Til death do us part

A similar reality is settling on the relationship between the United States and China, as China continues to grow as a global economic force, driving the country further away from its reputation as a low-cost provider of goods and services. And this will invariably change the dynamic of the business partnership between the two countries.

Some say the fruitful joint venture partners are already spoken for, like a row of bridesmaids all asked to dance. If you try to pick a partner now, there may be no one left to dance with, these critics add.

However, many are continuing their existing joint venture strategies to maintain better access to the Chinese marketplace, he adds. "Under the right circumstances, and with the right partner, joint ventures can continue to be beneficial."

"It's not unusual to partner with several companies on different brands, different products," says Brian Duggan, director of trade and commercial policy for the Motor & Equipment Manufacturers Association's (MEMA) Washington, D.C. office.

It's recommended that companies choose only one joint venture partner for the entire country, but others, like the executive director of global supplier Magna International, advise those just now going into China to go in alone because of the belief that most of the good partnerships are no longer available.

"There's not a single aftermarket supplier that doesn't have some kind of Asian strategy," says Dan Smith, president of Capstone Financial Group. Even retailers are skipping U.S. middlemen and going straight to Asian conglomerates, Smith adds.

As far as the good partnerships no longer being available, Smith says he doesn't see that being the case. He does see the "exclusivity" of some partnerships becoming scarce, however.

Those Chinese companies we interviewed also agree there are still a number of lucrative partnerships available in China.

"It is still reasonable for American manufacturers to set up joint venture partnerships with Chinese local private-owned companies," says Luo Qinglian, president of Zhejiang Luoshi Industrial Development Co., Ltd. "After all, the cost of establishing a factory in China is quite high," he adds. "Managing Chinese employees is not an easy issue, either. With a Chinese partner, American manufacturers can find sources quickly and comprehend the market more easily."

"I think if more U.S. companies come to China, they will find that there are so many opportunities to cooperate with us," agrees Shen Linlin, foreign trade manager for Wenzhou Huarun Electrical Machinery Co., Ltd.

Costs on the rise

China's workforce is becoming more sophisticated, manufacturing and labor costs are rising, and raw material and energy prices continue to increase, driving up the cost of doing business both internally and externally.

Despite this, we shouldn't expect any drastic negative changes to China's positioning within the global marketplace anytime soon, as the rising costs are somewhat softened by a freer Chinese currency and relaxed tariffs and taxes — not to mention the mounting trade deficit that the United States has with China.

After the dust settles, though, the end result will likely be slightly higher prices on the goods coming from China, Weingrod adds.

"China will no longer be the cheapest place in the world to make everything, but that doesn't mean China's export strength will diminish," he says, equating China's changing economy to a large ocean vessel. "China's automotive supply chain is too well developed. There's so much forward momentum," he adds. "Global outsourcing and procurement will not change course quickly."

Ealey believes that even as labor costs and the price of doing business increase, Chinese suppliers will achieve higher levels of scale, and the productivity increases will be enough to offset any rising costs.

"The costs are going to plateau or go down as suppliers become more capable and gain higher levels of scale," says Ealey. Raw material costs are an issue, and prices may increase on a variable basis as they pertain to commodities such as steel, but, "At the least, it's going to be a draw."

Eventually, it's believed that those manufacturers who are just going into China for price alone, including U.S. manufacturers, could be moving elsewhere, maybe even coming back home.

"As China has come from very low skilled kinds of manufacturing techniques into more sophisticated things, they are facing shortages of skilled labor just as we are in this country," says Smith, from Capstone. "We are starting to see some rise in rates, but we still have a long way to go before it reaches equilibrium."

When asked if there's a chance we'll see Chinese companies outsource to U.S. turf, Smith says yes, but not for obvious reasons.

"We are seeing more and more multinational and Asian conglomerates trying to buy their way into various levels of U.S. manufacturing and distribution," he says. These companies are looking for functions like high-tech performance systems and parts involving expensive metallurgy, sectors you likely won't see in China.

