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Manufacturing sector reaches critical juncture

Closures, overseas investments illustrate plight facing local factories

Now is not a good time to be a Chinese factory owner. According to recent media reports, a growing number of local manufacturers are opening plants in the US as they seek to avoid the badge that comes with selling “Made in China” products.

Meanwhile, many other local factories are struggling with labor shortages, rising costs, overcapacity problems and thinning demand. In response to such pressures, low-end manufacturers are increasingly investing in Southeast Asia, where production costs are more competitive.

Both of these trends signal the need for change in China’s manufacturing sector. Over recent decades, Chinese factories have become synonymous with low-quality, low-value-added products. Local manufacturers need to shake off this image by moving up the production chain. And with China’s GDP slowdown weighing on the country’s industrial sector, the need to advance is more pressing than ever.

According to reports, several of China’s largest and historically most successful manufacturing enterprises have not been immune to the challenges brought by changing times. Silitech Technology Co, a major supplier for Nokia, has suspended production since November. At its peak, the Suzhou-based company had more than 10,000 employees, but has reportedly struggled since Nokia sold off its handset division to Microsoft last year.

In December, United Win Technology Co, also in Suzhou, Jiangsu Province, announced its closure due to a financial crisis. It had previously been a major supplier for Apple Inc and had also cooperated with Chinese smartphone brand Xiaomi. The company’s closure is said to have left more than 2,000 workers unemployed.

Similar shutdowns are also said to be plaguing many of China’s traditional manufacturing hubs – including Dongguan, Guangdong Province, and Wenzhou, Zhejiang Province.

Of course, not all of the worries facing factory bosses are bad. Improvements in Chinese labor laws have made workers more willing to fight for better pay and conditions. For instance, upwards of 2,000 workers at Yue Yuen, a shoe factory in Dongguan, reportedly protested recently in front of the company’s gate for greater social security benefits. Yue Yuen is an assembler and producer for a host of big-name global brands, including Reebok, New Balance, Puma and Timberland.

But while China’s manufacturing sector has been expanding at a rapid clip for decades, most local factories remain at the bottom of the technological food chain, where they subsist on rock-bottom unit pricing and outdated technologies. Without upgrades and reforms, producers will become even more marginalized. Those who cannot adapt will be weeded out by the market.

Chinese planners have suggested that the country’s path toward a “new normal” pattern of development will necessitate greater innovation in the manufacturing sector. In a report issued Tuesday, research firm IDC described the agonies facing Chinese factory owners, while also putting forward predictions for the year ahead. During 2015, analysts at IDC foresee – among other things – the rise of intelligent factories, cloud computing and industrial robots (the latter of which could soon put many low-skilled Chinese workers out of jobs).

Chinese manufacturers will have to pursue these and other technological innovations if they want to stay in business. Fortunately, China is rapidly emerging as a research powerhouse. In 2012, the country overtook the European Union in terms of research spending as a percentage of GDP, according to a report issued in 2014 by the Organization for Economic Co-operation and Development.

The need to transform through innovation and research is particularly great among manufacturers focused on the highly competitive consumer market. If given the choice, many Chinese will purchase Japanese or South Korean-made goods. Such products typically carry high-price tags but are widely seen as being of higher quality than Chinese-made equivalents.

Chinese manufacturers need to focus especially on technologies that will help them become more specialized. They must also build brand value through higher-grade products. Ultimately, companies will have to choose development models that conform to their own conditions. Finding the right path forward won’t be easy, but sitting still in changing times is a surefire way to fail.

Chinese phone makers welcome Qualcomm fine

Chinese cellphone makers on Wednesday expressed their support of a record anti-trust fine levied on U.S. chip maker Qualcomm.

The National Development and Reform Commission (NDRC) ruled Qualcomm had abused its market dominance and charged discriminatory fees in the Chinese market when licensing mobile chip technology. The company was ordered to pay 6.09 billion yuan (994 million U.S. dollars).

Telecom giant Huawei told Xinhua that the NDRC’s decision would benefit telecom product manufacturers and Chinese consumers, as well as improve intellectual property protection.

