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Punch and counter-punch
2013-06-07, Sophie He

Chinese companies have met with suspicion and sanctions in America in the last decade, but some are thriving, even creating jobs for the US economy and its workers. Sophie He reports.

US President Barack Obama traveled to Miami in late March this year and spoke about putting Americans back to work by having them not only rebuild the nation’s infrastructure at the Port of Miami, but restore pride in the national moniker “Made in the USA”. But before the President could deliver his upbeat manufacturing manifesto, the White House advance team had the matter of an urgent site makeover to attend to. The logo of ZPMC, a Chinese machinery company, was festooned on cargo cranes at the port. In a blink, American Star-Spangled Banner flags covered the reality of ZPMC’s presence. But despite the best intentions of image makers, Nature blew in to refresh the reality; heavy winds dislodged one of the US flags, revealing a part of the Chinese-lettered logo above the American president’s head as he spoke. 

An alert CNN producer, as befits the age, took a picture and posted it online where it went viral across the Internet. The economic reality was stark and fast and shared en masse. Just as US jobs and manufacturing were in the doldrums, China’s cranes were flying. 

Welcome to the brave new world. Rising Chinese influence in the US market is one of many subjects Presidents Xi Jinping and Obama will verbally punch and counter-punch during their historic ‘blue-sky’ California summit which starts today. 

ZPMC or Shanghai Zhenhua Heavy Industry Co. Ltd, a State-owned heavy-duty equipment manufacturer listed on the Shanghai Stock Exchange, which entered the US market in 1994 undertaking projects at the Port of Miami, now accounts for the majority share of machinery used at the facility. For almost 20 years, its cranes have been flying the metaphorical flag for China’s expansive ambition. 

Given China’s accelerated economic growth as well as the increasing strength of its enterprises, more and more companies like Shanghai Zhenhua have been searching for opportunities overseas, particularly in the US — the world’s largest economy. But more often than not, Chinese firms met with mixed signals and found they were not so “welcome” as they may have expected. 

Telecommunication equipment supplier ZTE Corp is one of them. Last October, following a 10-month investigation, US Congress released a report in which ZTE and its cross-town rival Huawei Technologies were flagged as being a threat to US national security. Subsequently, both companies were exlcuded from public telecommunications projects and barred from buying US assets.

David Dai Shu, ZTE’s director of global public affairs, tells China Daily that during the investigation, issues that concerned Congress about the company’s products were solvable by technique. “The report is influenced by political factors,” Dai says.

It would be impossible for Chinese companies to undertake projects or supply equipment in building a nationwide telecommunication network anytime soon as a result of the report, he said.

“As the US telecom carriers have to take political factors into consideration … especially when ‘national security’ issues are involved,” says Dai.

 

$1 billion and counting

Around the same time, Cisco Systems Inc. also ended its longstanding sales partnership with ZTE after an internal investigation into allegations the Chinese firm sold Cisco networking equipment to Iran.

Dai says ZTE has been in the US market for more than a decade, and during the last 3 to 4 years, its businesses have expanded rapidly in the country. The company established a US subsidiary in 2003 headquartered in Texas, and made a substantial breakthrough in 2006 by supplying network equipment to Oceanic Digital Jamaica.

“We (ZTE) have always wanted to enter the US market, as it’s the world’s largest market for telecommunication equipment and terminal equipment … it’s a high-quality market and one cannot call oneself an international company without a foothold in the US,” says Dai.

The US telecom carriers’ capital expenditure for telecommunications equipments accounts for 20 percent of the global market, while profit generated from the US telecom equipment market is also lucrative.

Dai says the Congressional report is not the first obstacle the company encountered in the country. In 2010, ZTE and Huawei bid for US carrier Sprint Nextel’s wireless network project and came close to landing it, until the US Commerce Department intervened. By that stage, ZTE had spent 100 million yuan ($16.3 million) on product testing for the tender.

Dai says the Sprint tender made the Shenzhen-listed company rethink its US strategy, causing it to shift focus to sales of terminal equipment later.

In 2011, ZTE posted US revenue of $400 million, of which, 90 percent came from sales of terminal equipment; by 2012, that had risen to $1 billion, but 90 percent was from the sale of mobile phones, the rest from building a commercial network as well as a network in rural areas.

Although ZTE has met with many obstacles in the US, it is not deterred and will continue to compete, says Dai, who adds the company is the fifth-largest smartphone supplier in the US and holds a 5 percent market share. He believes in the next few years, ZTE’s mobile phone sales will continue to grow steadily.

“The US mobile-phone market is very suitable for ZTE’s products, as most of the phones there are custom-made by carriers, and we have extensive experience in custom-made phones.”

Dai believes business in the US is mutually beneficial, as in tandem with the company’s profitable expansion, ZTE is creating jobs for US citizens.

Not every company is able to maintain  ZTE’s passion and commitment to the US, especially after being blocked repeatedly from it.  

The development of mainland telecommunications equipment-maker Huawei in the US, is filled with such “rejections”.

