SAN ANTONIO (Oct. 25, 4:55 p.m. EDT) — China has more than 1.2 billion residents and a manufacturing base already in the global top 10 and on a fast track to the top five.
But the key to establishing a business there still comes down to who you know — and how well they know you.
"They are still relationship based," Kevin Painter, chairman and chief executive officer of Hong Kong-based Neptus Group, said Oct. 18 during Plastics News' Executive Forum 2001 in San Antonio.
"The first line of any Chinese contract is: `We agree to cooperate,' " Painter said. "The rest is just superfluous. That's good and bad for Western companies."
Painter has spent five years in China, including a stint as chairman and managing director of IBM Technology Products Co. Ltd., a joint venture between IBM Corp. and a Chinese computer maker, before launching Neptus this year. Neptus aims to serve as a matchmaker between Western companies anxious to expand into China and Chinese molders seeking outside contacts.
Setting up a base in the world's most populous country means spending years establishing ties with potential suppliers and workers, or finding the right person with the groundwork already in place to make those connections, he said.
"Relationship development is much more highly developed there," Painter said.
China is both misunderstood and impossible to ignore, he said. It is home to the ninth-largest manufacturing base in the world now, with an expectation that it will climb to the second-largest spot by 2003, overtaking all but the United States.
It is a country turning out highly trained engineers from national schools each month, but with training that stresses rote memorization, rather than "out-of-the-box" problem solving, he said.
Despite its vast population, China's buying power is limited to provinces near Shanghai, Beijing and Guangzhou. Companies should not focus their business plan on selling to the Chinese, Painter said, but instead on taking advantage of their manufacturing power for export.
Even as the Chinese government puts on a show of force against traditional enemies Japan and Taiwan, those same countries represent China's biggest investors, he said.
And pending trade agreements — from permanent trading relationships with the United States to membership in the World Trade Organization — will break the country's manufacturing potential wide open, he said.
"The more I learn, the less I know," Painter admitted, adding, "I believe they've gone so far down the track, they can't go back to a nonmarket economy.
"But I can be fooled."
The same trade agreements that will open China's manufacturing base also will allow goods to flow back out of China and throughout Asia more easily, Painter said. As a result, China may have double the output of Japan within three years, and nearly half of the combined manufacturing base of all of the European Union.
China made 9 percent of the imported processed plastic products brought into the United States in 1991, noted Michael Paslawskyj, vice president of economic research for CIT Group Inc., during another session at the Executive Forum. But by last year, that percentage had risen to 19 percent.
American companies traditionally shy away from investments in so-called emerging markets, Painter said, preferring to put their dollars in Europe, where trading partners are familiar with the same accounting principles and ways of doing business.
Those dollars will go further in countries like China, however, Painter said. A business can hire a highly trained engineer for $1,000 per month. Factory workers are in abundant supply and ready to work.
A U.S. company may not be able to match computer systems easily with China, but with trained operators available, they can hire people to transfer the information manually at less cost than integrating software and hardware.
Manufacturers who ignore a potential powerhouse like China will suffer in the long run, Painter said.
"The pattern has been simple," he said. "Most other countries look at emerging markets in the long term. We don't. We invest in so-called safe areas, rather than where our dollars will benefit in the future."