Made in China
Still think of China as a competitive threat? Think again. The country’s markets offer an enormous and growing opportunity for Minnesota manufacturers and tech companies. Here’s how to get started.
BY KEVIN FEATHERLY
No topic is scarier in American business circles than China, and not without reason. The country’s seemingly unlimited supply of low-cost labor is a real competitive challenge. Jobs and materials are being sourced to China in increasing numbers, and companies in the United States do have issues to worry about.
But if you’ve only been thinking about China as a threat, think again. The country’s markets also offer an enormous and growing opportunity for American manufacturers and tech companies, and Minnesota companies are well positioned to reap the benefits. Tony Lorusso, executive director of the Minnesota Trade Office, says China’s long historic relationship with the state of Minnesota places the Land of 10,000 Lakes on the short list of places with which China prefers to do business.
“There are a great many relationships that have existed over the last 25 years that have helped lay the groundwork for a very broad-based relationship between Minnesota and China,” he says. “That includes trade and investment, science and academia, arts and culture, friendship and humanitarian endeavors.”
It is one that already is paying dividends. Preliminary 2006 Trade Office data indicates that China moved last year into second place among the state’s leading international trading partners— ahead of Ireland and behind Canada. Minnesota-manufactured exports to China totaled $1.15 billion in 2005, up a full 71 percent over 2004. By comparison, U.S. exports to China overall in 2005 rose just 15 percent over 2004’s total.
“The primary areas [of trade] are still in technology—computer and electronic components—plus a lot of data storage devices and semiconductors,” Lorusso says, adding that these areas comprise about 45 percent of Minnesota’s Chinese exports. But other Minnesota-based industries also are primed to do business in China. “There are a lot of opportunities in medical devices and industrial equipment,” Lorusso says. “That means anything from manufacturing machinery to farm equipment to environmental pumps.”
Despite that, sources say it is a common fallacy to believe that, because trade with China has been open to American companies for 25 years, the window for establishing business ties closing. That would be a misread, says Tim Farey, vice president and Asia general manager of SoftBrands Inc., a Minneapolis company that produces enterprise resource planning software for manufacturers and hotel operators. It was just three years ago, for instance, that China liberalized distribution rights to foreign investment in its commercial enterprises, a move that made it far easier for Americans to establish commercial ties with China. “I think there are huge opportunities here still,” says Farey, who lives and works in Shanghai. “China is at the beginning of something that is going to get bigger and bigger and bigger.”
Lorusso echoes the point, noting that Chinese business currently is done mainly along the country’s West Coast. Its inland regions—and a mother lode of untapped customers—remain relatively undeveloped. “That again creates opportunities for growth,” he says.
Kent Kedl, executive director of Technomic Asia, a St. Paul-based market strategy consultancy, expresses the same idea a bit more colorfully. “I gave a speech a while ago about how everybody thought that, ‘Well, that ship has sailed—anybody who was going to come to China has already come to China,’” he says. “The title of the speech was ‘Late to the Party but Better Dressed.’ Honestly, things are just beginning to mature here.”
There is another solid reason for you to rethink your attitude toward China: Your competition already has. “I think companies here in Minnesota and in the United States in the $30 million to $200 million range are suddenly waking up,” says Eric Donaldson, CEO of St. Paul-based Reell Precision Manufacturing. “They’re saying, ‘Whether I admit it or not, I am a global company.”
OK. Now that we’ve got you thinking about the prospects, we’ll offer a bit of advice. What follows is a list of the top five things you need to think about before launching your company’s China strategy.
1. WHAT’S MY MOTIVATION?
Kedl has been working in China since the late 1980s, helping small and mid-sized U.S. companies— and many from Minnesota—find their footing in China. One of the things he tells clients is to identify the reasons they want to do business in China. There are really only five, he says:
- to get closer to customers
- to tap new markets
- stay competitive
- to realize cost savings
- shareholder push.
The last of those motivations tends to come up the least often, he says, but it does happen. “A company, when it’sfirst thinking about going to China, needs to look at those and say which one of those five motivations— typically there should be more than one—are really pushing them or pulling them to do something in China,” Kedl says, adding that how the company proceeds will depend on how it answers those questions. “If you are going to serve a customer, you’d better be able to do it quick. If you’re serving a market, or going after a market opportunity, you need to go a little bit more carefully to make sure you understand that market, and what you need to look like to be there. If you’re going after competition, you need to understand the competition and what you need to look like to compete.”
If the main driver is cost savings, he adds, “you need to qualify those cost savings because everybody can put together an Excel spreadsheet that looks good. But the reality very often is different.”
2. IN CHINA, IT’S NEVER “JUST BUSINESS”
In the West, Kedl says, people have a habit of saying “It’s not personal, it’s business.” In China, however, he notes, “that’s impossible. It’s both business and personal.”
Joan Brzezinski, interim director at the University of Minnesota’s China Center, says one of the biggest mistakes Americans make when they try to conduct business with the Chinese is their attempt to make it a “business deal.” The very concept is anathema to Chinese culture. “[Americans] are a ‘do the deal and get out of there’ kind of people,” she says. “Once we have finished the contract and we’ve finished the production, we’re not interested in necessarily the next step.” By contrast, she adds, “Chinese relationships are lifelong.”
Over the last decade, Reell’s Donaldson has worked in China in succession for 3M, Imation, Kodak, and his current company. He agrees with Brzezinski. “Think about the American language, about deal-making and how fast we want to do it,” he says. “That never works for the Chinese. Putting a term sheet on the table looks like demands to them.”
For the Chinese, according to Brzezinski, striking a business deal means that staying connected on a personal level is not simple courtesy—it’s a responsibility. “Every relationship has an obligation and a reciprocity,” she says. “So you as a business person are there to form relationships. And the stronger your network of relationships, the better I think your business is going to be.”
