On a Mission to China

Cincinnati Enquirer

By Cliff Peale

October 29, 2005

Local executives will explore a lucrative market.

It’s half a world away from Greater Cincinnati, but China is a potentially lucrative marketplace for companies here.

The emerging market of 1.3 billion people is compelling because of its low costs and because it’s the fastest-growing consumer market in the world, but establishing a business or supplier base there often can be frustrating, and even a little scary.

The problems can include finding the right suppliers or business advisers, and dealing with persistent patent infringements that big companies call one of their biggest impediments there. Despite the opportunities, business owners who have done business there advised caution in moving into the market.

“Don’t ride over on one plane and think you’re gonna do a big deal and make a windfall,” said Mike Brooks, chairman of Rocky Shoes & Boots Inc. in Nelsonville, who said his company has buyers in China. “It’s hard work.”

More companies in Greater Cincinnati and Northern Kentucky are about to start that work. The Cincinnati USA Regional Chamber of Commerce is taking about a dozen local chief executives to China next week, its first-ever trade mission there.

President Richard Nixon opened modern trade relations with the Peoples Republic with a 1972 visit. Since that time, U.S. companies have taken first baby steps and then giant leaps into the Asian nation.

Procter & Gamble Co., for example, moved into China in the late 1980s. P&G employs about 4,000 people there with sales of about $2 billion a year. But companies on the chamber trade mission are mostly mid-market companies seeking global opportunities. They include Cincinnati Sub Zero, Crown Plastics, HSR Business to Business, Standard Textile Co. and GBBN Architects.

GBBN is negotiating to open a Beijing office and gets more than $1 million in design fees from projects in China or through Chinese clients, partner Kim Patton said. They’ve been working there for about three years, with projects including residential developments.

While on the trip, Patton will use the Commerce Department’s Gold Key service, which helps U.S. companies meet with potential clients or business partners.

“We’re using this trade mission to explore opportunities in health care and the performing arts,” Patton said.

University of Cincinnati president Nancy Zimpher will be on the trip, as will several banks and law firms. But most of the delegates are local private companies looking to increase profits.

“It’s definitely new for us to go to China,” chamber president Michael Fisher said. “We hope to assist our companies that are growing with the expansion of their business in China and Asia, with the collateral benefit that it helps them expand their business in Cincinnati.”

The business connection between our region and China still is in its infancy. Chamber officials only know of one Chinese-owned company operating a facility here, a metals manufacturer in Mason called MECC USA.

But low labor costs are drawing more and more U.S. companies to open plants in China. That’s one of the factors that has led to a huge U.S. trade deficit with China, $162 billion last year, the highest ever with any country. Overall, U.S. imports from China have more than doubled in the last five years to $196.7 billion. In comparison, total exports to China from the U.S. nearly tripled to $34.7 billion during the same period.

That has made trade with China a political hot button. The issue emerged this summer when CNOOC Ltd., the government-backed Chinese oil company, bid $18.4 billion in an attempt to acquire American oil company Unocal Corp. Opposition to the bid emerged early, and Unocal agreed to be acquired by U.S.-based Chevron Corp.

But the low costs and potential opportunities in China have made those political issues secondary to many businesses, Brooks said, speaking as part of a panel on “Doing Business in China” here last week.

“In the consumer business that I’m in, footwear and apparel, if you’re not in China, you’re not in business,” he said.

Trading favors

For companies that want to open a plant or other supply operation in China, the traditional path involves finding a local joint-venture partner. That provides a relationship with local government officials and with the hundreds of languages, regulatory bodies and other issues they inevitably will confront, said panelist Ron St. Clair, president of Stalcop LP, an industrial components company in Thorntown, Ind.

“From our perspective, doing business in China is really personal,” St. Clair said. “You’ve got to learn how to trade favors, how they do business. It’s probably the most complicated place to do business in the world.”

Those local connections get more important as businesses locate farther away from the developed east coast, near cities such as Hong Kong and Beijing, to more remote provinces, said panelist Leland Lewis of Key Principal Partners, a private equity firm that has helped clients acquire several Chinese companies.

“We all think of China as very centralized,” Lewis said. “But I think the facts are that China’s very decentralized. It’s all run at the local level.”

More companies are avoiding the joint-venture partners and choosing to own their own assets in China, said Sean King, China portfolio manager at the Commerce Department.

All of the panelists who had done business in China emphasized the importance of finding lawyers, accountants and other professional service firms that have done business in China.

“I would caution people against doing things in China they wouldn’t do at home,” King said. “Never be unfaithful to your own company’s business model just because it’s China.”