• Continuing weakness in China's domestic auto sector. Total profits down 58.5% from a year ago to US $922.7 million in the first quarter.

• Cars purchased on credit accounted for 10% of all auto sales in 2004, down from 40% in 2003.

• Former U.S. Deputy Treasury Secretary Frank Newman was named as chairman of the Shenzhen Development Bank.

• Honda China will begin exporting China-made cars to Europe and Asia next month.

• China’s top 100 retail stores reported a first quarter sales volume of US $5.8 billion, up 20.9% from a year ago.

• A Gallup poll shows that 27% of Chinese urban households (representing approx. 140 mil. people) are middle class or higher, making at least US $6,160 in annual income (approx. US $31K in PPP).

• Hong Kong’s China Enterprise Index, which tracks 37 Chinese companies listed in Hong Kong, rose 18.4 per cent in the past 12 month. Conversely, the Shanghai index for 880 companies has fallen 31 per cent over the same period.

Fenghua, a spartan town 15 kilometers outside the eastern coastal city of Ningbo, is the somewhat inconspicuous birthplace of Ningbo Bird. A manufacturer of mobile phones which grew from obscurity to challenge large foreign competitors such as Nokia and Motorola, Bird is currently engaged in a bruising battle for mainland market share.Established with an initial capital of only US $20 million in 1992, Bird commenced its production and sales of mobile communication products (including mobile phones, handheld computers and systems equipment) in the late-90s.

Understanding the importance of evolving technology, Bird established research institutes in Hangzhou, Chongqing and Ningbo. Subsequently, Bird has invested more than 6% of sales revenue annually into its own R&D. Such attention to innovation has allowed Bird to grab a sizeable piece of the domestic mobile phone market in rapid fashion. With more than 30 million mobile phone users as of 2003, Bird has left other Chinese companies behind. Moreover, it is also currently out-pacing multinational giants like Motorola, Nokia and Siemens, which have long dominated the cell-phone market in China.

Central to this achievement is its sprawling network of 400 offices, 15,000 authorized dealers, and around 50,000 retailers and post-service centers. A strategy that places emphasis on China’s smaller cities with a population of more than one million inhabitants, as well as rural regions with limited landline service, has proven to be just right. Siemens, Germany’s leading mobile producer, employed a different strategy in terms of market entry in China. Newly-opened stores were predominantly represented in the highly developed cities of the coastal areas. By focusing on urbanized, high income cities, Siemens never managed to gain its projected market share.

The logical consequence for Siemens was to enter into a strategic partnership with Ningbo Bird. Siemens’ leading-edge technology and quality mobile platform, and Bird’s best-in-class sales network and comprehensive understanding of local consumer preferences, complemented each other neatly. Collaboration has given both companies the chance to increase market share.  Siemens investment in this marketing and sales partnership has opened the way for Siemens mobile phones to be sold in all of Birds’ stores - to a potential customer base of 250 million mobile phone users.

The notion of Chinese companies becoming more global, almost multinational in their business outlook, is a trend says Morgan Stanley. Prime examples are China’s largest companies, recently turning the tide in the prevailing model of M&A deals. The traditional one-way flow of FDI into China appears to be dwindling. In fact, there is a new development: Chinese domestic companies are now in a position to acquire offshore. The consequence is that China’s big companies are attempting to expand overseas, supported by new government policies which facilitate overseas investments. For example, the Ministry of Commerce announced in October 2004 that it had simplified approval procedures for overseas investments by domestic corporations.

Driven by the search for resources, technology and market access, the Shanghai Automotive Industry Corp. (SAIC) was one of the first to move, making a significant US $531 million acquisition of a 48.9% stake in South Korea’s Sangyong Motors. Moreover, in November 2004, SAIC paid MG Rover US $112 million for the right to build the Rover 25 and 75, as well as several engine types. Determined by SAIC's desire to reduce dependence on its existing joint venture partners (VW and GM) for technology and market access, negotiations of a Rover-Shanghai Automotive deal fell apart in April 2005. SAIC's main reason for termination was the British auto group's monthly deficit of US $60 million. Perhaps this is all to be seen as Chinese negotiation tactics: now that Rover has declared bankruptcy, SAIC can pick up the jewels of Rover at discounted prices – and move then to China.

TCL International was last years prime example of China flexing its own muscles in M&A deals. The Chinese television manufacturer merged with France’s Thomson. TCL gained the Thomson's family brand and holds a two-third controlling interest. Today, TCL is still struggling to turn the overseas acquisition around: in 2004 the Joint Venture with Thomson posted a loss of US $8 million and TCL’s & Alcatel’s mobile telephone M&A in 2004 failed. The head office remained in Shenzhen, headed by mainland Chinese who may have found it difficult to cope with the foreign target markets. Alcatel pulled out of the Joint Venture on May 16. 

The remarkable deal between IBM and Lenovo is another example of China’s companies going abroad. IBM sold its PC business to Lenovo for US $1.25 billion, creating global PC company with sales of US $13 billion global PC company and an 8% market share - third in the world behind Dell and Hewlett-Packard. The distinct feature of this deal is that the “new” Lenovo CEO is Mr. Stephen M. Ward Jr., former head of IBM’s PC operations, and that Lenovo will move its headquarters from Beijing to New York.

