BEIJING (Jan. 20, 10 a.m. EST) — While many plastics processors with operations in China use local partners, some are going another route — alone.
Companies like injection molders Perlos Oyj of NurmijÃ¤rvi, Finland, and United Plastics Group Inc. of Westmont, Ill., are setting up businesses in China known as Wholly Owned Foreign Enterprises. WOFEs are significantly different from entering into a traditional joint venture or contractual relationship with a Chinese firm. Unlike with earlier policies in China, a foreign company can own 100 percent of a WOFE.
Such enterprises often are in a special economic zone, including sites in the vicinities of Shanghai on the central coast, Guangzhou in the south and Beijing in the north. Typically, a WOFE assembles or manufactures for the export market outside China. Firms targeting the Chinese market often use a joint venture.
“If you have local knowledge, you don't need a partner” in China, said Chuck Villa, UPG executive vice president for business development.
His company first went through the WOFE process last year, and now plans to use it at least twice more, he said. Ownership ties helped UPG establish its WOFE.
Shannon White became UPG president and chief executive officer in August 2001 and saw customer demand for an Asian site, particularly to make cellular telephones and portable notebook computers.
“We had handshake agreements with a few companies, but immediately I started looking at a way around that,” White said.
UPG owner Aurora Capital Group of Los Angeles has an advisory board that includes Larry Bossidy, retired chairman and chief executive officer of Honeywell International Inc. Bossidy introduced White to Herbert G. Rammrath, at one time Asia president for GE Plastics and now nonexecutive chairman of UPG's board.
With Rammrath's help, White eventually hired Singapore native Lionel Liew as UPG's general manager for Asia.
“The combination of Herb and Lionel accelerated our program,” Villa said. Rammrath had connections with the Singapore government and, in late 2001, suggested that UPG create a WOFE and avoid the need for a Chinese partner, Villa said.
Corporate concerns about the process were short-lived. UPG was able to maneuver through the Chinese government and get work permits in less than two months, Villa said.
UPG identified a 24,000-square-foot, leased site in Suzhou Industrial Park in January 2002, obtained the license and permits a month later, and outfitted the basic structure and started commercial production in September. The huge Suzhou park, co-owned by Singapore and China, is in the Shanghai area and close to major UPG customers.
UPG met China's requirement for the latest technology, including modern injection molding presses and an automated paint line. UPG now views Suzhou as its flagship facility, Villa said. The plant started with more than 200 employees and 14 Van Dorn De-mag presses outfitted with Conair Sepro full servo robots. The plant is using about 60 percent of its capacity and has space to add six presses.
The plant also has a Class 10,000 clean room for assembly of cell phones with liquid-crystal computer displays.
Villa said using a WOFE helped UPG maintain its lean-manufacturing mentality.
“If you have a partner, you have a dilemma,” Villa said. Chinese partners favor high labor content, but UPG avoided that path. “We leaned out as much labor as possible.”
The Suzhou plant started in electronics projects but is migrating into consumer health and cosmetic products and some automotive and medical work. The output is being exported globally. UPG repairs tools in the Suzhou facility but by midyear plans to establish a separate Suzhou plant with mold-making capabilities.
UPG plans at least two more WOFEs — in the Guangzhou area possibly during late 2003 and in the Beijing-Tianjin area at a later date.
China began permitting WOFEs in 1996, but the concept initially was limited to certain industries, said Jay Rothstein, president of China Venture Advisors, which has offices in San Francisco and Shanghai.
The consulting firm assisted Tessy Plastics Corp. of Elbridge, N.Y., in setting up a WOFE that opened in Shanghai in 2001.
While agencies are selective about which industries to allow for WOFEs or joint ventures, telecommunications and electronics are among those that China encourages. Rothstein said the tide has turned toward WOFEs and against joint ventures. About 10 percent of foreign businesses setting up operations in China used WOFEs in 1996, compared with about 90 percent last year, he said.
Perlos decided to pursue its first WOFE license in early 1999. Now the company is working to set up a WOFE in Beijing after nearly three years of experience with a WOFE in Guangzhou.
Kari HÃ¤yrinen, Perlos executive vice president for the Asia-Pacific region, recommends using a WOFE “if the business is with foreign customers and the location of the operation is planned to be in a major industrial park.”
The alternatives — joint ventures or links with Chinese contractors — can result in problems, he said.
“Cutting corners to customers or total conflicts in investment decisions” can occur, HÃ¤yrinen said.
Still, he said joint venture partners can be helpful to companies that plan to sell product in China, or for those that want to run low-cost operations outside major industrial parks.
“Outside the industrial parks, the local partner can ease the handling of all the local matters” such as customs, he said.
Perlos' Guangzhou facility employs about 500 in 135,000 square feet of space and mostly uses Engel presses. A 25,000-square-foot expansion is to be complete in June.
Perlos now is forming a WOFE for a production plant in Beijing, where operations are to begin in the second quarter of 2003. The company said it plans to invest about US$5 million during the first year.