New markets, new problems
By Ed Sperling, Editor in Chief -- 5/18/2007
Greg Frazier, executive VP of worldwide supply chain services at Avnet, and Skip Streber, VP of global marketing at Arrow Electronics, sat down with Electronic News/Electronic Business to talk about doing business in developing markets. What follows are excerpts of that conversation, recorded in front of a live audience at the Electronic Distribution Show in Las Vegas this week.
Q: We tend to look at China as one country, but it’s really more complex than that. How does it look from a distribution standpoint?
Streber: It breaks down in four big chunks—northern China, central China, southern China, with Hong Kong as an adjunct to southern China, but also as a market unto itself. What that means for doing business in China is you have to understand who the political leaders are, who the business leaders are, and what the relationship requirements are. Everything is not governed with an iron fist out of Beijing. You need to have relationships with each of the regions. Customer bases tend to be different between regions, as well.
Frazier: We’re also starting to see competency changes, similar to what we saw in Latin America. On the border towns, you’re seeing wages increase. Employee loyalty is at an all-time low, because everyone is moving there and getting a job is one of the easiest things you can do. The interior is more stable. You can compare that to Guadalajara [Mexico] being more stable than the border towns. It’s still very localized in a lot of ways.
Q: The coastal towns in eastern China are relatively well developed, though, right?
Streber: If you were airlifted into Shanghai, aside from the road signs and the people you could be in any Western city in the world relative to infrastructure, capability, and the elements of city living. They’re all there. But one of the unintended consequences is wages continue to rise. This whole notion of, ‘It’s a lot cheaper there,’ isn’t true. While it’s still cheaper, it’s not a lot cheaper. That’s why people continue to move west, whether it’s out of Hong Kong into Shenzhen, or even further west where labor costs are even lower.
Q: Eastern China had possibly the fastest increase in wages in history.
Streber: They had a gross domestic product growth in the 8 to 10 percent range, and that’s because they’re controlling it. It would probably be higher if they let it go.
Frazier: First of all, you have to determine if you really need to be there. As the infrastructure gets better and better, the ability to ship from larger warehouses is something both Avnet and Arrow want. The fewer warehouses, the higher the quality for all the reasons we consolidate warehouses in other parts of the world. But first you need to determine if you need to be there.
Q: Does that mean leveraging off the infrastructure you’ve built up in other parts of China?
Frazier: Yes. It’s a question of what you really need. We have 24 sales offices in China and maybe five or six warehouses. The warehouses are in places like Shanghai and Shenzhen and Suzhou. As you move further in-country, we have to determine if a sales office is enough, with support from other warehouses, or do you need a local infrastructure? And if you need a local infrastructure, do you build it, buy it or partner with someone else?
Q: Do you have the same capabilities within China as in other parts of the world?
Streber: Yes, but in China you have to think about the legal ramifications of moving inventory.
Q: You mean between provinces?
Streber: Yes. One of the great benefits of the U.S. Constitution is interstate commerce. If you bring product into a free-trade zone in China, and you decide you need that inventory someplace else, it’s not as simple as just shipping it here. You need approval to ship it. It’s generally more convenient for us to keep U.S. dollar-based product in Hong Kong, because you can ship it anywhere in China. If you bring the product in for local consumption, you bring it in using RMB, the local currency. Then you have to pay a 17 percent [value-added tax.] When you think about the infrastructure, there are barriers. They’re not insurmountable, but they have to be understood. It’s time and distances, as well as trade law.
Q: One of the markets we’re hearing a lot about is India. What are the challenges there, and what’s the difference with distribution in India versus China.