“We are not interested in the US market anymore. Generally speaking, it’s not a market we pay much attention to,” Eric Xu, executive vice-president, said at Huawei’s annual analyst summit in April. (Huawei is the world’s fourth-biggest smartphone supplier behind Samsung, Apple and LG and second only to Ericsson in the telecommuniations equipment market.). 

Last October, China’s machinery manufacturing company Sany Group sued US President Obama for blocking its wind-farm project, pledging to fight “to the very end” the security-related order.

Other companies regained strength in the domestic market after being barred from the US, like China Zhongwang Holdings Ltd, Asia’s largest producer of industrial aluminum extrusion products.

 

All roads lead to Rome 

According to the Hong Kong-listed firm’s financial reports, in 2012, its profit attributable to equity shareholders was 1.8 billion yuan, a 63 percent rise over the previous year due to an increase in sales. For the first 3 months of 2013, the company recorded a 495 million yuan profit, an increase of 0.8 percent year-on-year.

Currently, the company is focusing “primarily on China and to a lesser extent  overseas”, the Liaoning-based firm said in a recent report, but this was not the case a few years ago. In  2009, the company was heavily dependent on the US market.

Vincent Cheung, chief financial officer of the group, tells China Daily that in 2009, Zhongwang earned 40 percent of its revenue from the US by exporting industrial aluminum extrusion products. Cheung adds that 3 years ago,  the gross profit margin for industrial aluminum extrusion products was more than 40 percent in the US, while only 30 percent at home. 

In 2009, the company sold 160,000 metric tons of products worth more than $800 million to the US. However, the honeymoon didn’t last long after the US Commerce Department started investigations in April 2010 on the mainland’s industrial aluminum extrusion product makers — all of which were legally required to deposit the duty owed until a final ruling was reached. 

And according to the final countervailing and anti-dumping rulings by the department in March 2011, certain aluminum goods imported from China are subject to a countervailing duty of 374.15 percent and an anti-dumping duty of 33.28 percent over the next five years.

Cheung said he believes the US Commerce Department was under economic and political pressure to make sure the final rulings served to protect local businesses in the US.

The rulings effectively halted Zhongwang’s exports to America, which cost the company dearly. For the first half of 2011, net profit declined by 80 percent to 412 million yuan ($64.5 million), from 2.1 billion yuan a year earlier. That followed a 26 percent year-on-year decline in 2010. 

Fortunately, the company switched strategy and focused on the domestic market. But that doesn’t mean it has abandoned the US market completely, says Cheung. In 2011, Zhongwang started to develop deep-processed aluminum products, which can still be exported to the US without incurring extra duties and profit margins are high.

He said that currently the gross profit margin of deep-processed aluminum products in the US is more than 30 percent, and hovers around 26 percent at home.

In 2011, Zhongwang produced 7,000 metric tons of deep-processed products, and 28,000 metric tons in 2012, the majority of which were sold to the US, says Cheung, adding that Zhongwang has increased its production capacity of deep-processed products. Up to 40,000 metric tons of such industrial aluminum extrusion products are expected to be produced this year.

“Although revenue from export is growing again, it will account for less than 10 percent of our total revenue, so, no matter what happens (in overseas markets), it will not affect our business significantly.” 

The company’s vice-president Lu Changqing said that aside from exporting, deep-processed products will also be used to build special vehicles in the Chinese mainland, like ambulances and trucks, and the government is likely to provide subsidies for these environmentally friendly vehicles, which are lighter in weight, and consume less fuel.

In recent years, an increasing number of Chinese companies are eager to grow their businesses to overseas markets. ZTE’s David Dai says it is critical for these companies to make sure their products meet overseas markets’ requirements. It is also important to localize the products, he says, adding that it could be achieved by hiring local lawyers, research people and sales people, as well as public-relations experts.

“Creativity and intellectual property also play important roles for a company’s overseas businesses,” Dai says. “Without strong creativity and intellectual property rights, many Chinese products will be unable to survive in overseas countries.”

He also cautions that trade protectionism is on the rise in many countries, so Chinese companies who want to “go global” must take political factors into consideration.

Chong Tai-leung, a professor at the Chinese University of Hong Kong’s Department of Economics, tells China Daily that the US, as well as some European countries, are unhappy that the Chinese government provides subsidies to certain products that these countries import, which has led to many countervailing and anti-dumping investigations in recent years; besides, some European countries are eager to export more of their products into China, so they use such investigations to put pressure on the Chinese government.

Echoing Dai’s words, Chong advises Chinese companies planning to expand their businesses overseas to understand the local “rules of game” first.

“You can’t expect to do business the same way as you are doing it in China, especially for State-owned enterprises. The rules of game will be different and you have to be ready for it,” Chong says, adding that Chinese companies also must find out whether there is demand for their products overseas before they actually “go out”.

He also warns that US labor costs are expensive, while labor unions are highly influential and powerful, which can significantly increase overall costs for Chinese companies.

 


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