The Blog:

Where should you set up a factory in China? 9/30/2010

Good Question.  That’s something that most companies struggle with at first, and something many companies struggle with after they set up a factory.  I recommend avoiding the latter by doing your research.  China is slightly larger than the United States in total land area and has cities (some more desirable than others) scattered throughout the country.  I often use this example to help people begin this conversation:  If you were an automotive manufacturer, would you be better off setting up your factory in Detroit or South Beach?  Obviously in Detroit.  Detroit would provide a skilled labor force, companies in similar industries, a pro-manufacturing regulatory environment, local supply chains, etc.  As such, I recommend thinking about the location of your existing facilities first.  What works?  What hurts?  Then you can begin to look for similarities in China and begin to narrow down investment locations.

Most foreign companies end up in the greater Shanghai area or in the greater Guangzhou area.  This is largely because these are the major manufacturing regions that have invested heavily in infrastructure.  These regions may both be places you want to consider, but I recommend doing additional research as you may find that another region will be far more suited to your industry and may offer more attractive investment incentives as a result.

Start with your customers.

Locating a facility down the street from your customers is always a good idea.  I recommend using Google Maps or Google Earth to map out all of your customers on a map of China.  This will help you to identify regional groupings that exist.

Focus on your competition.

After you know where your customers are, take a look at your competitors.  If you find that your competitors are all located near your customers, there might be a reason for this…

What about your supply chain?

This may be one of the most critical factors to take into consideration as you evaluate different regions and go through your site selection process.  It is extremely important to make sure that your supply chain can support a facility in a certain geography.

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Understand China Official Launch! 9/29/2010

Today marked the Official Launch of Understand-China.com.  If you are reading this, you have already realized that the site is up and running, but we were excited to make the announcement nonetheless.  After more than nine months of ongoing development, twelve hundred hours of research and over 250 pages of detailed information, Understand-China is the leading authority on doing business in China.

The site is intended to assist business looking at investing in China by providing a one-stop resource for all of the information they need to be successful in China. The Understand China site breaks down pertinent manufacturing and investment information by major investment region. The site includes detailed information on Beijing, Shanghai, Shenzhen, Tianjin, Hong Kong and twenty other provinces, special economic zones and Chinese special administrative regions.

Enjoy!

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China Continues to Attract More Foreign Investment 9/16/2010

An interesting article on the first page of the Business Section of the China Daily Newspaper today discussing foreign direct investment activity for the month of August in China.  The article states a 1.4% YOY growth for august, and forecasts a continued steady increase for the remainder of the year.  The service sector saw the highest increase in investment, and the government pledged a commitment to continue to deregulate this sector.

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Summer Davos: World Economic Forum comes to Tianjin! 9/13/2010

While exciting for many I am sure, I however, was not thrilled to learn that the world’s business heavyweights were ascending upon Tianjin this week.  Don’t get me wrong – Tianjin appreciates the attention and I am glad to see Tianjin continue to become a major financial hub in Asia.  What got me upset was that all my favorite hotels were all booked!  When I tried to make some reservations last week, I was surprised to see that the only room available at the Westin was the $15,000 USD per night presidential suite.  I waited a few hours to see if there was something wrong with the SPG website – upon my return even that room had been taken.

I had heard that an Asia “Summer Davos” event had been proposed in Tianjin, but I didn’t know that it had been scheduled.  To be honest, other than knowing that the World Economic Forum meets annually in Davos, Switzerland, the only thing I know about the event is that all the big wigs show up.  So, I decided to do some research and see what this one is really all about to see if it will impact foreign investment into china.

The Basics

Since 2007 the World Economic Forum has been holding the Annual Meetings of the New Champions.  The meetings, held every summer, alternate location between Dalian and Tianjin.  The conference primarily attracts Fortune 500 CEO’s, international political leaders and journalists.  You can get all the information you need at the World Economic Forum Website.

As you can imagine, the city has been preparing for weeks to welcome these leaders in the traditional Chinese fashion.  I heard that Premier Wen gave the opening speech, and have seen preparations prevalent throughout the city.  As Tianjin continues to attract this kind of global economic attention, it is sure to continue to fuel growth in the surrounding area – all of which is good for business as logistics infrastructure, transportation, accommodation, and foreign investment policies continue to improve.

