Surviving China

How small Connecticut manufacturers can export to China

By James B. Stepanek

Manufacturers often get calls like this: “We specialize in moving your entire factory to China.” The calls hurt, but are laughed off. American manufacturers resent being treated as though dead.

Small manufacturers are very much alive, and many want to export to China. But they wonder, how?

Here are Ten Lessons on how to export to China.

1. Follow customers and never let go.

If your customer moved to California, you would follow. You should follow your customers to China too. Since most companies do not have the money to chase customers half way around the world, many give up. Instead, your company President should call the customer to ask for a long-term supply agreement, if you go to China with them. With one or two such agreements, you will have enough money to help pay for a sales presence in China.

2. Customers that have migrated to China are not “lost”.

Back in 2001 your customer was in Detroit; now the purchasing person is in Shanghai, named Mr. Wang. Go find Mr. Wang. All that is “lost” is one e-mail address.

Mr. Wang undoubtedly works in one of the tens of thousands of American companies in China. (16,000 in Greater Shanghai alone). Each imports thousands of different products, like machined parts, precision tools, instruments, control apparatus, and industrial raw materials. American manufacturers in China are your entry point. Attack that beachhead first.

Few Americans know the stunning fact that China is a whopping importer. ( China’s 2004 exports: $570 billion and imports: $540 billion.)

What does this mean? It means China is an export engine (like Korea, Japan in their day), but an export engine fueled by massive imports (totally unlike Korea and Japan). Even better, China’s colossal imports are largely things you make: industrial engineered products and components, precision tools, filters, electronic components, control systems, advanced medical products, power generation equipment, and every imaginable type of specialized industrial part and component.

Who gets this business? Your competitors for this business are firms in Finland, Japan, Korea, and Germany – companies you compete against already.

Must you sell at the low “ China price” to win business there? No. China is importing more than half a trillion dollars because it has to. The goods are simply unavailable or of poor quality. Consider another stunning fact: in recent years these imports have been growing faster than China’s exports.

3. Learn to sell from your desk in the USA.

The first step is to start selling right from your desk here in America. It costs little. When a position opens up in the sales department, consider hiring somebody who knows some Chinese, enough to Google Chinese customers in Chinese. Find your old customers who have migrated to China plus other likely candidates. You will find 100 within a week. You should be able to do this without setting foot in an airport.

This 100-company attack list will include, most likely, US multinationals that have moved to China in the last decade (about 80% will fall into this category), Canadian, UK, and other Western firms (10%), and private Chinese firms (10%). Private Chinese companies now contribute more than half of China’s GDP. They are already voracious importers of US materials and technology.

4. Get to know the Purchasing Managers.

Purchasing Managers in China have become very important people, and why not? They have more money to spend than any other small group on the planet, outside the US. They are like the purchasing people we love and hate in America: smart, impatient MBAs. They race home to watch TV and relax, now that they have cars and real homes to go to. (Don’t make people go drinking after work, unless you know them.) E-mail is king, of course. They conduct business mainly in spoken Chinese but read anything in English. Hit all 100 names on your target list with e-mails.

5. Develop e-sales skills.

Your e-mails sent to China are often re-sent to colleagues in other countries. That is because global companies share supplier information. For example: A Connecticut company recently sent an e-mail to a firm in Shanghai, which forwarded it to their Frankfurt office, which forwarded it to the company’s Connecticut affiliate. The company ended up with a purchase order, not from China, but from a local firm.

The chances of your e-mails getting passed around go up, if designed right. Purchasing Managers in China want e-mails with contact information, your company website, and attached PDF capabilities file. Add a global cell phone number.

6. Visit your customers.

Go say hello to the customers on your attack list. Ask them if you should hire an agent, go through distributors, or set up your own sales network. It never occurs to most companies that their customers have the answers: nine times out of ten, will tell you not to go through agents. They want product integrity. The rampant copying in China has one big plus: “integrity” has come to mean “foreign.”

You are throwing away two assets if you sell through an agent. You are throwing away the perception of integrity, and you are throwing away being an American. Chinese like to work for, and buy from, American companies.

Same for distributors. Stolen American technology often enters China’s commercial blood stream, you guessed it, through distributors.

Setting up your own sales office in the Shanghai suburbs now costs roughly $22,000/year, fully furnished and equipped, including the salary of one English-speaking employee. That doesn’t include the approximately $10,000 you might have to spend registering the office (industrial zones often do this for free). For the cost of one fancy sales meeting, you can have your own sales representation in China.

Your customers may eventually demand something you dread – setting up a factory in China. But sometimes you have to go – to reduce delivery time. Customers in China find it increasingly hard to wait for goods to cross the Pacific. Falling cycle times and sales opportunities are what make people go to China these days, not cheap labor. There are probably 50 countries in the world with cheaper labor, so forget about China as the land of cheap labor. Labor is “cheap” in one respect only – it is productive. You get a lot for what you pay.