Huawei said the decision would create a fairer competitive environment and would prompt domestic research.

ZTE also welcomed the anti-trust ruling as it would have a significant effect on the global telecom industry.

The NDRC’s investigation began in November 2013. The watchdog said the fine would stop the company’s monopolistic practices, safeguard fair market competition and protect consumers’ interests.

It said Qualcomm improperly bundled unrelated licenses with baseband chip sales, forcing Chinese customers to pay for licenses they did not need.

San Diego-based Qualcomm said in a statement that it would honor the fine and modify its licensing practices.

China’s machinery sector continues to grow in 2014

China’s machinery industry continued to expand in 2014 but at a softer pace due to sluggish domestic demands and piling inventories, new data showed on Wednesday.

The added value of the sector increased 10 percent year on year in the last year, slightly down from 10.9 percent in 2013, data from the China Machinery Industry Federation (CMIF) said.

Chinese machinery enterprises posted combined revenues from main businesses at 22.2 trillion yuan (3.62 trillion U.S. dollars), up 9.4 percent from a year ago. The revenues grew 13.8 percent in 2013.

Chen Bin, executive vice president of the CMIF, said the industry, still plagued by overcapacity, will likely continue to slow as they are confronted with weakening demands and fierce competition at home.

Motorola Solutions Inc exploring sale

Walkie-talkie and radio systems maker Motorola Solutions Inc is looking into a possible sale, Bloomberg reported, citing people familiar with the matter.

Potential buyers could include private equity firms and defense contractors including Raytheon Co, Honeywell International Inc and General Dynamics Corp, Bloomberg reported, citing one of the sources.

The 87-year-old company is working with financial advisers as it looks for a buyer, Bloomberg cited the sources as saying.

The sale process has been going on for several months, though a deal isn’t on the immediate horizon, one of the sources told Bloomberg.

Motorola Solutions spokesman Kurt Ebenhoch declined to comment on rumors or speculation.

Yum! records 16% sales drop in China

US company considers regaining Chinese consumers as top priority after food supply scandal last year

Yum! Brands Inc, operator of big-name fast-food chains like KFC and Pizza Hut, has recorded a drop in its China unit sales in the fourth quarter ending December 27, 2014 due to a food supply scandal, which analysts Thursday said will continue to weaken Chinese consumers’ confidence in the following year.

The same-store sales in China, the US fast-food company’s No.1 market for profit, slid 16 percent year-on-year in the quarter, according to a full-year earning report released by Yum! on Wednesday US time.

The fall in the China division, however, was less severe when compared with the 19.4 percent dip projected by analysts surveyed by Consensus Metrix.

As for the whole year, the company posted a 8 percent drop in the operating profit of its China unit, in comparison with a 1 percent increase globally.

The losses for Yum! stood at $0.20 per share in the fourth quarter, or $86 million in total.

The company put down the underperformance to a food supply scandal erupted in 2014.

“Overall results in 2014 were disappointing as the Chinese supplier incident in July offset our strong first half of the year,” Greg Creed, Yum! Brands Inc’s CEO, was quoted in the report as saying.

After media reported on July 20 that one of Yum!’s suppliers, Shanghai Husi, was using expired meat, sales in China’s KFC and Pizza Hut chain restaurants suffered a massive blow.

The company, which quickly cut ties with the supplier as well as its parent OSI Group LLC, still saw same-store sales in China fall 14 percent year-on-year in the third quarter ending September 6. By contrast, the quarter ending roughly one month before the scandal tidings recorded a robust growth of 15 percent.

Greed said the company’s top priority now is to restore Chinese consumers’ confidence, anticipating “a strong second half of 2015” due to “the turnaround gains momentum, led by menu innovation across the year.”

New offerings would include premium coffee and revamped children’s dishes, according to media reports, citing Joey Wat, president of KFC China.

In late January, Beijing Morning Post reported that over 300 KFC stores in Beijing had started to sell coffee products.

