 Obviously,
all consultants are not created equal, Can
you tell us a little about your company and your background?
 Runckel
& Associates is a small U.S. based company with an extensive reach.
We have associates in three locations in China, Hanoi and Ho Chi Minh
City (Saigon) in Vietnam, Phnom Penh, Cambodia, Bangkok, Rayong and
Chiang Mai in Thailand, Laos, Singapore/ Malaysia, Manila, the
Philippines and Korea. Our website, www.business-in-asia.com, is
one of the largest websites focused on business with Asia and is
recommended by many trade ministries and organizations. The site gets
over a million hits a month and involves no advertisement or
sponsorship but is dedicated to the principle that understanding more
about business in Asia benefits all, including our company. My
wife and I, who own the company, each have more than 30 years of
experience in Asia: for me it is actually over 40 years and started in
1969. We speak Thai, Vietnamese and Chinese plus other world languages
and we have lived and worked in all of these countries. In fact, we
live in Asia for over half of the year. Our background allows us
to look at opportunities across Asia, not just China, and to guide
clients through the obvious and not-so-obvious challenges that come
with locating a business in Asia.
Where could a
company most easily go wrong trying to pursue "an Asian strategy"?
The easiest
mistake to make is not to spend enough time exploring options in terms
of countries and regions within countries. For example, Shanghai and
Guangzhou in China are both great places to site a project but both
have become relatively expensive in terms of labor, rents and other
costs. Today you need to look farther afield in China and oftentimes
outside China, say to Vietnam, Thailand or even perhaps soon Myanmar to
find the right fit for a project. In the event, your project is
more dependent on sales into the retail sector, China remains a good
pick but what needs to be remembered is that China is not one market -
it is a series of provincial and often city markets that oftentimes are
very different from each other and can take time to learn and master.
Thailand, which can look more expensive at first is actually
quite competitive when all cost factors are examined and compared.
Vietnam, is both low cost for manufacture and also has a fairly
large population with 90 million people who are very young and
prospering and thus can be a great retail market as well as a site for
manufacture. Again, the important thing is to do your research
and to clearly think about what you are trying to accomplish by
locating your business in Asia.
How can a company
determine whether it would benefit by either manufacturing or entering
a joint venture in Asia? Are there some general "qualifying" rules that
apply to any business?
Whether as
a point for sourcing of product, manufacture, OEM production, sales
and/or in some cases design end engineering, Asia offers a host of
opportunities and challenges for companies in the U.S. and other
countries. That said, we recommend going offshore only when there are
no other options or as part of a long term strategy for expanding a
business. I am not a big proponent of defensive business. If your focus
on Asia is strictly on reducing costs, you ore missing out on a large
part of the advantages of being in Asia which are the fast growth, the
young population, the growing middle class and the large underserved
markets there. The benefits of an Asian strategy apply to small and
medium sized companies as much as to bigger corporations. Companies
with from $1 million to many hundreds of million (even billions) in
sales have worked with us on projects in Asia, so the range of
companies that can benefit in examining opportunities and challenges in
Asia is considerable.
Does the fact
that China has in the past attracted so many multinational OEMs mean
that it should be the place to go?
One should
put aside any pre-conceived notions like China is always the cheapest
or best location or even that with 1.3 billion people China is the
largest market in Asia for your product because that can easily be
wrong, depending on what one wants to do. Look at all the costs and
look at them in detail. Pay attention to taxes, fees and expenses,
shipping costs, etc. as they can either limit your profitability or
doom your operation. Focus on shipping, and not just the cost of
shipping a 40-ft container but all the incidental fees, times in
clearance, etc. These matters are not as clear as they may seem to be
but they have to be factored into any business plan.
Again, keep an open mind. In China, this may mean looking past
locations you have heard of in favor of locations like Taizhou, if you
have a project that involves plastics, plastic molds or automotive
parts, or a place like Yantai or Weihai in Shandong province in North
China, if your project involves crankcases, tires, automotive spare
parts or electronics, or to Hanning or again Weihai or even to Ho Chi
Minh City if your project involves furniture. For wire and cable
companies there are several locations you might want to consider, such
as Zhejiang province in China and Rayong, Thailand or Binh Duong
province in Vietnam. For any sector, however, there are comparative
advantages that cause like industries to co-locate there. It is a rare
company that can choose a location and arrange for all the logistics on
their own, so it is essential to go there with someone who is
experienced in the country, thorough in their research and able to
understand you and your company and your needs.
China was in the past the cheapest choice for some products but this
time has largely passed. Chinese wages in the most recent period
have grown at levels higher than or approaching 20% per year and
oftentimes now Vietnam and in particular Binh Duong province just
outside of Ho Chi Minh City is a much cheaper place to produce your
products with high quality. China remains a great location for
those looking to sell into the relatively large and growing China
market but Southeast Asia is also a great opportunity and allows a
country to produce and sell into Southeast Asia, India, China,
Australia and many other locations.