In fact, a number of multinationals beyond China are interested in doing business on American soil as well, he adds.

All of this is merely secondary to the bigger news: China has surpassed Japan as the world's second largest automotive market.

A MEMA report states that the Chinese aftermarket is expected to triple over the next decade, with an anticipated value of $12 billion by 2015. The same marketplace was valued at $4 billion last year, adds MEMA. China's light vehicle sales, including imports, grew 27 percent to 3.6 million units in the first half of this year, according to Automotive News.

"China's vehicle population is growing so quickly that it doubles every six years and is slated to reach 98.4 million by 2015," says Frank Hampshire, MEMA's senior director of research, who was quoted in a news release.

China expects a fourfold increase in the use of vehicles by 2020, according to the American Planning Association.

U.S. imports of auto parts and accessories from China were $5.2 billion in 2005, a 37-percent increase from the previous year, according to the Automotive Aftermarket Industry Association's (AAIA) 2006/2007 Aftermarket Factbook. Exports of U.S. auto parts and accessories to China were $633 million the same year, a 1-percent decrease, the publication adds.

Looking for an unfettered yuan

China's yuan has long been a bone of contention with such entities as the European Union, the World Trade Organization and U.S. legislators. In response to pressure from these forces, China changed its strategy last year from tying the yuan strictly to the U.S. dollar — which kept the currency artificially low and goods priced cheaply in terms of U.S. dollars — to tying it to a basket of currencies.

While a step in the right direction, China still is accused of keeping its currency artificially weak.

Regarding the yuan, China's "certainly not going to make it a floating currency anytime soon," says Weingrod. "However, the yuan is getting stronger; it will continue to go up in value. If you're buying something from China, you're going to pay more dollars as time goes on."

Conversely, a stronger yuan can purchase commodities in the world market, like oil, for less money, Weingrod adds. This can offset the perceived negative results of a sturdier yuan.

"We think currency evaluation should be set by market forces and the Chinese should move in that direction," says Duggan, from MEMA. "Fair competition is competition and that's fine; but when your government has a longstanding policy of keeping your currency cheap with relation to your customers' countries, that is what is not permitted (by WTO rules)."

China has reduced its tariffs since joining the WTO, but tariffs tied to local content has emerged as a new problem. There's lots of discussion these days between China and WTO countries about China's local content requirements, Duggan says. The Chinese government agreed to postpone the rules — which levy higher tariffs on vehicles comprising less than 40 percent of Chinese-made components — for two years, but just the specter of the local content rules are enough to negatively impact companies that do business in China.

China, which charges a higher tariff on vehicles than on parts, alleges some companies are trying to avoid paying the tariff on cars by importing parts. The local content rules were initiated to close the tax loopholes being used by those companies that import automotive part "kits" that can be assembled in country, but all of this is moot, says Duggan, because "local content requirements aren't consistent with WTO regulations."

U.S. legislators have tried to leverage against increased Chinese tariffs and the artificially repressed yuan by threatening to raise the tariffs on imports coming from China, but Weingrod says this strategy would amount to an enormous tax on the American consumer. "It would immediately raise the price of everything coming from China. Our current benefits from the China price far outweigh our losses."

When you weigh China's currency changes and lowered tariffs with the myriad other factors at play, the end result of these financial fluctuations could be anyone's guess.

"China's trying to change the inflationary spiral by trying to cool off the economy," says Weingrod, but "it's hard to know what the net effect will be."

Smith, from Capstone, says the financial implications "used to be a straight line algebraic function; but now it's a Rubik's Cube."

Counterfeiters continue to steal the market

It's long been known that China is a breeding ground for counterfeiting: The country made 50 percent of the counterfeit goods seized in the European Union during the first 11 months of last year, down from 70 percent the year before, according to a Bloomberg News report, which adds that out of $138 million in counterfeit goods confiscated by U.S. Customs in 2004, 63 percent came from China.

