Selling Ice to Eskimos and Chopsticks to the Chinese

We’ve all heard the term “he could sell ice to Eskimos” to describe the consummate salesman who is able to convince someone to buy something for which they either have little need or likely have ample supply on hand.  Or perhaps we’ve heard “he could sell them the shoes off their feet.”  In either case the idea is that for those with the gift of persuasion, it is possible to convince someone to purchase something based less on need and more on charisma and charm.  There may soon be a new term in our vernacular that could describe one U.S. company, Georgia Chopsticks—“They can sell chopsticks to the Chinese.”

In a town ironically named Americus, Georgia two hours south of Atlanta, that is precisely what Jae Lee has set out to do, producing 2 million Chopsticks each day destined for Japan, Korea and yes, even China.  In May of this year, the Americus-Sumter County Payroll Development Authority (PDA) made a formal announcement that Georgia Chopsticks, LLC would open a production facility in Americus that employs 150 people.  According to Lee, China with its 1.3 billion population lacks ample natural resources to support demand for chopsticks and on Tuesday, May 31 a formal ribbon cutting ceremony was held to mark the opening of their plant.

According to the Atlanta Journal Constitution Lee who started his chopsticks business in Cochran last November, sent a couple of samples overseas, and within a few months needed to expand.  Said Lee, “I knew there was a need and I thought I could make a profit.”  Imagine that.

“We tend to think that the Asians take care of that pretty well,” said David Garriga of the Americus-Sumter Payroll Development Authority, the economic agency that owns the plant that Lee rents in the city’s old industrial park. “For Americus, the chopsticks factory represents a flashback to its days as a manufacturing center,” Garriga said. But as many companies shifted work overseas, many shops shut down.

So why aren’t more companies strategizing to include China in their plans?  In an October 6, 2010 Bloomberg Press report it was estimated that China market was valued at $150 billion in potential goods and services or a top ten global opportunity for U.S. companies. “U.S. companies have experienced tremendous commercial success in China’s market and the prospects for future growth are significant,” says Erin Ennis, vice president of the U.S.-China Business Council.

China has become the U.S. third largest customer for things like Greentech, machinery, luxury items and even wine.  China’s expanding consumer market clearly has an appetite for Western brands.  Thanks to the gateway of information available through the internet, television and other media there is almost built-in demand for products from the West.  As long as companies are focused on things like quality and safety the market is stronger now than in the history of our trade relationship.

“The Chinese appetite for fashion has become voracious,” says Farooq Kathwari , chairman, chief executive officer, and president of Ethan Allen Interiors.   “The observation that ‘we first dress ourselves, then we dress our homes” applies equally in China. For years, French, British, Japanese, and American clothing designers have taken China by storm. It was a natural evolution that consumers so immersed in couture and inspired by the biggest names in fashion would turn next to fashion for the home. The demand is there and growing.”

Kathwari should know.  He’s been in China since the 1970’s when he began buying arts and crafts there.  Today they are marketing Ethan Allen —a quintessentially American brand—in 53 locations in major cities across China. They ship 60 percent of what they sell there from their well-established U.S. manufacturing base and in turn buy Chinese products to be marketed in Ethan Allen Design Centers in North America.

The U.S. exports about $100 billion annually to China in goods and services, supporting about half a million American jobs.  According to the White House new deals in the works with China will support up to 235,000 new jobs in the U.S.  In addition to major players such as General Electric, Honeywell and Navistar, there are opportunities for companies of all sizes to exploit increased demand by the growing Chinese middle class.

For now, the man who would sell chopsticks to the Chinese quietly goes about his business of working toward a goal of producing 10 million chopsticks per day.  As of June he’d received 450 job applications.  For many of those Americans out of work in the little Georgia town, the Chinese market for their products could soon mean the good fortunes in their cookies may very well come true.

What’s Next for Manufacturing in China?

What is something you can think of that can’t successfully be outsourced in China?