So how do you go about maintaining an extended “relationship” with someone in China? It’s not that difficult, Brzezinski says. “It means, at least on the personal level, that you can count on each other and rely on each other for an introduction to a sales distributor or supporter or supplier,” she says. “You would want to establish a personal relationship with the key people you are doing business with.”
3. IS IT REALLY ABOUT COSTS?
The main reason Americans fear Chinese competition is cost. Labor is undeniably cheaper in China. Reduced labor costs are the primary factor that many businesses think about when they consider doing business in, or even moving their operations to China. But is it really cheaper, all things considered?
James Fallows, a national correspondent for the Atlantic Monthly who is living and working in China, says it is a clear case of “it depends.” There is no simple formula to determine whether making the leap to China will be justified through cost savings. “Certain aspects of operating in China are cheaper, labor costs being the first example,” he says. “Certain other things are more expensive—transportation, for instance, or offering English- language support.”
It is a matter, Fallows adds, of weighing the advantages of investing in China against “the risks, the extra costs, and disadvantages.”
Still, others say, depending on your type of business, there may be reasons to think twice about doing anything so drastic as moving operations overseas, especially if reducing cost is your main motivation. “My personal experience,” says Donaldson, “is that if you’re going over to China for cost reductions, well, that should be one of the lesser of the justifications.”
He argues that most Minnesota industries are not very labor intensive to begin with. “Expectations for cost reductions generally come from logistics, from presence and lower shipping costs than it does from labor,” Donaldson says. “I always warn people that the first and foremost thing if you’re in a business here, is that you go to China to get close to your customer or your logistics channels. And usually both.”
This suggests that it might be best to maintain a presence in both countries. Doing business in China, in other words, doesn’t have to result in a net loss to the American arm of the operation. “I’ve never seen it be anything but a gain,” he says.
Jiwei Ye, vice president of Asia-Pacific operations at J.P. Morgan, agrees with Fallows that the answer to the cost question depends on the particular business. While it may be cheaper to assemble your product in China, you have to factor in logistics. “Even if it is a small component that you need to ship to China, it will be much more costly to ship by airplane,” he says. “If it is a really big commodity that you have to ship by sea, then the income potential opportunity cost will be much larger. That doesn’t mean you can’t work from China, but it means you will have to put many more controls into your supply chain.”
Aside from that, Ye says, if you can’t automate your Chinese operation and therefore have to rely on cheap labor to assemble your products, is that necessarily a win? “If it’s not automated,” he says, “what about human error? Is that something that really becomes a problem?”
4. THE “SIX Ds”
Kedl defines the “six Ds” as “due diligence, due diligence, due diligence.” “That means really digging down and finding out who these people are, what the ownership structure is, who the influencers are,” he says. There is rarely one person who makes a decision in China, he adds—it’s always a group of people. That can lead to serious confusion. “We have seen situations where someone comes here and they’re going to go visit two suppliers,” Kedl says. “One morning the supplier takes them to the factory and they have a good time. The next morning, the second supplier meets them at the hotel, brings them to the same factory, and says, ‘This is my factory.’ Who knows whose factory it is? You need to know those things ahead of time.”
The first step as you prepare to do business with the Chinese is to study, says journalist Fallows. He recommends the book Mr. China, by Tim Clissold, and One Billion Customers, by Minnesotan James MacGregor. Donaldson adds to that list Thomas Friedman’s The World is Flat. “I’ve lived that book,” he says.
Still, no amount of reading can fully prepare you for doing business in China, Donaldson adds. To get a better lay of the land, he suggests consulting with people who have spent considerable time in China. One effective way to gain understanding is to volunteer time with Chinese students at the various universities in Minnesota. The state has the largest population of Chinese students and faculty in the United States, and there are many opportunities to assist students in programs such as English as a second language. Some of those students might eventually become key employees, he adds.
Finally, due diligence requires some understanding of the regulatory environment, on both shores. China is hardly a regulatory- free zone, notes Ye. On March 1, for example, it adopted stringent new “green” regulations that restrict hazardous materials contained in the electronics products and components that can enter the country. The ban includes lead, mercury, cadmium, hexavlent chromium, polybrominated biphenyls, and polybrominated diphenylethers.
Meanwhile, the United States has also adopted tough new regulations that place heavy tariffs on imported Chinese paper products. According to various news reports, they may well be extended to other imported goods from China, and those imports could be imposed on American products assembled products in China exported back home. It’s an area to watch closely.
“You’ve got to be ready for that stuff,” says SoftBrands’ Farey. “You’ve got to understand it. And you’ve got to understand and be out in that market at your customer’s site, following your products from door to door so you can get it.”
5. PATIENCE IS A VIRTUE
To Western eyes, China can be confounding. For example, you’ll probably end up cooling your heels waiting for a business deal to solidify. “A Chinese friend of mine said, ‘Signing a contract is just the next step in the negotiation—you sign a contract and then you keep negotiating that contract’ says Kedl.”
“Patience is huge,” says Donaldson. “Things move fast in China and they move slow. The way the Chinese negotiate is different from us.”
Donaldson says the need for patience is related to relationship building. “That’s why the negotiating process tends to be so long,” he says, noting that the Chinese design the process that way to build bonds with their new business partners. “I have been in situations with Chinese suppliers and customers that seem social, but at the end of the day were all about forming a business relationship,” he says. “They want days, weeks, and months sometimes, to get to know you and decide whether they want to be your supplier or your customer.”
That might mean doing some work together off contract during the early stages. “Western companies feel a little nervous about that.” Kedl says. He says patience in this case will be justified. Consider it a courtship. “Let’s kind of begin dating here before we get married and working together,” he says. “Being patient and working through that is a huge part of it.”