Its major rival McDonald’s Corp is also reportedly trying to win back Chinese consumers via menu adjustment. McDonald’s on January 23 reported a 4.8 percent drop in fourth-quarter sales for the region including China and Japan amid the fallout from the Shanghai Husi scandal.

Despite the efforts, analysts holds a pessimistic attitude toward the recovery of Yum! as well as that of McDonald’s in the Chinese market.

“The food supply scandal severely dampened the faith for the US fast-food chain brand in China, where consumers are paying increasing attention to food quality along with the rising standard of life,” Yan Qiang, a partner and industry analyst with Beijing-based Hejun Consulting, told the Global Times Thursday.

Yan noted that a full recovery needs at least one more year.

It is not the first food scandal to have occurred to Yum! in China. Chinese media allegations that KFC used tainted chicken in 2012 already caused a national scare and some damage to Yum!’s reputation in the country.

Regardless of those food scandals, US fast-food chains are also confronting fierce competition from domestic fast-growing counterparts, Tian Guangli, an expert at Beijing-based consultancy Longce Think Tank, told the Global Times Thursday.

“Many new rising stars such as pancake brand Huang Tai Ji have a better understanding of how to draw and maintain consumers’ attention in this modern Internet era than traditional fast-food chain operators including Yum!,” said Tian.

Finance companies launch new funding program for female entrepreneurs

China’s first funding program aimed at providing finance exclusively to female entrepreneurs has been launched by a group of heavyweight finance organizations.

International Finance Corporation, Ant Financial Services Group, a subsidiary of Alibaba Group Holding Ltd, and Goldman Sachs Foundation will jointly run the program.

The funds to be offered – through loans from Ant Financial Services’ microcredit arm Ant Credit, with the backing of IFC and Goldman Sachs – are expected to benefit around 46,000 female entrepreneurs. The program has 500 million yuan ($80.13 million) available to it.

“The market opportunity for financial products designed specifically for female entrepreneurs is huge”, said Ji Min, deputy director of finance research institute of the People’s Bank of China, with few, if any, currently on the market.

Karin Finkelston, IFC’s vice-president for Asia Pacific, said women starting out tend to invest their business knowhow in different directions from their male counterparts, for instance into family-oriented fields, including children’s education and family healthcare, which often represent appealing prospects for financial companies.

On the flipside, however, research shows that women entrepreneurs have traditionally found it hard to get financed, and if they do, the amounts approved can be tiny, even as little as 10 percent of what they are seeking, said Finkelston.

She claims her own organization, however, is female-friendly when it comes to financial support, a philosophy shared with its partner in the new fund, Ant Financial Services, which already has a strong client base of female-led startups, many of which run their businesses on Alibaba’s online market platform.

Yu Shengfa, Ant Financial’s vice-president, said that just over half of the business owners using Alibaba’s online market platforms are female.

IFC provided 1 billion yuan in senior loan funding to Ant Credit in 2014 which it loaned, in turn, to 62,000 micro-, small and medium-sized enterprises across China.

Online-based Ant Credit’s role is to evaluate potential borrowers’ creditworthiness based on their transactional and behavioral data, without the need for deposits, it says, or using any assets as guarantees.

By the end of March 2014, Ant Credit had loaned 190 billion yuan for more than 700,000 small and micro-business.

Ding Qinyan, 26, an Ant Credit customer, started her online apparel store on taobao.com when she was still in college.

Her first online business loan was granted in 2013, for the deposit needed to join an online sales campaign.

Based on Ding’s sales records and credit history, the application was approved within a minute at an interest rate of 0.0005 percent per day.

Lenovo posts profit fall in fiscal Q3

Lenovo Group, the world’s biggest personal computer maker by shipments, posted on Tuesday a drop in its fiscal third quarter net income, a result caused in part by its completion of the acquisition of unprofitable handset maker Motorola Mobility.

In the quarter ending December 31, 2014, the company recorded a net income of $253 million, a 5 percent dip from $265 million a year earlier, while its revenue rose 31 percent year-on-year, reaching $14.1 billion, according to a financial report filed to the Hong Kong bourse on Tuesday.

The profit, though it fell from the same period in 2013, still beat Bloomberg analysts’ estimate of $182.4 million.

