1. The Influence of Entry into WTO upon Chinese Paint & Coatings Industry

    The influence of entry into WTO upon Chinese Paint &Coatings Industry will be shown in two aspects: One is the direct influence generated by downward tariff; Another is the further influences caused by gradually opening up of markets, trade and service operated under the rules of market economy which should be in line with the arrived multilateral agreement under the principle of WTO.

1.1 Influence of Tariff-cutting down

    As specified[1], the preferential tax ratio of the most imported coating is 15%, and that of the raw materials used for paints, such as solvents, pigments and resins, etc. is 9%-16%. According to tentative tax ratio for imported goods in 2000, there is no evident changes except a few of raw materials, e.g. the preferential tax ratio for rutile titanium dioxide powder in 2000 is 14%, its tentative tax ratio is 4%.

    From table 1, it is shown that the imported coatings is ,by weight, 10% of the total production volume and the exported coatings is 5% by all. The average price for exporting is 1,479 US$/t and for importing, 2,034.3 US$/t. The import price is 37.5% higher over the export prices.

    Otherwise, the amount of import is not large in volume in Chinese market, even though the tax ratio for importing cutdown to 7.4% eventually, the price of imported coating has not shown an evident advantage. Considering the existing coating industry, most of the imported coatings are high- quality products, including antomotive coatings, auto refinish, architecture coatings,special coatings, furniture coatings and so on, while the exported coatings are mainly ranked as medium or lower-quality products. The former enters into Chinese market generally by its higher quality while that latter go out into the world market by lower price strategies. After China's entry into WTO, because of more channels for importing, less procedures, those high-quality coatings, such as car refinish will be affected mostly, which have a gloomy impact upon the relevant domestic enterprises and therefore, increase the difficulity for R & D and market development. In addition, it will show a positive influence on coatings, but there are lack of well-known brands of products in the world market, the positive effect can not be seen in a short period of time. According to the analysis of the tax ratio of raw materials, if the tax ration of TiO2 in 2000 after entry into WTO cuts down to 6% and the tentative tasx ratio of TiO2 powder is 4%, it is benefit from Chinese paint & coatings industry with the average level of tax-cutting is up to 8%.

Table 1
Statistics on Imported Coatings and Total Output in China(1996-1998)

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    Generally speaking, advantages will overbalance disadvantages in the field of paint & coatings industry after China's entry into WTO, if only consider the influence of tax ratio, because the medium or low-quality coatings are less influenced by transportation and delivery channels which otherwise give an effect upon the high-quqlity coatings. Nevertheless, such influence is limited recently, but will become stronger in the future, which is due to a very high cost of delivering. As for paint &coatings industry, the principal impact is not caused by the flooding of foreign goods with the downward tariff, but generated by the systems of investment, service quality and marketing operation.

1.2 Influence as Carrying on the Rules of WTO

    Paint & coatings industry is a traditional manufacturing industry and palys a minor role in national economy. It can not directly gain benefits from the given preferential treatments when China enters into WTO as a member of the developing nations, and possible protection during the period of protection over automobile, electics, agriculture, finance, ensurance and telecom, etc. On the contrary, it will be faced with more pressure. Besides the direct influence resulted from downward tax ratio mentioned above often access into WTO, the further influence is that we must strictly fulfill many basic principles of WTO, such as the most-favoured-nation treatment, national treatment, reciprocal trade, adimission into market, promoting fair competition and trade ,encourage to development and economic reform as well as transparency of trade legislations, among which the fundamental principles are those of the most-favored-nation treatment and national treatment which are composed of a number of multi-outlet treaties. That is to say, the insides should be in accordance with the outsides. The principle of transparency will play an important rule in the field of the fair trade and competition. The coatings industry in China will face the competition with foreign-owned enterprises under the same systems of laws and legislations. And there are two main influences: First, the foreign-owned enterprises can establish sales distribution channels in China and prvide more directly services for coatings trade. With their excellent reputation, effective management and powerful capital, their distribution cost can be reduced and improves themselves in competition with any other large-scale enterprises for regional market; second, in view of the foreign patents of coatings coming into work in China earlier than their products and less awareness of the importances of patents in China, Chinese enterprises may face more difficulties in technological innovation and become passive in development strategies while foreign firms can get benefits as carrying on Intellegent Property protocol Related to Trade and our Patent Law.

    Although negative effects exist in those influences mentioned above, there are still many advantages in terms of long-term development, such as promote the innovation in paint & coatings industry and enforcement of competitive ability. The most important is how to utilize the experiences which facing the coating giants and their products. We should grasp the opportunity to deepen the reforms by ourselves and enforce our competitive ability. During the last two decades of reform and opening up paint &coating industry has made great progress in products quality, management and service rather than crashed as facing the worldwide coating giants.

