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SPECIAL REPORT: Indiana companies charge into China

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HANGZHOU, China—When Gov. Robert Orr led a delegation to China in the late 1980s, he left a memento—a miniature version of the Indianapolis Museum of Art’s Love sculpture—with the chairman of Chinese auto parts maker Wanxiang Group.

In 2009, Gov. Mitch Daniels returned to China with a group that included Charles Gassenheimer, CEO of battery-maker Ener1 Inc., who met with the same Wanxiang executive, Lu Guanqiu.

China main Shanghai is mainland China’s leading financial center. (Photo/George Vlahakis)

“Dr. Lu pointed at the statue and said, ‘I have been waiting for you to come back,’” said Jeffrey Seidel, Ener1’s chief financial officer.

What resulted from that meeting was a game-changing joint venture for New York-based Ener1, whose principal subsidiary is EnerDel, the Indianapolis-based maker of lithium-ion batteries.

Under the deal signed in January, Ener1 will own 40 percent of a partnership that expects to make 40,000 battery packs a year by 2014. The packs will be manufactured at a 553,000-square-foot plant that Wanxiang is providing in this southeastern Chinese city.

China main comparison“This really opens up the Chinese market. You can’t really do that without a partnership,” Seidel said.

Many Hoosier firms are stepping up efforts to get into China, which is the world’s most populous nation and has its fastest-growing economy. China’s gross domestic product rose an average of 11.2 percent over the past five years and is widely expected to continue expanding at a rapid clip.

Experts say that while big Indiana companies long have had sophisticated China strategies, smaller firms often viewed it as a place for low-cost manufacturing, rather than as a vast new market for their products.

But with growth in the United States sluggish, U.S. companies are racing to capitalize as hundreds of millions of Chinese move into the middle class—and adopt a Western-style thirst for goods and services.

Many Chinese, especially in rural areas, remain poor. But 300 million of the country’s 1.3 billion residents now are considered middle class or upper class—and are only now beginning to spend accordingly.

“They are consuming cars, refrigerators, washers and dryers, and all sorts of other pieces of the fabric of Western society that even our generation takes for granted and our children’s generation can’t fathom being without,” said Mitch Roob, Indiana’s secretary of commerce.

“And, oh, by the way, there are a billion other people who are going to be coming into that in the next 20 years. So if you are making a product today and not selling that product in China, that probably means your competitors are, and they are going to be selling a product to a marketplace that is just going to continue to expand at 5, 6, 7, 8 percent a year.”

Mitch Roob Roob

It’s not a one-way street. Chinese companies are beginning to invest in the United States, albeit on a small scale compared with the Japanese invasion into the country in the 1980s. The biggest Hoosier deal to date: Last month, Shandong Province-based Nanshan Group announced it will spend nearly $100 million to build a 435,000-square-foot aluminum-extrusions plant in Lafayette, creating up to 150 jobs.

Don’t expect a deluge of similar deals anytime soon, though, in part because Chinese companies are focusing on their home market and don’t yet have global brands to market here, consultants and executives say.

But opportunities abound to go into China. The country welcomes foreign investment—and the know-how and business sophistication that comes with it.

Developing relationships is key, Roob said, since otherwise the Chinese might not even have heard of Indiana or known about its expertise in such areas as automotive manufacturing and life sciences.

Nanshan said its decision to build in Lafayette grew out of a meeting Daniels had with company officials when he led a delegation to China last fall. The governor also went on a Chinese trade mission in 2009. Indianapolis Mayor Greg Ballard led a delegation to the country in 2008.

“There are so many opportunities in China that it turns out that knocking on doors there actually works,” Roob said. “I generally hate the line that 90 percent of success is showing up, but in China it is.”

Mixed bag

But that doesn’t mean success in China is easy to achieve, said Ben Shobert, managing director of the Indianapolis consulting firm Teleos.

For starters, Chinese culture places heavy emphasis on “guanxi”—the building of personal relationships and connections—which slows down the process of gaining a foothold in the market. Especially key is building ties within the government, which regulates industry and owns many of the largest companies.