Lenovo attributed the profit fall mainly to two major acquisitions completed during the quarter. Its net income before non-cash acquisition-related accounting charges was $327 million, up 23 percent year-on-year, according to the filing.

In October 2014, the group closed its $2.91 billion purchase of Motorola Mobility from US tech giant Google Inc and a $2.1 billion takeover of International Business Machines Corp’s low-end server unit.

“They [the two recently acquired businesses] are definitely becoming our growth engines,” Yang Yuanqing, Lenovo’s CEO, was quoted as saying in a press release posted on the group website.

The group said it sold more than 10 million Motorola phones worldwide during the fiscal quarter, achieving record shipments.

However, Lenovo’s mobile business, including Motorola, recorded a pretax loss of $89 million during the three months through December, much more than the loss of $2 million over the same period in the previous year.

The increased losses in the mobile unit indicate that Motorola, targeting mid- and high-end customers, has yet to be able to offset the losses generated by Lenovo’s previous focus on the low-priced segment to snatch market share, said Zhang Yi, CEO of Guangzhou-based iiMedia Research.

“The mid- and high-end segments are a crucial turf for Chinese smartphone makers to raise their profit margin,” Zhang told the Global Times Tuesday.

Huawei appears to have already made a dent in the segments with its Ascend Mate series. Xiaomi Inc, famous for its low-budget phones, also jumped into the higher-level battlefields via its newly released flagship Mi Note, which the company claimed could be compared with Apple’s devices.

Against the backdrop, Motorola introduced three flagship smartphone models into the Chinese mainland market on January 26, to help Lenovo further woo mid- and high-end phone users.

Despite the efforts, Zhang is concerned that it may be hard for Motorola’s newly released smartphones to help Lenovo’s money-losing mobile unit return to profitability immediately.

The group should further enhance the brand value via effective marketing so as to undercut foreign rival Samsung in China’s fiercely competitive smartphone market, Zhang noted.

By contrast, Li Yi, secretary-general of the China Mobile Internet Industry Alliance, showed more confidence in Motorola’s future.

“I think that the Motorola brand will bring profit to Lenovo, given Lenovo’s mature distribution channel in China and Motorola’s powerful selling network abroad. Motorola’s patent portfolio can also facilitate the Chinese phone maker’s progress in the overseas market,” Li told the Global Times Tuesday.

The group expects Motorola to contribute over 40 percent of its smartphone shipments in the following fiscal year, the Wall Street Journal reported in early January, citing Liu Jun, president of Lenovo’s mobile business group.

Lenovo’s PC unit continued to be the main contributor to the company’s total revenue, although the proportion in the quarter fell slightly to 65 percent from 81 percent of the previous fiscal quarter, while mobile businesses’ share of the total revenue during the third quarter increased to 24 percent from 13 percent in second quarter.

As the world PC market is becoming more saturated, Lenovo is pumping up efforts to seek new potential growth in other segments such as smartphones, said Li.

Apart from launching new hardware devices, operations like gaming and clouding also appear to be areas Lenovo wants to bank on. In April 2014, Lenovo announced the launch of its gaming mobile app marketplace for Android smartphones.

Xiamen’s strengths benefit free trade zone

Xiamen, a coastal city in Fujian province, has an unparalleled advantage in building a free trade zone given its talent pool and rich experience of innovative policies, Fujian Governor Su Shulin said.

In a Government Work Report, Su said the Fujian free trade zone, with its proximity to Taiwan, will focus on cross-Straits cooperation and enhance exchanges of goods and services.

“Xiamen should set a terrific example of strengthening cross-Straits ties through the free trade zone,” Su said.

The Fujian free trade zone, which was approved in December and is scheduled to open in March, covers 118 square kilometers and includes the cities of Xiamen, Fuzhou and Pingtan.

More favorable policies should be implemented to attract Taiwan professionals by making their lives easier, said Chen Qiuxiong, director of the organization department of Xiamen’s Party committee.

While Xiamen offers a platform, the talent from Taiwan will bring technological support for the city’s goal of building a free trade zone, Chen added.

