Made in China

When Mike Bellamy first moved to the Chinese port city of Shenzhen a few years ago, whenever he saw another Westerner on the street he would take the time to introduce himself. Not anymore. There’s no way he could keep up.
“There is a tidal wave of Westerners coming over to China now to purchase goods or set up their own operations to sell to the Chinese,” said Bellamy, director of China operations for PassageMaker, a China-based, U.S.-owned and operated manufacturing company. “The time of first-mover status is quickly coming to a close.”
Bellamy was in the right place at the right time to ride the wave of China’s rapid transformation from emerging market to the world’s manufacturing breadbasket. In doing so, he and his team carved out a prosperous niche for PassageMaker by offering the advantages of China’s low-cost manufacturing backed by U.S. standards of quality and control.
But while the first wave is over, there are several more on the horizon and companies still on the fence about doing business in China have by no means lost out. In fact, in the marine industry in particular, holding back has only bettered the odds of success.
Until recently, there hasn’t been either a boating culture or an infrastructure to support a marine industry in China. This is now changing, thanks in large part to government support. More than 50 new marinas are planned or under construction, while special economic zones now exist with integrated services to support marine manufacturing.
U.S. manufactures have already taken advantage of the budding infrastructure. For example, Brunswick Boat Group has begun to manufacture both aluminum and fiberglass boats at its new facility in Zhuhai, a city in the Pearl River Delta (PRD) in southern China, where the local government committed $58 million a few years ago to build a boat manufacturing industrial zone.
The marine industry is also stronger with the emergence of an upper class of wealthy Chinese citizens who view yachts as the latest status symbol. There are an estimated half million U.S. dollar millionaires in China. What’s more, Ernst & Young reported that China’s luxury goods market is the third largest in the world, and is expected to grow at 20 percent per year over the next three years.
In the face of this growth, fearing that a wealth gap would contribute to social instability, the Chinese government imposed a 10-percent consumption tax on luxury goods, including yachts. As yet, however, this hasn’t seemed to slow sales.
The 11th China International Boat Show, held in Shanghai in April, for example, drew 320 exhibitors, 25 percent more than in 2005, and a record 21,000 visitors, up 30 percent over 2005.
And there will likely be additional growth next year from companies like Fountain Worldwide, the exclusive international distributor for Fountain Powerboat Industries, Inc., which has already committed to participate in next year’s show. The U.S. boat builder announced in August that it intends to expand into China, where it believes there is already demand for its products. In addition, it said Fountain Worldwide would work to help further the development of the pleasure boating movement in China.
“Asia now ranks as the world’s fastest growing economy, boasting double digit quarterly economic growth,” said Reggie Fountain, Chairman and CEO of the company. “With the results of the fact finding mission and marketing research conducted in the region … we believe there is an existing demand for our lines of high performance sport, fish and express cruiser boats.”
Boat Asia 2006, held in Singapore, also had a record number of exhibitors and attendees. The upcoming 2008 Olympics in Beijing is expected to raise the visibility of pleasure boating even more.
There’s no question: it’s time to get off the fence. How and where you land will be dependent upon how you leverage the opportunities at hand. That will mean determining whether to stick to sourcing components and parts or try manufacturing for exportation. It will mean determining, like Fountain and others have, whether manufacturing to sell to the Chinese would be a good idea. It will mean deciding between setting up a wholly owned operation or a partnernership with a local manufacturer. And renting, building or acquiring a facility.
Any and all of these options can be successful as long as you are patient and do your homework.
On the ground support
“The good thing about China,” says Bellamy, “is that there is pretty much something for everyone over here.”
That scale is also part of the challenge.
“China is the largest market in the world, but it is also the toughest,” said William Lawton, foreign service officer at the U.S. Export Assistance Center, U.S. Department of Commerce, Fort Lauderdale, Fla. “Everything is in the process of transformation — the economic system, political system, cultural system, everything. And the change is taking place at different rates in different parts of the country because of the way China inherently is culturally, so you need to take a lot of time when you do business over there.”
Many of those still considering doing business in China typically fear inconsistent-to-poor quality and the risk of counterfeiting to their intellectual property – and for good reason.
Counterfeiting remains a huge issue. PassageMaker protects its clients by assembling all parts in a secure facility under its roof. Another tactic is to divvy up component manufacturing so that no one supplier has all of the pieces, whether the final product is assembled in China or the U.S. But if the part or intellectual property still gets into the hands of a counterfeiter, the best protection, although not perfect, remains owning the trademark (see “Knocked Off, But Not Out” sidebar on page 42).
