Participants
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Agenda
2.15 pm – 2.30 pm  Registration
2.30 pm – 2.45 pm  Introduction (chairman)
2.45 pm – 4.00 pm  Presentation
                                “Sourcing of machines and machine tools in China or Europe?”
                                (Mr. Seoul Min, Senior Area Manager, Kerkhoff)
                                (Mr. James Qian, Consultant, Kerkhoff)
                                (Mrs. Christine Yu, Consultant, Kerkhoff)
                                to obtain the presentation please contact Ralitsa Kanetti at rkanetti@euccc.com.cn
4.00 pm – 4.15 pm  Coffee Breack
4.15 pm – 4.45 pm  Roundtable Discussion
4.45 pm – 5.00 pm  Summary/ Outlook for janurary

Meeting Minutes

        I. Presentation on SOURCING MACHINES AND MACHINE TOOLS IN CHINA OR EUROPE?
           a summary of a market research carried out by Kerkhoff Consulting

          1. Introduction to Kerkhoff Consulting

          As a consulting company from Germany (head office has been established in 1989 in Düsseldorf) Kerkhoff can provide its clients with both experience (over 450 projects realised, amongst others in the USA, Canada, Indonesia etc., expertise in wide range of sectors) and international presence (more than 450 employees worldwide; sourcing offices in Germany, Romania, China, India, Turkey, Poland, South America, South Africa, Austria and England; regional head office in Shanghai). The group can be distinguished from others by a specialisation on procurment optimization but also by an approach aiming at not only analysis and advice but also on a concrete implementation of the suggested measures.
Therefore Kerkhoff assists the purchasing department with the realization of the projects and is also involved in training the employees with purchasing responsibilities. Since Kerkhoff also takes responsibilities in the concrete amelioration or correction of the firms purchasing situation and tries to guarantee a long-term progress, they call their service 100% measurable and point out that it directely effects the P&L (profit and loss statement) of the firm they advice.
          The company carried out this research in order to be able to advice european firms operating in china. Typically those companies wondered whether they should continue to import all machines and machine tools from Europe or start buying them on the chinese market. The machine tool market can be considered as apecial since it is relevant for most foreign enterprises in china and since a lot of changings have occurred during the last years.
          Kerkhoff defines a machine tool as a “powerd mechanical device used to fabricate machine ingots or other material components in order to get requisite geometry form, dimensional precision and surface quality” and distinguishes between 4 categories of machine tools (metal cutting, woodworking, non-traditional, metal forming).

          2. Presentation of the world machine tools market

          Observing the world machine tool market, three main market areas can be identified: Europe (the main actors are Germany, Switzerland and Italy), America (USA and Canada) and Asia (South Corea, Japan, China, Taiwan). China is after Japan (with a 10,7 billion € production) and Germany (10,4 billion) the third biggest producer of machine tools worlwide (4 billions). For their research however Kerkhoff only took in account the european and the asian markets since they are the biggest ones and most relevant for foreign enterprises in china.
          The european market on its own already covers 44% of the world production and is clearely dominated in quantity and quality by Germany, Italy and Switzerland. In order to reduce their costs however the european countries have started sourcing more and more compontents used for the production of machine tools from either Eastern Europe or Asia and sometimes even whole prodution sites have been moved there. Europe is still considered having a large protrusion in qualitiy, efficiency and technology.
Germany stands out for its large prodution which is mostly delivered to foreign countries (59%). Most german companies focus on high-end machine tools and have a more or less world-wide presence. However Germany also imports a lot of machine tools which makes the country at the same time the world’s second largest consumer and producer. Machine tools are above all used in the automative and machine construction industry.
Italy is also at the same time a big consumer and producer of machine tools with import and export quite balanced. The exports to China and India are greatly increasing. Producing above all metal-cutting and metal forming machines the italian firms also focus on high-end or at least middle-end production.
Switzerland has a leading position for high value-added products, providing highly customized machine tools which are precisely designed for a special purpose. Switzerland exports about 80% of its production, most of the imports are parts and accessories used for production.
For all three countries China can be considered as a large importer and weak exporter, buying normal and middle-end (Italy), high-end (Germany) or premium (Switzerland) machine tools from Europe and delivering above all parts and accessories which in Europe are used for prodution. However the sourcing from china is increasing rapidely. Concerning the chinese imports of machine tools one has to take into account that this might above all be european firms which are buying tools from their home countries. It is not clear how many chinese firms actually import machine tools from Europe.

