Design institutes were typically responsible for the technical design of all new plants in China. They specified the technical specifications of the equipment to be installed. Historically, design institutes had been part of state-owned enterprises. However, with industrial reform starting in the mid-I 980s, they were gradually separated. By 1991, most of them had become 'engin
bureaus' no longer dependent on nor directly supervised by either the industrial ministry
enterprise to which they had belonged. Finding overnight that they had to fend for thenr
had drastically changed the way they operated. Understanding the critical role the
institutes played, enterprises and industrial ministries had recently begun to rebuild their rej
with them.
SHAIC understood the critical role the design institutes played in their business. If the institute included electromagnetic flowmeters in the technical drawings and specified Sl-l the preferred supplier, the likelihood of clinching the order was greatly improved. Giver flowmeters were relatively new and Krugers advanced technology was unfamiliar to Cl customers, they typically followed the design institute's recommendations in building production facilities.
SHAIC paid particular attention to the design institutes. Understanding the critical importar guanxi6 it had spent a lot of time and effort to cultivate good relationships with the institutes (as well as with the industrial ministries and enterprises themselves where stron or influence existed). SHAIC had developed a system where it hired as 'advisors' key de makers in the design institutes (and other influential government units). It negotiated an a contract with those advisors, and if they turned out to be useful and helpful, the contrac extended. A fixed advisory fee was provided; advisors working for design institutes recei' 1 - 1.5% commission on clinched orders.
In greenfleld operations involving foreign direct investment, the Chinese design institutes p an insignificant role. Big multinationals making plant investments in China had in-I engineering bureaus which executed the plant design. These bureaus were familiar flowmeters and flowmeter technology and typically specified equipment they used in their elsewhere in the world. European multinationals such as Bayer, BASE, and Ciba-Geigy woul Kruger technology US multinationals such as Coca-Cola and johnson and Johnson and v use US technology Japanese multinationals such as Marubeni and Itochu would use Jap technology. In this area, SHAIC was often quoted by Kruger as a reliable and quality don supplier but conflicts had occurred as Kruger sales reps in Beijing preferred to import equip from outside China for US dollars. In general, however, if plant investments were pa financed in (RMB), then SHAIC stood a chance of getting orders.
Another 30% of SHAIC's orders came from instrument companies which functioned as either distributors or original equipment manufacturers (OEMs). In 1995, the average order size was four flowmeters with orders ranging from l 0,000 to 200,000. The average list price for a flowmeter was about 20,000. To help customers in their budget proposals and design institutes in cost estimates, specific list prices for all equipment had been developed. Competitors had relied on these list prices as reference points for the domestic market
The domestic order cycle was highly seasonal. Typically, no orders came in until late February or early March; in subsequent months orders picked up and would peak in July, August. or September. As of October, orders fell rapidly up to the end of the year.
The steel industry in China was dominated by very large SOlEs such as Shougang (also known as Capital Iron and Steel), Magang and Baogang, some of which had ministerial status. Steel was considered a backbone industry and was tightly controlled by the central government Because of their historical heritage, many of the steel giants suffered from a 'planned economy' mentality which came to haunt them in 1993. With their huge production capacities, they had found themselves going for wider and wider geographic penetration to get rid of their steel output. This pressure pushed them into markets where they had no contacts (or guanxi, which they relied upon primarily to develop orders) and which were dominated by smaller competitors who were more aggressive and flexible, and controlled a strong local guanxi network. With the central government's economic retrenchment programme (which primarily eyed the rapid expansion of capital construction projects by SOEs) shaking the market and steel imports driving prices down, the steel giants ended up in the doldrums short of cash and highly indebted. By 1995, for example Shougang was SHAIC's largest customer but also its largest debtor. With a continued tght monetary policy to control inflation, the central government had not allocated any funds to the steel sector.
Endemic of the mentality plaguing the steel giants was the reaction to SHAIC's 1995 request to Shougang to settle its outstanding debt By the end of 1993, accounts receivable from Shougang stood at 6.7 million. Orders continued to come in but Shougang did not pay and SHAIC stopped devering. It was at about that time (and as the triangular debt problem worsened with the tight monetary policy) that SHAIC instigated a policy of cash on delivery, unheard of in the industry at that time. To avoid having to write off the debt (which eventually happened in 1995., SHAIC approached Shougang to settle the outstanding debt with a steel delivery. However, Shougang's production and sales department could not agree on the payment in part because the size of the delivery was rather small relative to the orders Shougang was traditionally used to.
As deliveries to the steel sector dropped, drinking water became a new and promising area of application. Under the administrative control of the Ministry of Water Resources (MWR), local water supply companies had been traditionally quite independent and essentially operated local (regional) monopolies in water supply. Recently, as the central government (and MWR) became concerned about drinking water, a process of re-centralization had been taking place with the objective to bring the water supply companies under central coordination and control. Water supply companies were now meeting three times a year to exchange infomiation and discuss development plans (including infrastructure investments). Recognizing opportunities in this sector, SHAIC had bought 'speaking time' at those meetings, and had recently engaged two 'advisors' from the MWR.
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