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Corrugated Industry Study Tour to China
| BEIJING, Thursday, November 13 | BEIJING, Friday, November 14 |
AICC members arrive in Beijing BEIJING, Thursday, November 13 – Nineteen members of AICC arrived last night in Beijing, beginning a 10-day working trip through the political and industrial heart of the People’s Republic of China. The purpose of the trip is to learn, explore and understand the economic and business practices of this booming economy and to see first-hand the Chinese corrugated industry and its level of sophistication. The formal program begins today, with a planned dinner and discussion with Mr. Craig Allen, Commercial Officer with the U. S. Embassy in Beijing, a contact arranged through Hycorr Machine Corp., in Kalamazoo, Mich. On Friday, November 14, the day begins with presentations by the Chinese National Economic Commission and a visit to the China National Packaging Association. The group then tours Beijing Number One Corrugated Box Factory, a state-owned enterprise. The educational part of the program and the plant visits were arranged by Cynergy-Global, an international consulting firm with offices in Greensboro, N. C., Washington, D. C. and Shanghai. The firm’s principals are GeFei Li and Joe Carroll. Li spoke about the China situation to AICC’s 2002 Annual Meeting held last year in Toronto. As the tour progresses, AICC’s president, Steve Young, will be issuing regular bulletins and a day-by-day photo summary. Click on www.aiccbox.org/chinaprogress for daily details. Members hear of Challenges and Opportunities on First Day in Beijing The complexities of the Chinese economy, the size of the population and confounding cultural nuances were the topics of discussion for AICC’s Corrugated Industry Study Tour’s first full day in the Chinese capital of Beijing. We began with an early-morning trip to the Great Wall, where we learned effective negotiation skills from the T-shirt and trinket vendors camped out there. Later this evening we hunkered down for a business briefing and discussion session on the problems posed by China’s entry into the global economy. Even after returning to the hotel tonight at 10:00 p.m., members lingered in the lobby talking and comparing notes. The day’s discussions among members focused on one thing: the rapid emergence of China as a factor in the U. S. Corrugated industry, individual entrepreneurs can react to the effects that this emergence is having on the traditional customer base of corrugated packaging manufacturers. Bruce Janowsky, Chief Financial Officer for Jamestown Container Corp., Falconer, New York, said he was on this trip to “test his assumptions.” “Unless I came here and saw first hand what was going on here, I would just be relying on my preconceived notions,” he told me. “Better to understand it all.” Tyler Howland, Sound Packaging, said members who couldn’t make this trip “will certainly want to come on the next one – and after what I’ve learned today, there will be a next one.” Many members who are here are on an exploratory mission, not sure what they’ll get yet somehow knowing they have to be involved and that there are opportunities for participation in this enormous economy. We enjoyed an early evening business briefing by Mr. GeFei Li, Principal of Cynergy-Global. GeFei gave a feature presentation at AICC’s 2002 Annual Meeting in Toronto, where he spoke to the group via webcast hookup about the emerging Chinese economy. GeFei’s resume in the paper industry began with Sonoco, where he ran the film division in Singapore. He later came to mainland China where he oversaw Sonoco’s recycled linerboard operations. His main message to us in his briefing was that we shouldn’t be fooled by the relative lack of sophistication of Chinese industry. “The Chinese are very good at running profitable operations by efficiently using the materials and capital equipment they have,” he said. “I have seen many occasions where a small entrepreneur in the box business has outrun the investment of some of the major multinational companies.” Today, China’s newfound affection for private enterprise is changing attitudes and practices. We’ve been cautioned, however, that officially the government does not like to use the expression ‘private enterprise,’ preferring instead to encourage “a diversity of ownership structures.” Presumably this means private ownership in many industries is now allowed, except those necessary to state security – extraction industries like coal and oil, telecommunications and defense. The most important feature of the government’s new policy is that for legal purposes it considers private ownership on the same par as state ownership, worthy of equal protection and encouragement. GeFei’s presentation was the tee-up for the evening’s dinner speaker, Mr. Craig Allen, Minister Counselor for Commercial Affairs for the U. S. Embassy in Beijing. Allen, an 18-year veteran of the State Department, has been posted to both China and Japan. This is his fourth tour of duty in China in the Commercial Section. Allen gave a broad overview and perspective of the economic, demographic and political situation in China today. Some of his main points were:
But for all these forces working, there are also big problems looming, Allen said.
