Orders at China's Smaller Manufacturers Remain Stable Despite Trade Friction
Miao Qi
/SOURCE : Yicai
Orders at China's Smaller Manufacturers Remain Stable Despite Trade Friction

(Yicai Global) Oct. 10 -- Smaller but competitive Chinese manufacturing firms have maintained stability in their orders from abroad despite the shadow cast by trade frictions between the US and China. Many of these companies are the sole or preferred suppliers of their American clients and they are leveraging their cost control and technology advantages to counteract the risks associated with the trade spat.

Stable Orders From the US

Aluminum castings maker Mingzhi Technology acts as the sole supplier for its American clients, some of which the company has worked with for around ten years. US clients purchase some USD5 million annually from Mingzhi and are "unable to find a replacement supplier in the short-term," General Manager Wu Qinfang told Yicai Global.

Mingzhi Technology exports the lion's share of its products to Europe rather than the US. Generally speaking, the China-US trade frictions have had little impact on the Suzhou-based company.

Hengye Auto Parts, on the other hand, has seen many more orders from the US this year. The Quzhou-based company secured two new orders from the US in 2018, one of which exceeded CNY30 million (USD4.4 million), Board Chairman Xia Tiansheng told Yicai Global.

"It is not easy for them (the company's US clients) to find a proper supplier," he said. It took one-and-a-half years for us to secure this order." Hengye's prices are 15 percent lower than those of its US clients' former supplier. The company expects total business revenue of about CNY200 million this year, a 20 percent increase compared with the same period last year, and an average gross profit rate in excess of 20 percent, Xia added.

Orders from the US contribute around 20 percent of Kaili Precision Casting's export orders and American orders remain stable. The company, based in Xinchang county in eastern Zhejiang province boasts much lower production costs than foreign companies, representing a considerable advantage. The company faced high salary costs, increased material prices and higher environmental investments in recent years, though it can still bargain effectively and business volumes have increased by 20 percent to 30 percent on annual basis.

Accelerating the Shift to Smart Manufacturing

The ability of these traditional manufacturing industry companies to protect their businesses in light of the frictions is closely related to their accelerated transition to smart manufacturing, which bolsters core competitiveness while also generating a  higher profit rate.

Mingzhi Technology's main business is high-end and complex aluminum castings' foundry, processing and assembly. The company has invested some CNY100 million to enhance production technologies, assemble a series of automated production lines and introduce a manufacturing execution system, thus taking great strides towards smart manufacturing.

Firms investing in such equipment in recent years are expected to see a return on the costs within around two years, Wu said. The replacement of human workers through automation will save two-thirds of labor costs and cut original total costs by half when compared with traditional production lines, he added. Automation brings lower costs, more stable quality controls and higher efficiency while also doubling profits.

"Given the same price and lower cost, our new workshop produced double the profit compared with the old workshop, achieving a gross profit margin of 20 percent to 30 percent," Wu said. Mingzhi's annual investment on research and development was between CNY30 million to CNY40 million in recent years, representing 5 percent to 10 percent of sales, Wu added. The company's revenue and profit annual growth this year could reach 30 percent to 35 percent.

Mingzhi Technology is not a big company, but its added value and profit margin are relatively high for the industry thank to its smart workshop. Mingzhi Technology once bid on a project from a Chinese company that had been more inclined to buy foreign products in the past. The firm soon discovered that Mingzhi offer was 20 percent lower than those of foreign firms while the products were roughly the same in quality. Mingzhi ultimately won the order, he added.

Hengye invested over CNY100 million in a new factory that entered operations in 2016. It boasted an advanced casting production line from Japan and upgraded digitalization capabilities. The new factory produces medium and high-end auto parts, enabling the company's products to enter the purchasing lists of international high-end brands.

"Japanese auto parts buyers visited our factory and felt that our production line was more advanced than that those of its domestic suppliers," Xia said, adding that the company must meet the requirements of high-end customers to attract them.

Xia attaches importance to management innovation as well as quality assurance. "Enterprises are able to continuously reduce costs by improving management efficiency," which is why Hengye possesses a cost advantage compared with competitors.

Going Global

Accelerating globalization and improving customer structure have become key priorities of an increasing number of Chinese firms, and this has become more urgent in the face of the China-US trade spat.

Having previously been mainly focused on the domestic market, Hengye has seized international market share in recent years on the back of new investments, Xia said. The company aims to secure more than half of its new orders from overseas within two to three years, he added.

Mingzhi Technology established a unit in Germany last year with the aim of manufacturing equipment and expanding its European market, Wu Qinfang said.

Kaili Precision Casting General Manager Wu Liangliang expects the company to consciously make more diversified choices according to customers' requirements as a means to boost the profit rate of products.

Editors: William Clegg

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Keywords: Oversea Orders , Business Performance , Trade Dispute , Smart Manufacture , Industry Analysis