Volume 41, Issue 5 - May 2006

China Syndrome

As China Continues to Emerge as a Worldwide Glass Industry,
US Companies are Adjusting

A USGlass Special Report
by Ellen Giard

In the game of manufacturing, if you want to win you have to play smart and you have to play fast. Customer demands require manufacturers to produce quickly and at a low cost. This “fast and cheap” mentality is most common among manufacturers of commodity products. As a way to make a lot of product quickly and at a low cost, such manufacturers often choose to shift their production offshore to countries where labor costs, for example, are considerably lower than in the United States.

Consider the tale of wood furniture producers. Their production shift to China took jobs away from furniture component manufacturers here, including the mirror industry and other suppliers of glass for furniture components. In the February 2006 issue of USGlass magazine (see page 66 in that issue), we looked at the state of the North American mirror industry. Producers said that, while the demand for mirror has remained steady, it was the change in the origin of the product that created upheaval in the business. The amount of product coming from domestic producers is declining as foreign competitors, most significantly those from China, continue to advance their industry technologies and knowledge. 

Today, as Chinese manufacturers continue to advance, more and more production is being done there and more and more products—commodities and value-added—are being imported to the United States. The country’s rapid, low-cost production is making its way into the high-end, value-added glass industry as well. Why? Simply put, the Chinese are getting smarter and faster when it comes to technology, and they have the labor, capacity, space and money to take a strong hold of the worldwide glass industry. Knowing this, all segments of the glass industry, from fabricators to suppliers, are scared.

The Chinese Glass Market
In the March 2006 issue of USGlass Jim Gresehover of Guardian Industries provided a detailed look at the composition and structure of China’s glass segment (see March 2006, page 66). Consider these points:

• There are an estimated 140 float lines (including sheet production) operating in China. Excluding China, there are 35 - 40 lines in Asia; 
• The number of float plants in China has increased continually over the past 20 years and is expected to continue as such through 2007;
• There are 20 float lines in the Jiangsu province alone; and
• The cost to start up a float plant in China is believed to be approximately one-fifth of what it costs in the United States. 

What, one may wonder, is the driving factor behind China’s 100-plus float lines and increasing glass industry growth? It all comes down to the country’s economy.

Stephen Weidner, vice president of sales and marketing for Pilkington North America in Toledo, Ohio, says China has been making huge strides to transform its economy.

“The government has loosened up its business strings; [the country] is becoming very entrepreneurial,” he says.
Pilkington has had a presence in China for several years, and has joint ventures there through Shanghai Yaohua Pilkington Glass Co. Ltd. (SYP Glass) in Shanghai. The operations of SYP are different than glass companies in the United States. The company is vertically-integrated, meaning it produces float glass and also fabricates glass products, including tempered, insulating, laminated and more. Frank Zagar, North American agent for SYP Glass, says, that as a vertically-integrated company SYP is able to keep costs low. “Another reason [for low costs] is volume,” he says. “Because of the growth in China the volume [of glass we produce] is significant.” 

He also agrees that economic growth is the main driver behind the growth of the glass industry there.

“The requirement [for glass] has led to a staggering amount of glass,” says Zagar. Another reason for the growth, he says, comes from the performance abilities of glass, be it the amount of natural light it can provide and its abilities to reduce heating and cooling costs. “The [technology] in China [used] to manufacture glass is world-class … so you have very good performance characteristics combined with a growing economy and a construction boom that’s like nothing we’ve ever seen here. There’s a tremendous demand [for glass] in China.”

Furnace manufacturer Glasstech Inc. of Perrysburg, Ohio, opened a representative office in Shanghai two years ago. Since then Jay Molter, vice president of marketing and sales, has spent a good deal of time traveling to and from China and has also seen the changes happening within the country’s economy.

“A growing middle class has created a very large market and a government policy that requires the use of safety glass and energy-saving building materials has also driven growth,” Molter says. 

James Gao, director of sales and marketing for Asia with Edgetech I.G. in Cambridge, Ohio, agrees that China’s economy is a major factor for industry growth.

“Due to the large population and fast-growing economy, the demands for both residential and commercial buildings are increasing very fast,” he says.

Fast indeed. Weidner says construction work takes place 24 hours a day, seven days a week in China.
“The construction market is growing. They are continually rebuilding cities,” says Weidner. “In Beijing there are more than 100 high-rise buildings going up. The domestic market consumes the majority of what they produce.” 

Joe Effertz, business developer for international markets with Viracon in Owatonna, Minn., agrees. 

“China is undergoing a rapid urbanization, thus creating new markets. There are now 104 cities with a population of 1 million or more versus approximately 15 cities in the United States,” says Effertz. “China saw the largest foreign investment in property development in 2005, also fueling the urbanization movement.”