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Flying Coach to China is your Competitive Advantage 9/12/2010

So you are starting a business or doing business in China.  The opportunity to leverage cheaper labor costs, address a market with a middle class the size of the population of the entire United States, and expand your global footprint has presented itself and you are now ready to make the leap.  This leap, like most things in China is big.  That’s because the only thing separating you from endless possibility and success is 6,000 miles of the deepest ocean on earth.  Or, if you’re one of our friends joining us from Europe, 6,000 miles of daunting terrain, including the world’s largest mountain range and some of the most dangerous places in the world.

I am writing this post from United Flight 889 from San Francisco to Beijing, cruising at 598 mph some 38,089 feet above a sea I cannot name.  But that’s likely irrelevant – I’m pretty sure no one ever swam there and lived to tell about it anyway.  Seat 23E today – a seat that wouldn’t excite most people (including myself).  It’s an economy plus seat.  A seat in front of the “Main Cabin” that provides slightly more legroom than my friends in the way back of the bus.  They don’t charge me extra for this “luxury” because I fly with them so much, but they charge an extra $200 or so for those “not-so-frequent” fliers to sit here.  I paid about $1500 for my ticket today.  A pretty good price considering I was flying on Sunday with many of the other businesspeople headed to Beijing.  The average price I pay seems to be about $1700 per round trip from Southern California to Beijing.  I make this trip quite often – usually between 8 to 12 times per year.  Some of you are going to read that lest sentence and cringe.  At an average of about 12 hours each way, that means that I spend 24 hours per trip, up to 290 hours per year on this exact plane criss- crossing this ocean.

The first question I get, without fail, every time someone new learns about my travelling, is “Well, at least your company probably pays for you to fly business class….right?”  The answer, unfortunately, is no.  But I’m not complaining!

I don’t buy business class fares to china, because our company has a travel policy.  A travel policy that was adopted from day one.  Our travel policy reads:  We fly coach.  We fly coach because we make smart business decisions.  Please let me explain.

$8,000 USD.  This is the average cost of a business class ticket from the United States to China.  That’s a $6,300 difference from the average coach ticket that I purchase.  $6,300 USD CASH.  [numberquotes.com].  When you take into consideration my average 10 trips per year, that’s an annual savings of $63,000.  From another perspective, let’s say that I was a manufacturing company with average margins…say 12% operating profit.  Under this scenario, $63,000 is approximately the same amount of profit that I would generate on about $484,000 in sales.

Let’s look at it from another perspective.  Let’s say you are targeting to hit $2 million in sales from your new venture in China in year 2.  You achieve above average operating profit margins that hover around 15%, or $300,000 in this case.  You hired a local Chinese General Manager, but you, the CEO/COO/President expect to be there 4 times next year.  Your #2 also plans on attending the quarterly meetings.  Your engineering and quality groups also need to make trips (let’s say a total of 8 over the 2 year period), and your customer asks you to meet them at the facility next June, and you do so along with your head of sales.  In addition, in order to get them the proper training, you flew your production lead, head of engineering, and head of Quality to your USA facility for training (8 trips in total).  This represents a total of 26 trips to China over 24 months.  You were smart, and before you opened your office, you made sure that everyone understood one thing – that you, and your staff fly coach to China.

The 26 business class tickets to China would run you a total of $208,000. During year one you weren’t expecting to make money anyway, and had accounted for this expense.  However, in year 2, let’s say that approximately one half or $104,000 was spent on business class airline tickets.  Looking at your 15% standard operating profit number above, you gave 1/3 of your profit to the airline companies.  Had your team flown coach, your total costs for airfare for the identical trips would have been about $20,000.  That $84,000 you could have saved by flying coach would have represented a 25% improvement in operating profit.

I won’t get into further details about the opportunity cost of the money that was wasted above, but I will tell you why I wrote this post today.  I am currently sitting next to a gentleman who works for a Fortune 500 Company.  He actually got “Down-Graded” from business class…..yes that is the opposite of business class, and it happens when they are oversold.  He and 6 or 7 others from their company are on this  flight, all booked in business.  Our company is spending $2,500 for me to be here this week, which means that for every trip one of these Fortune 500 employee takes, I can take about 4.

I know that many of you will bring up the age old argument that it’s tougher to sleep in coach and if you fly business you will wake up more prepared for your meetings, etc.  I completely agree with you.   It is much easier on the body to fly in business.  That’s why I try to get upgraded (at no cost to me) as often as I can.  And that’s why I am a little angry about being in seat 23E today.  It’s been almost a year since an upgrade didn’t go through.  I’m not used to coach anymore, but I’ve still got a big smile on my face.

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