Then there’s the country’s highly regionalized and fragmented distribution system, which puts national distribution out of reach for many firms.

“Going to China and selling into China is too broad of a way to start,” Shobert said. “Being successful in Shanghai would be a great start.”

The issues are especially thorny for high-tech firms, which must wrestle with spotty intellectual-property protections, or even the risk that the Chinese will co-opt U.S. technology for themselves.

Especially controversial are the country’s “indigenous innovation” policies, which are aimed at helping Chinese companies address an inherent weakness: their failure to come up with ground-breaking technology

Unlike the United States, the country hasn’t been able to come up with the “monster, earth-shattering innovations that can take one in a very different direction,” said Scott Kennedy, director of the Research Center for Chinese Politics and Business at Indiana University.

Kennedy Kennedy

That’s partly because it’s in the catch-up phase of economic development, “where what is most valuable isn’t inventing some new product, but in more efficiently manufacturing things that already exist,” he said.

Even so, China is eager to move beyond its reputation as the world’s factory floor, producing low-margin, commodity products. Its leaders want to move up the economic food chain, becoming a force in higher-paying industries where the United States still thrives.

That could mean China would condone, or not severely prosecute, violations of intellectual-property laws, Kennedy said, though he noted that the government has watered down the most egregious elements of the indigenous-innovation policies.

The U.S. Chamber of Commerce is assuming the worst. In a report last fall, it called indigenous innovation “a blueprint for technology theft on a scale the world has never seen before.”

The good and the bad

Ener1 encapsulates both the risks and opportunities of tapping the Chinese market.

The company was the recipient of a $118 million U.S. Department of Energy grant, which allowed it to expand production but doesn’t ensure strong sales. China, on the other hand, is stoking demand, setting targets for cities and provinces to purchase a certain number of buses and taxis that use lithium-ion batteries.

“We are getting access to an end market we normally wouldn’t have access to, and we are seeing the demand side primed through government stimulus,” Ener1’s Seidel said.
China economy chart
But under the joint venture, Ener1 is turning over to Wanxiang its technology for assembling battery packs—potentially saving the Chinese company three years of development time.

“They are already very, very advanced in terms of cell manufacturing,” which is the more sophisticated technology, Seidel said. As for pack assembly, “you ultimately will get there. From that standpoint, I don’t have a lot of concern.”

On the other hand, he said, Ener1 carefully structured the joint venture to ensure its interests are protected. For example, he said, most matters require a unanimous board vote, even though Ener1 is the minority partner.

“We will have a very, very firm handle on how the JV grows, how it is capitalized, and what customers it is focused on,” Seidel said.

Indiana implications

How this deal, and similar moves into China by other Hoosier firms, will affect employment in the state isn’t entirely clear.

Seidel Seidel

Columbus-based Cummins Inc. is one of the success stories. It says rapidly growing sales in China and other emerging markets will fuel its hiring of 350 additional headquarters workers by next year.

In January 2010, Ener1 said it planned to create 1,400 jobs in Indiana over the next several years, most at a new production plant in Hancock County. Seidel said he thinks that estimate “is still in the ballpark. It depends on how end markets develop.”

“I think what will happen is, you might not see assembly jobs [in Indiana as a result of the China joint venture], but you might see a fair amount of expansion in R&D and process engineering,” he said.

That’s in step with larger economic trends in Indiana. The most secure jobs increasingly require brainpower and at least an associate’s degree, while nuts-and-bolts factory jobs that require only a high school diploma are disappearing.

China misc factsAnd the viable factories of the future in Indiana will employ fewer people and feature more technology, said Mohan Tatikonda, an associate professor of operations management at Indiana University’s Kelley School of Business in Indianapolis.

“A lot of people bemoan that the United States is not a manufacturing country anymore, or that all our manufacturing has been lost,” he said. “But the reality is the United States does more manufacturing now than it has ever done in the past. It simply does so with fewer people.”