While quality is another ongoing problem, it is vastly better today than it has been — as long as you take steps to ensure the proper controls are in place. That usually means on-the-ground support, whether through a vetted Chinese partner or a Western management team.
“Seventy percent of our customers have had experience in China, good or bad,” said Bellamy. “They’ve either had products knocked off or they tried to do business but then decided they needed a trusted partner with a team of native English-speaking managers on the ground to help communicate some of the cultural complexities.”
Bellamy has visited hundreds of manufacturing bases in China and has seen the spectrum from state-of-the-art facilities to those with broken equipment and leaking ceilings.
“There is such a range that it is vital that as a buyer you visit them or you have someone you trust visit them,” he said.
Richard Walcome, owner of New Found Metals, maker of hand-cast marine hardware, Port Townsend, Wash., agrees.
“It’s really almost a cliché now,” he says, “that you need to be hands-on in doing business in China, whether you are producing something yourself or buying it from a supplier. You can’t just give someone your specs and then walk away. You will be sorely disappointed in the results.”
New Found Metals sources its hardware in China, where it’s made in factories owned by Walcome’s family members. He prefers having a wholly owned foreign enterprise, or a WOFE as they are referred to in China, rather than a joint venture with a Chinese factory because, as he puts it, “I prefer having very, very strong control over the production. There is a lot of artwork in every manufacturing process. If you are polishing something, how much polishing does it need to be flawless? That’s hard to get across and why you need to be hands on.”
Not all parts and components are suitable to being sourced in China. At the same time, with some components, it’s almost impossible to find a source outside of China.
“If a product or component is fairly straight-forward in terms of materials and quality requirements and labor intensive, then China is a good option,” Bellamy said.
Although manufacturing in China is less expensive, like all things there, the issue is more complex.
According to Bellamy, because labor costs are less in China, set up costs are roughly one-third of what they are in the United States. So when all other considerations are equal, there is a substantial savings. However, all other considerations are not always equal.
For example, certain components for sailboats and yachts are made of high quality materials only available in the U.S. or Europe. If the raw materials are shipped to China, then processed and sent back for assembly, there might be a point where the potential savings are negated, especially if the company pays a duty tax on the materials coming into China.
“You really have to be careful,” said Richard Hipp, general manager, Southco Marine, a business unit of Southco Inc., headquartered in Concordville, Penn. “When you add in the logistics, duties and freight, sometimes it is a wash, and what you are giving up in many cases is service. Shipping via boat is at minimum 45 days and sometimes 60 days, so add that to your lead time and do the math.”
Patience, patience
Southco opened its Asian headquarters in Hong Kong in 2001 and its Shanghai facilities in 2002. Since then, it has added another manufacturing plant in Shanghai and two plants in the south in Shenzhen in line with its global strategy of manufacturing where its products are consumed. Southco originally moved into Asia at the request of its high-tech clients who moved east for low-cost manufacturing and wanted the tax benefits of having local suppliers as well.
Southco’s expansions included building a plant from the ground up as well as acquiring a Chinese company through a joint venture and then renovating the facility. The process at each location required enormous patience as well as cultural finesse.
“Each area in China requires different licenses, and each organization from the local industrial park to the municipal or central governments responds differently,” said Thomas Mehler, vice president of Asia Pacific operations for Southco, Shanghai. “China is not a country where you can just submit your request. You have to substantiate it and be proactive. You may have to go back and forth three or four times.”
The importance of taking the time to build relationships before entering into any business negotiation with the Chinese cannot be overstated.
“You need to do due diligence three or four times, and I’m not exaggerating,” said the U.S. DEC’s Lawton. “If I see a business card with a person’s position, I immediately have at least three other things I want to know about them: What is the person’s full name, who is their family and how powerful are they in the region? Are they a [communist] party member and if so, what is their ranking? It is necessary to know that not from a standpoint of ideology but simply from a point of what power do they exercise.”
It doesn’t stop there. Business people as well as government officials will want to get to know you as well.
“They want you to know them and their families, and they want to know you and your family,” Lawton added. “This takes a long time, and people sometimes get turned off by it. On the other hand, I’ve watched multi-million dollar deals done on a handshake. They can move with absolutely blinding speed once the relationship is built.”
There is also the legal aspect to consider. Because the legal system is in transformation like everything else, it is vital to know the laws that apply during the negotiation phase but also to continue to monitor them over time. Because everything changes in China.
