Manufacturers face unique problems in China

By Scott Malone

NEW YORK (Reuters) - China's rapid pace of industrialization presents a huge opportunity for makers of factory components and other heavy equipment, but doing business in the world's most populous country also presents a host of unique challenges.

That was the word from a lineup of top industrial chief executives who spoke at the Reuters Manufacturing and Transportation Summit in New York this week.

"It's not a place where you just show up and sell," said John Rice, a vice chairman of General Electric Co. (GE.N: Quote, Profile, Research, Stock Buzz) who serves as president and CEO of the diversified conglomerate's industrial unit.

"You have multiple points of contact and it's always important that you understand the decision-making process" with Chinese customers, Rice said, adding that GE plans to double its sales into that country to $10 billion by 2008. "It may be a little more complicated, or not as obvious as it might be doing business with a U.S. or European company."

China's surging economy -- gross domestic product is forecast to rise 9.6 percent in 2006 -- has made boosting sales of everything from electric generators to corporate jets in that country a key target for many executives at the summit.

With 1.3 billion people, China is already a major market for many manufacturers -- it's No. 2 for diversified manufacturer Emerson Electric Co. (EMR.N: Quote, Profile, Research, Stock Buzz) and on the brink of being No. 2 for Swiss engineering firm ABB Ltd. (ABBN.VX: Quote, Profile, Research, Stock Buzz), the CEOs of those companies said.

Chinese companies are investing in high-tech robotic equipment to run their plants more efficiently, partly in response to rising wages in rapidly developing markets around Shanghai and north of Hong Kong, executives said.

"There is a misperception of China and that is that the only reason they're successful is because they have cheap labor," said Keith Nosbusch, chairman and ceo of Rockwell Automation Inc. (ROK.N: Quote, Profile, Research, Stock Buzz)

"It's much broader than that, they are investing in leading-edge technologies and they're doing that to become world-class suppliers," Nosbusch said. "It isn't all about the cost of labor."

In a research note published on Thursday, Goldman Sachs analyst Deanne Dray noted that manufacturing workers in China are paid only one twentieth what their U.S. counterparts make, but wages are rising by about 8 to 10 percent per year.

UNEVEN GROWTH

Executives noted that growth in China can be uneven. Companies from China and abroad continue to pour money into factories and other businesses, the head of diversified manufacturer Ingersoll-Rand Ltd. (IR.N: Quote, Profile, Research, Stock Buzz) told Reuters.

"On the industrial side, as people continue to expand their manufacturing presence and as the local economy continues to get stronger," demand is growing by 25 to 30 percent per year, said CEO Herbert Henkel. But he said demand for government- funded heavy products is easing off, on track for a decline of as much as 5 percent this year.

The Chinese government has been trying to ease back the throttle on growth. The country's central bank raised its benchmark one-year lending rate to 5.85 percent from 5.58 percent in an effort to slow a boom in credit and investment it feared could destabilize its economy.

Beyond the threat of an economic slowdown, companies working in China also remain concerned about the risk of having their products knocked off or their ideas copied. That's one factor encouraging companies to continue investing in other developing markets, such as India.

"We have less fear of copycats in India -- actually, we have none," said Dinesh Paliwal, the North American ceo of ABB. "We do have that in China, our products get copied. We have to stay ahead all the time on technology."