Download - Asia Business Letter

8/4/2019 Asia Business Letter

1/11

Box 240, SE-101 24 Stockholm, Sweden (World Trade Center, Klarabergsviadukten 70) Tel: +46 8 588 660 00 Fax: +46 8 588 661 90

[email protected] www.swedishtrade.se www.swedishtrade.com

Asia

Business LetterThe Swedish Trade Councils newsletter about your business in

Asia. The headlines o this issue are as below.

Asia Business Letter, No 3

China: Chinas cost-innovation challenge

Vietnam: WTO or bust

India: India - a hub or rugal engineeringChina: Chinas design revolution

Thailand/Taiwan/South Korea: East Asia Changes Costume

Contact

Are you interested in starting or developing your business in Asia? Please contact Mattias Berg-

man, Vice-President Asia, [email protected], +46 8 588 660 09.

You can also nd the contact details or all our Swedish Trade Council oces at

www.swedishtrade.se

Taipei City Government


2/11



China

Chinas cost-innovation challenge

Author Peter J Williamson oers his opinions on how Chinese companies attitude o doing more

with less are poised to shake up global markets.

For Peter J Williamson, co-author (with Ming Zeng) o Dragons at Your Door: How Chinese Cost

Innovation is Disrupting Global Competition, within ve to 10 years globally expanding Chinese

companies will have transormed the global playing eld, and it will not be, as most people think

to be the case, simply by oering more o the same at cheaper costs. Williamson argues the trans-

orming actor will be cost innovation.

Most people think that cost advantage is just about lower prices, says Williamson. But what we

have ound is that many Chinese companies are looking at cost innovation, moving high technol-

ogy to lower prices, achieving mass variety o products at lower costs, and taking niche marketsand exploding them into mass markets.

One o the most striking examples o cost innovation through moving high technology to lower

prices, says Williamson, is digital direct X-ray technology. Philips and GE, among other compa-

nies, applied this to heart scans that could be transerred to a computer network using machines

that cost around US$400,000. What the Chinese did - a company called Zhongxing - was to

apply this technology to everyday applications such as chest X-rays at a much lower cost, with

machines that cost around US$50,000.

Another area that Williamson thinks Chinese companies will use cost innovation is producing ahuge variety o products through low-cost cost engineering, thus oering consumers or industries

aordable and wide-ranging choices.

The third example o cost innovation, says Williamson, is taking a niche market and exploding

it into a mass market. Chinese white-goods manuacturer Haier Group provides a good example

o how this can be done, he says.

Haier took specialist rerigerators designed to store wine and started selling them at US$790

versus prevailing prices o US$1,600. It gained 60% market share in the US and Korea within twoyears. In other words, because their break-even price is lower, Chinese companies can produce at

higher volume, and the only reason you think your product is a niche is because your prices are so

high.

For Williamson, this is an example o how Chinese companies, which have emerged in a ercely

competitive market, target what he calls the loose bricks in the walls companies have built up in

their markets.


3/11



Williamson is quick to point out that the claim in Dragons at Your Door is not that the Chinese

companies that are gearing up to create tectonic shits in the global economy are superhuman.

Rather, he says, theyre simply using their cost advantage in innovative ways.

Countering arguments that Chinese companies lose their cost advantages when they make oreign

M&As and take their business abroad, Williamson maintains that Chinese business investment isollowing a unique trend.

One o things we ound is that Chinese companies are keeping their manuacturing and even

R&D in China, he says, so as to maintain cost competitiveness, and most o the money that they

spend on oreign investment and acquisitions is spending on technology and brands. The diculty

or oreign companies is that they are oten not in position to make that kind o investment on

design centres and engineering and hiring in China, or that they do not have the local expertise to

do so.

Williamson agrees that the China cost-innovation challenge is not an absolutely new phenomenon.

The so-called Asian economic miracle that began in the 1950s in Japan and gathered momentum

through to the crisis o the late 90s through the combined industriousness o Taiwan, South Ko-

rea, Hong Kong and Singapore was achieved by similar strategies.

However, Williamson maintains that while there is no substantial dierence between the current

threat rom China and what the previous emergent dragons in Asia achieved, he says the scale and

speed o what is happening is unprecedented.