Mehler has some other suggestions as well. Never, for example, appear as though you are under any time constraints when in negotiations. And don’t expect an immediate response after you’ve made an offer. They might talk about something else for several minutes before responding to you, and they expect the same tactics when they make a counter offer.
If you need to work with an interpreter, Mehler recommends finding someone who works for a Western company and who has lived and worked in the United States or Europe.
“What Westerners see as integrity is rare … find someone who is [working as an interpreter] because he believes it is the right thing to do,” he said.
Still emerging
Early this spring, Lawton organized a marine trade mission to China at the invitation of the China Boat Industry and Trade Association. The group represented a broad spectrum, from marina developers to vessel buyers and sellers, and at least three of them are now in negotiations with Chinese entities.
There are also negotiations in the works between members of a Chinese trade delegation that Lawton arranged to visit Miami last fall. Despite coming just after Hurricane Wilma hit, the delegation was able to attend the International Boatbuilders Exposition and Conference and tour the port and several vessels.
Despite Lawton’s bullishness on China, he cautions that there are big challenges ahead. In particular, there are the $200 million to $240 billion in nonperforming loans still in the Chinese banking system that no one knows what to do with. They originated when the government forced the banking system to fund state-owned enterprises.
“These were usually fairly massive companies that should have gone bankrupt,” he said. “If they cut them off now all at one point, they would have thousands of people on the streets. They have been doing it slowly but surely, but not quite as fast as some would like to see.”
One bump in the road for the marine industry in particular goes back to the lack of a recreational boating culture. Although it is growing, it is still embryonic. While the number of boats shown at the 2006 Shanghai boat show nearly doubled this year, the reality is that there were only 90 boats on display.
In addition, most of the population resides in high-rise apartments. They have neither the room to store a boat nor the transportation to haul one.
There have also been regulations introduced that don’t support recreational boating. Brunswick, for one, has been working with the Chinese government to help nurture a more conducive environment for recreational boating and has made some strides. For example, the marina at the Mercury Marina facility in Suzhou is the first in China to be granted permission to provide license training and testing to both Chinese nationals and foreigners in conjunction with the local port authority.
Lawton remembers his disbelief when Mercury Marine first entered China.
“I couldn’t have been more wrong,” he said. “Mercury has definitely recouped all of its investment.”
Brunswick entered China because it believed it must as a global company. As a spokesman said, “We believe that to be a truly global company, we must be close to the markets to understand and serve them. We must deal in local currency, avail ourselves of local supply chains, cultivate local dealers and understand the local styling and features desired by local customers.”
Does that mean all of the U.S. marine industry needs to be in China?
That’s still a matter of each company’s strategic growth plan, but executives must consider the long-term impact.
“I think that in 10-to-15 years, recreational boating in China will present a huge market, and the companies that get over there now and learn how to do it will reap the benefits,” Walcome said. “The U.S. market is pretty mature with slow and steady growth, but the Chinese market is an upward angle.”
If nothing else, a visit to China would be eye-opening.
“I always wanted to work in Asia for the experience, but before I moved to Shanghai, I didn’t even like Chinese food,” said Southco’s Mehler. “But now I love it. I love the energy that it is. Even Chinese food is different, it’s much better. I came out of necessity for my career, but now I think it is the best place in the world to be.”
Lawton is just as enthused: “You can’t imagine it until you’ve seen it.”
Resources
The U.S. Commercial Service has a network of export and industry specialists located in more than 100 U.S. cities and 800 countries worldwide to provide counseling and other services to assist small and midsized U.S. businesses in exporting their products and services. See www.export.gov/eac/index.asp to learn more. The China Business Information Center at www.export.gov/china also provides insight on exporting to China.
There are many non-government Web sites that provide information as well. PassageMaker’s Mike Bellamy recommends www.globalresources.com and www.alibaba.com for identification of China-based suppliers but emphasizes that “you will never really know if the partner is right for you unless you walk their production line.”

Sidebar: The Chinese Threat
Do U.S. boat builders need to prepare for an invasion of Chinese boat builders competing with them for U.S. consumers?
“Not at all,” said Tom Waugh, general sales manager for Ocean Alexander Marine Yachts Sales in Seattle.
Alexander Marine, the manufacturer of Ocean Alexander yachts, nearly doubled its imports to the West Coast between 2003 and 2005, when it led all importers of luxury yachts into the West Coast ports with 23 percent. It expects double-digit growth for 2006 as well.