A recruitment event catering to Taiwan professionals will be held in March in Xiamen, highlighting sectors such as new energy, marine engineering and cultural and creative industries, according to the city’s Federation of Taiwan Compatriots.

According to the plan, Xiamen will recruit 300 Taiwan experts on management, science and research by 2020.

Yao Yuangen, a researcher at the Fujian Institute of Research on the Structure of Matter, suggested Xiamen make a foray into aircraft leasing and prepare for overseas financing of large-scale equipment.

3D printing ready to revolutionize manufacturing

After decades of development, 3D printing is now ready to revolutionize manufacturing

In October, the southern Chinese city of Changsha launched an industrial park. What sets it apart from other manufacturing centers is that it is poised to play a key role in the growth of Chinese technology.

The development is China’s first hub for 3D printing technology, and was established with an immediate goal to produce 100 3D printers, and to triple the number of devices by 2016. Taking Changsha’s lead, the cities of Wuhan and Zhuhai have announced plans to develop similar industry hubs.

Other countries in the Asia-Pacific region are also focusing on this fast-growing technology.

Over the next five years, Singapore plans to invest $500 million to boost skills in advanced manufacturing, focusing heavily on 3D printing.

Companies in Japan are already marketing inexpensive desktop 3D printers, while South Korean conglomerates are widely using the technology.

After decades of development, 3D printing has emerged as a viable and affordable technology, increasingly used by both the private and public sector. While problems remain, it could eventually revolutionize the manufacturing sector that many countries in Asia depend on for economic growth.

“3D printing has been around since the 1980s and has been expanding into mass production and specialized manufacturing since then,” says Maria Smith, head of law firm Baker & McKenzie’s trademarks practice in Hong Kong.

“The business is growing rapidly. In 2013, the (global) market size was estimated at $2.5 billion. It is projected to reach $16.2 billion by 2018.”

3D printing, also known as additive manufacturing, has already been used to produce cars, buildings, guns and even artificial body parts.

“In the medical field, Chinese scientists have gone a step further, using live tissue to create organs and print ears, livers and kidneys,” adds Smith.

As it becomes increasingly accessible and affordable to consumers, the technology is making it possible for products to quickly reach the market with less labor-intensive production required.

But these benefits are also a cause for concern. As 3D printing allows for the quick and easy copying of products, it is, in turn, presenting fresh challenges for regulators that have yet to adapt to the technology and for companies seeking to protect their intellectual property rights.

Once prohibitively expensive, the technology that makes 3D printing possible has evolved substantially.

Hewlett-Packard in October introduced a 3D printing technology 10 times faster and 10 times more precise than existing technologies. The Multi Jet Fusion 3D printer is set to launch in 2016.

In November, General Electric announced its plans to invest $32 million in developing an additive manufacturing facility in the United States?a factory that operates using 3D printers.

In Asia, XYZprinting, a company backed by Taiwan’s electronic manufacturing conglomerate Kinpo Group, launched the world’s first allin-one 3D printer with built-in scanner.

The da Vinci 1.0 AiO, weighing around 20 kilograms and resembling a large microwave, is available to buy for $799 through e-commerce websites including Newegg.com and Amazon.

A 3D printer introduced in late 2014 and developed by China Aerospace Science and Industry Corp is due to be mass-produced and available later this year.

Li & Fung, a Hong Kong-based consumer goods design, logistics and distribution company, has in recent years run a series of 3D printing initiatives. In 2013, it carried out Asia’s first in-store 3D printing retail experience at a Toys R Us outlet in Hong Kong. Li& Fung has also explored the possibility of teaming up with other companies like Samsung Electronics Co to drive the technology further.

“With nearly 30 years of development, 3D printing technology is already quite mature,” says Luo Jun, secretary-general of the World 3D Printing Technology Industry Alliance.

“It has been widely used for design in creative industries and printing teeth or bones in the biomedical field,” adds Luo, who is also executive-president of the China 3D Printing Technology Industry Alliance. “Manufacturing and the aerospace industry use it to print complex moldings and components, or customized buildings.”