Tatikonda said a classic example of a modern manufacturer is Roche Diagnostics Corp., which produces test strips for blood glucose monitors on the northeast side of Indianapolis. “They have put in place such advanced manufacturing technology that they can produce a great volume of products with high quality and high precision” with not that many workers, he said.

Rather than wishing for yesteryear, Indiana manufacturers must rise to the challenge, Roob said. The days of Hoosier workers’ earning premium pay making commodity products are gone and aren’t coming back, he said.

“We can wring our hands that the Chinese and the Indians and the others are going to whip our butt, or we can decide that we are going to create competitive products and services that meet a world scale at a world price,” he said.

“I think that is the attitude that realistically most Indiana manufacturers have taken—that it is impossible to put the genie of globalization back in the bottle, and that globalization in the main has had a positive effect on humanity and a positive effect on this country.”•

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  • essentially large U.S. corporations have lelft loyalty to U.S. workers behind
    I don't know how they expect U.S. consumer to buy their products once they have abandoned the U.S. workforce that created them. They are a bunch of cowards in the upper echelon.
  • China
    The nerve these companies have skipping out and expect us to buy whatever they make. They take away our jobs leave us hanging and expect us to accept what they do. Just to save from paying US tax. In return what about the people who made them? Gave them hours of labor and they skip out to really help another country. I say tax tax tax them if they import to the usa. Make these companies think twice about abanding us. It is wrong its greed. Answer if Americans would realize this they would let Obama do his job and we should do ours by standing by our president. We should reframe from buying products made in other countries and high tax their products so they do not profit from the move out of usa.
  • started well before Daniels
    I paid thousands of claims under the Trade Adjustment Act (TAA). NAFTA caused the exodus of jobs to Mexico and the imports from China. Indiana has lost tens of thousands of jobs well before Daniels was elected governor. Take off your specific party blinders and look at the whole picture. It does not matter what party is in charge of Indiana or the United States. Until ‘we the people’ once again become ‘we the people’ things will never change. It is up to us.
  • Special Report
    I thought the right-to-work law was supposed to keep jobs in Indiana. Did the lawmakers in Indiana sell us out again?
  • building an online chinese american platform in indiana
    Being a Chinese living in Indiana for 5 years, I have friends doing international trade business, and other rich Chinese people seeking opportunities in Midwest. Just built an online Chinese community online for Indiana Chinese, and I have added translation service to my site. visit, bbs.indyren.com, and start your adventure to interact with Chinese in Indiana
  • Is your name Rip Van Winkle?
    Sorry folks, but did you just wake up from a long sleep?...Ross Perot warned you a long time ago that NAFTA (passed during the Clinton Administration by the way, for all you folks who think the international exodus is a only a Republican supported idea...all of our Presidents since Nixon have supported this policy, or not opposed it) would be the end of manufacturing as we know it in the states, and he was ridiculed at the time...as the article says, we still manufacture as much as we ever did in the states, but it is now highly automated, and much cheaper than in the assembly line days, or it is made overseas...globalization has happened, the Unions that protected jobs are under attack from every sector, and it is a much different world...we can not go back...it will be a dire world for citizens in the future who refuse to educate themselves or acquire an in demand skill...the days of walking into a GM factory with a high school eduction and getting hired for $20-30 bucks an hour are over, and they are not coming back. All these people who are complaining don't seem to realize those days are long over...they were going to be over eventually anyway, but Nafta certainly speeded up the process...at this point you are either in the global economy, or going out of business...those of you who are complaining are trying to close the barn door 20 years after the horse left, and the company you/I worked for, the politicians you/I voted for, and the unions people paid dues to and CEO's that ran our companies were all partners in it...at this point we have no choice but to get on the global economy bandwagon. This article, alas, summarizes how American firms will have to do business in the future...all over the world...and Indiana will not tax companies for moving jobs, they will be glad to get anyone to locate here, global presence or not. I don't know why the same sex thing would matter to anyone in China by the way...they are such a compassionate government when it comes to human rights anyway, I am sure they are very concerned about your thought that they would care about your right to a same sex marriage...they are still trying to get the rural population to quit throwing their female children in the Yangtse...good luck with all that...the Chinese govt are like everyone else...show them the money...
  • Bye Bye
    I am glad you pursuaded your Chinese counter parts not to come here but the ban on same sex marriage is a good law and it will help keep Indiana as a conservative leader in the nation. How ever that ban does not have a damn thing with doing business in Indiana since you take it personally and feel it's directed at you. Indiana gives great tax breaks to big and small business and it is a family friendly state. You can own property here at a reasonable tax rate. So, I guess it's bye bye!!
  • Don't buy
    Look, all people here need to do is not buy if it's made in China, is that hard to do? I do it every day because I'm a American first, Traitor second..
  • Seriously?
    Did you guys not even read the article? THESE COMPANIES ARE BUILDING PRODUCTS HERE AND SELLING THEM IN CHINA. That is the very definition of the economic environment we want. Americans dont need billions more batteries each year - we already have plenty. These companies are bringing in revenue for the state and creating new manufacturing jobs.

