[Note: below is Chapter 7 from Great Wall of Numbers]
When I was teaching at a college in Bengbu, Anhui there was a small supermarket across from the main campus entrance called Joy Mart (合家福). While a new Carrefour had just been built downtown, most students and faculty still regularly shopped at the nearby Joy Mart due to its physical proximity. While I had originally brought a number of extra spare shaving razors from the US and Korea (where I had worked previously) I eventually ran out and needed to shop for more. During my first trip along the shop aisles, I noticed one razor package that stood out among the rest: “Blades: Made in the USA.” I got a good chuckle out of it because of all things you picture as a US export, razor blades is probably not one of them.
Which brings up a good question: being the world’s 2nd largest exporter, what exactly does the US export? Who does it?
In case you skipped ahead I mentioned in Chapter 1 that, in its August 2012 SME Viewpoint, the US Department of Commerce noted that small and medium-sized enterprises:
- Only 1% of US 28 million SMEs export to any country
- And only 10% of those that export, export to China
If you are reading this, odds are you do not work for a company that exports products and services to China. There may be any number of reasons why. The same publication notes that legal uncertainties and property rights protection rank among the top reasons preventing US firms from doing business in China.
But what if you are willing to take the risk and attempt to generate revenue through customers in the 2nd largest economy? How would you do it?
ExportNow is a turnkey solution provider founded by Frank Lavine, former U.S. Ambassador and Undersecretary of Commerce for International trade. It is a streamlined central sales platform that allows US firms – small and large – to export their products directly from the US all the way through customs into the hands of Chinese customers. There is no need for warehouses or store fronts as ExportNow promotes and markets the products through China’s largest online retailer, Taobao (Tmall).
Who goes shopping online in China and how much do they spend? Nearly 60% of Taobao’s userbase is between 25-35 years of age. For comparison, according to Quantcast, nearly half of Walmart.com shoppers are under the age of 34 and more than a quarter of Amazon.com’s customer base is 45 years or older. To give you an idea of how large online shopping is in China and how fast it has grown consider that Boston Consulting Group (BCG) published last year noted, “nearly 173 million people in China shop [online], and the e-commerce space is expected to exceed $118 billion gross merchandise value for last year .” In 2012 that increased further to $196 billion and 242 million shoppers. The BCG report also estimates that China’s e-commerce market will become the world’s largest in 2015, with 329 million online shoppers (each spending roughly $1,000 annually online). In fact, Analysis International projects that China’s e-commerce market will hit 2.57 trillion RMB ($410 billion) by 2015 and $457.6 billion in 2016. And Ali Research Center estimates that if B2B transactions are not included, by 2020 sales of consumer goods via e-commerce on the mainland will reach 10 trillion RMB ($1.61 trillion).
And if you would prefer to look around for other e-tailers, in addition to Taobao, US firms looking to tap into the Chinese e-marketplace should also consider Yihaodian (an online grocery store), 51buy.com (a subsidiary of Tencent) and 360buy (which specializes in electronics) all three of which have had double digit growth rates over the past several years. And these are hardly fly-by-night operations. For example, in February 2012, Walmart increased its ownership stake to 51% in Yihaodian and by December 2012 had over 20 million registered users and 400 supplier partners. And in October 2012, 360buy introduced its native English channel to allow easier access for international buyers and sellers. Furthermore, In February 2013 Saudi Arabia’s Kingdom Holding’s investment group announced it had paid about $400 million for a strategic stake in 360buy.
So the first step is less ambiguous as you now know who you can sell your wares to in China and how you can sell them. Chapter 12 discusses the social media and social marketing aspects of promoting your products and services in China. But what about services and supply chain improvements?
While most Westerners are under the impression that you cannot compete with China’s millions of relatively low-skilled workers, there are still opportunities in the future.
For example, as its economy has developed, wages in China have increased dramatically as well (in economics this is called the Lewis turning point ). According to Ernst & Young, “[t]he average labor cost in China has nearly doubled in the past five years, going to more than 40,000 yuan ($6,400, 4,900 euros) a year in 2011 from less than 25,000 yuan a year in the beginning of 2007.” In fact, these higher costs are forcing many Chinese firms to relocate and automation is becoming increasingly popular (see below). According to one Chinese official, nearly one third of manufacturers in provinces like Zhejiang and Guangdong (who produce textiles, shoes and garments) have relocated overseas to neighboring countries in Southeast Asia such as Vietnam and Malaysia in a move that has been called “the great transfer.” This is not to say that manufacturing on the mainland is faltering, in fact for the third year in a row, FDI reached over $100 billion in 2012 on the mainland spurred in part by firms trying to “move up the value-added chain.”
As a consequence, firms such as Hon Hoi Precision (Foxconn), which make the iPhone and other electronic devices, plan to move inland to provinces where wages are lower and install 1 million robots in their new factories and plants by 2015. For example, in 2011 Foxconn only used 10,000 robots throughout their factories yet planned to have in place 300,000 by the end of 2012. In fact, following the 2013 Spring Festival (春节), Foxconn announced a hiring freeze on the mainland where it currently employs more than 1 million workers. The company will use this time to install robots throughout their factories in Shenzhen and Zhengzhou, replacing manual labor.
