May 1, 2012

Why Nanshan Came to Indiana

The Chinese aluminum extrusion manufacturer moves into a still-soft U.S. market.


LATER THIS YEAR, Nanshan America Co. Ltd's huge, new aluminum extrusion manufacturing facility, with an estimated cost of $100 million, begins production in Lafayette, Indiana. The 50-acre facility is the first significant Chinese direct investment in large-scale U.S. metals manufacturing.

In 2010, before Nanshan broke ground on the site, China had less than $500,000 invested in primary and fabricated metals manufacturing facilities in the United States, according to the U.S. Department of Commerce Bureau of Economic Analysis.

The new plant—a 600,000-square-foot aluminum extrusion manufacturing facility and testing house, and a 90,000-square-foot warehouse—will make motor and body components for the auto, truck trailer and fast-rail industries. Its 12-inch press is scheduled to come online in July, says Nanshan America president Lijun Du. The facility's 9,200-metric-ton press is expected to go live by year's end, and a casting house will be installed in 2013. A greenfield project, the state-of-the-art plant will employ 150 to 200 people.

A nice boost for the local economy. And possibly a first sign that Chinese investment in the U.S. metals market is poised to expand, says Christopher Tang, a manufacturing and supply chain management professor at the University of California, Los Angeles, Anderson School of Management.

The U.S. Department of Commerce so far is welcoming the Nanshan factory. While some see Chinese expansion here as a threat, Commerce officials “view foreign direct investment and bringing manufacturing jobs back to the U.S. as a positive thing” for the national economy, said Commerce spokeswoman Mara Lee.

There are a basket of reasons for Chinese expansion here. Primarily, of course, they get close to a large and robust North American market. Then, in addition to avoiding transportation and import costs, Chinese companies see real estate bargains in a still-limping U.S. commercial market. Add in the United States' pool of underemployed labor, its relatively strong infrastructure, and local tax incentives, and there's little reason not to set up shop here, Tang says.

To be sure, American companies can't invest in China as easily. In addition to a maze of government restrictions and often substandard or nonexistent infrastructure in China, foreign companies seeking to build facilities there have to contend with expensive real estate and labor costs that are rising 15% each year, says Tang. There's also a systemic problem with corruption and a labor force that, while huge, is unskilled in high-tech metals production.

“What we might be seeing is similar to what the Japanese did in the '80s,” Tang says, when companies including Toyota, Nissan and Sony began building U.S. manufacturing facilities. “Chinese companies are reaching out now, too. They want to become global; they don't want to just be a Chinese company.”

When Nanshan announced the Lafayette facility's construction in 2011, local and state legislators greeted the news with robust enthusiasm, citing it as a sign of an economy on the upswing.

Even competitors welcome the facility's upgraded technology as a benchmark. “The extrusion industry needs to be upgraded in the coming years to account for greater demands from many new applications,” says Patrick Lawlor, president of Sapa Extrusions North America, headquartered in Chicago. “Hopefully, Nanshan can add to that effort.”

But not everyone is so excited.

“Their capacity is significant, and you have to assume (Nanshan) is going to lead with pricing. That could drive the price down across the market,” says a source at one of the United States' larger metals producers, who spoke on condition of anonymity. “This facility could have a negative impact on everyone else.”

“A lot of people felt that this was unnecessary, particularly because other soft-extrusion facilities were operating below capacity,” says Morningstar senior analyst Bridget Freas, who tracks the metals industry. “Plus, this is still a pretty weak market, and a lot of people in this sector have lost their jobs.”

Those losses are stark: Between 2007 and 2009, nine U.S. aluminum producers closed 16 extrusion plants, while 22 producers saw prolonged shutdowns or slowed production at 30 facilities, according to a 2010 U.S. International Trade Commission report.

But the reviving automotive market has driven a steady recent uptick in American primary aluminum production, says Nicholas Adams, the Aluminum Association's vice president of business information and member services. During January, U.S. primary aluminum production was 17.7% higher compared with the same period last year. The new plant “is good for us, for the economy,” Adams says. “It doesn't really change the dynamics of the industry.”

Nanshan's president sees it a bit differently. “We believe we are 30% to 50% more efficient than our competitors, so we can offer customers better prices and service,” Du says.

To do that, the firm opened its American branch in 2007, but soon found shipping its China-made products here too expensive. By early 2010, the company began shopping for an existing manufacturing site among the numerous closed or under-producing U.S. facilities.

“But most of the facilities are old, from the 1960s and 1970s,” Du says. “We wanted to have the most advanced technology, so in October of 2010 we decided we were on our own.”

The company chose the Lafayette site because it's close to Interstate 65, within a day's drive of most of its potential customers, and it had an attractive price tag bolstered by local tax incentives, Du says.

None of which will guarantee success: Cultural misunderstanding and mismanagement can make it difficult for foreign companies to operate efficiently on U.S. soil, notes Tang. Nanshan hopes to sidestep such problems by relying on local design and labor, Du says. To ensure a Westernized talent stream, the company gave nearby Purdue University a $10 million grant last fall to provide research, training and scholarships over the next five years.

“To really embrace the global economy, I think [the United States] has to allow this kind of investment,” Tang says.

Freas remains among those who are unconvinced. “Any benefit to Nanshan is probably someone else's loss,” she says.