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How China Is Hitting All The Right Notes

Tong Zhi Cheng sits down at the piano and taps out a slow tango, but Get the Party Started might be a more fitting tune. As general director of Pearl River Piano Group, Tong is at the vanguard of a shift that's remaking the world of musical instrument production. In the past decade, China has become the world's biggest maker of pianos and guitars and is a growing force in band and orchestral instruments. And Guangzhou-based Pearl River is the mainland's biggest instrument maker, expecting to churn out half a million guitars and 80,000 pianos this year. "With our good quality and low prices, our products will be successful," says Tong, who started in Pearl River's wood shop 44 years ago.

He'll face plenty of competition. There are some 1,000 instrument manufacturers in China today, according to the China Musical Instrument Assn. Last year, they made 3 million guitars and 343,500 pianos, and exports jumped 20%, to $600 million. While Chinese companies make a handful of excellent instruments, most of what they produce are low-quality products destined for the domestic market. But manufacturers are learning fast, and exports are growing. A few years ago most Chinese guitars were "junk," says Richard McDonald, vice-president for marketing at Fender Musical Instruments Corp. Today, he says, "the Chinese are getting the bulk of the business because they're getting the quality right."

China's rise in the instrument business, as in many others, is pushing prices down. It's now possible to find a decent piano, for instance, for less than $2,000 in the U.S. It's no Steinway, but it'll get your 8-year-old through her Suzuki exercises. "Because of China, our average retail price in 2003 was 10% lower than in 2002," says Richard Ash, chief executive of Sam Ash Music Corp., a retailer with 41 outlets in 13 U.S. states. Today, he says, more than a third of the products he sells come from China. "Anyone who's not there can't compete," Ash says.

Steinway Musical Instruments Inc. knows that. In the past five months, it has closed two factories that make saxophones and clarinets in Arizona and Indiana, and it is buying more low-cost instruments from China. The company insists the products once made in the two factories won't now be made in China. But it's clear that demand for more expensive instruments has dropped. "We made a decision to offer more price points," says Steinway CEO Dana D. Messina. "That's the impetus for us going to China."

ROOM TO GROW. Overall, though, this isn't a story of the U.S. exporting jobs. Production of entry-level instruments crossed the Pacific decades ago, first to Japan, then to Korea, then Indonesia. It's those countries that will suffer job losses in the shift to China, following other labor-intensive industries, such as garments and footwear. Yamaha Corp., the world's biggest instrument maker, has a joint venture with Pearl River and is opening its own plant in Guangzhou this fall. Korea's Samick Musical Instrument Co. plans to double annual capacity in Tianjin, to 60,000 pianos, by 2008, while its production in Korea fell to 40,000 pianos in 2003 from 200,000 a decade ago. "Our Korean partners are now our Chinese partners," says Henry E. Juszkiewicz, chairman of Gibson Guitar Corp.

In fact, the net effect of China on jobs at U.S. instrument makers could ultimately be positive. Fewer than 1% of Chinese households today own pianos, compared with around 20% in developed countries, so there's plenty of room for growth. And many top-of-the-line musical instruments -- $50,000 Steinway & Sons pianos and $2,000 Gibson Les Paul guitars, for example -- are U.S. brands. Those are the brands consumers typically seek as incomes grow. Indeed, Steinway says it already earns more selling pianos in China than it spends buying instruments there. That's a tune U.S. manufacturers will dance to. By David Rocks in Guangzhou, China, with Moon Ihlwan in Seoul

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