Allen’s conclusion was stern, but hopeful. “China’s emergence into the world economy is forcing restructuring in many areas around the world.” He cited the U. S. tool and die industry as an example of one suffering from the flood of low-cost tooling and machine parts from China. “Yet with a comparative advantage in one key component – labor – they will continue to be a force to reckon with.” Like GeFei Li, he said there were opportunities for “entrepreneurial thinkers” in China. "You have to develop a base of knowledge about this system and the economy, even if you won’t do business here directly,” he said. “You don’t have to be here in China to feel the effects.” Chinese Officials Tell Members the State of China's Economy, Packaging Industry BEIJING, Friday, Nov. 14. - The subject of China's booming economy was front and center on the second day of AICC's Corrugated Industry Study Tour to China. At a breakfast meeting on the morning of Friday, November 14, Dr. Li Ming-Xing, Director of International Research for the State-owned Assets Administration spoke to AICC members about the difficulties facing the Chinese economy and the government's ambitious economic goals. With Mr. GeFei Li serving as translator, Dr. Li told the group that the Chinese government's stated objectives for a sustained growth rate of 7-8% per year for the next eight years. Dr. Li said this is to correct the imbalance that exists in the current economy between the industrial, more affluent coastal areas, where per capita income is $3,000-5,000 per year, and the poorer interior of the country where incomes average between $500-600. In order to raise living standards - what the government is now calling the "comfortable society" - he said China needed to restructure its economic system; allow more "innovative ownership structures"; and encourage more scientific innovation. Restructuring the Economic System 'Innovative Ownership Structures' Encouraging Scientific Innovation Packaging Industry Officials Say Modernization is the Key At a meeting with officials of the China National Packaging Association, Mr. Shiu, Chairman, and Mr. Jin, General-Secretary, told AICC members that the Chinese packaging industry - at least the state-owned side of it - needs to invest in modernization and technology if it is to meet the needs of its customers, especially those owned by foreign operations assembling and manufacturing in China. Underutilization of assets is a problem in the Chinese corrugated industry, it seems, as Mr. Jin explained that the industry was running at only about 80% of its capacity. He said there was a tremendous need for more innovative investment in the industry, and he cited the opening of a "sheet plant" (sheet feeder) in the Beijing area as an example. He also said that China has recognized that its paper quality needs to be improved and he cited a major investment in Indonesia in pulp and paper mills, although he would not disclose the amount. The Packaging Industry officials echoed the previous speakers' themes of private investment, and he offered to put AICC members in contact with any of his member companies if they were interested in investment opportunities. China, recognizing the need to bring its packaging industry up to date, has just invested $1.3 billion to develop a packaging center near the city of Hongji, near Shanghai. This is an industrial park area designed to attract technology and foreign investment into China. Beijing Number One Corrugated Box Factory Mr. Wang Shuli, General Manager of the plant, hosted AICC members for a question and answer session, during which members asked about sales and their customer base. While he wouldn't disclose sales figures, he did say that the company enjoys a 13% profit margin. Ninety percent of their production goes to private customers, only 10% to state-run businesses - and that portion is shrinking. Quality expectations from international customers such as Nabisco and M&M Mars have been rising dramatically, and the plant received its ISO 9001 certification last year. Asked about his company's strong points, Mr. Wang said his management team's ability and technical expertise have made the company successful. By way of commentary, the tour of Beijing Number One illustrated to the group the Chinese philosophy that low cost of capital and low-cost labor equate successful operations. By our standards there were too many people -- I counted six manning the Emba, and there may have been more - but this is China's biggest comparative advantage in relation to the rest of the world, and they are using it most effectively. Forbidden City and Peking Duck Shanghai's Capitalist Face belies Communist Past SHANGHAI, Saturday, Nov. 15. - We arrived in Shanghai Saturday morning, aboard a packed-to-the-gills China Eastern Airlines A-300. Everything about China's largest city deals with crowds and motion and buying and selling, and the