The New Tao of Trade: Don’t Just Import from China. Sell There.
January 23, 2013 Leave a comment
Chester Higgins Jr./The New York Times
Vision Quest Lighting’s chief executive, Larry Lieberman, started to break into the Chinese market by selling through an established local company.
Published: January 24, 2013
Like many American businesses fighting to keep their prices competitive, Vision Quest Lighting turned to China about six years ago. It now imports about a sixth of the two dozen to three dozen parts required to make its lighting fixtures from there. Recently, however, the Long Island company began to see China in a different light: as a sales target. The growing economy of the world’s most populous nation made it ripe for Vision Quest’s architectural lighting fixtures, many custom-made for hotel and restaurant chains like Hilton and KFC.
When one such client, a clothing retailer, ordered 1,500 lights for five stores, Vision Quest’s chief executive, Larry Lieberman, decided it made sense to start manufacturing lights in China. Other American clients, he reasoned, would no doubt begin placing similar orders as their chains sought to capitalize on the world’s fastest-growing consumer market. And with high-quality products from the West coveted in China, Mr. Lieberman also imagined his products on display in Chinese showrooms.
And yet, selling goods in China is not easy. Mr. Lieberman made the 1,500 lights only to see them gather dust in a warehouse in Guangzhou for more than four weeks because he had not yet established a local enterprise approved to process sales.
“The customer couldn’t pick up the goods because we were still trying to set up something so they could buy them correctly and pay the right tax,” he said.
With help from an experienced consultant, Mr. Lieberman finessed the impasse by selling through an established local company, and he remains bullish on cracking the Chinese market – as do many other small-business owners. After all, China, according to a 2012 McKinsey & Company report, From Mass to Mainstream, will be the world’s largest growth market for many years.
This small-business guide offers tips for getting started based on the experiences of entrepreneurs and small businesses that have already tried.
BILINGUAL IS NOT BICULTURAL Lou Hoffman is founder and chief executive of the Hoffman Agency in San Jose, Calif., a communications consulting company that generates more than 50 percent of its revenue in Asia. Mr. Hoffman planted his flag in China in 1999. “I thought I was in not just another country but another universe,” he said. “It starts with the language, but goes much deeper. We couldn’t do business on the phone or by fax. Placing our first classified ad took 14 hours. We had to do everything in person, and considering the traffic in Beijing, you could kill three hours so someone could see your face.”
Instead of dispatching a trusted lieutenant from his California headquarters to open a satellite office in Beijing, Mr. Hoffman delayed that expansion for nearly a year. Instead, he hired a Chinese national and embedded her in his San Jose office for 10 months so she could learn his agency’s culture, then carry it home with her. “We wanted someone able to interview people in their native tongue and able to bridge the cultures, which she was able to do,” Mr. Hoffman said.
SET UP SHOP AS A WFOE Although it is possible to scout opportunities with a so-called rep office and to do business in China by selling through distributors or by licensing products to a Chinese company, most American businesses that are serious about selling in China invest the time and money to establish themselves as a wholly foreign-owned enterprise, or what is known as a WFOE (pronounced WOOF-ee). “We do probably 100 WFOEs for every rep office,” said Dan Harris, a lawyer with the Seattle firm Harris & Moure who writes a blog about Chinese law and business. “Legal fees for company formation, trademark and employee contracts and manuals typically run around $30,000 to $45,000.” But the upfront investment does not stop there. Depending on the location and the type of business, the Chinese government has minimum capital requirements – money deposited in a Chinese bank account – that can range “from $15,000 to millions of dollars,” he said
And think months, not weeks, to get all of the paperwork approved. “In China, you can’t do anything last minute,” said Savio S. Chan, president and chief executive of U.S. China Partners, which is based in Great Neck, N.Y, and which helped Vision Quest move its light fixtures out of regulatory limbo. “It can easily take up to six months to set up a WFOE.”
LET OTHERS NUDGE THE DOOR OPEN Cabot Hosiery Mills, which makes high-end recreational socks in Northfield, Vt., has edged into the Chinese market. Sought out by a Chinese distributor at an American trade show, the company has traded a bit of profit potential to test the demand for its made-in-America goods without wrangling a WFOE or staffing a sales operation. “Right now, it’s very straightforward and still small, less than 1 percent of our volume,” said Ric Cabot, chief executive of the company, which owns the Darn Tough Vermont brand. “But if it gets to the point where we see we’re leaving too much money on the table, we might consider doing something different.”
DON’T GET KNOCKED OFF Product infringement and knockoffs are risks in China. As a result, Earl Kluft, owner of E.S. Kluft & Company in Rancho Cucamonga, Calif., a maker of luxury mattresses priced from $3,500 to $70,000, watched his first attempt to tap into the Chinese hunger for premium Western brands fall apart. “A huge manufacturer of recliners and small mattresses came to us, and we started a program under their name,” Mr. Kluft said, explaining that the arrangement started with six mattress products named for American cities. But on successive trips to China, he started to see fewer of his products on display – and more of other brands that looked very much like his. “Even after we stopped selling to them, they still had my picture up,” he said. Networking through a friend, Mr. Kluft has since signed a deal with a Chinese division of an Indonesian company that cautiously re-established a sales channel with minimal upfront investment. “The idea is to get this up and running,” he said. “We charge them a royalty, so much a year for use of our name in their stores, and they buy the product at a special discount.”
Mr. Harris, the lawyer, advises getting started by finding reliable partners on the ground. “Find them through people you know, and then pay for whatever due diligence is necessary to make sure that you have made the right choice,” he said. “And do all of this before you start doing business with them.” LOOK LOCALLY BEFORE YOU LEAP For some entrepreneurs, help may be surprisingly close at hand. Many states – including Georgia, Pennsylvania, Mississippi and Tennessee – have international trade programs that offer counsel.
“We think it’s hard for a small company who’s never been to China to figure this out all by themselves,” said Samir Ali, assistant commissioner of international affairs in Tennessee. “We’ll help them see if there’s a need for their product in China and to think it through: Do they need to set up a WFOE? Do they need to have a presence or not? Should they go the e-commerce route? And tell them how much they should budget going forward.” The assistance includes the use of Tennessee’s China offices for meetings with potential partners and help with business-to-business matchmaking through companies the international trade program has vetted in the 10 largest Chinese cities.
Though bullish on the opportunities, Ms. Ali finds herself repeating mantras like: “Don’t go in too fast. Don’t go in blind. And don’t leave your common sense at home.”
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