Waugh believes that both the strength of the U.S. boating industry and the logistics and costs of importing boats from China to the United States will impede rapid growth in imports. The size of the market is also an issue.
“I don’t think the industry is large enough to draw their interest,” he said.
Still, there are some unsettling considerations. For example, when China emerged as the world’s manufacturing center, there was the assumption that it would always depend on the West to provide the innovation. Few still believe that myth.
“There are currently 350,000 students in the United States working on engineering design degrees. In China, there are 3.5 million,” said Richard Hipp, general manager, Southco Marine, Concordville, Penn.
Currently, the Chinese marine industry is still hampered by quality issues whether it is exporting or selling into the Chinese market.
“It is estimated that there are about 260 fiberglass boatyards here, but only about 30 or so are building quality yachts,” said James Georgechen, of Genuine Marine Ltd., Shenzhen, a distributor for marine products.
Part of the problem is that most of the workers in the boatyards have never seen a yacht and don’t understand the need to meet certain standards. Alexander Marine had this problem when the company first moved its operations from Taiwan to China.
“There was definitely a learning curve,” Waugh said. “Because they had never been in a boat, they might do something a particular way because they were thinking cosmetics rather than functionality, but we are taking care of it and they are getting more and more aligned with how we did business in Taiwan.”
When the company first moved its operations to China, it assumed that it could train its new employees in just a few months. In reality, it has taken three years to achieve the level of quality required.
Through his dealings with the boatyards, Georgechen is working both formally and informally to improve quality. Long-term, he envisions a time when Chinese innovation will keep pace with the rest of the world, but that it is still a ways away.
“China has a lot to do,” he said. “Yachting is still very new for the Chinese people, but the more they are involved in building boats, the more they will realize the importance of supporting the industry. I think this is happening, but of course it will take some time.”
Sidebar: Knocked Off But Not Out
Two years after learning that the individual in China suspected of counterfeiting its products had applied to trademark the Faria brand, The Thomas G. Faria Co. has reached an agreement with the man to drop the application.
“It bothered me to basically award a prize to a counterfeiter to regain our name in China,” said David Blackburn, president and CEO of the Uncasville, Conn., firm, “but the option was to contest his application and spend three to four years fighting it in the Chinese court system with no guarantee of success and probably spending an exorbitant amount of money in the process. So while it was distasteful for me, from a purely economic perspective and for expediency, it was by far the best way for us to go.”
Blackburn’s experience with counterfeiting in China is not unusual (see Hot Property in Boating Industry’s September 2005 issue). Counterfeiting remains a top concern for U.S. companies doing business there.
“I know of a handful of our products that are being knocked off, and we are working on that,” said Richard Hipp, general manager of Southco Marine, Concordville, Penn. “One of the things working for us is that we are becoming a local company, and we are seeing that we are getting support from China when these things arise. But we are also getting smarter about it. In the past, we patented our products where they were consumed, and now we are looking at patenting them where they are manufactured.”
China is a first-to-register trademark country, which means it doesn’t matter who invents a product or even who commercializes it first. Whoever applies for the trademark can be awarded ownership.
This summer, the Chinese government announced it was establishing a branch of the court system to deal specifically with intellectual property cases, in an acknowledgment of the scope of the problem. Whether that was window dressing, given the announcement’s timing on the eve of President Hu Jintao’s visit to Washington, D.C., or a true commitment on the part of the government to try to deal with the problem remains to be seen.
One of the most difficult aspects of the issue is that many Chinese don’t understand why copying a product is a problem. In other cases, the real culprit is a foreigner.
“I’ve seen firsthand that in many cases they don’t even know that what they are doing is wrong,” said Hipp. “They haven’t done their homework and found out that there is a patent. Someone from the West said, ‘Make this for me,’ and then down the road, they find out that they were told to make something that infringes on a patent.”
Both Hipp and Blackburn believe that once Chinese inventors begin developing their own intellectual property, and they will, counterfeiting will become less of an issue. Until then, given Blackburn’s experience, one might think he would want little to do with China, but that isn’t the case.
“There are 1.4 billion people there, with India right next door with another 1.4 billion people,” he said. “It would be stupid not to try and develop a strategy for selling into that marketplace … But it deserves an appropriate amount of research before jumping into the fray. I want to really make sure that I am comfortable with the strategy that we develop for establishing our presence there before we rush ahead.”