Following other Asian nations, China is moving up the technology ladder—but at an unprecedented pace. This speed is phenomenal in and of itself. However, China possesses significant advantages relative to nations that have followed this very same path.

A Compelling Mix of Strengths

China possesses a combination of characteristics that enable rapid and sustainable growth of its technology base that few other nations enjoy. These include a:

  • Strong work ethic;
  • Priority focus on education, particularly math, science, technology and engineering;
  • Large talent base of highly motivated, young, technically skilled people;
  • Tremendous financial strength;
  • Effective, centrally directed “market” economy where key industrial sectors (i.e., I.T., automotive, and aviation/aerospace) receive governmental priority funding and development; and
  • Populous nation with a huge domestic economy which affords local firms easy access to ever growing markets of increasing affluence.

Taken together and combined with relatively easy access to North American markets and new technologies, these factors make a very compelling case for continued expansion of the Chinese economy, as well as for rapid growth of its technology and industrial base for decades to come.

The Koreans, Japanese, Taiwanese and other Asian nations are leveraging this situation by investing heavily in the Chinese manufacturing sector. Their purpose is to serve the Chinese domestic market and profitably extend their home country business model there. Importantly, these investments in China also provide an often unbeatable competitive advantage: a high quality, low cost manufacturing footprint to support sales to regional Asian markets, as well as North American and European markets.

The significance of this rapidly continuing advance presents formidable challenges to North American manufacturers.

General Equipment and Machinery

Consider the general equipment and machinery business. The moat around this sector and similar businesses generally consists of product design and development, distribution channels, and after-sales service. However, these barriers are likely to be overcome by Chinese-based manufacturers within the next decade. Just look at Sany America and what its parent company simultaneously is doing in North America, Europe and India (see

If you’re in this segment, it is vitally important to move quickly to evaluate opportunities that may exist for your company in China. And it’s just as important to be able to deal with threats posed to your North American business model by these Asian competitors.

Industrial Supplies and Equipment

Quality and precision at the best North American shops typically are better than China’s best. But this gap is closing quickly. Although true, the statement “Our American-made machines will last 20 years including a 10-year major overhaul,” has little meaning and provides little comfort. At significantly lower cost, a comparable Chinese machine, that may only last five years, plus five additional years on a major overhaul, needs only to be priced at half the North American price to be performance and cost competitive. And at half price, it’s likely that Chinese competitors are making significantly higher margins than their North American competitors, and will soon be financially positioned to buy out weakened firms.

Not only are North American producers excluded from Chinese domestic markets due to relatively higher costs and thus higher pricing, they are ultimately threatened by the entry of Chinese-based enterprises into North American markets with products that offer real value and savings to customers who demand it.

The Automotive Industry

In the automotive industry, China has obtained considerable component manufacturing and vehicle assembly technologies over the past 20 years. However, although Buicks made in China were rated by GM’s Japanese importer/distributor Yanase as higher quality than comparable vehicles made by GM in North America, the Middle Kingdom still is not world class when it comes to designing vehicles from scratch. To achieve this, a very broad range and depth of engineering capabilities are required to integrate fuel economy, safety and emissions regulations, and an ability to create aesthetically appealing designs for a broad range of cultures.

Nevertheless, China has developed the industrial and technical infrastructure, and amassed sufficient numbers of skilled engineers, designers, technicians and auto industry management expertise. It also has the financial resources and is poised to quickly integrate complete new vehicle design capability into its booming domestic auto industry through acquisitions of major global auto producers (e.g., BAIC’s attempted purchase of Adam Opel of Germany from General Motors).

Aviation and Aerospace

China’s strengths in the aviation and aerospace industries are similar to those in the auto sector. China has mastered requisite manufacturing and assembly technologies, but is still high on the design and development learning curve. Plus, China is not yet perceived to have the breadth and depth of engineering and design capabilities to create complete new aircraft designs that can sell in international markets. It will, however, also at some point in the future.

Chinese industrial infrastructure and skills needed to achieve all this are quickly maturing. And today, China has the financial clout to buy an interest in Boeing, Airbus or Bombardier, as well as the technical tools to grow design and development capability in China.

China’s aviation and aerospace industrial growth and development likely will diverge from the path followed by Japan—whereas Japan continues efforts to create its own aircraft designs, that country is still largely confined to the role of supporting partner to North American and European firms.

Japanese efforts to build its indigenous military fighter also were quashed. China, with its substantial demand for commercial and military aircraft, likely will push forward to create this industry at home. In addition, it will force global aircraft makers into a much broader collaboration, and will eventually participate in foreign markets.

Establishing a Chinese Presence Could Be Essential

Those who argue that over time, China’s current competitive advantages will be diminished by logistics, increasing fuel costs, intellectual property issues, and challenges posed by North American and Chinese cultural differences, miss an important point. The domestic Chinese market is large and quickly growing. American companies that establish a presence there will have many opportunities. Plus, once a footprint is established there, U.S. firms will be positioned to leverage their North American capabilities, integrate these with Chinese strengths, and seize opportunities to rationalize design work, product development, manufacturing, and sales and marketing efforts.

Those who do not will undoubtedly miss out. Plus, they will be putting themselves at significant risk in North America.

Why? Increasingly, U.S. firms’ North American market position will likely be eroded by nimble Chinese companies, as well as by China-based competitors from Korea, Taiwan, Japan, Singapore and elsewhere.

Focus on Current Strengths

Whether or not a Chinese presence is sought, to remain competitive American industrial manufacturers should:

  1. Take advantage of China’s high precision, high quality, low cost manufacturing capabilities to source components and sub-assemblies that can be used in their North American products;
  2. Focus their North American resources on (a) fulfillment needs in the home market, while marrying Chinese component supply with North American final assembly, software and control systems, and (b) the integration of machinery and equipment into customers’ manufacturing and enterprise resource planning management systems; and
  3. Ensure they are able to offer their North American customer base greater overall value at competitive price points vis-à-vis their foreign competition.

The American Edge

Though the changing global manufacturing environment is both challenging and daunting, North American companies will continue to benefit from the competitive advantage of an open American business and social environment that encourages innovation. Plus, unlike any other country, the United States has a cultural mindset that supports all challenges to existing technologies in all industries at all times.

Thus, the American drive to innovate continually has created and will continue to develop game-changing technologies. Widespread private and public enthusiasm for the “new and revolutionary” exists at all levels of American society. And this enthusiasm welcomes global participation.

Adapting to competitive changes due to increasing sophistication of China’s technology base and growing financial prowess is vital if North American firms wish to remain one step ahead.

This article appeared in Impact Analysis, September-October 2009.

Bob Rice
About The Author Bob Rice
Bob Rice, Co-Founder and Managing Director of Trans-Pacific Management Partners, has 30 years Asia-based experience in partnership/alliance management, strategy development and implementation, M&A and joint ventures, and project management.

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