SHANGHAI – Keith Lomason, executive director of Magna International’s office in China, offered 10 recommendations for suppliers starting or expanding operations in China.
He made the following suggestions at the Automotive News Europe China Conference.
1. Invest in China through a wholly owned subsidiary.
A joint venture with a Chinese partner is recommended only if that partner provides strategic market share.
2. Go to a Central Government Economic Development Zone.
These areas have clearly defined tax rates and better infrastructure than most other areas. There are 55 such zones across China.
3. If you must use a joint venture, use one for all activities in China.
This reduces your intellectual property exposure and lowers training, engineering and other costs.
4. Quadruple your training plan.
This includes funds to bring people over to train new hires and ongoing costs because of the high turnover of staff, particularly in the coastal areas.
5. Build on undeveloped land – eventually.
“Few existing facilities will meet your needs,” he said. Also, land costs in China still are relatively cheap but will continue to rise.
6. Go quickly.
Tax benefits for foreign investment are being reduced and may be eliminated. “Doors of opportunity are now windows, and they are closing,” he warned.
7. Where possible, concentrate on export opportunities.
The domestic market is fragile. It is easier to achieve consistent economies of scale by building your business plan around known export markets. Plus, forcing your employees to meet overseas quality requirements will prepare them for the day that Chinese carmakers insist on the same quality levels.
8. Don’t forget due diligence and a business plan.
“Profits will be harder to come by in the future,” Lomason said. “My guess is that 20 percent” of carmakers “will be consumed or closed over five years,” he said. “The same for suppliers.”
9. Use lawyers, but don’t let them slow you down.
Lomason recommends having solid exit or takeover clauses for joint ventures.
10. Establish a local resources group and use it.
To gain market intelligence, Lomason said, “Local networking cannot be overestimated.”