China: the land of opportunity or the land of obstacles?
It is no simple matter for a company to pack its bags and open a site in China, according to a panel at Plastics News' Executive Forum, held in Litchfield Park, Feb. 27 to March 2. While the Far East country can be bewitching, it also can be bewildering.
``Everything in China is possible, but everything is difficult,'' said Phil Spanninger, executive vice president of Americhem Inc., a color-concentrates producer based in Cuyahoga Falls, Ohio.
His perspective echoed the views of other panelists: a China-based molder, a consultant, a lawyer specializing in launching companies in China, and the head of one of North America's largest injection molders. Each spoke of booming growth offset somewhat by setup costs, retention issues, intellectual-property protection and unexpected taxes.
The opportunities are difficult to ignore. Jack Yeung, vice president for marketing and business development for Shenzhen, China-based Ace Mold Co. Ltd., ticked off many of the growth engines that are moving China at the speed of a bullet train. China now is third in dollars spent in world trade, recording $1.16 billion in 2004, Yeung said. Gross domestic product increased at an exhilarating 9.5 percent last year.
U.S. companies already have taken advantage of that boom, investing $2.43 billion into China in 2004. Within China, 9,100 plastics processors made $36 billion in plastic parts last year, Yeung said.
But with the voracious appetite for growth has come the need for more foreign investment, said Yeung, whose company injection molds and makes tools for personal-care packaging, health-care products and other industries.
``Investment in products continues, and you can take advantage of it,'' Yeung said in the Feb. 28 panel discussion. ``My advice is to go where your customers go. The world is getting smaller, and companies that are truly global will win. No guts, no glory.''
Clinton, Mass.-based Nypro Inc., a large injection molder and contract manufacturer, has rapidly moved internationally, with more than half its business coming from overseas. Brian Jones, president and chief executive officer, continues to be amazed by China and its dedication to growth. Recently, a Nypro joint venture rebuilt a plant in Tianjin, China, installing a two-story, sophisticated painting system for production parts, he said. The project started in early December and was finished in only four weeks, ending Jan. 3, Jones said.
The Chinese crew that rebuilt the plant had one regret, Jones said. They wanted to finish the plant Jan. 1, but were two days late, he said. That included taking time off for holidays in December, he added. The dedication in China is unmatched when it comes to building a Western-style economy, he said.
``Chinese people are on a mission,'' he said. ``The fire and drive outstrips that of people in the United States. It presents a huge challenge to the U.S., and we have to get serious about China if we want to compete.''
Yet, the downside of a China strategy is all too real, said some panelists. The Chinese government recently tacked a 17 percent value-added tax on goods exported from China, a decision made without much debate and in lightning time. It left many foreign companies in China attempting to figure out a strategy after the fact, Jones said. One escape route, he suggested, is to set up a plant in an export processing zone that is VAT-exempt.
Another looming issue is power brownouts in a country where electricity demands are starting to outreach supply, Jones said. Companies must either buy an expensive backup generator or work in an industrial park where one is available, such as the park where Ace Mold's plants are located.
Otherwise, daily, unplanned rolling power shortages can be a frustrating experience, he said. And, Jones said, ``It's going to persist.''
Another China challenge involves worker retention in a country where employee turnover can exceed 18 percent a year and workers will leave for a small difference in compensation, Spanninger said.
Workers can be motivated by continuing education that can enhance their jobs, he said. If they learn a new skill, they feel valued and are more likely to stay, said Spanninger, who was based in Hong Kong from 1997-2001, serving as vice president of international business development for automotive and aerospace supplier TRW Inc., with direct responsibility for the Asia-Pacific region.
Spanninger, now leading Americhem's work to put a plant in China, said managers in China also need continual rewards, including regular performance bonuses, tuition reimbursement and a car allowance. ``Cars are really valued in China,'' he said.
Nypro, which uses only Chinese locals to staff its plants, is extending its employee stock ownership plan to offer the same benefits to eligible employees worldwide, Jones said. U.S. workers are part of an ESOP established by Nypro in 1998. Now it is developing a process to provide stock-appreciation rights to most of its global workers, Jones said.
Beyond worker rights come intellectual property concerns, and Yeung said businesses have to be careful when selecting suppliers in China.
Jones said the Chinese people are ethical, but the culture and laws differ there.
Panel moderator Allan Goldner, a partner at Cleveland law firm Benesch, Friedlander, Coplan & Aronoff LLP and chair of Benesch's China Group, said laws will change for the better within the next 24 months. The Chinese government is recognizing the value of property and the need to crack down on problems, he said.
``Enforcement is important, and China wants to continue to look good to the world,'' Goldner said. ``You want to go into China with your best and not have one hand tied behind your back.''
But going to China is not always the best strategy. China Optimization Group, a consulting company that helps firms determine a Far East strategy, recently worked with a U.S. thermoformer considering building a plant in China, said President and Chief Executive Officer Jeff Pluto.
At first blush, the idea sounded good, said Pluto, who is based in Geneva, Ill. The company, a maker of food containers, saw the potential to reduce product costs and expand its market. But Pluto said the firm eventually decided that its product could not be made more affordably in China.
Instead of opening a plant, Pluto said, the company chose to work with outside suppliers. The move already has helped the processor generate $2.2 million in new sales.
Each company has to ask similar questions, Pluto said.
``Is it an opportunity or is it a threat, and how do I pull it all together?'' Pluto said. ``You have to recognize the business there and the costs as well.''