In the medium-term M&A activity will increase, particularly as China’s economy is increasingly in private hands. Overseas investments and acquisitions by domestic Chinese companies will continue to be driven by the search for resources, technology and market access.

The first Sino-foreign joint capital venture by a major investment bank, Credit Suisse First Boston, and a group of bankers and investors around Mark Qiu, CNOOC's former finance director, was announced this month.  Apart from being one of the increasing number of private equity vehicles in China, this venture aims to buy into young Chinese companies and provide management expertise rather than purely acting as a financial investor.

Recently, investments from international private equity firms to Chinese companies have increased, likely a result of ever-growing business opportunities on the mainland. The Carlyle Group, for example, has already invested US $80 million in China. They would like to add value to their portfolio companies in China by leveraging their global expertise in different sectors. Moreover, the International Finance Corporation (IFC) is going to double its investment in China to US $500 million within the next 2 years. Apart from investing in private Chinese companies, international equity firms are also looking for opportunities in non-tradable shares. Newbridge Capital Ltd., for example, has acquired non-tradable Shenzhen Development Bank Co. shares comprising 17.89% of total shares. After the transaction, Newbridge became the single biggest stake holder in the southern Chinese bank. These examples prove the rise of private equity as an investment form in China.

As Chinese private companies are often denied funds from the state banks for political reasons, the potential for opportunity abounds. Government funds are usually granted to a limited number of state-owned enterprises. Therefore, Chinese private companies are actively seeking foreign investment to assist in their growth. Unfortunately, there are numerous regulatory hurdles for foreign investors, such as capital contribution limitations, acquisition regulations, and ratio limitations on acquisitions.  These pose major challenges for foreign companies to make strides in this dynamic part of the world.

China is widely regarded as the “world's factory”. Nevertheless, China is no longer simply characterized by its low labor costs and promising huge market potential. Instead, Foreign Invested Enterprises (FIEs) might have to cope with greater competition in China. They have to be more flexible and efficient in order to sustain the fast growth of their business. Can IT (Information Technology) help? Does it make sense to leverage logistics efficiency with the help of IT, since labor costs in China are still quite low? Where are the benefits that compensate IT spending?

In response to these questions, the following emerging concerns of mid-sized manufacturing FIEs in China can be observed:

• Need for the right local IT-partner
Today, if one takes a look at the worldwide IT rollout plan of some mulitnational companies, China doesn’t necessarily receive the priority treatment it should. Moreover, for the IT director at company headquarters it can be a difficult task to find the right partner for IT development in China operations. The partner should not only act locally, but also think globally.

• Company group standards Vs. reality in China
Even for a company with group-wide IT strategy, the decision of selecting a rollout plan of IT solutions for its subsidiary in China could be quite a lengthy process. Some companies are running an IT solution which doesn’t have international support (e.g. language). This is one of the reasons why FIEs accept stand-alone solutions in China, even with limited functions.

• Need for more transparency and control in production
Manufacturers need more transparency in production, reliable, real-time production data-collection, and traceability for ad-hoc reporting. This turns out to be one of the most important requirements of FIEs in China. Here companies need a shop floor solution (or MES: Manufacturing Execution System) which can either be integrated into ERP or be implemented as a standalone.

When analysing general MES availability in China, it becomes evident that MES is still in the development, or localization phase (like language support) in comparison to other IT applications.  Many MES-solutions are individual developments, tailored for certain type of manufacturing or even for a single company. The low standardization level of MES solutions leads to a lack of ERP integration, or the possibility of integration only with costly interface maintenance.

MES solutions should have the following features:

(1) Modulized and standardized functionalities

• Advance planning and scheduling:
Makes out an optimal production schedule according to production orders, customer priority, machine capacity, personnel shift mode, material stock level, change-overtime, costing and so on.
• Online shop floor data collection and monitoring:
Makes transparent the actual production process via real-time data collection and monitoring; reduces the reaction time for exceptions and problems.
• Quality management:
Standardizes the quality assurance process and integrates it with other modules like data collection, scheduling, and reporting.
• Traceability:
For each end-product, replays each step in the manufacturing process in order to discover possible problems with materials, machines or operators.
• Material and warehouse management:
For each end-product, replays each steps in the manufacture process, in oder to find out the possible problems on materials, machines or operators.
• Multi-level data analysis and reporting:
Provides different tools and interfaces to analyze data according to the customers’ requirements and presents results in data charts which are easy to understand.

(2) User-friendly interface and role-management

MES should use accessible Gantt-charts to present the results of planning and actual manufacturing progress for managers. Operators at the shop floor level can use touch-screens, barcode-readers, RFID sensors and other devices to input data. The contents are based on different roles like shop floor manager, shop floor operator etc..

(3) Varied application scenarios

MES should have an adaptable integration interface that can work smoothly with other ERP systems (e.g. SAP, Baan, SAP Business One, Fourth Shift) as well as running standalone.

Written by Dr. Jie Li, Freudenberg IT (F-IT): part of Freudenberg’s worldwide group, supporting companies in the build-up and expansion of IT infrastructure and integration with global IT structures. (www.f-it.de)

Fiducia Management Consultants herewith announces the opening of a Personnel Management Consultancy department in Beijing, providing service in executive search, management retention, and personnel development and assessment for Beijing and China's north and north-east regions.

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