He notes that in the car industry, or example, companies such as Toyota and Honda were ableto create huge shits in the landscape, but they did so at a relatively slow pace, starting rom the

1960s on their domestic market, and not penetrating oreign markets in a wrenching way until the

1990s.

The point is that globalization is allowing Chinese companies to eect cost innovation at a much

aster rate, he says. It took countries like Japan and Taiwan a long time move away rom being

the producers o cheap products, but in a globalised market the Chinese are able to move much

more quickly.

For Williamson, the scale o Chinas cost-innovation challenge to the global economy is something

that has never been seen beore. With its 1.3-billion strong population supplying a near endless

supply o low-cost labour or the oreseeable uture and its vast geography, among other actors,

Chinese companies attitude o how can I do more with less will create a ar greater shake up

than the little dragons did in the 1980s and 1990s.

China has a much bigger resource base, so the shits it causes will be much bigger, says Williamson.

Swedish Trade Council


4/11



Vietnam

WTO or bust

It may not be happening tomorrow, but there is no turning back or Vietnam now it has joined

the WTO, and Vietnam will allow wholly oreign-owned enterprises to control their own sales

and distribution rom early 2009, says Hkan Ottosson.

It took some 11 years o negotiations, and protracted bargaining with the United States, but in

January o last year Vietnam nally became the 150th member o the World Trade Organisation

(WTO), oering the promise to oreign businesses that the Communist Southeast Asian country

will open its markets to wholly oreign owned companies.

Hkan Ottosson, head o Swedish Trade Council in Vietnam, or one is condent that that is

exactly what is going to happen, even i he cautions that some patience is required. Vietnam is

not poised to immediately fing open its doors, particularly when it comes to allowing oreign-owned subsidiaries operate their own sales and distribution within the country.

Whats happening here is that with Vietnams accession to the WTO, we expect the market to

open up by early 2009, says Ottosson. Ive talked to a lot o companies, and at the moment

theyre sitting around waiting, but we want to let them know that its happening.

The main hurdle to Vietnams WTO accession was the US, which put strong pressure on Viet-

nam to provide deep market access or US businesses, and also pressure on issues such as subsi-

dies, intellectual property rights, trading rights, with some observers suggesting that the US

played hardball ater learning rom its experience o having welcomed China into the WTOwith insucient pressure on it to make binding commitments on certain trade issues.

All the same, despite its ormerly tightly state-controlled economy, the interest in Vietnam is

understandable. The country has seen average economic growth o 7.25 per cent over the past

hal decade, and while that lags behind Chinas double-digit growth rates, some analysts are pre-

dicting that when Vietnam ully implements its WTO commitments, oreign trade and capital

infows will boost its growth to a aster clip than the worlds astest-growing economy.

Also attractive to oreign businesses is an industrious workorce in a country with lower averagemonthly wages than in southern China and the Yangzi River region, Chinas much-touted ac-

tory o the world.

But the transition rom a state-controlled economy to a ree-market economy will bring a host

o challenges, and will likely be a wrenching aair, posing a serious threat to the majority o

Vietnams state-owned industries, which account or nearly 40 per cent o the countrys gross

domestic product (GDP).


5/11



Some major oreign companies had already taken the plunge and set up shop in Vietnam beore

the countrys WTO accession, notably US technology colossus Intel, which is building one o

the biggest chip oundries in the world in southern Vietnam. Ford Motor already has an auto-

assembly plant in northern Vietnam, while Canon decided last year to build the worlds largest

laser- and bubble-jet printer actory in Vietnam.

However, while the WTO accession and the presence o major international players is sure to

raise condence in Vietnam as an investment destination, inrastructure remains creaky, and as

Ottosson concedes, companies investing in Vietnam are best served by exercising as much con-

trol as they possibly can over sales and distribution.

I you really want to control marketing, says Ottosson, you need to control it yoursel. The

same applies or ater-sales service. You need to have your own technicians, and i you dont

control your own stock there will likely be problems with the availability o spare parts. Out-

sourcing is not an option, because Vietnamese companies are unproessional when it comes to

ater-sales and marketing.

Ottosson also points out that control is important when it comes to logistics. I you use local

distributors, he warns, you will probably have problems with payments and meeting delivery

deadlines. There are many fy-by-night operators in Vietnam, but i you control your own stock,

you can control its fow.

But Ottosson is condent that by early 2009, in the great majority o industries, oreign busi-

nesses will be able to set up their own enterprises or distribution and sales.