          3. Presentation of the Chinese machine tools market

          The “chinese machine tool market” as refered to here is only the chinese mainland market (not including Taiwan).
Mainly traditional machine tools are produced in China (the chinese machine tool production amounting 4 billion €), the import (more than 5 billion €) concerns above all the high-end or very modern machine tools. 21% of the machine tools produced worldwide are used in China, making the country the world’s biggest consumer and importer. The export as mentioned above is still very low but increasing. The main industries using machine tools in China are the marchinery, the automative, the aviation, shipbuilding and agriculture and irrigation industries. Weakening in terms of traditional machine tools the demand from China concerning CNC (Computer Numerical Control) machine tools increases steadily since there is a lot of need for modernization. Customers in general still prefer imported tools, above all products from Germany, Japan and Switzerland have a high reputation. Although the local market improves in terms of quality, european machines are still considered better and therefore possessing them is a marketing advantage for firms in China. The local supply has been satisfying the needs of the low-end market in China for some years, nowadays machine tools produced in China are also more and more used in the middle-end machine tool market. This trend is likely to continue in the next years and chinese brands start to get their own reputation. However, they are still unable to provide high-end CNC machines or to deliver large machine centers. Chinese suppliers are still weak and depend on compontents which they import. Their productivity is low and they face hardship since most of the manufactories in China are state owned (nearly 75%) and prefer imported machine tools.
The legal regulation nowadays are preferential for the foreign-invested enterprises but equal right are likely to be granted to both sides in futur. Once the standards in terms of quality are reached, the statial enterprises might also purchase from chinese machine tool producers. An official guideline will be signed in order to support the local CNC machine tool market. Therefore by 2010 half of the market needs in CMC machine tools shall be provided by chinese producers, about 10% of the domestic tool supply shall be exported.

          4. Presentation of the second-hand machine tools market

          Since it is so expensive for chinese firms to import machine tools from Europe, second-hand machine tools are quite popular, still providing a higher quality and reputation but at a lower price. Especially Small and Medium sized private owned enterprises consider this possibility since they often can’t afford new machinery from Europe. Equally a large number of small companies are involved in trading with those second-hand machine tools. Since there is no official market and not everybody has personal contacts these companies, functioning as a link between supply and demand are in a key position. The main problems here are the non-tarrif trading barriers since there are no fixed standards for quality assessement and evaluating the safety, environment sustainability or technical standard of the machine might be problematic. Authorized documents or certificates indicating the machine’s standard are difficult to obtain. In addition to that there is no or few after-sales service and warranty, so that in case that problems occur they are not easy to solve for the chinese firms (spare parts are not produced any more, there is nowbody available to repair the machine).
Besides personal contacts action houses, trade fairs and specialized internet platforms are the main sales channels and market places. Having the right ressources and contacts this market can be very lucrativ and provide a lot of opportunities.
European firms in China should consider the possibility of buying a second-hand machine in order to use somne of its componnts as spare parts for thir own machine park, since this might be cheaper than comending directely the spare parts.

          5. Conclusion and forecast

          The import to China is expected to be stable over the next years whereas the exports from China will increase due to the huge growing rate of the loal market. Chinese producer are going to become more and more competetive and poduce more and more middle-end machines. Concerning the CNC machine tool market a large increase in Research and Development as well as in production is expected. This will be backed by a tendancy from the chinese government to put up less favorable policies for imports. Due to the increase in competition, prices for middle-end products will be reduced.
It seems to be a good choice to source general machine tools in China since the price and tarrifs are lower. Those general machine tools as well as machine tool components will continue to be the main export goods from China. Consiquentely Kerkhoff advices european firms operating in China to include qualified chinese producers into their sourcing choice for low-end and middle-end machinery. Concerning high-end machinery chinese suppliers can still be requested to send a proposal since his might enable the purchasing firm to put preasure on the price during a negociation with suppliers from Europe. Therefore one can summ up saying it is always advisable to include chinese suppliers in your choice even if you don’t plan to buy from them in the end.
Two additional points have to be tacken in account: firstely as mentioned above the european firms producing machine tools also source components from China for their production, therefore there seem to be no difference if you directely buy those tools in China. Secoundly it might be an advantage concerning the after-sales services to buy in China since chinese engeneers might be more likely to know how to repair the machine.

        II. ROUNDTABLE DISCUSSION

Q: Are the chinese producers likely to achieve the european standrads in terms of quality?
A: Not in the next years. Anyway they will not specialize on high-end and quality products but produce low-end and middle-end machines which they will be able to provide for a lower price. We have to consider that in China, the government’s decissions still have a large impact on the economic development so that all events can not be predicted.

Q: Which machine tools will be used in China in the future? Europeans or chinese ones?
A: It is advisable to use a mix in order to make use of each country’s advantages. Machines from China will always be lower in terms of price but also quality. The question is always for which task machines really have to be imported and for which ones they can also be sourced from China. You might discuss this issue with your engeneers and get their statement, where chinese products can be used. It is also possible to just import parts of a machine (a special knife), if special criteria has to be met and build the rest in China. A lot of efforts must be made in order to find out how a company can “mix” chinese and foreign products reduce its cost without giving up quality standards. It is advisable to use all advantages, the chinese market offers.

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