7. Get the CEO involved.

The CEO must go to China to see the sales opportunities, and come home articulating a positive vision. Such a vision can help employees think of China as something other than just another word for unemployment. Right now China is the best way to grow your business at home.

The CEO must learn why China is not a repeat of Japan or Korea, where foreign firms played a small role in those growing economies. Today foreign firms are driving the economy. As much as 75% of all Chinese high-end manufacturing and exports are foreign-owned (by Hong Kong, Taiwanese, Japanese, US, and other owners).

The CEO needs to understand why everybody prefers “Wofees.” (Wofee is slang for “wholly foreign-owned enterprises”.) That means most foreign enterprises in China do things themselves, without partners. These are the most profitable group of enterprises in China, every study shows. Size is no barrier. Even small US manufacturers with 20 employees are doing Wofees.

8. Sell first, source later.

Use your sales staff to kick off sourcing, to avoid the common, gigantic mistakes. Your sales people are in China and their overhead is paid for. They know Purchasing Managers who can help you source because – and this is a vital fact – most Purchasing Managers often wear two hats and are their company’s VP for Sourcing. That means they possess valuable information on where and how to buy things in China. They often give this information to suppliers they want to encourage, like you. You would never know this if you didn’t sell into China first.

Your sales people also know what things really cost, something a middleman would never tell you. Knowing what things cost can also help you avoid being copied, if you follow the Colgate Palmolive Rule: “Nobody will copy you if you stay within 20% of the true China price.”

Finally, by selling first you avoid the #1 mistake – sourcing in an intelligence vacuum. People never seem to learn that buying from China does not guarantee low cost.

9. Sourcing the wrong way is easy.

It is hard to say “no” when somebody in China charges $1.50 for something that costs $2 in America. Who can turn down a 25% cost savings? The middleman, Mr. Li, promises parts made to your specifications delivered to your doorstep. No payment is required until the goods are tested. He is the only person you have to know, and he speaks English. You are doing business in China without having to spend a penny on building an infrastructure in China. The board of directors looks upon you as a genius.

But consider this: You think you are paying less, but 99% of the time you are paying the mezzanine price, the price half way between the world price and the real China price. You do not know this, because you are not selling in China.

Something else to think about: The PDF blueprints you gave Mr. Li are flying around China at cyber speed. Mr. Li cannot protect your intellectual property. The copy cats are alerted. They realize somebody in America is willing to pay the mezzanine price for your product, the last thing on earth you would want anyone to know.

Between you and the source stands Mr. Li. He is probably a nice guy just protecting his livelihood, yet he sees transparency as a threat. He has no incentive to help you get control over the factories making your parts, and he may not tell you where the factories are. Even harder is linking those factories with your company’s supply chain and Enterprise Resource Planning systems, something your customers have been demanding for years.

You end up selling Chinese-made goods at high prices. Your factory becomes a sales warehouse. Your smartest engineers start leaving. You try to buy Mr. Li out, but it is tough negotiating the mezzanine price down.

10. Don’t sell the farm.

“What was the fuss all about?” is the question people ask about the Japanese threat years ago.

There are many reasons the China “fuss” will pass too, as it did for Japan. You will be the low-cost manufacturer again (if you are not already). A long overdue shift in exchange rates would correct the US-China competitive imbalance. It is now roughly 8 Chinese Yuan to one US Dollar; some economists think it could be as low as 6:1 in a few years.

A far more important reason is China’s increasingly poor business environment (for Chinese firms). One example: Chinese companies are hit with “taxes” in a way that would scare the daylights out of the average Connecticut businessman, and stop investment cold. These levies take the form of “requests” by local authorities for “donations”. (These blatant threats rarely happen to foreign firms in China, who have access to the international media.)

Uncertainty of this kind in America would lead to short-term thinking, and it does in China too. Everybody in China seems to want to make money and run. Roll down the window next time in China and look at the environment, and wonder. Look inside factories where two dollars and a bucket of paint would make life better, and wonder. Look inside the state-funded giant Chinese enterprises that are supposedly poised to buy up America (where maybe 20% of executives do all the work and the rest cannot be fired because they have mommies and daddies high up in the Party) and you might begin to wonder if democracy really does improve a nation’s economic competitiveness.

Unless the tax authorities are separated from the one-party state and China implements many other anti-corruption reforms soon (which is most unlikely) it is hard to see Chinese firms posing a long-term threat – assuming you never stop innovating and investing in the future.

Remember the guy who wanted to shut you down and move your equipment to China? Time to start selling.
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Jim Stepanek is an industrial consultant who helps manufacturers export to China. He was the general manager of two Fortune 500 companies in China and the former China Desk Economist at the IMF. He lives in Shanghai and Branford, Connecticut. jamesstepanek@msn.com

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