Ater all, according to its ercely negotiated WTO agreements, Vietnam has committed itsel to

even allow oreign organizations and individuals with no investment or business registration in

Vietnam to apply or trading rights, though Decree 23 o the WTO agreement does require that

oreign investors apply or a separate sales/distribution license. This, according to analysts, will

create a host o opportunities or sales o industrial products as well as consumer goods.

Basically, with the WTO accession, says Ottosson, or Vietnam, theres no turning back, or at

least that going back is not an option. The timeline is the beginning o 2009, and even though

there may be some delays, its time to get the word out.



6/11



India

India - a hub or rugal engineering

Frugal Engineering is a concept o how to engineer cheap products. Business developers rom

industries all over the world have their eyes set on the rapidly growing automotive industry in

China and India, where the masters o rugal engineering make their home.

The Tata Nano is here! The worlds cheapest car, developed and produced by Indian car manu-

acturer Tata Motors, was launched in early January 2008 at Asias largest car show, AutoExpo,

in New Delhi. The Tata Nano will cost less than US$2,500 and is predicted to have the same

proound eect on the world as Henry Fords Model T did almost 100 years ago. Both cars are

excellent examples o rugal engineering, a sector in which India has proven to be the ront-

runner.

Were here to learn about rugal engineering, said Carlos Ghosn, president and chie execu-tive o Renault and Nissan, when they launched their new model, the Logan, to the rapidly

growing automotive market in India in April 2007.

Once again, it is in the mature, global and highly competitive automotive industry that a new

business development concept has been initiated. The industry is the same, but the geography

has changed. Concepts such as Industrial Design and Business Process Reengineering have

their origin in the US, while Total Quality Management and Lean Production were devel-

oped in Japan. Now, business developers rom industries all over the world have their eyes set

on the rapidly growing automotive industry in China and India, where the masters o Frugal

Engineering make their home.

Frugal Engineering is the practical concept o how to engineer cheap products that neverthe-

less have sucient unctionality. The use o rugal engineering has oten allowed a product to

target new markets, thus boosting a companys growth. A ew examples o rugal engineering

over the past century are the PC, bringing industrial computers into our homes; the Volkswagen

Beetle, allowing European middle-class amilies to own a car; and Skype, giving anyone with a

broadband connection ree international telephone calls.

Two o the latest rugal engineering projects are MITs US$100 laptop, which will be pro-duced by Taiwan-based Quata Computer, and now Tata Motors 1 lakh car. A lakh is Hindi

or 100,000 and indicates the Rp100,000 price o the car, which is equivalent to US$2,500.

This is 50% less than the QQ3 model by Chinese car manuacturer Chery, which, until recently,

was the cheapest car in the world. To be able to achieve this price, the engineers at Tata Motors

have had to radically challenge the conventional way o engineering a car. In the process, Tata

Motors led 34 new patents or the car itsel and about 200 other patents or various other in-

novations to create the cost-ecient new technology.


7/11



India has three actors that make it interesting rom a rugal engineering perspective. First, it

has a strong tradition o producing highly skilled engineers. The worlds rst university was

started in Takshila in India about 700BC, and India is where the number system, the zero (0),

and the value o pi were invented. In 2006, about 450,000 engineers graduated rom Indias

250 universities. Secondly, the size and characteristics o the Indian domestic market make it

interesting to develop products or; these products can then be taken global. Thirdly, Indiasmanuacturing sector has grown in size and capacity to be able to cater to the global market.

During the period 2000-2006, the sector grew by 13% and the number o high-quality manu-

acturers is growing concurrently. For example, Indian manuacturers have earned 15 Deming

awards and two Japan Quality Medals.

Today, more than 100 companies on the Fortune 500 list have R&D acilities in India. In addi-

tion to Swedish companies with such acilities in India, including AstraZeneca, Ericsson, ABB

and Sony Ericsson, are such companies as General Motors, Honeywell and Microsot. It is in-

teresting to note that Chinese companies have also set up R&D acilities in India, among them

Huawei and ZTE, two o the worlds largest telecom network producers.

Thanks to the increasing number o R&D acilities in India, the countrys importance as a home

or patents is growing. In 2005, India was the 11th largest patent ling country in the world

and, during the period 2000-2005, was the 6th largest ling country o origin or multiple pat-

ents rom the same invention.