2.Curent Situation and Challenge for Paint & Coatings Industry

2.1 General Review

    Paint & coatings industry generally belong to the sector of manufacturing and service, which has a close relation with other various national economic sectors , and people's daily life as well. Because coatings are generally not used as main materials in aspects of functions, they only play a minor role in national economy. However it is one of the accessible industries and therefore, at the beginning of reform and opening up the foreign products, technologies and capital can enter into China ealier. There have been up to thousands of enterprises, including township enterprises, privately owned enterprises and the rapidly developing non-state enterprises as well as the key state-owned enterprises, which resulted in the growing of the coatings production volume from 1 million tons in 1980 to 2 million tons in the year 2000, which ranked NO.3 in the world. But the per capita consumption of coatings in China is only about 1.5 kg,compared with 15kg in developed countries. There is still a great potential market in China. In view of the position of paint & coatings industry in national economy, it goes without any protection policies and so market competition become very sharp and will be sharpe after access to WTO. It is clear that the paint & coatings industry in China has already faced the worldwide competition, Now, the top 10 coatings manufacturers in the world have entered Chinese market with their products and technologies. In addition, dozens of raw material manufacturers,medium or small-sized coating enterprises and relevant enterprises from foreign countries also entered Chinese market. However, Chinese paint &coatings industry still maintains strong, which gives us an optimistic attitude towards entry into WTO. Although we have successfully delt with partial pressure resulted from access to WTO, if we make a careful analysis, great innovation must be taken as facing the international competition.

2.2 Small-Scale, Less Intensive and Poorly Profitable Paint & Coatings Industry

    During the last 20 years of reform and opening up, paint & coatings industry has expanded rapidly with its production capability up to 4 million tons per year, but the average production capability is less than 1,000 tons/a; estimating it by sales of 2 million tons, the average production volume is less than 500 t/a. From the economic statistics [4] on 40 odds backbone enterprises in 1999 by China National Paint & Coatings Industry Association, the top 6 profitable enterprises are : Shanghai Huashen; Shunde Huarun; Tianjin Dengta;Shanghai Tuliao; Zhejiang Tiannu;Zhejiang Huanqiu. The total sales amount of the six enterprises in 1999 was 175.6 thousand tons and their sales revenue was 2.18 billion RMB; The average unit price was 12.4 thousand RMB(Table 2); The productivity was 20.7 tons pen year per person (269 thousand RMB per year per person). These figures represent the higher levels in coating industry in China. The top 10 worldwide coating companies are listed in Table 3.

Table 2
Six Best-Profitalbe Domestic Coating Enterprises in 1999
(40 Backbones in List)

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Table 3
The Top 10 Global Coatings Companies [6] in Sales Revenue(1998)

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    It is found that the total sales volume of the top four enterprises is 134.4 thousand tons from Table 2, which accounts for only 6.72% of the total and shows the highly separated Chinese coating market. The sales revenue of the biggest domestic enterprise is only 0.613 billion RMB which accounts for only 5.9% of that of the 10thworldwide company. In a word, All domestic enterprises fall in the passive situation.

2.3 Low-tech Enterprise, Urgent Adjustment for Product Structure.

    Many key enterprises can be also called small-scale and full-item ones characterized by their 16-18 categories of products available. For example, they produce pigments, resins, even solvents and coatings. But the products lack advanced technology and systematic control. These are no key products that show strong competitiveness in market and consequently the only way of competition is price war. However, foreign-owned enterprises and outstanding non-state enterprises are out of question. Statistics[4] shows that average price of the 38 backbones in 1999 was cut down by 8.7% over that in 1998. The state-owned enterprises are always defeated in price war because of their heavy burden of history as well as low productivity. This reveals that non-state enterprises could grow strong while the backbones were forced off the list and worse stagnated and even crashed. On the contrary, the leading foreign companies appeal to customers with their advanced and outstanding products even though the average sales price of 14 top worldwide companies is about 22.12 thousand RMB per ton, which is higher than that of the 18 home companies, 10.57 RMB per ton.

2.4 Slack and Slim R& D

    The clear feature is that the domestic coating enterprises invest little in R & D, almost less than 1% on average. In addition, many slack and separated enterprises go with low-technology, repeated input and thus lead to a sluggish adjustment for product structure. Now the noticeable imported technology of car coatings is forced to be innovated. Electrophoretic paints upgrading, waterborn and powder top coatings are developing in Lab, but it is far from practical application and just in its infaincy. After entry into WTO, it becomes less possible to import advanced technology from foreign countries, because there is no barrier for foreign coating companies to enter China with their products and capitals. Even if importing, we may spent a higher cost than that of the frist time.