Frazier: The infrastructure is one of the reasons you see call centers and software as opposed to massive manufacturing. The talent pool is very high, but the ability to move things around is not. We’re spoiled. You can move things from the tip of Nova Scotia to the bottom of Mexico overnight with almost no problems at all. In other parts of the world, that doesn’t exist. Our strategy for India was expressed eight or nine years ago, when we made an acquisition of Max India. We want to be in India, but you have to wait for the infrastructure to mature. Some of the large contract manufacturers have either made acquisitions or they’re talking about greenfields there. It’s going to be slower than China. China exploded, but the government helped that. People are saying 1.5 to 2 years, but they said that 1.5 to 2 years ago. It’s going to be a very attractive place to manufacture. When people talk about moving manufacturing, it usually boils down to two things. If they’re moving it just for cost, they can go anywhere in the world—Vietnam, Thailand, Eastern Europe. But if one of the strategies for going there is to penetrate a market, you have to go to India or China. If you penetrate the Vietnam market, what do you get, versus penetrating the Chinese or Indian markets?
Streber: We have five locations in India. We’ve been there a long time, as well, mostly to support an indigenous business. Up until now, it has not been a major exporter. But it’s clearly a matter of when, not if. We believe the government wants this to happen, but it’s not like Singapore or China. They’re not funding it.
Q: You mentioned Vietnam and Thailand. How do those markets compare to India and China for setting up distribution operations?
Streber: That whole region is known as ASEAN (Association of Southeast Asian Nations). It’s Singapore, Thailand, Malaysia, Vietnam. It used to be that Singapore was the center of the world for that. It wasn’t long ago that we shipped from Singapore to India. But as the manufacturing expanded into Malaysia, either [Kuala Lumpur] or Penang, we grew with them. It’s easy to deal with them. The Japanese manufacturers, whether it’s Sony or Matsushita, also outsource into Asia.
Q: Isn’t Asia for Japan what Mexico is for the United States—the lowest-cost manufacturing with proximity to the largest economies?
Streber: Yes. But culturally it was a difficult step for Japanese companies. North America said, ‘This is a good idea because no one wants to spend $1,000 for a DVD player.’ Japan took longer. All Sony Playstation 3s for our consumption were made in Japan. They’re currently being built in China. That’s fueling that market growth. It’s not just a Western transition. It’s also a transition for Japanese companies.
Frazier: The Japanese companies take a different approach, as well. A lot of them are not only using contract manufacturing, they’re establishing their own plants. They’re wearing a belt and suspenders. If something happens with the EMS providers, they’ll be able to make their own. Not everybody is doing that, but there are a percentage of companies that are establishing both.
Q: Does that make it easier to crack the Japanese market?
Streber: We have two different strategies. About nine years we created a joint venture in Japan with Marubun. It’s a 50-50 joint venture. Marubun provides the customer relationships, the demand creation support. Outside of Japan Arrow provides logistics, office space, warehousing, IT support. And together we put people on teams. It’s 75 percent in Asia, 25 percent in North America, but it’s a reasonably successful enterprise in tracking the migration of business. We split the profits.
Frazier: In the early ’80s, we had a greenfield attempt in Japan that was wildly unsuccessful. The acquisition of Memec brought to us a business that Memec had started in Japan.
Q: But going back to the question, does the expansion of Japanese companies out of Japan make it easier to do business with them?
Frazier: It’s still the most difficult market to penetrate. You work at it and work at it on both ends, but it’s still very difficult.
Streber: In most of the world the customer decides who is going to get the order. In Japan, it’s still the supplier.
Q: Given some of the constraints we’ve talked about in Asia, is doing business in Eastern Europe getting easier now that some of those countries are being accepted into the European Union?
Frazier: As each one becomes part of the EU, it becomes easier for that particular one. Quite often, one becomes a member of the EU and then manufacturing will shift. Three or four years ago, we partnered with DHL because we had no infrastructure in Eastern Europe. With each of them joining the EU, it’s that much easier to do business.
Streber: More and more customers are looking for proximity, as well, so you have to support that, too. It’s a little bit of a reversal from centralizing everything. You have to be flexible. What also happens is a company builds a product in Hungary for six months and then decides to move it to Penang [Malaysia]. They tell us, ‘And we’d like you to take the bill of materials, the backlog, and we’d like you to start Tuesday.’ You have to be that flexible.
Frazier: If you can keep the material someplace where it’s easy to get into and out of, you’re way ahead of the game. If your material is stuck in Brazil, it’s hard to get stuff out of there.
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