Nokias successul model 1100 shows that rugal engineering does not always have to include

cutting-edge research and development, but rather that smaller product modications that cut

costs can provide sucient unctionality. The low-cost model eatures an anti-dust keypad ordirty roads, anti-slip grips or use in the heat and a one-button fashlight in case o power cuts.

With this model, Nokia built its unquestionable market leadership as the worlds astest-grow-

ing telecom company, with over 8 million new subscribers each month.

In the same manner, Tata Motors is now targeting the ast-growing automotive market o global

emerging markets. We have simply designed the cheapest possible car to meet the demands o

the people, said Ratan Tata, Chairman o the Tata Group, at the launch o the US$2,500 Tata

Nano.

We dont even know how to design and manuacture a US$5,000 car, says Ghosn, who contin-

ues: Indian companies are doing a great engineering job, and why should we reinvent the wheel

when we can simply partner with and learn rom companies that have already done so.


8/11



The fve cheapest cars in the world

1. Nano. Produced by Tata Motors in India. Price: US$2,500 (1,250)

2. QQ3. Produced by Chery Automobiles in China. Price: US$5,000 (2,500)

3. M800. Produced by Suzuki-Maruti in India. Price: US$5,200 (2,600)

4. Merrie Star. Produced by Geely Automobiles in China. Price: US$5,500 (2,750)

5. S-RV mini SUV. Produced by Geely Automobiles in China. Price: US$5,780 (2,890)Sources: Reuters; Business Standard Motoring (India); Chinese auto websites (US$1=Rp39.3)

Fredrik Fexe

Swedish Trade Council in India

China

Chinas design revolution

Chinas sizzling economy, growing consumer market and the global aspirations o its biggest

companies is resulting in a design boom, says Charlotte Rylme.

Fuelled by Chinas double-digit-growth economy, ahead o the Beijing Olympics, some o the

worlds coolest architectural rms are transorming Chinas ormerly drab city skylines. Just

take Beijing, where Dutch architect Rem Koolhaas is bringing the unique loop-like 230-metre

CCTV Tower into existence, and French architect Paul Andreu is responsible or the egg-like

titanium- and glass-girded National Theatre.

For Charlotte Rylme, who as head o Swedish Trade Council in East China helps Swedish archi-tects compete in the bidding or new architectural projects in China, architecture is not the only

area in which China is witnessing a design boom. Apart rom a surge in the numbers o Chinese

students graduating in design, she also points to Chinas ast-growing consumer market and the

push by homegrown Chinese companies to take their products global.

There are around 400 schools and universities in China oering design, and together they are

producing around 10,000 graduates annually compared to about 1,500 in 2000, says Rylme.

She points out that these graduates will play a role in both taking Chinese products to oreign

markets and also help oreign companies that are setting up design centres aimed at adjustingtheir products to the Chinese market.

From a relatively recent start in 1982, when Hunan University opened Chinas rst school o

design in Changsha, says Rylme, design has now become one o Chinas most popular majors.

She also notes that Chinese designers are even starting to win prizes abroad. A Chinese student

rom Hunan won the top prize in the biennial Nagoya Design Do! competition, and a gradu-

ate rom the Tianjin Academy o Fine Arts studying in Germany was one o the nalists or the

prestigious Braun Prize.


9/11



Many such students will likely nd themselves working with oreign companies that are look-

ing to adjust their products to the Chinese consumer market. The Electrolux Design Centre,

which was inaugurated in November last year, or example, is staed with people who have close

contact with the local market, says Rylme, who thinks this is growing trend.

More and more Swedish companies have been setting up design centres in China, so as to adjusttheir products [to local market needs], she says, also noting how some oreign automobile mak-

ers are modiying their vehicles or the China market.

BMW, or example, she says, has extended their car to give more space or people sitting in

the back seat o the car, and Volkswagen, has used articial wood in their cars or rst time ever

in China because Chinese consumers want them to stand out.

Rylme explains that, when designing products in China, it is essential to bear in mind that the

Chinese consumer likes to appear rich, and have products that stand out and impress. Some

luxury brands, such as clothes and bags, says Rylme, have or example developed special prod-

uct lines or the Chinese market, where the brand and the logo is more visible compared to other

markets, where people want to hide the brand logo.

