Constructing The Future: China Makes Way For Modernization
But one need only take a short ride through town and see the great number of construction projects and cell phone users to get the idea that the city known as the "Venice of the East" is modernizing at a rapid pace. Much of the infrastructural change is driven by new government programs, says Cheung, who spoke with PCI in November at ChinaCoat '99 in Shanghai. He says the urban populations along China's East Coast in cities such as Shanghai, Guangzhou and Tianjin are more receptive to foreign products, processes, and ideas, and to the pace of modernization, than their counterparts in West China. This, he says, largely reflects the influence of the high number of private entrepreneurial enterprises in and near these cities.
"China is a very distinctive market in terms of business culture. Doing business in the South is quite different than [doing so] in the Shanghai area, which is different than in the North region." Foreign paintmakers looking to expand here, he says, need to understand the differences.
The rapid growth of China's more modern, industrial cities is expected to fuel double-digit growth for well-established paint and coatings firms. China has an annual industry growth rate of 12-14%, according to Chinese government reports. Government officials say that over the next 10 years the Chinese paint market will grow to be a leader of the same size, in quantity and value, as the United States and Europe.
Some foreign suppliers at ChinaCoat agree with the government's projections for the total paint market, and add that certain sectors, including powder coatings, will expand fast because they are starting from a small base. Others say the government's projections are too high; they estimate overall annual growth at under 10%.
Gops Pillay, BASF Coatings Raw Materials regional marketing manager (Singapore), says the government's projections are not unrealistic. "In 10 years the paint market here will be more sophisticated," he says. "But it is unfair to compare it to NAFTA or Europe, because there are entirely different dynamics here." He says the industry has many questions yet to answer, such as when and if paint will become more popular than ceramic tiles. Will a larger middle class emerge? Will investment continue in new projects for commercial and residential buildings?
According to a recent Freedonia Group (Cleveland) study, Chinese paint and coatings demand is expected to rise 6.1% annually to 2.4 million metric tons (MT) in 2003, due largely to rapid expansion in China's construction industry and OEM markets, including motor vehicles, furniture and appliances. Demand for industrial coatings, such as machinery refinishes and marine coatings, has expanded in line with China's manufacturing sector and higher levels of international trade, the study reports.
A recent Frost and Sullivan (Mountain View, CA) study estimates that the revenues and shipments of the total Chinese coatings market in 1998 were $3,820 million, and 1.8 million MT. Revenues are expected to climb to $6,130 million in 2005. The market is expected to post a compound annual growth rate of 7% for the forecast period from 1999-2005.
Whether the country will be able to compete with the well-established markets in the West, however, depends on if and how quickly China opens its doors to the international marketplace, says Mac McManus, Air Products and Chemicals business director for epoxy additives (Manchester, England). The China/U.S. World Trade Organization (WTO) accord is only one factor, albeit a major one, to liberalizing trade, he adds.
The landmark trade agreement, reached the day before ChinaCoat opened, was the hot topic for many visitors and exhibitors. Many said the agreement, which removes a barrier to China's entry into the WTO, would help Chinese companies by opening up the world market to ideas and commerce and by lowering import taxes. Others noted controversies surrounding China's entry into the WTO, and the WTO itself. Such opposition was spelled out by WTO protestors in the United States and Europe just weeks after ChinaCoat. Protests included charges that the WTO allows companies to roam the world to exploit labor and the environment.
Wang Jian Hua, president of a 1,000-MTA latex paint facility in Western China's Xin Jiang province, says he welcomes China's entry into the WTO. "It will be easier to communicate with the world economy because it will be easier to exchange materials and information," he said through an interpreter. "The door is wide open."
Still, he says he understands that everyone does not share his enthusiasm. His company is located in a remote, oil-rich area of China and foreign paint companies are not likely to target the region in the immediate future. He says he does not worry over the possibility that they may eventually drive him out of business. "We will learn from each other."
Most of the high-performance market in China is imported at an average import tariff of about 22%. "For imported material the driving force is the tariff, so the WTO is good news because it will lower this to about 17%," says Edward Lam, Ciba Specialty Chemicals regional marketing manager for the Far East (Hong Kong). "The bad news is that it won't favor more local producers, because cheaper goods and better quality will be available and will [compete] with them."
Pang Feng, director of Frost & Sullivan's China office in Beijing, says environmental policies and regulations in China would improve with entry into the WTO because international quality standards would stimulate competition. "For large Chinese companies, the WTO is good news because it will allow them greater access to the international market, including advanced technology, such as environmental friendly coating products like waterbornes," says Pang. "In the past, they could not get a good source of this technology, but after WTO it will be easier to form licensing agreements and joint ventures to get these products."
He adds that paintmakers would benefit from restructuring in other industries. For example, the distribution sector, "always a headache for Western companies," will open up under the WTO. Pang says that today Chinese distribution companies lack the ability to cover a wide geographic region, a strong sales force, and sound knowledge of international business practices. But the increased competition and new business ideas that the WTO is expected to usher into China are expected to significantly improve this sector.
For some large-scale and medium-size domestic companies that have good manufacturing size, strong sales distribution networks, and some capability to export, China's entry into the WTO would offer opportunities to increase sales in the international market. Most of the well-established domestic paintmakers are state-owned and have good manufacturing size, says Pang.
