Manufacturing opportunities abound across Asia

The recent China FTA is very good news for certain manufacturers, while others might find better returns in other Asian countries. Alan Johnson reports.

The China-Australia Free Trade Agreement (ChAFTA), which came into force on January 1 this year, is great news for a wide range of manufacturers, who will see more than 86 per cent of Australia’s goods exported to China entering duty free (worth more than $90bn), as well as the reduction of tariffs on billions-of-dollars-worth of other Australian exports.

Readers involved in consumer goods, advanced technology and equipment, meat, dairy, wine, seafood, fruit and vegetables, processed foods, vitamins and health products will be looking to grow their exports to China.

With its population of 1.4 billion people and a rapidly rising middle class, China presents enormous opportunities for Australian businesses well into the future.

Already connecting to Chinese consumers is vitamin supplements manufacturer Blackmores and meat exporter Sanger Australia. Each has signed agreements with JD.com to sell their products on China’s largest online shopping website.

However, according to Sara Cheng, Senior Manager, China Practice, before manufacturers celebrate this exciting opportunity, there are a few things they must bear in mind to leverage this opportunity to grow their export-to-China business.

“There is a saying about China’s consumer goods market: ‘Brand is more important than product, and price is more important than quality’,” she told Manufacturers’ Monthly.

“This summarises the characteristics of two market segments in China: The upper market which judges products by brand and the low end and mass market which is most price sensitive. “

She pointed out that as a high cost country, Australia can rarely compete with China on product price. “We have to focus on brand building and product differentiation to tap into the upper or middle-upper markets in China.”

“However, given the fact that over 95 per cent Australian businesses are SMEs, Australian exporters do not enjoy the luxury to spend big on brand building in a huge and unfamiliar Chinese market.”

Cheng describes most of Australian SMEs’ marketing investment in China as sand dropping into a vast ocean which ends up with no or little profit.

“Considering Beijing and Shanghai each has a population of over 20 million, Australian exporters need to have realistic expectations and should start with one city/region and commit all necessary resources to win the battle in that target city/region,” she said.

And when it comes to marketing, she advises Australian companies to never leave the marketing to their Chinese business partner.

“Established Chinese distributors/agents may be competent in sales with their existing sales network and market experiences, but they are often not willing to invest in building someone else’s brand or incapable to conduct effective marketing.”

Instead Cheng said Australian exporters need to leverage Chinese business partners’ local experiences and knowledge, develop a clear marketing strategy and work closely with Chinese business partners to build the brand and market the products in China.

According to Austrade, it’s vital Australian companies choose the right business partner to avoid commercial disputes. This includes fully understanding the company, its history, structure and background, as well as the key individuals involved.

It’s a similar story with intellectual property rights (IP). Although China is now a signatory to most major international IP agreements and has a legislative framework broadly in line with international norms, Australian companies need to be cautious of the potential risks around IP infringement.

China operates a first-to-file system meaning just that – the first person to register a trademark in China becomes the legal owner.

Consequently, one of the most common IP risks is ‘Trademark squatting’. If an Australian company finds this has happened there are options available to recover their brand but these are often lengthy and expensive, with no guarantee of success.

Austrade strongly recommends that Australian companies considering manufacturing in or exporting to China register their trademarks in both English and Chinese as early as possible. Registering transliterations of trademarks should also be considered.

ASEAN region

One area manufacturers should take note of, especially those in the automotive industry, is the ASEAN region for opportunities to enter the global value chains of Asia’s fast-growing vehicle manufacturers.

South East Asia is becoming a global automotive hub due to the region’s strong economic growth and rising consumer class. According to the latest Economist Intelligence Unit’s ASEAN Automotive report, car sales are projected to rise from 3.6 million to 5.3 million over the next five years.

Thailand is ASEAN’s largest automotive manufacturing base, producing nearly two million vehicles in 2014. Australia exported vehicles and parts to Thailand were worth around $31.5m in the same year.

According to Stuart Charity, Executive Director of the Australian Automotive Aftermarket Association, Australian automotive aftermarket products, especially parts and accessories for off-road vehicles, are well-recognised in Thailand as premium products.

“There are some very good sales, partnership, distribution and investment opportunities for Australian automotive component manufacturers there,” Charity told Manufacturers’ Monthly.

Indonesia is another opportunity for Australian manufacturers. With 1.2 million vehicles sold in 2014, Indonesia is ASEAN’s largest automotive sales market.

The country’s strong domestic car sales are creating demand for aftermarket products such as roof racks, tinted windows, custom wheels and in-car entertainment.

The use of 4WDs is also growing at double-digit rates, offering substantial opportunities for aftermarket suppliers catering to this market.

Shannon Leahy, Austrade’s Trade Commissioner in Jakarta, said there is an increasing demand in Indonesia across a broad spectrum of automotive parts and components.

“These include opportunities in driveline and engine cooling systems, fan belts, electronics and shock absorbers,” Leahy told Manufacturers’ Monthly.

“Indonesia’s automotive supply chain growth will also provide opportunities for companies that wish to invest through a joint venture supply chain manufacturing model.”

India

India is another country manufacturers should keep on their radar, especially those in the automotive industry.

India’s car industry is in the process of major expansion plans especially with the country’s ‘New Fuel Efficiency standards’ which will govern Indian car manufacturers from 2017; and the Indian Government’s implementation of the National Electric Mobility Mission Plan 2020, which includes the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME India) scheme.

The Indian auto industry and Government of India have prepared a new automotive mission plan for 2016-26, which aims to make India among the top three automakers in the world.

The industry is projected to account for over 12 per cent of India’s GDP, up from the current level of 7 per cent, and 45 per cent of its industrial output.

According to Nicola Watkinson, Austrade’s Senior Trade and Investment Commissioner for South Asia, with India fast becoming a major automotive hub, Indian companies are looking for partners to help build their global competitiveness.

“Australia is well placed to assist the Indian automotive industry in enhancing their global competitiveness, and provides significant opportunities for Australian organisations looking to expand operations, especially as Australia has high-quality research institutions, specialist research and problem solving skills and strong capability in future vehicle technologies,” Watkinson told Manufacturers’ Monthly.

However Ian Metherall, CEO of Silo Bags, cautions Australian manufacturers that doing business in India can be difficult.

“New exporters have to understand that India is definitely a challenge, and need to meet that challenge by having deep pockets and lots of patience,” he said.

He said it’s important companies design their business plans for the market they’re entering.

“We found the Indian market has similarities with many other under-developed countries while differing from markets in developed countries. But there’s a very fine line here.”

Metherall said business for his company’s silo bags, which are used as a safe and economical way to store grain right across India, is growing rapidly.

“But India is so totally different from anywhere else in the world that it’s hard to extrapolate lessons learnt here to other markets,” he said.

However, he regards potential in the Indian market as huge.

“There are opportunities throughout the country and throughout the region. But you have to work at it. Don’t expect overnight success,” he concluded.