landscape here is being rapidly transformed to accommodate it all. Shanghai alone has 16 million people, and the "metropolitan area," which GeFei Li defined for us as a three-hour driving radius from city center, has an estimated population of between 60-80 million. The construction cranes compete with the buildings themselves for attention, and our guide told us that in the past seven-eight years - beginning just since 1995 - more than 4,000 buildings of 20 stories or more have been constructed in the city. The architecture is dazzling, the height dizzying and the bravado of a world-force city is on full and brash display. And while statues of Mao Tse Tung can be seen in the many "Peoples" parks, squares, plazas or corners, he and the whole of Marxist ideology are little noticed and apparently long forgotten. The contrast from Beijing is striking; as someone in the group said, Shanghai looks like "capitalism on steroids." Shanghai is the center of China's export economy. Its location on the coastal plain along the Huangpu River make it the most powerful port city in all of Asia, rivaling the tonnage of Hong Kong and Singapore. Recalling Dr. Li's talk of the previous day, more than 60% of China's economy is export driven and most of this muscle is centered in the Shanghai-Guangzhou corridor. Our purpose here is to visit some of the companies that are feeding and fattening on this stream of goods and to learn something about their operational philosophy. We've got a rich opportunity, given there are 205 corrugators and more than 2,000 so-called sheet plants in the Shanghai area producing a total of $680 million/month in sales. Long Chen Paper Co.: 100 percent recycled and looking forward to integration On Sunday, a two-hours' drive out of Shanghai brings us to Huishan District and the city of Wuxi. There, a small Taiwanese integrated paper company by the name of Long Chen Paper has acquired a formerly state-owned 100% recycled paper mill. Long Chen Paper's Taiwanese division operates a 500,000 ton per year mill and three corrugated box plants on Taiwan. Here in Wuxi, the mill's two Yeuli machine produce 300,000 tons per year - 200 in medium and 100 in linerboard using OCC culled locally and imported from Europe, Japan and North America. Mr. Chiou Jih Kuo, the general manager, told us of the next phase of his company's expansion. In 2006 an additional 300,000 tons per year of capacity will be added to this site, bringing the total to 600,000 tons. Following along this path, the company then plans to begin the addition of converting capability, beginning with at least three corrugated box companies around the country. We're now seeing the beginnings of vertical integration in the Chinese corrugated industry, where, according to Mr. Kuo, 95% of the box plants are "independent," that is, they do not own a paper mill. The Chinese government has let go of its reins on the paper industry in China, and it is one of the few where government involvement in ownership and control of production has ceased. The major problems facing Long Chen is not too much different from other 100% recycled mills: sourcing a good, long-term supply of OCC at predictable price levels. Currently he's paying about $90 per ton for the local OCC, and upwards of $135 per ton for AOCC (American OCC). The selling price is $260-280 per metric ton and $315 per short ton. He also said that it is also difficult to find well-educated workers locally, and that most of his managers have to be brought in from outside. Despite obstacles, the Long Chen Paper Company has managed to find a "sweet spot" with its customer base. The product is certainly not up to US standards, but for the local Chinese market it works. And using the formula which we're learning is the key to success in the China market, the company has leveraged its cost advantages - low cost of capital and low labor costs - to earn a decent return. Mr. Kuo is also a hospitable man, and following our tour we were hosted at a nearby restaurant for lunch, where we toasted in Chinese tradition to long life, health, and - this being Shanghai - successful business. Foreign Joint Venture and Independent Startup are Studies in Contrast SHANGHAI, Monday, November 17 - Our corrugated industry study itinerary, arranged by GeFei Li and Joe Carroll of Cynergy-Global, is offering us a birds-eye view of the Chinese industry's ownership structures and operational philosophies. This morning we ventured out into Shanhai's Pudong New Area to visit one of the region's largest foreign joint venture operations, Shanghai-Rengo Packaging Co., Ltd. Shanghai-Rengo is a ten year old project, begun when Japan's Rengo, the largest producer in Japan, acquired a 50% stake in a state owned Shanghai Packaging Co. Now the combined operation is headquartered in a gleaming new, 265,000 square foot facility, running a 2.2 meter (about 87") Mitsubishi corrugator line with A and B flute single facers. Madam Dong, the assistant to the general manager for public affairs, served as our host for the tour, explaining the plant's vital statistics: Shanghai-Rengo Packaging Co., Ltd., at a glance
