[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:1
- 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.2 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).345
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.6 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.7 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 .”8 In 2012 that increased further to $196 billion and 242 million shoppers.9 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).10 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 2016.11 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).12
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.13 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.14 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.15
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 point16 ). 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.”17 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.”181920 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.”21
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 2012.22 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.23 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.24 The number of industrial robots sold on the mainland quadrupled between the five years spanning 2006-2011.25 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).2627 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.2829 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).30 For example, to improve efficiency and reduce prescription errors, many US pharmacies like CVS have rolled out automated robots in pharmacies.31 Similarly, companies like Philips and Tesla Motors have installed robots that help load and unload shipments from trucks, saving time and reducing physical stress.32 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.33 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.34
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.35 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”).36 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.37 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.3839 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.4041
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.42
Other firms such as US-based Stratays will lease 3D printers and prototyping machines to users at a monthly rate.43 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.44
In terms of legal considerations, in February 2013 I spoke with Stephan Kinsella, an author and intellectual property lawyer specializing in patents.45 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.46 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.47 For instance, last November 3D Systems (noted above) sued Formlabs for patent infringement.48 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).49 Thingiverse is a site facilitating the sharing and distribution of user-created digital files (CAD).50
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.51 All told, Wohler’s Associates estimates that the 3D printing industry will be a $3.1 billion market by 2016.5253 And the Consumer Electronic Association estimates that printer sales would rise to $5 billion by 2017 (up from $1.7 billion in 2011).54 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.”55 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.56
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.57 Thus, performing market research on consumer behavior is just as important in the East as it is in the West.58
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).
- See Opportunities for U.S. Small and Medium Business in the China Market from the American Chamber of Commerce in Shanghai. [↩]
- It is called ExportNow. I would like to thank both Eric Meng and Matt Garner for bringing this service to my attention. [↩]
- While some Western sources consider Chinese auction e-tailers to be less than trustworthy, Alibaba (Taobao’s parent company) has implemented a number of policies to improve the quality, reliability and service of Taobao. As a consequence it was recently removed from the USTR “notorious markets” list. See Alibaba Group’s Taobao Removed From “Notorious Markets” List By U.S. from TechCrunch [↩]
- Another reason to export is that the long-term potential for emerging market annual consumption is expected to reach $30 trillion by 2025. See Winning the $30 trillion decathlon: Going for gold in emerging markets from McKinsey Quarterly [↩]
- In Q3 2012, online ad revenue in China surpassed newspaper ad revenue: 14.53 billion RMB ($2.33 billion) versus 14.39 billion RMB. See China Online Ads Market: Review and Prospect from China Internet Watch [↩]