In 2011, China as a whole was home to 74,300 robots, up 42% from 2010 due in large part to a collective acquisition of 22,600 robotic units. The number of industrial robots sold on the mainland quadrupled between the five years spanning 2006-2011. All told there are approximately 21 robots for every 10,000 workers on the mainland. For comparison, Japan is home to the largest number of industrial robots (more than 250,000) giving it the highest density of robots to manufacturing workers (339 per 10,000). Thus Chinese firms with robots, of which there are next to zero per capita, have a long way to go before such densities are reached. One of the reasons why the robot per capita rate is relatively low is that at 140,000 RMB to 160,000 RMB ($20,000 to $25,000) a piece, these robots (or “Foxbots” below) cost more than four times the annual salary of an assembly line worker. On the domestic side, Sun Zhiqiang is the managing director of Risong Group based in Guangzhou, Guangdong. For the past 15 years they have been developing robotic automation systems and their revenue has increased 20-fold since it was founded due in part to firms switching as a result of increased costs of human labor. This means there may be potential long-term opportunities for foreign robotic design firms, especially at lower price points.
While Foxconn plans to use domestically made “Foxbots” for some of the work, this trend towards automation provides possibilities for Western robotic manufacturers, designers and programmers to export their goods and services. All told, 80% of robots currently being used in China are imported from abroad (in 2011 imports increased 62% to 38,000 robots). For example, to improve efficiency and reduce prescription errors, many US pharmacies like CVS have rolled out automated robots in pharmacies. Similarly, companies like Philips and Tesla Motors have installed robots that help load and unload shipments from trucks, saving time and reducing physical stress. Thus firms providing robotic solutions in these segments like pharmacies and shipping may find new customers on the mainland.
Do you or does your company currently design, manufacture or maintain robotic systems? Perhaps you can find new clients in Zhejiang and Guangdong. Cities like Yiwu and Dongguan are some of the largest and most developed manufacturing hubs in China and as a consequence are areas where workers wages have also risen. In fact, because wages have doubled since 2007, the return on investment of installing a new robot may outweigh the costs of hiring relatively more expensive human labor.
A distributed decentralized manufacturing process
But what if you have a small business that already manufactures goods on a small scale? How can you compete with large OEMs?
There is a disruptive technology on the horizon and currently moving out of hackerspaces, garages and hobbyist circles called 3D manufacturing. As futuristic and seemingly science-fiction as it sounds (and barring legal hurdles), 3D printers and rapid prototypers have finally begin to mature into economically viable tools.
There are a number of ways a 3D printers can work, the most common of which now is ‘additive.’ Much like a printer nozzle lays ink, commonly used 3D printer nozzles add additional plastic layers on top of one another to build the widget. For example, using computer-aided design (CAD) software you can design a customized object like a plastic toy for your young nephew. Using relatively inexpensive hobby kits or even professionally manufactured 3D printers, you send the CAD file to the 3D printer. The 3D printer then builds this toy, layer upon layer – right in your home (giving it the nickname of “desktop manufacturing”). And as I mention below, several of these 3D printers are now sophisticated and versatile enough to build much more complex objects than your average, everyday coffee mug.
A new report from SmartPlanet suggests that 3D printing can “make global supply chains” increasingly unnecessary. The report notes that while the technology is still in its germination, maturing phase, the potential to decentralize manufacturing can save on transportation costs by completely removing the costs and time of shipping from China to the US.
For example, US-based manufactures, both small and large can now purchase relatively precise 3D printers from a number of vendors. This includes the highly acclaimed MakerBot, Fab@home and Reprap among many others. The award winning MakerBot allows users to turn CAD files into physical constructions, starting at $2199 (the top-end model is $2,799). Thus if you currently own or work for a US-based manufacturer, regardless of size, you have the potential to build and export anything from miniature toy action figures and playable guitars, to goods of all shapes and textures such as automotive parts, football cleat, artificial ears, cell phone faceplates, stainless steel dice, James Bond cars, UAVs, fuselages, microscale figurines, prosthetics, face jugs, robotic dinosaurs, civil engineering dams, houses, life-sized robots, conductive thermoplastic composites (carbomorphs), marine life models, stem cells, lunar structures and even photo booths.
This also presents a good opportunity for independent entrepreneurs looking to start-up a part-time project. For example, entrepreneurs do not even need to purchase 3D printers as they can contract the physical manufacturing process to a nearby fabrication owner, allowing the entrepreneur to simply design the product and export it to China or elsewhere. One such US-based company that already provides this content-to-print service is 3D Systems.