However, he adds, some of the state-owned companies will collapse because they are not as well run and operated. Regardless of whether China enters the WTO, this could still happen, say suppliers. In 1998, Prime Minister Zhu Ronghi pushed for reforms that would close certain non-performing state-run industries within three years. While his efforts were set back in early 1998, suppliers say the demise of such industries is inevitable.
Pang says that a recent Chinese report shows that only about one-third of the state-run companies are profit makers. Others are break-even operations or "loss makers." Some experts project that the future of break-even operations with relatively good manufacturing conditions lies in being acquired and integrated into large domestic groups or offered to foreign investors.
Township enterprises, another strong business base in China, are operated by town residents. In the paint industry, township enterprises are largely medium- and small-size firms engaged in finished paint production, says Pang. They generally do not have resin production capacity and usually outsource raw materials. Their products overall are of poor quality and can't compete in quality with Western imports, he says. However, they do compete, and often win, on pricing.
"For the small-sized weak domestic enterprises, the competition likely to come from WTO is not good news," Pang says. With China's WTO entry, more high-quality products will be imported at lower, more competitive prices due to the reduction of import tariffs and other import costs. "Some small, weak domestic enterprises will be shut down by competition from state-owned and foreign companies."
Market drivers for the paint business in China are "ill formed" because there is no standard by which to compare high-performance products, says McManus. "People don't have any definition of what high performance means," he says. "What they mean is they want to be [producing] high-performance products, like in Europe, the U.S. and Japan." He says that Western technology is viewed as the "up market," and Chinese paintmakers are eager to learn more about it.
Apple Wu, Eastman Asia Pacific business market manager, says about 60% of the architectural coatings market is emulsion paint. "From a technology viewpoint, they are using lower end products, like white wash and polyvinyl acetate products." However, he says a trend is developing toward higher quality products, such as 100% acrylics.
Legislation introduced by Chinese provincial governments regarding ceramic tiles is another potential industry driver, says Lynch. In 1998, he says, the government began encouraging construction companies to use paint instead of tiles on the exteriors of certain buildings.
Combining China's architectural, deco and light industrial sectors, growth is expected to be slightly above GDP, or about 8-10%, says Edward (Ted) Merry, Rohm and Haas coatings business manager for the Asia/Pacific region (Victoria, Australia). He says total production in these sectors is about 800,000-1 million MTA. He says construction of more residential housing and conversion from tiles to paint on exteriors will drive this sector.
Lam says the output at foreign firms producing vehicles in China continues to climb. For example, production at Shanghai Volkswagen, which plans to launch the Passat in 2000, will rise up to 300,000 units. Shanghai GM production for the Buick is expected to be above 150,000 units, and Guangzhou Honda is slated to produce 30,000-50,000 Accords in 2000. Also, Lam says China's motorcycle production, hit hard in 1998, is recovering.
The Freedonia study projects total demand for automotive coatings to rise more than 9% annually to 80,000 MT in 2003. While OEM will continue to dominate the market, automotive refinish also is expected to expand in line with steady gains in the number of motor vehicles in use in China. Freedonia reports the number of motor vehicles in use doubled between 1989 and 1998. While use rates are still low, they are expected to double again by 2008. Thus, the study explains, while the market for automotive refinish coatings is still in its infancy, it is poised for tremendous growth in coming years.
Most of the major multinational OEM paintmakers have some production in China. These include DuPont, PPG and BASF. Akzo Nobel, which has production facilities for marine and powder coatings as well as a JV with Red Lion, plans to establish a manufacturing base in automotive refinish, coil and wood in China.
"China is a very big market not to come into. I imagine the [multinational paintmakers] who are not yet here are viewing this as a major opportunity. Of course, it does take time to develop a position. It doesn't happen overnight," says Thomas P. Grehl, Rohm and Haas Chemical Specialties Group business director for North Asia (Taiwan).
Merry agrees and stresses that a major mistake Western firms make is not understanding that conducting business in China is not like doing so in the United States or Europe. "The one irreducible [factor] about coming to China is: don't imagine you can do it offshore by remote control. You have to have your own people on the ground here, dealing with distributors, JVs, or whatever you do," he says. "We are seeing evidence that a number of foreign companies are dabbling in China."
He says the "dabblers," split 50/50 between the United States and Europe, enter and exit the market quickly due to their lack of fully understanding the Chinese marketplace as well as a culture that is different from the West.
"Think of it this way - would you walk blindfolded into a room with people you don't know, with a wad of money on the palm of your hand?" He says that China is a dynamic market that is "full of opportunity" for paintmakers. Even so, he says, "The buyer beware rules apply."
ChinaCoat '99:A record 13,714 visitors attended ChinaCoat last November in Shanghai, according to Raymond Ho, director of Sinostar International, which co-organized the event with the China Coatings Journal.
ChinaCoat, held in conjuction with a surface finishing exhibition, SF China, drew 184 exhibitors representing more than 300 companies, says Ho. SF China, which attracted 11,423 visitors, contained about 84 exhibitors, representing more than 150 companies.
The sponsors alternate show sites between Shanghai and Guangzhou, where ChinaCoat 2000 will be held Nov. 15-17.