Paul Shao, CEO of Trustworthy (Beijing) Technology, a 3D printer company that distributes systems developed by brands including 3Shape and Roland, says the region is quickly finding its way with 3D technology.

“In Asia, the markets in Japan, China and South Korea are more mature in terms of 3D printing, but we can see many regions like Southeast Asia and central Asia are joining the game in trading and applications,” Shao says.

A country’s 3D printing capacity is closely linked with its competitiveness in traditional manufacturing, he adds.

“Compared with the US, Europe and Japan, China is still at an infant stage in terms of innovative design, precision processing and economic power. We have much space to grow in many key technology areas such as laser and materials. But we are getting closer and closer,” says Shao.

The evolution of supply chains is also driving the development of 3D printing. More brands are using just-in-time supply chains that make good use of the technology, getting products manufactured more quickly and into the hands of consumers.

In other regional markets, many of which rely on labor-intensive manufacturing for economic growth, the technology is less mature. Examples are Thailand and Malaysia, two middle-income countries moving up the value chain.

Thailand imports all of its 3D printers from the US, Canada or Germany because it lacks the technology to make its own, despite being a prodigious supplier of microchips.

But as Luo points out, the use of 3D technology in the region is likely to gather more pace.

“3D printing technology has been growing fast in China with more than 100 companies involved in industry, biomedicine, creative (industries), architecture, materials and software. China’s 3D printing market has seen more than 40 percent growth for two consecutive years,” says Luo.

China’s Ministry of Science and Technology has included 3D printing technology in the National High-Tech Research and Development Program, which sponsors research in key high-technology fields. The Ministry of Industry and Information Technology, or MIIT, is accelerating the process to launch support policies.

“The Ministry of Education is planning to bring 3D printers into schools,” Luo adds.

In September, MIIT announced it was working on a plan to promote the industry.

“We will see greater usage of 3D printing with increased affordability encouraged through government initiatives,” says Andy Leck, managing principal and head of the IP practice at Wong & Leow, a member firm of Baker & McKenzie in Singapore.

“Key examples of these initiatives include the Singapore government’s Productivity and Innovation Credit scheme and the investment of $500 million over five years as part of the government’s Future of Manufacturing program,” he says.

All this attention, however, may be creating a bubble. After a boom in raising capital through 2013, many 3D printer manufacturers have performed badly, particularly in terms of their stock price.

The share prices of some major 3D printer producers have dropped significantly over the past year. US-based ExOne fell from $66 in January to $21 in November, Stratasys slid from $134 to $105 and 3D Systems plunged from $96 to $36. In the same period, Germany’s Voxeljet dropped from $47 to $12.

A number of linked companies listed in China’s A-share market, such as those involved in robotics, have not performed well, either.

One exception is Guangdong-based polymer materials company Silver Age, which saw its value grow from 6.16 billion yuan ($994 million) in January to 17.45 billion yuan in November.

And if IP issues and fears of a bubble are not enough of a concern, the industry in Asia still faces a couple of other challenges including the high cost of materials and a dependence on imports. Another hurdle is the lack of a mature business model for companies in the sector.

Mobile health sector expected to hit 12.5b yuan by 2017

China’s mobile healthcare market is expected to see fast growth and hit 12.5 billion yuan ($2 billion) by 2017, according to a report released by China Medical Pharmaceutical Material Association at a press conference on Wednesday.

According to the 2014 China Medical Internet Development Report released by the CMPMA, there are more than 2,000 mobile healthcare applications in China.

The report states that the market in China will expand by 400 percent when compared to 2013 when the market was at about 2.36 billion yuan.

The dramatic growth of the mobile healthcare market can be largely attributed to the fast development of China’s mobile internet, said Long Yan, deputy president of CMPMA at the conference.

As of 2014, the number of China’s internet users through cell phones was 527 million.

While the market has grown, Long said a number of healthcare apps were pulled from app stores over the past year due to poor performance and user retention.

Companies are required to integrate the online apps with offline services and products to cater to the developing trend of the mobile healthcare industry, added Long.