Weidner adds that more and more people in China are starting to drive, leading more people to want cars. “There’s a huge potential for car manufacturers through potential drivers,” he says.

Molter agrees, “The automotive market has increased substantially and this, in turn, has had a significant impact on the automotive glass market.”

Going There for Business
For companies wishing to expand, China offers a vast number of opportunities for business growth. Many U.S. companies have ventured into the market there. 

“There are tremendous opportunities due to the size of the market,” says Molter. “For manufacturing, costs are lower in China so many U.S.-based companies are looking to lower their costs and are sourcing parts to China.”

This outsourcing of production to low-cost countries, such as China, however, isn’t always good for everyone. It’s what lead to the demise of the North American mirror market.

“For our company the [growth of China’s glass market] has had more of an indirect impact,” says Drew Mayberry, president of Lenoir Mirror in Lenoir, N.C. “Traditionally, we sold our products to [wood] furniture manufacturers; it was the furniture manufacturers that shifted their production to China. It was almost an evaporation of the market when the supply of components for furniture went to China,” says Mayberry.

Mayberry also agrees that cost has been the biggest driver behind this shift.

“Labor costs are a big expense in furniture component manufacturing,” he says, adding, “Also in China, they do not have the same environmental regulations that we do here.”

According to Weidner, China is an “untapped market” that many companies see as an opportunity for business.
“As the country becomes more modern [through growth, construction, etc.] it will require a tremendous amount of glass,” he says. “The other reason for operating in China is the relatively inexpensive labor force. China is exporting all around the globe, so numerous countries are seeing it as an opportunity for a low-cost manufacturing platform.”

Exporting to the U.S.
While some interviewed for this article say the majority of the product produced in China does stay in China, North American companies say they have started seeing an increase in the amount of Chinese glass being used here.

“China has become the largest exporter [of glass] into the United States, resulting in a large trade deficit here,” says Gao. “In order to maintain that high-level exporting business and political trade relationship with the United States, the most important foreign relationship to China, the Chinese government encourages companies to import from the U.S. when they need to purchase foreign products.”

Since China is able to offer competitive products at lower costs, some glass fabricators and suppliers fear they could start losing more and more business to the Chinese.

“I personally believe that aluminum and certain ornamental metals is where the Chinese are going to make their biggest impact relative to our industry,” said one glazing contractor who asked to remain anonymous. “We have seen some extremely large curtainwall systems come in from both China and South Korea in the past couple of years. In fact we were recently offered a job where the contractor told us that they were going to buy the aluminum and glass curtainwall system from a Chinese importer and they wanted to know if they could contract with us to provide the labor to unload, assemble, erect and caulk the Chinese system. This is a little scary, because apparently these Chinese distributors or sales reps will sell directly to the owner, developer or general contractor, throwing a whole new wrinkle into the process.”

“The push for Chinese architectural products here is getting stronger,” says one glass fabricator who asked to remain anonymous. “In the past five years the Chinese fabricators have advanced the quality of their products; it’s just a matter of time before their products are just as good as the ones here.”

Mayberry agrees that the quality of the Chinese product has definitely improved.

“With some of the early pieces [coming from China] there would be breakages from time to time and some was poor quality,” he says, adding that now their products have improved. “But we [here in the United States] taught the Chinese what our quality expectations are.”

Responding to the question of quality in the Chinese glass products, Zagar says his company’s first objective was to meet ASTM International standards. “Now we’ve meet them,” he says, and adds they are now working to exceed them. “Quality is the number-one priority.”

Likewise, Weidner says that because the Chinese learn so quickly, they are fast making the changes that improve the products they manufacture.

“Some [companies] do produce a low-quality product, but with the glass and equipment [they use] they have the latest and the greatest; some that far exceeds what we have here as far as equipment goes,” says Weidner. “Some of the products there, such as clear float glass, are as good as what we make here. It’s in the higher-end, value-added products that the quality is not as good.” He adds, though, “The Chinese go up the learning curve quickly; they learn quickly and they can exceed what we do. They won’t be inferior for long.”

Weidner continues, “There are a large number of glass manufacturers in China, but [even though they have considerable capital to produce] there is a high percentage of technology and equipment that there is not as high grade as here in the United States or the Western part of the world. That’s not to say that they are not upgrading. The Chinese have made a conscious effort to go up that curve to use Western technology.”

Michael Spellman, president of IGE Solutions Inc. in Jupiter, Fla., can attest to that, and says the level of quality produced in China is typically either very good or very bad, with very little in between. His company represents Chinese machinery and equipment manufacturers in the United States, as well as manufacturers from other countries. 

Quality Matters 
“There is a large number of glass fabricating equipment manufacturers in China making various levels of quality equipment, from very good quality to poor and cheap quality,” says Spellman. “And the reason for the various quality levels is that the majority of the glass fabricators in China don’t have a high demand from their domestic market to produce high quality glass work. So, because the demand for quality fabricated glass from China’s domestic market is so low, the quality of much of the machinery produced is also low.”

