ZHONGSHAN, CHINA (Nov. 20, 2 p.m. ET) — China built its business reputation being the world's low-cost, mass-production factory floor, but one British entrepreneur believes there's a future in the other end of manufacturing, in specialized product development and rapid prototyping.
British engineer Gordon Styles, who started several prototyping companies in the U.K. before moving to China in 2005 to launch a similar business there, said he's found a niche welding China's costs to Western rapid manufacturing technologies in plastics and other materials.
The result, he said, is a good environment to make prototypes and low-volume, customized products, rather than the commodities bound for Wal-Mart and Tesco shelves that now dominate Chinese exports.
In an interview at his small Zhongshan factory, Star Prototype Manufacturing Co. Ltd., Styles offered examples of the company's precision manufacturing. It uses vapor-polishing of polycarbonate to make a prototype of a point-of-sale terminal for a South African customer. Or, it can manufacture 3,000 production-quality prototypes of a plastic device for removing hard skin for health-care product company Dr. Scholl's.
Rapid-manufacturing technology in China generally lags that of developed economies, said Styles, but he believes the industry has potential to grow as China pushes into higher-tech areas.
Star's factory, about two hours by car from Hong Kong, offers a picture of how some manufacturing in China is changing to cope with wages rising at double-digit rates and competition from emerging, low-wage countries like Indonesia.
The firm has grown to 120 employees and about $10 million in annual revenues in seven years.
“China is going to go high-tech, specializing in certain fields,” he said. “They are looking for niches in the world and they are trying to fill them like crazy.”
While labor costs are rising dramatically, he said the country's engineering base is still less expensive than those in developed economies, and it's possible to produce good prototypes for one-third to one-half the cost.
Part of China's strategy to adopt technology has been to lower tariffs on high-tech equipment, he said.
The country's strengthening currency has also helped. The yuan has risen 25 percent against the U.S. dollar since 2005, and while that's hurt export competitiveness in some industries, it's also made it much cheaper for local companies to buy better imported technology, he said.
“It's a major indicator that the Chinese government is trying to incentivize private businesses and state businesses to import higher-tech equipment,” he said.
For Star, China's status as a workshop for the world also brings a more worldwide customer mix than Styles had in the U.K., Styles said.
“Being in China, immediately you are global, you don't have a choice,” he said. “As a foreigner you open your door in China and bang, you're global because everybody is looking at China, everybody is coming to China.”
Star's history has some close financial parallels with his first U.K. prototyping firm, Styles RPD in Middlesbrough, England.
From 1993 until he sold it in 2000, he said that Styles RPD grew to 80 employees and almost $6 million in annual sales. Star has taken a similar path in its first seven years, with 120 employees and $10 million in revenues.
But the stories diverge there, Styles said.
The Middlesbrough company was $1.49 million in debt in 2000, with profit margins of 6 percent, while in Zhongshan, profit margins are 15 percent, the company is debt-free and it sees room to grow to 500-plus employees with a much wider range of capabilities, according to Styles.
“It's the size of the rapid product development market globally and the fact that being in China puts you on a global stage,” he said. “In England I could never export for lots of different reasons, both real, psychological or whatever.”
The company has customers coming in Brazil and Chile. In addition to a base of clients from the U.K. and North America, firms from Australia, Germany, and other parts of Europe are customers.
“I never really felt [Styles RPD] was going to get past 100 employees because in that environment, it's like a goldfish grows to fit the pond,” he said. “The pond we're swimming in now is just huge. Clearly we can be a bigger goldfish.”
Beyond the macro trends in manufacturing, Styles also said he feels strongly that government policy has neglected manufacturing in the U.K. and other Western countries — so much so that he spent 10,000 pounds of his own money in May for an advertisement and open letter to the British prime minister in the Financial Times.
He advocated an unorthodox, 10-point plan for restoring British growth that included closing the Bank of England, having the government directly control the U.K. money supply and adopting the German system of technical education.
While foreign business groups complain about China's uneven law enforcement, intellectual property rights or currency manipulation, Styles said governments in the West need to do more to boost competitiveness.
Small manufacturers in the U.K., he believes, have been struggling without access to capital for too long.
“It is those managing directors and CEOs whose companies have been starved to death for cash for so long that these people have just been beaten into mediocrity,” said Styles.
While his strong feelings are evident when he's asked about the advertisement, the 47-year-old entrepreneur said he's more focused on building a strong firm.
The company plans a multimillion-dollar investment in new prototyping equipment this year, partly to test the Chinese domestic market for such services, rather than only focus on exports.
Star also is planning to bring in-house plastic thermoforming to complement injection molding, and in the future wants to add a range of range of manufacturing technologies such as blow molding, sheet metal fabrication and sand casting.
He sees Star looking at a potential public offering. It's taken some unusual steps for a factory of its size, such as hiring a full-time English teacher for Chinese staff.
“As a company I don't want to borrow money and I don't want to have a venture capitalist involved, but at some point in the future I wouldn't be surprised if we did an IPO,” he said. “That would actually be to bring transparency to the business so that employees can also own stock in the business if they want to, and also set it up for future transitions.”