacity and efficiency in shipping ports, air cargo and road networks. As the domestic market grows, service, repair and training centres are expanding rapidly. A similar picture is emerging in India. All of these offer opportunity to UK companies.

It is important to identify your strengths and unique capabilities throughout the value chain and match these with Chinese and Indian opportunities. For example you may be a product supplier with a strong casting design capability, or have specialist knowledge of using certain alloys. Delivering your service in the West may have given you expertise in branding or certain domain knowledge. You may have developed strength in establishing distribution channels and managing logistics. Within your IPR portfolio there may be a specialist technique or application knowledge that could be transferred across market sectors. UK Trade & Investment (UKTI) and organisations such as Cambridge University’s Institute of Manufacturing can help you undertake this process and identify matching opportunities in China and India.

IP protection plan

When you undertake this review you will often find that your real strength is not necessarily where you first imagined, which will open up new opportunities and possibly a new direction for your business. One of the main fears of companies entering China and India is that they will lose their IP. One advantage of undertaking the review is that a company’s understanding of its key strengths and unique capabilities will increase, supporting the development of an IP protection plan which will be part of its market entry strategy.

Establishing in-country capability is also an important consideration when looking at market entry. Apart from obtaining a market based cost structure, establishing in country capability allows you to gain an essential understanding of the market characteristics and is sometimes a prerequisite to trading. For example on the Chinese C919 aircraft programme it has been stated that preference will be given to suppliers who have formed relationships with Chinese companies and in India consideration is being given to expanding the defence offset regulations to the power generation equipment sector.

I am sure that many UK companies will have considered, if they are not still doing so, sourcing low valued added activity from China or India in order to increase global competitiveness. “Purchase, Establish Then Sell” (PETS) is an established approach to market entry.

Our man in Mumbai, Beijing

An essential aspect of this process is establishing a ‘man-on-the-ground’ at the first stage. This can be your own employee, an outsourcing agent or distributor, or a partner company or organisation. The ‘man-on-the-ground’ will be your trusted eyes and ears and help bridge the communication and cultural gap. UKTI and local organisations like the Chinese British Business Council (CBBC) and UK Indian Business Council (UKIBC) can help with identifying such a person or organisation.

As we are all aware, the value chain opportunities in China and India are vast. In order to capture these we cannot compete on cost unless we source from low cost economies; that in itself can be turned into market entry opportunity through a PETS approach. We have to review our value chains to identify our sometimes hidden strengths and unique capabilities and match these with real needs in China and India. The task is not easy, patience is required and there are risks but with the right approach the vast opportunities China and India offer can be captured and risks mitigated. UKTI and associated organisations are here to help.

For those of you who haven’t seen the film Kinky Boots, it is inspired by the true story of WJ Brookes Ltd, Northampton, a company that made traditional, hand-stitched leather brogues. In 1993 Brooks faced closure, like many other small county firms that once made Northamptonshire the UK heart of footwear manufacture, as cheap fashionable imports flooded the market.

The film depicts a chance encounter with sassy, flamboyant Soho cabaret star and transvestite Lola, who provides a glimmer of hope and a surprising last chance for the factory and its employees. Lola’s quest for stylish, kinky women’s boots (for men) provided the answer to Brookes’ prayers. But was the traditional Northamptonshire workforce open-minded enough for the likes of Lola? After many humorous encounters, with Lola’s help, the factory designs and manufactures the “kinky boots”, relying on their unique technical expertise in strong heel design and — following a dramatic (and funny) catwalk scene — successfully created a new niche market thus saving the factory and the jobs of the employees. The company found out that its real strength and unique capability was in materials knowledge rather than their ability to efficiently operate sewing machines. While not forgetting the design skills of their new employee, Lola.

This article was written by Paul Calver BSc (Hons), MBA, global value chain specialist in advanced engineering, UK TI Sectors Group.