Other firms such as US-based Stratays will lease 3D printers and prototyping machines to users at a monthly rate. One business opportunity could be renting one of these Stratasys machines and subcontracting and in-sourcing work orders from both international and domestic clients. For example, Staples, the office retailer, will begin to integrate and install 3D printers into its printing facilities beginning in Q1 2013 making subcontracting and decentralizing relatively easier.
In terms of legal considerations, in February 2013 I spoke with Stephan Kinsella, an author and intellectual property lawyer specializing in patents. According to Kinsella, “3D printers are a disruptive innovation that will probably face substantial legal hurdles depending on the jurisdiction. 49,000 3D printing systems were sold worldwide in 2011 and even in the face of copyright and patent lawsuits I suspect that tens of thousands more will be sold. Furthermore just as bit-torrenting and encryption have enabled file-sharing as means to avoid copyright law, ultimately the prospect of 3D printing may do something similar for patents. And just as the RIAA sued Napster, patent holders will unsurprisingly fight to prevent this innovative process from occurring as Wired and the EFF have pointed out.” Wired recently showcased 10 patents that could stifle the homegrown 3D printing market and the EFF is a non-profit organization that has chronicled how patents stunt innovative advances. For instance, last November 3D Systems (noted above) sued Formlabs for patent infringement. Formlabs is a startup that plans to sell a new 3D printer based on a processing technique called stereolithography that 3D Systems claims to have patented.
Despite these legal issues Kinsella still sees business opportunities, noting that “once we have sophisticated 3D printers that can make copies of themselves like the RepRap project aims to do and are capable of printing out objects retrieved on the Internet from sites like Thingiverse via encrypted files, then patent holders will find it much harder to stop 3D printing which will lead to further proliferation and economies of scale as CAD files are distributed and decentralized globally. The traditional manufacturing business model will eventually have to change either way and since two-thirds of all 3D printers are currently made in the US, there are still several ways profit from this disruptive innovation without the need to open a factory in China. For example, any first-mover fashion trend such as designing a creative accessory (e.g., Lady Gaga-inspired purses) and being first to print, ship and sell it to a distribution channel or even to end-customers themselves. Information, which is what CAD files are, will ultimately become “free” – so to futureproof your business model, entrepreneurs should factor in this change sooner rather than later.” RepRap is an open-source 3D printer project with a goal of being able to build an identical copy of itself using everyday material (in situ). Thingiverse is a site facilitating the sharing and distribution of user-created digital files (CAD).
Just how large can such the 3D manufacturing process be scaled? On October 19, 2012, New York City mayor, Michael Bloomberg, cut the ribbon to a new Queens-based 3D manufacturing facility that will soon be home to 50 large industrial-scale 3D printers capable of producing millions of customized consumer goods. All told, Wohler’s Associates estimates that the 3D printing industry will be a $3.1 billion market by 2016. And the Consumer Electronic Association estimates that printer sales would rise to $5 billion by 2017 (up from $1.7 billion in 2011). These goods can in turn be sold domestically, or as illustrated above, sold to Chinese customers through ExportNow or a variety of other e-commerce providers.
Would Chinese consumers be interested in buying your 3D printed objects? Perhaps they might, depending on what it is. For example, in 2011 mainland toy sales increased by 18%, generating $8.58 billion in revenue. As a consequence Toys ‘R’ Us is not only expanding by building smaller brick-and-mortar stores but also stocking them with more education-focused products like toy microscopes because “[a]bout 35% of sales in existing stores in China are tied to education, compared with 21% in the U.S.” In fact, Lego, the plastic build block company, announced in March 2013 that it was building a new factory in China, its first mainland factory to cater exclusively to the Asian market; a market that has seen annual sales growth of Lego’s increase 50% for each of the past several years.
But remember, even though the Asia-Pacific region is expected to become the world’s largest toy market in 2016 and just because you make a product that is popular in the West, does not mean it will also be popular in China. For example, in 2009 Mattel opened a $30 million six-story flagship store in Shanghai that included not only the world’s largest collection of Barbie dolls but also other branded goods and services such as customized furniture and even a fashion runway. Yet the store shut down two years later in large part because Chinese consumers prefer the “cuteness” of Hello Kitty over the “sexy” blonde icon. Thus, performing market research on consumer behavior is just as important in the East as it is in the West.
Takeaway: In the US, only 1% of SMEs export and only 10% of these firms export to China. This amounts to roughly 30,000 SMEs. And odds are your company is not one of them. Yet solutions like ExportNow make it easy for any American company to export and sell their products directly to Chinese consumers online via Taobao. And because of labor arbitrage, developmental economics (specifically the “Lewis turning point”) and specialization, it is becoming increasing expensive to own, operate and scale manufacturing plants in hubs like the Pearl River Delta and Yangtze River Delta regions. As a result, US firms specializing in automation (specifically robotics designers and producers) now have potentially new sources from which to generate sales. In addition, US firms specializing in 3D printing also have the ability to disrupt and modify existing supply chains, enabling CAD designers in the US to compete directly with Chinese-made products (specifically just about anything made with plastic today).