Think long and hard about this. Resist the temptation to veer toward intangibles or time sensitive services with obvious geographical barriers such as a haircut or plumbing repair. What product theoretically cannot be manufactured in China? How about a portrait? I have an acquaintance that has connected with amazingly talented artists who will take a family photo and reproduce a framed, hand painted, oil on canvas likeness taken from a photograph.

It will have the same level of detail and quality as those done by artists in the U.S. costing a minimum of $1200-$2500 just for the painting itself. This does not include the frame which can be another $350-$500. The exact quality portrait from China can be delivered to your doorsteps for $450 or about a quarter or less that which someone would expect to pay here. Why is this?

If you said labor cost you are only partly correct. There are many more factors that play into “the China price” for which Westerners have had an insatiable appetite since the Wal Mart effect took hold in the early nineties. Yet now writers, politicians and economists say the tide is turning. Many assert that currency fluctuation, labor shortages near China’s coastlines, and a rising middle class, are quickly narrowing the cost gap between China and the West. They might be forgetting one thing though according to Mike Bellamy, author of The Essential Guide to China Sourcing , “there is no Next China.”

Rising Labor Costs in China

 

rising labor costs china

In a Roya Wolverson interview published in Time, May 16, 2011, Pin Li, President of the Wanxiang America Corporation stated that “rising labor costs in China will only cause inflation and not necessarily jobs returning to the U.S.” He further explained that what this means is “instead of paying $1 for latex gloves the price may rise to $2 and will still represent the lowest cost available in the world.”

In other words, assuming material costs are consistent globally, even doubling or tripling the average monthly wage of Chinese factory employees still does not bring total cost of goods in line with U.S. workers.

In a recent conversation, Bellamy, Chairman of the Advisory Board for China Sourcing Information Center begins to make the “No Next China” case with the notion that China’s economy is still vastly lopsided in its dependence on exporting. The Chinese and its neveaux riche’ have created the world’s second largest economy that many predict will be bigger than the U.S. within the next decade. The only fuel to keep this burning is the demand for cheap(er) exports. A growing middle class also means bolstered domestic consumption, particularly as brands become more prevalent with Chinese consumers. But to sustain economic growth, exports have to remain a big chunk of the equation.

A Shift By Coastal Manufacturing Regions

The question may not be so much about “Made in China” as it is “What will be Made in China?” Sure there is great capacity and infrastructure in coastal regions but there may be a shift developing with the evolution of improved skill sets and wage increases. Dr. Eric Thun , lecturer in Chinese Business Studies at the University of Oxford China Center, says “pushing manufacturing into high value-added activity is very much what the government wants. This kind of cost pressure stimulates upgrading.”

Bellamy adds, “because China’s economy is still heavily export dependent at present, over the past years there have been concerns about the China government promoting the interior too fast at the expense of the coast. This could have major side effects on the much needed revenue stream gained by supplying product to overseas buyers. But, as April data demonstrates to policy makers, the development of the interior is not having a major impact on exports. “

The Role Of Appreciation In Chinese Currency To U.S. Job Creation

Since June, 2010 when currency truly began floating, the RMB has appreciated 6% against the US dollar. Depending on whom you talk to however, the RMB is still undervalued by as much as 25%. Add to this CPI inflation and productivity growth rates (Chinese worker productivity is growing faster than U.S.) and the RMB will continue to be undervalued for five years or more.

Pin Li argues that “currency can help but it also can hurt. Structural issues are more fundamental for the U.S. and China. This is more of a political question than any economist can even measure. Politically we have to pretend it’s an issue. But the reality is that jobs from China won’t come to the U.S. They’ll go to Mexico, Korea, and Indonesia. And that means the imports that came from China will now cost more which also doesn’t solve the deficit issue.”