    Slim R&D is due to the lack of input and integration, additionally, it is due to ignoring of the development of the world coating technology. Many foreign coating giants pay concerns on development of environment friendly products because of strict regulations. Although domestic coating enterprises pay more attention to environment protection than ever, they can not balance the cost of controlling VOC against environment protection. Until now China has signed 18 international environment treaties and protocols. Improvement of regulations and strictly fulfilling them is also required for entry into WTO. Especially in the field of coating industry, it would be a serious mistake in development strategy if they ignore the development of waterborn coatings, high solid coatings and solvent-free coatings, etc. Environmental protection is gradually becaming a non-tariff barrier for the developed countries and a key issue to open Chinese gate, Table 4 shows the statistics on the patents applied in the field of coatings and pigments from 1985 when the patent system was started up again, until the end of 1999. It is easy to find from the table that foreign enterprises are better than domestic ones, and the individual goes ahead of enterprises. It is of course reflect the manager's concepts and slim R & D and innvovation in home industry as well.

Table 4
Statistics on Patents for Coatings and Pigments

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    Among the Chinese patents, the foreign applicators account for about 16% of the total, and about 50% of patents on coating. It indicates that the amount of foreign enterprises entering into paint & coatings industry is higher than the average level of the whole industry. Therefore, those key enterprises have limited ability for innovation for the technical and management personnels move to foreign-owned and non-state enterprises.

2.5 Less effectiveness of companies gone public

    By the end of the 1999, five large-scale state-owned coating enterprises, A, B,C, D, and E have reformed their systems and gone public. Table 5 shows the data for sale and revenue of the year 1996 and 1999.

Table 5
Data for Domestic Company Going Public
(sales revenue:M.RMB; sales amount:M.t)

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1 Company D shows that data of the year 1998 because of its reorganization.
2 Deduct the loss of non-business operation, the loss is 8.735 M.RMB.

    The previous companies have raised money of 1 billion RMB by means of going public and then allocating their share quota, but the sales volume fell by 22.7%; the sales revenue fell by 28%; the average price of product fell from 10.71 thousand RMB/t to 10.26 thousand RMB/t; the market share fell by from 10/7%(based on the total amount of the year 1996, 1.21m.t) to 5.7%. Analysing these coating companies in aspects of management and operation, we can find that the general competitive ability became weak and adjustment of product structure did not make any difference. So great concerns should be taken because these companies can be considered as "aircraftcarrier" in the field of coating industry, and should have been the main forces entering into the international competition. These companies keep going without good profit partly because of underdeveloped operating mechanism which can , at least, account for some weakness existing in modern enterprise system, and some difficulties existing during the reform of state-owned coating enterprises. If we have not yet taken a urgent action to establish a responsive operating mechanism appropriate to modern enterprise system so as to improve management, enforce innovative ability for themselves, these companies would have had a gloomy future.

3.Facing Challenges with the Good Up,the Bad Down.

    After entry into WTO, China will keep in pace with the trend of economic globalization. Paint & coatings industry will face the impact and challenge earlier than any other industry sectors. The coating industry in China experienced the influence resulted from importing foreign investment and their technologies. Meanwhile, it was forced to reconstruct resources, personnel and market so as to improve its comprehesive ability. Now the product volume ranks No.3 in the global market . In addition, the coating enterprises spreaded nationwide have established good sales channels, effective industrial operation and great potential market. The non-state enterprises are also growing rapidly. All these above-mentioned can be regarded as the benefitial foundation for facing challenges. However, if analyzing in aspects of the global competition and the above-mentioned facts, we must emphasize the following issues.

3.1 Activating the Industrial Organization and Enforcing Coordination

    With the further reconstruction of coatings industry, the form of multi-outlet property structure and the great reform of governmental function, Paint &Coating Industry Association should play a key role in keeping the industrial behavior in order and works out the industrial developing strategies. Meanwhile, association itself should also speed up its reform, transform its traditional imagine such as from management into service and promote information exchange co-operation so as to stengthen the competitive ability as a whole. Particularly National Paint & Coatings Industry Information Center and Paint & Coatings Industry Society, etc. should enhance their service consciousness. By means of journals, meetings, network and so on, they can do as a bridge between China and foreign coutries in light of technology and economic information, communication improvement so as to make Chinese paint & coatings industry meet the needs of information age. Paint & Coatings Industry Standardization Orgnization should speed up the work of study and standardization on environment compliant coatings products and test methods, in particular pay more attention to advanced foreign standardiztion work as as to promote the technology and competitive ability of the coatings industry.