Forty percent of the company's customer base are Japanese companies with direct investments in manufacturing facilities in Japan. Other customers include 3M, Unilever and Sony. In our discussion with Madam Dong, we asked about set up times on the Hamada flexo folder gluer and she reported two to three minutes. Incredulous, we ventured out onto the plant floor and watched an order change in process, and while the 2-3 minute mark was missed, we estimated 7-9 minutes for the complete changeover and color check. Once running, the Hamada machine was clocking about 14,000 clicks/hour. Yet as impressive as the technology, the speed and the housekeeping was, the reality is that this plant is not a star performer for the joint-venture partners. While we are not privy to specific numbers during our visits, the principals who host us have been candid and open about their performance. Despite the level of capital investment, this facility has not met the return objectives of the partners. Once again, the Chinese method of low cost of capital, low labor cost and efficient use of existing equipment appears to be the most effective for this very competitive market. A scrappy 'independent' Guo Jia Packing Paper Products Company, Shanghai The resume of Madam Xu Ya Li, General Manager, Sales Manager and Owner in Guo Jia Packing Paper Products Company, could easily be substituted for any AICC member. She began working as a floor supervisor in a major state-owned corrugated box company in China 23 years ago. She soon tired of that and moved into sales, where apparently she set the world on fire with her passion for customer service. Yet, as successful as she was in sales, the company didn't care about the customer and so after a lot of years she decided to venture out on her own. Three years ago, she and four other partners raised $1.3 million in start-up capital and founded Guo Jia Packing Paper Products Company. Now, with an asset value of $3 million and $10 million in sales, she's a successful, privately owned independent. She's doing well using older equipment and a lot of hand labor. She has a 1.6 meter (68") corrugator running A, B, C and E flutes, including triple and quad wall which in China is made into home furnishings such as book cases. The independent philosophy appears in everything she does. She described the "family" atmosphere among her 200 employees, spending holidays and birthdays with them whenever she can. She tells her people to treat the company not as a manufacturing facility, but as a service facility - like a hotel. That attitude has motivated and energized the workforce to perform to the level where she can guarantee an 8-hour leadtime in delivering orders. This performance standard hasn't come easily, but according to Madam Xu, the competition in the Shanghai area is so keen that she has to be a low-cost, service oriented supplier. In fact, to meet the eight-hour leadtime promise, she has taken a page from a Wal-Mart playbook and has forced her own suppliers to up their service so she can meet her customers' increasing demands. She told us one printing plate supplier in her industrial park can deliver finished plates to her within an hour, a benchmark she sets and holds if they want to retain her business. As a result of her tenacity and persistence, Guo Jia Packing Paper Products Company has just been awarded sole-supplier status for Delphi Automotive in all its five locations in China. Like independents on this side of the Pacific, she complains about rising raw material prices - her raw material averages 60-65% of her selling price - and worries that China's increasingly stringent environmental laws will raise containerboard prices even more. She thinks overcapacity is a real problem in China, and understands that technology investment is the key to her future success. Guangzhou: Historic Position Makes it a Southern Export Hub GUANGZHOU, Tuesday, Nov. 18 - Arrive at Guangzhou's City Airport and you arrive in the old China. The terminal is cramped and crowded with vendor stalls selling all sorts of commodities - fruits, vegetables, poultry, jewelry and even something over in the corner that said "Fiber Package," whatever that was. Our guide tells us that Guangzhou - known to Westerners as Canton - was always the most open of the cities in China. Its location in the south in the Pearl River delta area gave easy access to early European traders and missionaries and its commerce and outlook have always been influenced by Hong Kong, only 70 miles to the south. Because of its historic openness and its proximity to easy port access, Guangzhou was the model province for premier Deng Tsao Peng's early economic reforms in the late 70's and