Bellamy claims “we can expect that the US government will probably use the April export record to put pressure on China to allow their currency to appreciate. The China government has a plan in place for a slow but steady increase as opposed to a dramatic adjustment as desired by the US. Don’t expect China to change their plan just because of this April data and any related pressure from the USA.”

China as a Market

Li’s passive reference to the deficit is interesting and should not go unnoticed. While many grip about jobs, only a small percentage of Western companies have invested in growing market share in China.

In an October 6, 2010 Bloomberg Press report it was estimated that China market was valued at $150 billion in potential goods and services or a top ten global opportunity for U.S. companies. “U.S. companies have experienced tremendous commercial success in China’s market and the prospects for future growth are significant,” said Erin Ennis, vice president of the U.S.-China Business Council.

Beijing has a $145 billion trade surplus with the U.S., more than its deficit with the next seven- largest partners combined. But is this solely due to undervalued currency and cheap labor? Could it be more the apathetic or myopic strategies of only selling into North American and European markets and not breaking from traditional business models?

Pin Li makes a bold statement when he asserts, “Firms’ access to Chinese should be their more of a concern than an unbalanced currency.”

The Next 5 Years

China remains a factory to the world. Government subsidized infrastructure has ensured overcapacity of manufacturing availability. One needs to simply travel from town to town; cranes as far as the eye can see. Staggering development continues in all sectors such as transportation, industrial, housing, recreation, hospitals, shopping centers, and resorts. Innovation and branding are now woven into the next generation’s mindset with Beijing’s full support. There is no next China. Whether as adversary, trading partner, or ally the future will depend on setting priorities and building mutual trust.

David Alexander is President of BaySource Global www.baysourceglobal.com

4 Ways China And The U.S. Could Build Brands Together

selling chinese products in america

A question was recently posed on a LinkedIn Group asking why there aren’t more Chinese companies selling brands into the U.S.

Rather than taking a myopic view on the question or dismissing the notion that Chinese brands per se’ have little to no chance of overcoming the stereotype of the U.S. consumer,  it strikes me that the real opportunities continue to lie in synergizing and combining strengths, resources and talents.  The skills for identifying and penetrating the best distribution channels in the U.S. are here.  If a Chinese entity wants to lever this market they are wise to understand that this can’t be done (yet) with a Chinese brand or with Chinese sales and marketing.

Conversely however, through innovation, low cost labor and subsidies, China remains the factory to the world in multiple categories.  There are facilities in China that are far superior to our own.  What has been increasingly evident is China’s transformation from merely an OEM to an ODM supplier meaning that in addition to offering strictly manufacturing China is now becoming a low cost design and engineering hub.  So don’t think cheap cost is the only driver for China’s potential here.

Beijing has taken note of the dearth of Chinese brands.

“We’ve lost a bucketload of money to foreigners because they have brands and we don’t,” complained Fan Chunyong, the secretary general of the China Industrial Overseas Development and Planning Association. “Our clothes are Italian, French, German, so the profits are all leaving China. . . . We need to create brands, and fast.”

So according to Tom Pomfret’s Washington Post article titled, “Beijing tries to push beyond Made in China Status,” the government has responded in lavish status by embracing a “going out” strategy http://bit.ly/going-out  backing firms seeking to seeking to buy foreign businesses and gain a foothold on innovation.

If China wants to deploy its assets by capturing a piece of a market here OR if a U.S. company wants to sell into the Chinese market here are four key considerations.

1.  A Brand Is A Very Different Thing Between Our Two Countries

Most brands sold into China are Western.  For the Chinese it is more cache’ or prestige that drives demand.  For the U.S. a brand is many things but mostly involves years of exposure and dollars spent positioning the brand to its respective markets (assuming high quality and value are the cost of admission).  Only in the last 10 years or so has there been demand for consumer brands in China yet there is almost built in demand for established brands from the West.