U.S. companies are becoming ever more cognizant of the counterfeiting dilemma, but as they become more aware, they see how rampant and serious the problem is.

Each year at the Automotive Aftermarket Products Expo (AAPEX), manufacturers find out just how many of their parts are counterfeited, as they encounter fakes of their own lines under the same trade show roof; sometimes it's their first time discovering this activity.

The aftermarket has applauded the Stop Counterfeiting in Manufactured Goods Act, which seeks to add more teeth to the nation's anti-counterfeiting efforts. The bill strengthens penalties for counterfeiters, seizing their assets and destroying the counterfeit products taken as part of criminal investigations.

"The bill requires convicted counterfeiters to turn over their profits, as well as any equipment used in their operations, so it can't be used to cheat our people again," said Pres. Bush, who signed the bill in March.

MEMA's Duggan says the bill was first put into practice to charge a pharmaceutical counterfeiter in Florida, whose equipment was seized as part of the operation.

Although the alleged perpetrator plea-bargained down to a lesser crime, "We are glad that at least the prosecutors in Florida were familiar with (the bill) and started to use it," says Duggan. "In its first trial, I'd say it was successful."

Another bill — S. 1984, also known as the Intellectual Property Rights Enforcement Act — was introduced by Sens. Evan Bayh (D-Ind.) and George Voinovich (R-Ohio) and seeks to improve the way federal law enforcement officers work together on intellectual property rights enforcement. Duggan says passage of S. 1984 will be a priority for suppliers and other manufacturers in the coming year, when the new Congress begins, but he doesn't necessarily expect any action on the legislative proposal for the remainder of this year.

Perhaps some of the victims most afflicted by counterfeiting are those Chinese companies that attempt to do business on the straight and narrow. They not only face pirates in a marketplace that's reputed to be less than vigilant, but they battle against the perception from international trading partners that they, themselves, could be culpable of counterfeiting.

"U.S. buyers think we produce low-quality products, but actually we pay much attention to our (intellectual) property protection," says Linlin, from Wenzhou Huarun Electrical Machinery Co., Ltd.

"Lots of people think we are a 'copy country,'" asserts Jerry Yang, general manager of Hua Dian Cross Country Automobile Accessories Co., Ltd. "But with the development and improvement of the market, we focus on the intellectual property, our brand exposure, design and creativity."

In fact, a number of Chinese suppliers we interviewed stress the lengths to which they go through to protect intellectual property as they attempt to break a long-held stereotype surrounding Chinese manufacturers.

Supplier disparity leans toward parity

China's advancing highway system and infrastructure, which will link previously isolated parts of the country, will help make wages more competitive throughout the nation, another factor driving up such costs as labor and benefits. Most Chinese people have historically never traveled more than 70 miles from their homes, says Hampshire, from MEMA.

Chinese manufacturers have also had to lower prices to compensate for overcapacity, but as a natural shakeout will eliminate the less successful suppliers, this, too, will encourage manufacturers to increase prices, believes Weingrod.

Despite China's growth and the attendant hikes in the cost of doing business, to manufacture in the United States is still a disadvantage in comparison.

While Asian manufacturers can survive on a 5-percent gross profit margin, U.S. competitors have to earn a 20-percent gross profit margin just to break even with their Asian competitors, asserts a report by the Capstone Financial Group.

Asian manufacturers don't pay freight, advertising allowances or sales commissions, and they have little need for research and development and rarely take back returns, according to Capstone. Typically, construction costs for buildings in China are 20 percent of what they are in the United States, as many of these facilities do not have heating, air conditioning and sprinkler systems, as well as regulations such as those imposed by the Occupational Safety and Health Administration (OSHA), the report states. Additionally, machine costs are 50 percent to 60 percent less than those in the United States.

The situation between China and the United States is far from bleak, and experts say U.S. companies need to keep doing what they do best: innovating. Those who distinguish themselves can withstand the "China price" and the competition that looms from any outside country.