3.2 Company Reconstruction with Competitive Ability Improvement

    Most of the Chinese enterprises have less global competitive ability, even the regional competitive ability because of their small-scale and big distribution. Recently, the top 10 global companies have been undertaking reconstruction for a higher level of competition by means of obtaining market through technology sales or obtaining technology through market sales or united development and utilization. Nippon,Kansai and other foreign-owned enterprises are growing rapidly in Chinese market while home enterprises are still stagnant. So the important thing is to break down those out-of-date concept and mechanism of market operation,such as divided market geogralphically. It is also necessary to break down the subordinate relationship and undertake the communication and reconstruction of resources, such as capital,personnel, technology and so on, and finally establish large-scale companies with the ability to operate in domestic and even world market.

    Some strong non-state enterprises have been succeeded because they are not subjected to subordinate relationship. ( for example, Yixing Sangmu Company, etc) However, their production scale are still limited because of the capital and technology. Anyway, those companies going public should have better situation than non-state enterprises in aspects of capital and technology. Expanding market share by merger is a practical way. The problem such as producing many items but lack of high quality can be solved by expanding production scale and market share, which shows the comprehensive efficiency in aspects of scale-oriented operation including capital, technology, management, etc.

3.3 Adjusting Product Structure, Improving Specialization Level, Developing Profitable Products

    Among foreign enterprises, Kansai Inc. stands strong in Chinese market with its outstanding product--automobile coating. And Nippon Paint Inc. is noticeable for its latex paint. So a company must have its own specialized and profitable products if it wants to have an edge in competition. Among domestic large-scale state-owned enterprises,Shanghai Coating Company shows better by means of importing foreign technology and setting up joint venture company; And its subsidiary companies have their own special features. For example, Zhenhua Coating Company for its coil coatings; Shanghai Paint Manufacturer for its automobile coatings; Kailin Paint Manufacturer for its marine coatings. Their product price is 15% higher than the average price of the top 6 enterprises and 34% higher than the average price of the 40 enterprises. Unfortunately, they have not made noticeable progress yet in expanding the nationwide market while Shanghai Huashen Co. and Shunde Huarun Co. are growing rapidly through specialization. Of course, such development must be supported by technology. It should be said that the age of capability of producing all itsems including 18 categories is fading away, because it is not in line with world trend. Such companies are still weak in competition even though expanding further, many large and medium-scale state-owned companies are the examples. So state-owned companies must speed up the work of withdrawing the state capital based on the advantageous condition including facilities and personnels so as to eliminate those less competitive products even having their market ,and concentrate on developing hi-tech products. It is ture that medium and small-scale non-state enterprises can benefit from low-quality coatings for the low operation cost and high efficiency. It optimizes the resources if considering it in level of industrial field and society. In fact, domestic and foreign practical experiences show that medium and small-scale coating enterprises can still stand up and develop, even erect top nationwide trade-mark only if they have an edge in specialization.

3.4 Keeping in Close Pace With World Trend Enforcing R & D

    Setting up big companies, yielding profitable products and improving competitive abilities must rely on highly innovative ability in R&D, for which foreign company is much better than domestic company. So a long-term strategic idea should be required. Imported technology can help us to start up rather than ensure a long-term development. In view of 21st century coating industry development-"Green Shield", it is urgent to develop environmental compliant and high-tech products. Paint& coating enterprises should firstly establish their own system of R & D and carry on in a practical way.

3.5 Speeding up Transition of System and Mechanism and Personnel Training

    Frankly speaking, during the last 20 years of reform and opening up. The reconstruction and coating company's ups and downs showed that the state capital operation was not fit to paint & coatings industry. It also could be testified by the results of used-to-be key enterprises and state-stocked coating companies. Therefore large and medium-scale state-owned coating enterprises must speed up their reform mostly concentrating on the property system at the right time of establishing national social security system, and make responsive operating mechanism in line with modern enterprise management system, carry on innovation in labor and human resource management, income allocation, regulation of production factor and so on. Only in this way, we can fulfill those above-mentioned works indeed.

    Coating industry is a traditional industry. The large-scale state-owned enterprises have a serious loss of human resources. The reform system and operating mechanism should be firstly focused on keeping and attracting personals in management, technology and marketing. In addition, it seems important to employ personnel ,who is good at international economic and trade as well as foreign languages.

    In a word, with the economic globalization undergoing, the market competition between enterprises, as a matter of fact, are mostly in the sectors of personnel, technology, capital, enterprise operating mechanism as well as advanced production relations or blend and optimization of the above-mentioned resources. Only a better system and mechanism are established, the enterprise can attract the outstanding personnels and establish a much better mechanism. And some business strategies such as advertise, erect of good name, etc. are not the most principal problems.