2.  Successes and Failures of Previous Attempts

For U.S. companies wanting to tap into the China market they should consider brands like Loreal, Buick, and Coke to see what has been successful and what has failed.  You can’t simply put a known label on a piece of junk and believe you’ll capture the loyalty of the Chinese market.  The Chinese want prestige yes, but they also focus on safety and quality too.  Are you speaking to a younger audience;  the decision influencers of the future? See http://bit.ly/caWdra.

What about distribution channels?  We may understand traditional retail here but it is a completely different game in China.  According to the China Chain Store and Franchise Association, the number of stores of the 100 largest retailers in China increased 18.9% in 2009. The 100 largest retail chains sold only 11% of all consumer goods in China.  How is your experience marketing to kiosks and neighborhoods?  Have you ever set up a sales force to tap into a billion person market?

3. Patience is a Virtue

If a Chinese investor(s) wants to sell goods into the U.S. they will have to have reasonable expectations for investment in gaining market share.  They won’t necessarily understand or be patient with the initial burn rate of capital for their ROI so tell them to fund the endeavor, put it the hands of U.S. marketing professionals and apply their expertise and focus on the supply chain and manufacturing.  This isn’t to suggest in a cavalier way that they should be totally hands off.  As principals they have every right to monitor their investments.

4. Future Opportunities

There are enormous opportunities in the creation of funds that don’t necessarily follow the typical M&A or PE models when it comes to risk or multiples.  There are many well known companies who through their years of staying power still maintain significant brand equity yet may only be doing $10-$50MM in sales–not enough to fly on the radar of big deal makers yet still very viable with the right investor profile.

Take that state of the art factory you have in Shenzhen and manufacture AND OWN an old U.S. brand putting together a “newco” re-launch model.  There has never been a better time and available talent here.

We are not going to see Chinese or U.S. brands in the future but rather well funded global brands that offer businesses or consumers the best return for their investment.

David Alexander is President, North America for BaySource Global, a strategic solutions provider specializing in specialized sourcing, project management, distribution and fulfillment in China.    www.baysourceglobal.com

China News

Each day we read and hear more and more about the co-mingling of China and the U.S. as these two interdependent nations refine their geopolitical position with each other and the rest of the world.  China is a vast nation teeming with industrious minded entreprenuers who are seeking their fortune much in the same way as U.S. pioneers in the early 1900s.  Our countries are indissolubly linked from an economic standpoint and nothing on the horizon seems to contradict this long term description of our relationship.  China, while still “factory to the world,” will forge ahead in Western style to build consumer brands, capitalize on the meteoric rise of a middle class market, and play a vital role in world financial markets.  It is a story that will be amazing to see unfold and in no way does the ending have to be a negative one as both nations continue to innovate and lever their strengths and resources. 

If you or your colleagues and associates have the need for a competent and experienced partner to manage your company’s China business, we want to be just that.  We have a China staff of over 30 who have working knowledge of hundreds of industries and disciplines.  Our specialties are complex manufacturing assignments, supply chain management, fulfillment and distribution in China, greenfielding, and highly competent project management.  We are integrity driven, quality focused and have an ardent desire to see our clients succeed in every undertaking. 

Thank you for allowing us to continue to reach out to you with newsletters and emails.  Should your business plans include any aspect of dealing with China, please don’t hesitate to contact us for a free, no-obligation consultation.  

China to continue RMB exchange rate reform Chinese President Hu Jintao reiterated on May 24th that China will continue to steadily advance the reform of the formation mechanism of the RMB exchange rate under the principle of independent decision-making, controllability and gradual progress. Hu made the remarks at the opening ceremony of the second round of China-US Strategic and Economic Dialogue in Beijing. 

Hu said China will continue to pursue a win-win strategy of opening up. The country would expand market access in keeping with established international economic and trading rules, support the improvement of international trading and financial systems, and askance trade and investment liberalization and facilitation. 

On China’s effort to accelerate the transformation of its economic development pattern, he said, “We will make great effort to expand domestic demand and increase household consumption, vigorously promote sounds and balanced growth of external trade, and reject protectionism in all manifestations.” 

