Companies Prepare for a More Open China
Orange County companies gazing toward China and its massive potential market are stepping up plans in anticipation of the country’s expected entry into the World Trade Organization this year.
“We just put our operation in place,” said Mikael Jacobsson, chief executive of realityBUY Inc., an Irvine developer of 3-D software for e-commerce. “We’re still training people and marketing to prospective clients.”
RealityBUY starting doing business in China in 1999 and in September announced plans to acquire 20% of its franchisees in China, Hong Kong and Taiwan. Jacobsson, who said RealityBUY has done about $1.2 million in sales in China since starting up there, sees the company’s China business growing 50% annually in the next two years.
Rainbow Technologies Inc., an Irvine maker of security software and devices, is betting that China’s entry into the World Trade Organization will accelerate the country’s integration of U.S. technology.
“We’re seeing 80% annual sales growth in China right now,” said Humphrey Chan, director of Asia-Pacific Rim operations for Rainbow. “And we expect that to continue well into the foreseeable future.”
Cyrsh Technologies Corp., an Irvine developer of language translation products, has been busy pursuing licensing agreements with Chinese companies. Cyrsh’s products translate text between languages via the Web. For Chinese users, the software converts data entered using Chinese characters or phonetic spellings into other languages and back again.
“We’re in negotiations with quite a few China-based companies,” said Aj Khan, Cyrsh’s chief executive. “Our business does depend on China.”
For now, China remains a difficult place for U.S. companies to make money. Experts say the country’s entry into the World Trade Organization should result in a steady opening of markets there. OC executives say they are looking to gain a foothold in China, despite the short-term difficulties of doing business there, such as China’s stringent controls on the transfer of funds to other countries.
“It’s not enough to just sign contracts,” Jacobsson said. “You have to actually get the money out of China.”
Last year, OC exports to mainland China hit a projected $343 million, up 9% from 1999’s $314 million, according to figures from California State University, Fullerton. OC shipments to Hong Kong made up another $488 million in 2000. Mainland China ranks No. 11 among OC’s top export markets, but is seen moving up to No. 8 by 2004.
“We’re very bullish about China in the long run, although it’s not a major player right now from an OC perspective,” said Esmael Adibi, professor and director of Chapman University’s Center for Economic Research in Orange.
By 2004, OC exports to China are seen growing to $760 million. The figure factors in China’s World Trade Organization membership, and is nearly 30% higher than OC export projections if China weren’t in the 140-member world trade body.
“What’s attractive about China for us is that the country is already showing a very high demand profile for exactly the types of products OC companies produce,” Adibi said.
For Delmar Medical Systems LLC, an Irvine maker of cardiovascular monitoring equipment, China accounts for about 10% of international sales, said Jim Fincher, the company’s vice president of global sales.
“The Asia-Pacific region is especially important to us this year because of the weaker euro,” Fincher said. “China will be a potential growth market for us in 2001.”
China also has the appeal of low-cost labor and industrial space, according to Jim Djen, managing director of Bridge Technology Inc., a Garden Grove data storage and communications company.
Bridge is paying 10 cents a square foot per month to lease a new 110,000-square foot manufacturing facility near Shanghai. Labor costs are about $100 per month per employee, and the company is afforded tax-free status for the next five years, Djen said.
Starting in March, the plant and its 300 employees are set to produce power supply units for computers and consumer electronics. At full capacity, Bridge expects to add another 600 employees, Djen said.
Team China/USA Inc., a Newport Beach-based engineering company, is part of a group working on what it calls an environmentally friendly power plant fueled by waste coal that China would be unable to use with its own technology.
The project also includes Newport Beach-based Sceptre International Corp. and Pasadena-based consultant Andrews International.
“We are making use of Chinese coal that would otherwise have no value,” said Patrick Mulcahy, president of Team China/USA. “We’ve done a lot of work there before but never anything as complex as this current project.”
Mulcahy said his group received Chinese State Planning Commission approval after it brought in $26 million in financing to fund 30% of the project’s cost.
“It would’ve been very difficult for the Chinese to raise capital for projects like this without foreign help,” he said.
Still, doing business is challenging in China, where a mix of central planning and Confucianism pervade most dealings.
“People have been known to call in feng shui experts to advise on which way a planned electrical power plant should face,” said Malcolm Jones, owner of Laguna Niguel-based engineering company Malcolm Jones Associates.
Although China has streamlined approvals, Bridge Technology’s Djen said some government officials go ballistic over even the smallest errors in paperwork, especially for imports.
“They have no tolerance for mistakes, even typos,” he said. “And it doesn’t matter whether you’re bringing something in with plans to add value and re-export it later.”
The language barrier and China’s relative few partnerships with Western corporations are constraints to the country’s development, according to Cyrsh’s Khan.
“You and I don’t speak Chinese,” he said. “That makes it tough for most of the world to do business with China.”
Even so, the formidable Chinese business acumen can help commercial partnerships move forward, according to Ken Smith, a project manager at Sceptre.
“People in China understand the importance of rate of return on investment and the time value of money,” Smith said. “I haven’t always found this to be the case in parts of the Middle East and in some Eastern European countries.”
China’s evolving legal system and rigid political system can be the biggest shockers for those looking to do business there, according to Team China/USA’s Mulcahy.
“You have to be in it for the long run,” he said. “And be ready for more disappointments than joy.”
When Team China was nearing the end of negotiations with the Chinese State Power Corp., the state-run utility threw the engineering coalition for a loop by striking a minimum payment provision from its purchase contract.
“That took away the backbone of our finance structure for equity, and it also took away the guarantees we had given to banks to repay our debt,” Mulcahy said. “It took us a whole year to renegotiate that contract.”
Once agreements are reached, though, Chinese contracts generally are solid, according to Jones.
The Chinese “are very honest and they aren’t likely to breach an agreement because it would cause them to lose face,” said Jones, whose firm provides mechanical and civil engineering consulting for power generation plants and plastics plants in China.
“They don’t rely on legal infrastructure as much as Western countries do,when they give their word, they live up to it,” Jones said. “I think I’ve met about three lawyers in China.”
As in other markets, OC and other U.S. companies have to tailor their products to suit the China market.
RealityBUY’s technology allows manufacturers to deploy three-dimensional objects within their Web site, created from product data and photographs. This allows people to examine a product from all angles.
But reproducing products from China is difficult, due to a lack of available data. For China, the company has to use photos of a product to create a three-dimensional image before placing it on a client’s Web site, Jacobsson said. n