    If you people stopped being so damn stupid and actually considered the issue instead of jumping immediately to them 'stealing your jobs', you'd realize this is exactly what you want. Quit with the angry rhetoric and be proud that as a state, we're finally making the right step towards the next level of our country - making products that other countries have a hard time making and selling it to them.
  • totally agree
    why don't we take care this business over here and not oversea? law makers should make the law to attract our own business growing in our own land instead somewhere out there.
    • Had enough?
      Three cheers for the NAFTA Agreement that opened up the Mexican border for us. The jobs that didn't go to China are in Mexico. In return we received all their illegal aliens. What a deal! Of course, all companies plan to bring their cheap products back across the borders and sell them to Americans.
    • Sending jobs away
      I am so sick and tired of our Indiana Gov. Mitch getting rid of the jobs here in our state to send jobs overseas. He has been the reason close so many companies have went belly-up. He is not working to get any jobs for us here in Indiana, but is always talking about jobs in China which does'nt help us one bit. It only helps the company owners get richer, by having cheap labor. I can not understand why anyone would want to see him run for president when he has ruined the job market here in Indiana, and practically helped destroy the middle class here. Mitch Daniels needs to show more efforts to find jobs for the people in state, not overseas. I'm tired of the lies !!!
      • Bye Middle Class USA
        I'm so thrilled to see that the middle class in China is swelling while the middle class here in America is slowly being bled to death by politicians and the criminals who run the crooked craps game that they refer to as Wall Street. All so long as they can profit.
      • Tax Them
        Why not place a very high tax for these investors for sending jobs to China? What happened to investing in America and keeping the jobs here?
        How American can this be to move your company to China!!! Shame on Mitch.
      • Amway gone to China
        The Chinese love Amway cosmetic and vitamin products.
        Amyway was an American Company producing In America a product for Chinese Consumers.

        Well Amway announced it is closing down its production in America and sending all the manufacturing jobs and most office positions to China..

