AGCO picked Changzhou partially for its quality suppliers in the machine manufacturing industry, he said. Currently the company, which has $8 billion in revenues, spends only 3 percent of its sourcing budget in China, a proportion the company would like to ramp up to 10-15 percent. Eventually, suppliers from China and India will send their parts to the Changzhou site for testing before they're distributed to other factories around the world.
It would've been difficult to source high-value parts from China a decade ago, but the country has steadily moved up the value chain, Mr. Muhlhauser said.
“It's possible today because China has developed rapidly, also quality-wise over the last years, and we're taking advantage of that right now,” he said.
AGCO will keep costs down by hiring a local workforce, which is still much cheaper than in developed countries, despite improvements in quality.
“The cost is rising in the last 15 years, but compared to Europe and America it is still very low,” said Russell Cai, deputy director for investment promotion at the Wujin Hi-Tech Industrial Zone, where AGCO put its Changzhou factory. “The cost increase is reasonable, because Chinese people would like to improve their living environment, but the labor cost is still only 8 percent of manufacturing cost.”
Changzhou has a 16-building educational complex that provides employee training so companies have a steady stream of qualified personnel, which was attractive to AGCO.
In addition to workers, the Wujin government and the zone offered AGCO a period of free rent and exemption from sales tax and value-added taxes, Mr. Cai said.
Equally as important in the site selection process, though, was the local government's ability to relate to the western business mindset, said Andreas Weishaar, an AGCO vice president who is overseeing the establishment of the new factory.
“One of the reasons we went here is that it shows when cities or certain districts have experience with western companies, the way they deal. Generally you have that in some cities and in others you don't,” Mr. Weishaar said.
It's easier to work in zones in the Yangtze River Delta, a manufacturing hub that has long served as the engine of China's growth, but AGCO isn't waiting around for less-developed areas to reach Wujin's level, Mr. Weishaar said.
“We're also investing in places where this [mindset] isn't in place yet, but we are determined to go there and we will go there, and we're leveraging our local staff and our local knowledge,” he said.
AGCO has 15 percent share in the global agricultural machinery market, mostly in developed countries. Because of that, the company's profitability decreased by 20 percent during the 2009 recession compared to the previous year but it remained in the black, Mr. Muhlhauser said.
AGCO wants more exposure to emerging markets like China and India, he said. It has already captured more than half the market in South America. In Africa, the "Massey," short for AGCO's Massey Ferguson brand, is “synonymous with tractor,” he added.
“We are very bullish on the outlook for our industry in general and specifically for us at AGCO because we feel we are very well positioned,” Mr. Muhlhauser said.
To learn more about how AGCO's China investments will affect its Africa operations, see AGCO Executive: China Investments Will Pay Off in Africa.