In more than nine years of doing business in China, Keith Lomason has done some things right, made some mistakes and learned a lot of hard-knocks lessons.
After it all, Lomason remains a confirmed ``China-holic,'' he said, convinced that China is the automotive place to be this century.
The executive director of Magna International, China, shared some lessons at the Automotive News China Conference in Shanghai. Lomason offered his ``10 Recommandments'' for suppliers starting or expanding operations in China.
1. Invest in China through a wholly owned subsidiary.
A joint venture with a Chinese partner is recommended only if that partner provides strategic market share. In fact, Lomason said, ``Long-term, you'll be better-served by operating for two or three years as a sales office,'' rather than rushing into a partnership.
2. Locate in a Central Government Economic Development Zone.
These areas have clearly defined tax rates and better infrastructure than most other areas. There are 55 such zones across China.
Even there, though, comparison shopping pays. Lomason displayed a table comparing the widely varying investment and operational costs for various economic development zones. In particular, he noted that social benefits as a percentage of salary can range from 25 percent in one zone to 45 percent in another.
``Social-benefits costs can have an impact on whether you really have lower labor costs,'' he said.
3. If you must use a joint venture, use one for all activities in China.
This reduces your intellectual property exposure and lowers training, engineering and other costs.
4. Quadruple your training plan.
This includes funds to bring people over to train new hires and ongoing costs because of the high turnover of staff, particularly in the coastal areas.
5. Build on undeveloped land - eventually.
``Few existing facilities will meet your needs,'' he said. Also, land costs in China still are relatively cheap but will continue to rise.
6. Go quickly.
Tax benefits for foreign investment are being reduced and may be eliminated. ``Doors of opportunity are now windows, and they are closing,'' he warned.
7. Where possible, concentrate on export opportunities.
The domestic market is fragile. Inexperienced buyers and manufacturers can cause swings in demand. In contrast, by building your business plan around known export markets, it is easier to achieve consistent economies of scale. Plus, forcing your employees to meet overseas quality requirements will prepare them for the day that Chinese carmakers insist on the same quality levels.
8. Don't forget due diligence and a business plan.
Some companies were so hasty to get into China that they forgot those basics. You need to ignore the hype and have robust business plans, Lomason said.
``Profits will be harder to come by in the future,'' he said. And prepare for consolidation. ``My guess is that 20 percent [of carmakers] will be consumed or closed over five years. The same for suppliers.''
9. Use lawyers, but don't let them slow you down.
Good legal advice is available - and critical. In particular, he recommends having solid exit or takeover clauses for joint ventures. These may be as unpleasant to bring up when negotiating a partnership as a prenuptial marriage agreement - and as necessary. Also, understand that, as in a marriage, daily negotiations will start after the contract is signed.
10. Establish a local resources group and use it.
To gain market intelligence, Lomason said, ``Local networking cannot be overestimated.''