- Nearly 60% Taobao Shoppers Between 25-35 Year-old from China Internet Watch [↩]
- See Demographic Differences Are Key in Amazon-Walmart Online Battle from CBSNews. For recent data from Quantcast see Amazon and Walmart [↩]
- Wal-Mart Set to Cash In on Chinese Online Boom from The Motley Fool [↩]
- See Bezos’ Kindle-Less Amazon Mashed in China by Ma’s Alibaba from Bloomberg and China Had 564 Million Netizens By End Of 2012; Fewer Using Desktop Computers To Surf from China Tech News [↩]
- Saudi Arabia’s Kingdom Holding Invests in 360Buy Jingdong from The Wall Street Journal [↩]
- See China Now Has 242 Million E-Commerce Shoppers, Spending $40,000 per Second from Tech In Asia, E-commerce in China – Statistics and Trends from Go-Globe [↩]
- China E-Commerce Market to Reach 30 Trillion Yuan in 2020 from China Internet Watch [↩]
- Over the past three years, sales at 51buy.com “increased by nearly 20 times.” See Tencent Adjusts E-commerce Subsidiary Structure In China from China Tech News [↩]
- Walmart’s Chinese E-commerce Initiative Takes Further Shape from China Tech News [↩]
- Saudi Arabia’s Kingdom Holding Invests in 360Buy Jingdong from The Wall Street Journal [↩]
- Named after economist William Lewis, this eponymous law describes the transition from relative subsistence to a modern industrialized economy with higher wages (e.g., capital accumulation leads to prosperity which leads to specialization away from subsistence agriculture). See How to blow away China’s gathering storm from Financial Times, What Does the Lewis Turning Point Mean for China? A Computable General Equilibrium Analysis by Huang Yiping and Jiang Tingsong and The Lewis Turning Point in China and its Impacts on the World Economy by Andong Zhu and Wanhuan Cai [↩]
- The rise of the robots from China Daily [↩]
- See Economy Higher costs forcing firms to relocate from China Daily, Chinese Graduates Say No Thanks to Factory Jobs from The New York Times and What Worker Shortage? The Real Story of China’s Migrants from The Wall Street Journal [↩]
- On the other hand, remaining factories may be moving up the value chain. See Analysis: Investors make $100 billion bet on China’s drive up value chain from Reuters and China Still The Place For Manufacturing from ChinaLawBlog [↩]
- Mexico is increasingly competitive in manufacturing as the maquiladora’s in border cities continue to grow in experience and talent. See Mexico: The New China from The New York Times [↩]
- For example, Samsung is investing $7 billion to build a chip plant in Xi’an and another $1.7 billion to expand production capacity at an existing plant in Kunshan, Jiangsu. See Analysis: Investors make $100 billion bet on China’s drive up value chain from Reuters and Samsung Ups Chinese Manufacturing Investment from China Tech News [↩]
- Will your next iPhone be built by robots? from IT World [↩]
- 富士康暂停招工机器人将上岗from Sina [↩]
- Another estimate puts the increase at 51%. See Chinese robot wars set to erupt from China Daily [↩]
- Ibid [↩]
- See What’s Behind Japan’s Love Affair with Robots? from TIME and The Rise of the Machines from IEEE [↩]
- Another robot that could potentially assist both the elderly as well as manufacturers is Baxter. See Small Factories Give Baxter the Robot a Cautious Once-Over from MIT Technology Review [↩]
- The average salary for assembly line workers in Guangdong is typically around 30,000 RMB a year. See 富士康机器人上岗：每台成本14万 智商七八岁 from TechWeb [↩]
- Another estimate from Wang Tianmiao, head of the State High-Tech Development Plan is that “a typical industrial robot costs around 300,000 yuan and has annual maintenance costs of 20,000 yuan. The total layout of 500,000 yuan over 10 years is considerably less than that for a 6,000-yuan-a-month technician, and robots can work three times more efficiently.” See Chinese robot wars set to erupt from China Daily [↩]
- Ibid [↩]
- Will Robots Steal Your Job? from Slate [↩]
- Skilled Work, Without the Worker from The New York Times [↩]
- Hackerspaces are small, community owned shops typically owned, run and managed by hobbyists (like independent researchers and engineers) to allow for tinkering and education. China now has several hackerspaces including perhaps its best known, XinCheJian in Shanghai. See Created in China by Silvia Lindtner and David Li [↩]
- How Big Business is Stymying Makers’ High-Res, Colorful Innovations from Wired [↩]
- You can even used recycled plastic to refill the spool used in a 3D printer with the new Filabot which successfully completed its Kickstarter goal. See Turn Your Plastic Recyclables Into 3D Printing Spools With Filabot from Singularity Hub [↩]