        So whats the point. No matter what we do America loses the jobs even when the American Company corners the Chinese market...The Chinese still get the jobs...
      • Indiana hostile to Chinese business
        Just so you will know, I took a two week trip to China at the end of October 2010. I met with a number of business counterparts and informed them that Indiana was not the place in the USA to do business. I encouraged them to take their businesses elsewhere based upon a very unwelcoming climate in Indiana. I let them know that anything they heard from our Governor or Mayor endorsed trade were full of lies and that Indiana would not honor agreements made with China based companies. I also told them recently, that because of pending legislation in this state related to same-sex marriages and denial of rights to people of the same sex wanting to marry, that I was going to move my business out of the state of Indiana. Further I am in discussion with a number of other business associates to have them move their operations out of the state of Indiana as a result of the same-sex marriage ban legislation and the abortion bill that may be passed in the state legislature.
        I told my Chinese counterparts that Indiana was a very unwelcoming state and that they wouldd be better served by taking their business and operations elsewhere.
        • Jobs for America or China?
          So, basically, we are reading of another manufacturer who has gone overseas to get cheap labor. The company will prosper, China will prosper but the American worker will get very little. Eventually, the Chinese will learn the technology from Ener1, and be able to make the product cheaper than in America. What happens then? The 1,500 new employees get laid off and the whole production site goes to China? Is there a clause in there protecting the American worker from being displaced by Chinese, once their factory catches up? It just looks to me like we are to happily embrace another country going overseas for their production. How is this supposed to help the Indiana/American worker in the long run?
        • I know who is benefiting!
          Governor Daniels and all the companies that are doing business in China. China is slowly buying our country and is slowly moving into Indiana with the help of our Governor. I do not understand how reasonable people think it is okay to make jobs in China and export products to China not knowing that in reverse we are going to get taken to the cleaners. For once I want a politician that will work for Indiana companies promoting them at home right here in Indiana. Japan is a good example of what can happen when you invest all your home grown dollars overseas. Governor Daniels is the Indiana Governor? Or is he a foreign diplomat? I am a repulican but I am sick of wathcing all these indiana stores and companies go belly up. Next time you are out driving around look at all the empty shops next to Walmart. They were a US company, now they buy from everywhere for less. They bring those items from other countries under their umbrella and sell them here much cheaper elimating our small store owners and many large ones also. I know what I am saying because I am one of those small businesses that crumbled under the failed foreign plan that Governor Daniels has for our state. The media is a partner in this crime also by giving time and legitimacy to these unbelievable business dealings. China is also a communist country have we forgotten?
          • that's great jean...
            ...let's help more chinese companies take jobs away from america, very patriotic of you to suggest...hope those checks cash at the bank for ya (they're in yuan right?
          • Universities help build Chineses network
            For those interested in working with China, you may be interested in the Purdue Global Business Engagement initiative. See http://www.purdue.edu/newsroom/general/2011/story-print-deploy-layout_1_11572_11572.html

            Also, it should be noted that primary reason Nanshan Group considered Indiana was that it company is led by a Purdue graduate. Our universities are a major resource for international networking

            • oh yeah...
              â??Dr. Lu pointed at the statue and said, â??I have been waiting for you to come back,â??

              well of course the Chinaman was waiting, they've got all our jobs the Repuglican govs have helped their corporate masters ship to China during the last 30 years...and of course this has worked out just GREAT for Indiana & the US, at least if you have an Inc. behind your name!

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            1. If I were a developer I would be looking at the Fountain Square and Fletcher Place neighborhoods instead of Broad Ripple. I would avoid the dysfunctional BRVA with all of their headaches. It's like deciding between a Blackberry or an iPhone 5s smartphone. BR is greatly in need of updates. It has become stale and outdated. Whereas Fountain Square, Fletcher Place and Mass Ave have become the "new" Broad Ripples. Every time I see people on the strip in BR on the weekend I want to ask them, "How is it you are not familiar with Fountain Square or Mass Ave? You have choices and you choose BR?" Long vacant storefronts like the old Scholar's Inn Bake House and ZA, both on prominent corners, hurt the village's image. Many business on the strip could use updated facades. Cigarette butt covered sidewalks and graffiti covered walls don't help either. The whole strip just looks like it needs to be power washed. I know there is more to the BRV than the 700-1100 blocks of Broad Ripple Ave, but that is what people see when they think of BR. It will always be a nice place live, but is quickly becoming a not-so-nice place to visit.

            2. I sure hope so and would gladly join a law suit against them. They flat out rob people and their little punk scam artist telephone losers actually enjoy it. I would love to run into one of them some day!!

            3. Biggest scam ever!! Took 307 out of my bank ac count. Never received a single call! They prey on new small business and flat out rob them! Do not sign up with these thieves. I filed a complaint with the ftc. I suggest doing the same ic they robbed you too.

            4. Woohoo! We're #200!!! Absolutely disgusting. Bring on the congestion. Indianapolis NEEDS it.

            5. So Westfield invested about $30M in developing Grand Park and attendance to date is good enough that local hotel can't meet the demand. Carmel invested $180M in the Palladium - which generates zero hotel demand for its casino acts. Which Mayor made the better decision?

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