Elevator rivals rise to the challenge
MAJOR manufacturers in China are prepared to fight for a slice of the elevator and escalator market expected to reach 40,000 units annually in 2000.
The manufacturers are already facing mounting competition as prices of new equipment and labour costs rapidly escalate in the industry.
Each manufacturer has drawn up strategies to ensure it is ahead in the race, especially against rival manufacturers moving over from Europe and North America.
Making a sale of an escalator or elevator in China is not as difficult as collecting the payment for the product - the hardest part of the deal on the mainland, experienced dealers in the China market said.
As the number of companies defaulting on payments has grown in the past few years, the Schindler group, the leader in escalators and second largest elevator maker in the world, has taken stringent action to prevent this from happening to them.
Over the past two years, the Schindler group has required clients in China to make a downpayment or progress payment before shipping them the product.
Schindler president for Asia Pacific Werner Kummer, who stressed the group did not face a lot of bad debts in China, said clients were also asking for better services, improved performance and were also better educated.
'We expect for the coming years profits to be maintained, but we have to be more competent,' he said, adding the group's strategy for the future was to build up local sources of raw materials and products.
'For Southeast Asia, we are considering building up our own factories and our plans are very well advanced,' he said.
Mr Kummer said the value-added tax and other taxes had not made a 'dramatic impact on profits'.
'There are rumours and from the preliminary information we cannot confirm the impact on products and export of products out of China.
'We hope the situation will not change from today,' he said, adding its products were sold in China, Malaysia, Thailand, Singapore, Hong Kong and Australia.
Mr Kummer said Schindler had about one third of the market share of escalators in China. 'Out of three escalators sold, one comes from our factory,' he said.
He said it was difficult to give an exact figure but estimated demand of 3,500 escalators and 25,000 elevators in China this year alone.
'Our expectation is that the market will continue to grow but not in a linear way,' he said.
Schindler's newly opened, wholly-owned factory in Suzhou, the Suzhou Esca Step Company, is expected to produce 10,000 steps for escalators this year for the group's three other factories in China, and also serve third parties in the escalator industry. The new plant will produce more than 100,000 steps a year in the first phase.
Pier Luigi Foschi, Otis senior vice-president for Pacific Asia Operations, said Otis' strategy in China, among others, was investment in expensive technology despite the presence of cheap labour in the mainland.
'The workforce [in China] today is not expensive but it is going up fast between 20 to 22 per cent per year,' he said, adding that as a result the cost of doing business in China was also increasing.
'People tend to fill capacity and price products not knowing market conditions,' he said.
Otis went through the learning curve in China and others had to go through the same process to do business in the mainland, he said.
New companies opening up in China often resorted to luring experienced and trained people from existing elevator and escalator companies by paying them a much higher salary such as a 50 per cent rise, Mr Foschi said. These companies could afford to pay such high salaries as they did not have to bear the cost of training these people, he said.
Mr Foschi said this sort of competition pushed up the cost and that was why Otis had been investing in high technology despite the existing cheap labour.
Otis, which handles about US$300 million worth of elevator and escalator business a year in China, is also investing more than US$3 million in a training centre in Tianjin to meet the manpower needs of the group in China. The company also has a smaller training centre in southern China.
Despite the competition, Mr Foschi was optimistic that Otis would be able to cope due to its strategies already in place.
Mr Foschi said Otis, which held about one quarter of the market share in both the escalator and elevator business in China, was more concerned about market size.
'As there are fewer projects, the market is smaller and each manufacturer depends on his own share,' he said.
Otis had invested in machinery and management tools to provide first class products to customers and to create a cost infrastructure even if modern China continued to push up prices, he said.
Mr Foschi said Otis' strategy was to assist the central government in its long-term policy to develop the interior and western areas of the mainland rather than the coastal cities.
He expected development to take place along the Yangtze river up to Sichuan province, and also the cities in northeastern China embracing Manchuria.
So only time will tell whether the strategies of these companies will bear fruit.