Spellman quickly points out, though, that there are a select few outstanding producers in China.

“Several glass fabricators/manufacturers [in China] are exporting where there is a demand for high quality glass fabrication, such as the United States, Canada, Mexico and Europe,” he says. “IGE Solutions started researching the Chinese market for high-quality glass fabrication equipment five or six years ago and then after a great amount of research decided two years ago to make our move toward two high-quality glass equipment manufacturers, one located in the capitol city of Beijing and the other in the south near Guanjou,” Spellman says. “Consumers should be cautious due to the fact that high-quality machine producers may also manufacture some low-quality products for their own Chinese market.”

Why Buy from China
There are many reasons why fabricators here in the United States are starting to buy equipment from Chinese producers. For one, the value of the dollar.

“In Europe the EURO presently costs $1.22, so there’s a premium to be paid just for the currency,” says Spellman. “The Chinese currency is pegged more or less to the U.S. dollar so the customer can receive a bigger bang for the buck compared to European glass equipment.” 

Another reason is the low cost of labor in China, which also keeps the equipment price low. Then, Spellman adds, are the parts that are used to make the machinery, such as the steel and motors, which are all priced as commodities.

“North American glass fabricators are buying machinery based on quality and value,” Spellman says. “Innovation is important and the next thing they will see when researching some Chinese machinery. Europeans, who currently dominate the industry, have watched the Chinese copy them and now they are watching them innovate and improve upon original designs.”

A large time zone gap, diverse cultures, a language barrier (in some cases) and a considerably lower cost to do business are just some of the factors that must be considered when operating in and with China. Business practices, policies and procedures are also very different. 

“The differences in culture have resulted in differences in doing business in China,” says Gao. “China is also still a developing country, so the percentage [of customers] who can afford high value and high-tech products is still very low.”

“There is a very unique customer base in China,” adds Molter. “Within the same market you have small private companies, large publicly-traded companies and state-run enterprises. Each company has its own unique personality that must be recognized.”
Ric Jackson, director of marketing for TruSeal Technologies in Beachwood, Ohio, says there are a number of key differences in the markets. TruSeal, which has been selling to China since 1997, works with a distributor in Beijing. 

“The most significant [difference] relates to the development, or lack there of, of enforceable codes and regulations for building materials,” says Jackson. “China is very rapidly trying to put in place energy codes and insulating glass (IG) certification programs, but still lacks the infrastructure to monitor and enforce these. Because the use of products like ours (IG spacers) is still somewhat new to residential construction, there is relatively little awareness of critical performance requirements.” He says that conventional IG has been used in China’s commercial market for many years, but is only beginning to emerge in residential construction. “This has meant many Chinese-made spacer systems come to market that do not meet standards of performance expected in other parts of the world and at very competitive prices,” adds Jackson.

A fabricator wishing to remain unidentified says he, too, sees differences in the business practices of China compared to in the United States.

“The stock market is still relatively new in China; the goal there is more to get a job and be busy because so many companies’ holding companies are state-owned … what’s good for the company is good for the state and the good of China …” he says.

“It’s different in the United States because there are more investors and stockholders involved in the projects being constructed, along with the companies themselves.” 

“In North America we have well-established business practices and laws, so doing business here is very well-defined,” says Weidner “There, some practices and laws are not as fully developed, so what we take for granted here may not be happening there.” One difference in business practices involves copyrights, patents and trademarks. In the United States, laws about such matters have always been very well-defined, but not so in China. There have been numerous instances where Chinese manufacturers of equipment, machinery, hardware and other components have allegedly stolen U.S. company patents, designs or other intellectual property. 

At the 2005 China Glass show in Shanghai Renata Gaffo, director for GIMAV, the Italian equipment suppliers group, told USGlass magazine that the blatant copying by Chinese equipment manufacturers has been an issue for members of her group. 

“It [China] is a very important market, but the problem is that in many cases the Italian companies’ machinery has been copied. The more simple machines are copied the most,” she said. “The more simple it is, the easier it is to copy.” 
Spellman says he has seen copying going on for years and not by just the Chinese. “Copying is nothing new,” he says, and is quick to point out, though, that copying is not done just by the Chinese, but has also been done by companies in the United States, Canada and Europe, against which his company has had to compete.

Patent infringement on the other hand, he adds, is a whole other case. “[Patent infringement]—that’s what’s bad,” he says.

“A breach of patent law is not as condoned as people think in China and the Chinese government is really starting to crack down.”