early 80's. Today, Guangzhou has become the center for textile and small appliance manufacturing in China. Most of these products are part of what we have learned is the "65%" export component of China's GDP. We're here to visit two operations, the state-owned Guangzhou-Yangcheng Carton Company, a corrugated box operation, and Dong-Fang Carton Machinery, a private partnership manufacturing flexographic printing equipment in the nearby city of Nanhai. Guangzhou-Yangcheng Carton: A general managers struggles under state mandates Guangzhou-Yangchen Carton Co is an older complex tucked away on a narrow street lined with local vendors. We're welcomed by Mr. Gua Ming, general manager, and we're lead into the company's second floor conference room for the formal introductions. Any regional manager in any industry could identify with Mr. Gua. He struggles daily with imposed overhead and mandates handed down by "corporate," which in this case is Beijing. Guangzhou-Yangcheng is a state owned company, and the reason we're here is to see the last vestiges of China's state-owned corrugated businesses. Mr. Gua confesses that his plant is "low-end," and he's right, but his world-brand customer base - Panasonic, Sony, Procter & Gamble and Wrigley Co. - demands a high level of quality and service and he delivers it. And low prices. Although the company enjoys annual sales of $12-13 million, he gets by on net profit of barely 1%. The reason for this, he explains, is the incredible level of competition in the Guangdong provincial area, and that the government is giving the tax breaks, import duty relief and other economic benefits to private or quasi-private competitors. In fact, he tells us that his company is the single biggest corrugated industry tax payer in Guangdong Province. If he had outside investors, he would have far greater flexibility because he too would enjoy the government's benefits. He would welcome such investors, he said, but he needs approval from "corporate" to recruit them. The company employs 400 people in a 500,000 square foot facility. There are two antiquated, narrow width corrugators, and a litho printing operation on site where they print labels for lamination to single face. The converting equipment consists of two and three color printer slotters, two of which were newer Dong Fang Machinery models. In the competitive market in the Guangdong Province, Guangzhou-Yangcheng is a low-cost producer which is successful in selling, but at low price levels and burdens imposed by the government, is barely profitable. The key point we take away from Guangdong-Yangcheng is that this sector of the Chinese corrugated market is fast disappearing, to be replaced by a more competitive and flexible private ownership. China's Corrugated Machinery Manufacturers Rising to the Challenge NANHAI, Wednesday, Nov. 19 - We round out our trip today with a visit to Dong Fang Carton Machinery Co., a privately held manufacturer of bottom print flexographic printing equipment, rotary die cutters, and flexo folder gluers for the corrugated packaging industry. Victor Tang, Francis Wu, and Gary Tseng, partners, welcome the group at the door of its six-story headquarters building. Tim Gray, Vice President of North American Sales for Dong Fang's sister company, Brausse Group, leads our tour. (Dong Fang is part of the IMG Group, a consortium of companies that include Brausse Group of Vancouver, B.C., Canada, and Klett Machinery of Remscheid, Germany.) We're briefed by the principals about the structure of the company and the products it makes. Anyone who doubts the ability of China's machinery manufacturers to produce quality equipment for the world market has not visited this facility. China's corrugated industry, largely behind the times and struggling to compete, will be a huge market for corrugated equipment manufacturers in the coming years. Dong Fang says they will sell 298 machines across all its company lines this year. Their forecast is to sell 315 in 2004, and 340 units in 2005. The equipment we'll see today is not yet sold in North America, but the Dong Fang Company will have a machine at SuperCorrExpo 2004 next year in Atlanta. Dong Fang shatters a lot of stereotypes about Chinese manufacturers. This is no sweat shop: Ninety five percent of the 300 employees live in the company living facilities with basketball courts, cafeterias and other recreational facilities. The company machines its side panels, print cylinders and other major parts, but imports gears and other components from places like Taiwan. We tour the facility and watch a print demonstration on a six-color flexo printer. The print quality is commendable, but the greater impression is that Chinese equipment manufacturers are rising to meet the growing demand in their own market and the world's. Next Week Coming Home: How can we use what we've learned?
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