With its surging middle class, Rylme calls China probably the most dynamic consumer market

in the world, and points out that a growing number o Swedish businesses are coming to China

to participate in the boom.

We support Swedish companies to set up in China, and there are currently around one every

our days doing so. Between the summer o 2006 and the summer o 2007, 92 Swedish compa-nies set up in China, and an important thing to note is that around 40 per cent o them are not

only ollowing old customers rom Europe, but are also looking or new customers in China.

To highlight Swedens growing infuence, the Swedish Consulate General has produced a cata-

logue o Swedish design in China. Rylme calls it a good marketing tool or showing people

what Sweden is good at, and also a way o sending a signal back to Sweden that shows people

there what is going on in China.

An additional argument that China is undergoing a design boom, according to Rylme, is the

recent launch in Shanghai o Shenet, a emale network started in Stockholm in 1999. One o

the core Shanghai Shenet members, says Rylme, is Ewa Kumlin, who ounded Tokyo Style and

Swedish Style in Tokyo, and who is now manager o Svensk Form.

The launch was attended by a lot o Shanghais elite, brand consultants, designers and so on,

and there was a ashion show with Chinese models wearing Swedish and Chinese-designed

clothes, says Rylme, adding that Swedish and Chinese designers got to meet and exchange

ideas through seminars and discussion groups.


10/11



But, i Chinas sizzling economy is creating a growing swell o consumers with money to spend

on smart design, and both local and oreign designers are seizing the opportunities that are aris-

ing, the other equally signicant aspect o Chinas design boom is that Chinese companies are

looking to take their products abroad.

The best companies know design is crucial, and they all want to be the next Samsung, saysRylme. More than a decade ago, this Korean company was a second-tier brand, but then they

ocused on design and today they win a lot o design awards and is one o the worlds most valu-

able brands.


Thailand/Taiwan/South Korea

East Asia Changes Costume

Over the past month, there have been three interesting elections in East Asia, each o them indi-

cating movement towards becoming more open and investment-riendly countries.

Samak Sundaravej, Ma Ying-jeou and Lee Myung Bak were the three winners in the recent elec-

tions in Thailand, Taiwan and South Korea even though neither Mr Thaksin nor Mr Ma were

themselves on the ticket and they have more than a winning attitude in common.

In December, Thailand held its rst election since the military took over in September 2006.

The reincarnation o the disbanded Thai Rak Thai (TRT), the Peoples Power Party (PPP), ledby Samak Sundaravej, is once again taking steps towards democracy.

Analysts expects that the new government will strengthen investors condence and that Thai-

land will get back on track, reinstating the strong annual economic growth o 5% that the coun-

try experienced beore the military took over.

The PPP has announced a more investment-riendly approach compared to the military gov-

ernment and changes to the Foreign Business Act (FBA) are expected to increase oreign direct

investments, says Tomas Dahl, head o Swedish Trade Council in ASEAN region.

Henrik Bystrm at the Swedish Trade Council in Taiwan continues the same goes or Taiwan,

there could be many new business opportunities arising in the near uture as there will undoubt-

edly be several important changes.

With its election to the Legislative Yuan, the Koumintang (KMT) enjoyed a landslide victory,

securing 81 seats in the 113-seat chamber. The ruling DPP, or Democratic Peoples Party, won

only 27 seats.


11/11



The KMT advocates better relations with mainland China, including direct fights and tourism

rom the mainland. It also advocates massive investment in inrastructure, such as rail and mass

transit systems. In March, Taiwan will hold presidential elections and, i the KMT candidate Ma

Ying-jeou wins, this will mean that the same party will control both the legislature and the ex-

ecutive branches o the government, which has not had a majority in the legislature since 2000,

hampering many reorms.

In South Korea, Lee Myung Bak is the rst president with a background in business. He was

previously vice president or a construction business in the Hyundai Group and said during the

elections that he plans to run South Korea like a business. The new conservative president won

with the biggest margins seen since South Korea became a democracy. It is not yet said that he

is becoming the next president since corruption accusations is still ollowing him.

The worries about the economy dominated the election campaign and Lees promise to broker

aster growth, reduce regulations and create better conditions or oreign investors made him the

winning candidate says Tarras Delin at the Swedish Trade Council in South Korea.

The new president is also bringing an end to 10 years o a liberal government that has given

large amounts o aid to neighboring North Korea.