China’s trade back into surplus After a US$7.2bn deficit in March, China’s trade retuned to surplus in April but shrank 87% from a year earlier due to faster growth in imports. The trade surplus stood at US$1.68bn in April, according to the General Administration of Customs. Exports rose 30.5% you to US$119.92bn in April, while imports surged 49.7% to US$118.24bn.

Harley Sales Up Harley Davidson Inc has reported that sales in China doubled last year, according to Rodney Copes, VP of international sales. Since it entered China in 2005, Harley has developed four dealers nationwide – one in Shanghai – and plans to open four new dealerships this year in Wenzhou, Xiamen, Dalian and Chengdu. 

Foreign Investment Reflecting the determination of China’s central government to attract additional foreign investment-and to direct that capital towards industries and regions that serve the government’s broader social and economic goals-the State Council issued Several Opinions on Further Utilizing Foreign Capital (Foreign Capital Utilization Opinions) on April 6, 2010. The Foreign Capital Utilization Opinions set priorities that encourage foreign investment in research and development centers, high-end manufacturing, high and new technology, alternative energy, and other environmentally friendly industries while discouraging investment within industries that consume large amounts of energy, pollute the environment, or are already over capacity in China. 

Shanghai Pudong – new policy on JVs On 13th April 2010, The Shanghai Pudong People’s Government issued the Tentative Measures On Setting Up A Sino-foreign Equity Joint Venture (“EJV”) and Cooperative Joint Venture (“CJV”) In Pudong (“Tentative Measures”). The Tentative Measures have been introduced to allow domestic natural persons to establish EJVs and CJVs in the Pudong New Area. The Tentative Measures came into effect on 1 May 2010 for a trial period of 2 years. 

The Chinese laws on joint ventures, which were initially issued in 1979 and 1988 respectively, do not allow domestic natural persons to set up EJVs or CJVs with foreign companies or individuals. Such restrictions do not conform to the principle of “national treatment” and so have been seen as being an obstacle to domestic individuals hoping to cooperate with foreign entities and/or individuals. As the Chinese people are becoming more prosperous, pressure has increased to abolish the existing restriction. 

The usual way to circumvent the restrictions is for a Chinese natural person to set up a limited liability company (normally a one-person company), and to use the new company as a vehicle to partner foreign parties. However this route is very inconvenient and the issue of the “invisible investor” has led to many disputes between contracting parties. 

Foreign investors have encountered difficulties when trying to partner with a Chinese citizen they trust. There has been rapid growth int he need for cooperation between individuals from SMEs and foreign individuals in high-tech and creative industries. As the officials from Pudong said, “We have changed because such change is required.” 

Highest Level of Confidence  Chinese consumer confidence rose int he first quarter of the year to the highest level since 2007 as people became more optimistic over their future, a survey by Nielson Co and the National Bureau of Statistics. The Consumer Confidence Index in China climbed to a three-year high, bolstered by better employment prospects. However, people’s willingness to spend fell slightly due to soaring asset prices.

World Expo Opens  Shanghai kicked off the 2010 World Expo with an extravagant opening ceremony and fireworks show. The two-hour performance at the new US$270m Expo Culture Centre ended with a spectacular outdoor multimedia show punctuated by a parade of hundreds of national flags carried by boats along the city’s Huangpu River. The city has spent US$45bn, more than Beijing spent not he 2008 Olympics, to put on what it says will be the biggest Expo ever.

 

David Alexander is President of BaySource Global, a U.S. based manufacturing and project management firm with offices in Shenzhen and Shanghai. www.baysourceglobal.com

Are You Marketing to China?

It’s a simple question, but it does carry a lot of weight…

With the middle-class consumer demographic growing rapidly in China, companies who are not including China in their target audience could find themselves falling behind in the years to come. Here’s more…
 

 Are you ready to talk to them?