In fact, China’s National Intellectual Property Rights (IPR) Working Group Office in conjunction with several state offices, including the Ministry of Commerce of the People’s Republic of China, recently formulated what is being called China’s Action Plan on IPR Protection 2006. According to the Ministry of Commerce, the action plan was created to “punish and combat various infringement and other illegal activities,” covering four areas: trademark, copyright, patent and import/export. The action plan involves drafting, formulating and revising 17 laws, regulations, rules and measures relating to trademark, copyright and patent and customs protection, as well as drafting, improving and revising six judicial interpretations. 

Speaking for SYP, Zagar says he does not see the issue as one that really involves the glass industry. He says all of the equipment they use through partnerships and royalties or are licensed to do so.

Competitive Edge
So now, with a growing number of Chinese fabricators making their way into the U.S. market, improved quality and a substantially lower price tag, domestic companies are having to find other ways to keep themselves and their products competitive and on the cutting edge. Companies say the only way they can do this is by giving customers what the Chinese competition cannot.

“The only way we can compete with the Chinese is through service,” says Mayberry. “They cannot duplicate one-week service. So we focus on customers who need a quick turnaround; those who don’t buy full container loads.”
Effertz has a similar point of view. “We bring total project coordination and we build our product around the job. This is all in the way we operate our facilities,” he says. 

The competition that comes from China can be twofold, according to Gao.

“In the Chinese market we are not only dealing with good local competitors who can offer similar products [at a smaller] price, but also competition from Western countries.” He says, though, they have seen good demand for [warm-edge technology] since energy costs are a concern for China, just as they are in other parts of the world.

According to Weidner, the North American companies taking strides to think like the Chinese are the ones who will be successful.

“U.S companies have to take a mindset similar to that of the Chinese. We have to be fast and offer products and services that they do not,” he says. “We need to offer a bundled product that they can’t get locally and we have to change consistently and adapt, because they do; we have to be as nimble as they are and offer unique products and services.”

Challenges to Face
Still, as China’s glass industry continues to grow, those in the United States who choose to do business there can find themselves faced with a number of challenges. The one challenge upon which most everyone agrees involves the logistics of getting product to and from China.

“Lead times vary based on the shipment,” says Molter, “and some items can be delayed because of paperwork.” He adds that efficient customs clearance can also be a concern. 

Gao says the lead time to get his company’s product to a customer in China is about 45 days. 

“In order to ensure the salespeople there follow our directions, we have to keep in close communication with them and meet with them often.”

“You have to make sure it all [the product being shipped] gets there in one piece,” says Weidner, who explains that all logistic aspects must be considered, including the way the product is packaged and shipped.

“Lead times can be slow if the transportation is not well-monitored by a seasoned company or distributor who understands it,” adds Spellman. He says his company stocks several of the major products it sells in North America. “We keep several of our major, best-selling machines here in the United States, with others on continuous order or in stock in China.” He advises, though, when ordering a product from China that’s being shipped from China to find out exactly how and when it is being shipped.

Zagar says when shipping to the United States speed is important. He pointed out that the U.S. Office of Homeland Security has been working on a “known shipper” program to help decrease clearing times into the States.

“Those who pass can get through the ports a lot faster,” he says. “There can definitely be concerns if you’re held up in port.”

Again, considering China’s growing middle class and the country’s push toward higher quality, Jackson says the challenge will remain for North America to continue its own product growth.

“The challenge is to maintain product differentiation, as many Chinese producers imitate virtually any product that is brought into the country,” he says. One way to survive, he says, is to find a niche market that values the “made in America” product aspect and constantly promote the quality that is not available in the look-a-likes. 

“Our company is also very active with our Beijing rep office in working with associations and government bodies to try and establish better standards and monitoring of IG,” says Jackson. He adds that while China’s markets have opened up considerably over the past decade, import duties and taxes remain high and restrict imports from being truly competitive.

“Also, selling in China must involve trading companies or partners that have access to currency exchange, which also adds a layer of cost,” he says.

What Next?
As China continues its emergence as a major player in the industry, many may be left wondering, what next? Some companies worry about losing business, while others embrace the growth opportunity before them. Spellman says to expect to see more innovation from the Chinese.

“More and more are heading to the China Glass Show,” he says. “It’s only a matter of time before it’s on everyone’s calendar, just like glasstec and Vitrum.”

“China is a dynamic market and what we sell today, they will learn,” adds Weidner.

So how do U.S. manufacturers need to position themselves to stay competitive? Through service and innovation. 

“The Chinese may be able to compete on price, but service will be a challenge due to the distance between China and the United States,” says Molter. He adds, that as fuel costs continue to rise some of China’s price advantage will diminish. “China will experience increasing costs of its own as the middle glass continues to grow,” he says. 

But the bottom line is to continue to find ways to evolve.

“Continue to innovate and stay in front of the market with new technology, new products and better service,” advises Molter. 

Ellen Giard is the editor of USGlass magazine.

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