The sound of a balloon deflating (in China)
An experienced SME manager sets up a successful production facility in China, but there are still things he wishes he'd known in advance…
Lots of Western businesses have set out to establish production in China (and other countries too, of course) – some successfully, others less so. Each story is unique, and we should beware of elevating specific instances to become generalizations, but they can at least help us to think. I heard a fascinating story of this type from Rob Nirsimloo recently. Rob has many years of senior management experience in manufacturing and exports in the chemical and engineering sectors. In the last couple of months he has launched RaM Business Associates to help businesses (especially in the North East of England) get export-ready. RaM also advises on international sales, human resources, finance and design and marketing. Anyway, with his permission, here's the story. Do read to the end - it's well worth it, and you'll learn the significance of the strange title too!
Rob begins: "We'd been exporting to China for a number of years and quite successfully too, but I found there were some companies that we just couldn’t break into. That was largely because our lead-times were too long. We were manufacturing inks that were alcohol-based and highly flammable, so they had to be transported from the UK by sea freight. When you added customs clearance times on to that, the lead-times were about 8 weeks in total.
"So then I had what I thought was a great idea: to warehouse the product in Hong Kong and then just take it across the border when required. That worked well for a year or two, until Hong Kong Customs & Excise decided to levy a 5% duty on everything we were sending in. In fact we had to pay a deposit of 100% of the value of the goods, and then they would return 95% of that deposit to us once the goods had been analyzed and cleared. But imagine: we had a container going in every month, each load was worth around £50,000, and the Customs deposit refund process took 60 days – it really started to cause us a problem with our cash-flow".
So were the Hong Kong authorities counting this product in with alcoholic beverages, for customs purposes? I ask. "Exactly. I can remember going out to talk to them about it and saying: This stuff - you can't drink it. It'll kill you" [he laughs]. "All to no avail."
"So anyway, that led to the decision to set up production in China. We got help from advisors who were able to assist with the registration and regulations, but I still had to spend a lot of time scouting out the right location. It took the best part of a year, during which time I made about 10 visits. We wanted to go in with low-level investment, renting existing premises rather than doing a new-build. But the properties we were being shown just weren't suitable; some wouldn't even have passed local safety regulations.
"After nearly a year meeting with different local authorities (having the usual banquets etc., then typically being shown something in the middle of a field that was totally inaccessible), we were on the verge of deciding to build something ourselves. Right then a kind of 'serendipity' thing happened. I went to see an Australian company outside Shanghai, a potential supplier of pigments for our inks. Later, on the plane on the way home, I realised that we could both benefit if they made our product for us using their pigments. It could be a win-win situation, and we would get into China with virtually no investment. So when I got back home I called them and asked if they would be interested. They were.
"Sometimes in business you need that stroke of luck – right people, right place, right time. On this occasion I had that".
"99% of our raw materials were being locally sourced. In order to protect IP we had our technical people take out some of the key ingredients, and produce a pre-mixed additive that was non-hazardous, which we could then FedEx to them easily from the UK - a kind of mystery ingredient X".
Very clever. So is the operation still going on, I wonder? "Yes. But what I said about 'nil investment' wasn't actually true." [he chuckles] "If you're thinking of investing in China, first think of a number then multiply it by ten." Right. He'd already mentioned about all those business trips while looking for premises - they didn't sound cheap, even if some were done en route to and from other meetings. The time alone was a significant investment, especially seeing as he was the Chief Executive of the business.
Rob goes on: "You asked me what obstacles we had to overcome – that's a good question! – here's one that immediately comes to mind. We'd been around visiting our Chinese customers (and potential ones too) and asking: What if we reduce our lead time from 8 weeks to 3 days? We were going to reduce our prices a bit too, passing on some of the cost savings. Anyway, they all said: Yes, this is wonderful, we will buy from you. Tell us when you're going to do it. Next, it took a bit of time getting ready because we had to fly our techies out there to teach the local guys how to make the product correctly. We had to do lots of testing to make sure the ink was identical to what we made in the UK, and consistently so – that was vital.
"Eventually we were satisfied. The quality was right and we had all the test results to back it up. So then I went back into China, expecting a triumphant tour going round all our customers saying: Give me your order numbers. But… I was flabbergasted to find out the attitude of our Chinese customers towards the China-made product. They just said: It can't possibly be as good as the UK product, because it's made in China." [He pauses to let this sink in. And then bursts out laughing.] "You know the sound of balloon deflating?"
pphhffffffffhh. Yes, I can imagine the feeling. What a let-down! We've all heard of similar trust issues with, say, food products – baby milk power being the classic example. But ink?
"That set us back 6 – 12 months, while the customers did their tests. These were real-time tests – there was nothing we could do but sit back and wait. You wouldn't believe the level of testing and technology that goes into the something considered as mundane as the ink in a whiteboard marker!
"Britishness is a good thing; Made In Britain is still a hell of a cachet to have when you're exporting. In our case, the product lost a bit of its magic once we began to make it there in China, even though the actual quality was identical. Anyone from the West considering manufacturing in China needs to do their market research and find out whether the sector they're in has similar cultural questions. Talk to your potential customers and try to eke this out of them before you take the plunge."
So there's the story, and it illustrates very well the importance of good, advance market research, and of knowing how your product is perceived by people in different overseas markets. What value is placed on the location of manufacture? (in monetary terms, or lead-time, say?). Is it viewed as a necessity or a luxury? Normal or exotic? Cool or passé? And how is it categorised legally? (art product? hazardous chemical? beverage?). pphhffffffffhh.