- See The Desktop Manufacturing Revolution from Fast Company, Desktop Manufacturing’s ‘Macintosh Moment’ from Wired, Disruptions: On the Fast Track to Routine 3-D Printing from The New York Times and Print me a Stradivarius from The Economist [↩]
- See 3D printing may put global supply chains out of business: report from smartplanet, Mr. China Comes to America from The Atlantic, The Insourcing Boom from The Atlantic, 3D Printing and the Future of Shopping: Shapeways CEO Peter Weijmarshausen from Reason, Big Data and cloud computing empower smart machines to do human work, take human jobs from The Washington Post and What’s the Deal with Copyright and 3D Printing? from Michael Weinberg [↩]
- The New MakerBot Replicator Might Just Change Your World from Wired [↩]
- There are more than a dozen publicly released 3D printers available to consumers. See The shape of things to come: A consumer’s guide to 3D printers from Engadget and Formlabs Co-Founder Describes Their Stereolithographic 3D Printer from Slashdot [↩]
- See Completely Customizable 3-D Printed Figurines from Wired, The World’s First 3D Printed Guitar from BusinessWeek and voxeljet builds Aston Martin models for James Bond film Skyfall from 3ders [↩]
- Student Engineers Design, Build, Fly ‘Printed’ Airplane from UVAToday, Everything you need to know about the Lumia 820 and 3D printing from Nokia, Microscale 3D printing of a spaceship from Nanoscribe, Weighted Companion Cube Die – Stainless Steel from Etsy, 3D Printed “Exoskeleton” Lets a Little Girl Lift Her Arms and Play from Stratasys, Robohand: How cheap 3D printers built a replacement hand for a five-year old boy from ArsTechnica, A Simple, Low-Cost Conductive Composite Material for 3D Printing of Electronic Sensors from PLOS One, Nike launches its first 3D-printed football cleat from Engadget, Bioengineers print ears that look and act like the real thing from Chronicle Online, Recreating 19th-century face jugs with 3D scanning and printing technology from BoingBoing, Robotic Dinosaurs On the Way for Next-Gen Paleontology at Drexel from Drexel NOW, Honey, I Shrunk the Dam! from US Army Corps of Engineers, Dutch architect to build “endless” house with 3D printer from 3ders, Print your own life-size robot for under $1,000 from CNN, 3D printing: The world’s first printed plane from NewScientist, Airbus Explores Building Planes With Giant 3D Printers from Forbes, Colony: beautiful 3D prints, reminiscent of marine life-forms from BoingBoing, Edinburgh scientists use 3D printing to produce stem cells from BBC, Foster + Partners works with European Space Agency to 3D print structures on the moon from Foster + Partners and 3D Printing “Photo Booths” Popping Up Across the World from Singularity Hub [↩]
- 3D Systems [↩]
- Stratasys [↩]
- Staples to Use Mcor IRIS in Copy Centers from Fabbaloo [↩]
- KinsellaLaw [↩]
- New Industry Report on Additive Manufacturing and 3D Printing Unveiled from Wohler Associates [↩]
- How Big Business is Stymying Makers’ High-Res, Colorful Innovations from Wired and EFF [↩]
- 3D Systems Sues Formlabs and Kickstarter for Patent Infringement from Wired [↩]
- RepRap [↩]
- A free open-source repository of CAD files for 3D printing is actively maintained at Thingiverse and Autodesk recently released an iOS app called 123D Creature that allows users to design and print 3D creatures. [↩]
- See Giant 3-D Printing Factory Opens In New York City from Popular Science and Inside The World’s Biggest Consumer 3D Printing Factory from Forbes [↩]
- Next Year’s 3-D Printers Promise Big Things — Really Big Things from Wired [↩]
- Stratasys recently merged with Objet to become the largest 3D printer company (ahead of 3D Systems). See After Merger, 3D Printing Industry Has A New Leader from SingularityHub [↩]
- Domestic research and development of 3D printing is a nascent industry on the mainland. According to Wohler’s Associates, two-thirds of 3D printers sold in 2011 were made in the US compared with just 3.6% from China. See China’s 3D Printing: Not a Revolution – Yet from Caixin [↩]
- Toys ‘R’ Us Grows in China, With ‘Tiger Moms’ in Mind from The Wall Street Journal [↩]
- Lego Ramps Up Production for Asia from The Wall Street Journal [↩]
- See Why Barbie Stumbled in China and How She Could Re-invent Herself from Forbes and What do Chinese consumers want? Not Barbie from CNN [↩]
- In addition to studying the 250 million members of the emerging middle class and their shopping habits, another area of potential research involves that of the consumer behavior of only-children which may impact the sales of the goods and services from your company. See Ambition and angst: inside China’s middle class from The Times and Little Emperors: Behavioral Impacts of China’s One-Child Policy from L. Cameron et. al. [↩]