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A company
considering establishing a presence in Asia understands that this is
not a simple matter. Can you give us an example of a few of the types
of logistical problems that can happen that might be outside of the
realm of what one might expect?
The
changes in oil and other commodity prices have been a worldwide
phenomenon. Plastic is derived from oil and the prices for plastic
resins have often moved rapidly. These oil related cost increases
have had affects across the spectrum of projects these past several
years. Although all companies in Asia have born the brunt of these cost
increases, some have been less willing to pass along all of the costs
of the increase and this has affected selection or best sourcing and
OEM partners. Shipping costs both inland freight and sea freight have
also been affected by this but again the effect has not been evenly
spread across all countries. Some have been affected more than others
and this has affected selection of the best company and country for a
project. A more recent example is the effect of the rise in
minimum wages as governments throughout Asia have tried to spur
consumer buying and to change from more of an export-driven model to a
more consumer-driven model. This change has driven up wages
sharply for labor intensive industries in countries like China,
Thailand, Malaysia and others.
What factors
might make other Asian countries a better location?
China
is a very good choice for some projects, but it is not the best
solution for everyone. China is no longer low cost in many areas but it
does offer relatively close access to many city and provincial markets
with large populations. The lack of a convertible currency is a
hindrance but can be dealt with. The currency has appreciated but it is
the cost of wages and benefits that has most strongly affected
manufacturing in China. The weak rule of law and lack of predictability
of commercial dispute resolution is more of a worry. China is a
particularly bad choice if the project involves substantial
intellectual property (IP) as the reality in China is that China's
continued performance in this area is very unsatisfactory.
In terms of other countries, Vietnam is generally one of the lowest
cost places for many projects such as computer software, furniture,
garments, shoes, furniture and some metal projects. It is a country
still building out its supply chain system and there are many
opportunities for companies that offer goods or services that support
manufacturing. Japan in particular is making big investments
there now and these are all facts to keep in mind. Thailand is a
great location for projects where a wide range of well trained and
experienced suppliers are critical. Malaysia can also be a good choice
although it is gradually becoming a relatively higher cost location and
there often has to be more substantial value added in the project to
justify being there. Indonesia is a low cost country but a country
where we do not recommend many projects as the political and security
situation there has become less predictable although currently things
have been fairly quiet. India can also be a good choice for some
projects although it remains a very bureaucratic country where much
more revision of procedures and laws is still most needed. Singapore is
a great location for a regional office or for entry into Asia by a
company. There is significant rule of law and predictability and as a
location for banks or financial companies Singapore is a great choice
as laws are probably the strongest in Asia and very predictable.
A company needs to compare various Asian locations (say China,
Thailand, Vietnam and India or some other combination) in terms of what
business costs, incentives for location there and long term growth
prospects they offer. Don't take surface reality as given but due
deeper due diligence on company information, employee background and
other facts. In projecting further growth potential, don't only
look in the past when you do the analysis but also look at the future
which you can determine by talking to experts on current trends as this
will be most important for your project. These are all services
that we provide and have an edge in.
Is China on an
unstoppable momentum roll for world manufacturing?
The world economic outlook is very challenging and China is
experiencing strong but somewhat different economic challenges now just
like those that Europe and other areas have had to deal with. I
am not as willing as some to count American business out of the
competition. China has strengths, but it also has lots of weaknesses. I
believe the news stories are generally only seeing part of the picture.
Yes, costs have been low. The reality today, however, is that most of
the manufacturing base in China was built on cheap credit, is running
at less than 50 percent of capacity and that thousands of factory
buildings and even whole factories have been built on "spec" without a
reasonable business plan and without the sales and customers that would
drive an investment decision in the west. I believe many Chinese
factories are not economically viable for the long term; that Chinese
manufacturers have not sufficiently valued the importance of knowing
their customers and developing a sales network. Many U.S. companies
undervalue their own knowledge of customers and what will sell and what
won't and ultimately there will be a shakeout on both sides and
American business will find opportunities to adapt and profit by being
closer to the customer, more attuned to where the market is moving and
ultimately more agile than the competitors.
In Asia, I believe the rush into China has mainly waned at this point.
We still work with companies establishing projects in China but
nowdays it is more projects looking to sell into the China market, not
projects looking to export. We also work with Chinese investors taking
the money they have made in the real estate market and looking to
expand into the U.S., Southeast Asia or elsewhere. Projects
looking more to export tend to go elsewhere - many to Vietnam, some to
Thailand, some to the Philippines or Indonesia. The advent of the
ASEAN Economic Community(AEC) that will bring the countries of
Southeast Asia into a common market has already resulted in the cut of
most custom duties and will lead to further cuts prior to 2015.
We feel the AEC is something that many businesses should be
looking at more seriously as it will create a market of over 600
million people with a middle class larger than that in China or many
times larger than in Indian which are both double it in currently
population. We feel the opportunities offered by Southeast Asia
are really something most U.S., Canadian and other countries aren't
sufficiently valuing and that more attention is needed here.
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