Magazine

Online Extra: Dipping a Yankee Toe in China


Back in 2001, John Bank was just another owner of another small American manufacturer. Today, he's CEO of a Chicago-based multinational with two joint ventures in China. The change makes him both excited and anxious.

Bank serves as chairman and chief executive of Phoenix Electric Manufacturing, started in 1938. The privately held company makes components for small variable-speed electric motors used in power tools, treadmills, kitchen appliances, golf carts, and automobiles. Its customers include General Electric (GE) and Emerson Electric (EMR). A lawyer who wanted to do something more entrepreneurial, Bank bought Phoenix in 1991 following the unexpected death of its CEO.

HELPFUL RIVALS. The company then had $3 million in annual sales and 30 employees. Today, Phoenix Electric boasts nearly $20 million in sales and roughly 100 U.S. employees in a couple of sites in and around Chicago. It also just started operations in China, its first foray outside of the U.S. Bank had begun planning to move into China in 2001, when he made his first visit to Suzhou, near Shanghai.

As a small-business owner, how did he even know where to go in China? His big customers weren't much help. The contacts he had at Emerson, for instance, couldn't lead him to the right folks in China. Instead, Bank availed himself of his network of competitors and suppliers for leads, as well as fellow members of the Young Presidents Organization (YPO). He also used the Internet to vet potential joint-venture partners.

His smartest move was to rely on a Japanese competitor -- which manufactures similar products in China -- to help him make contacts. "The 21st century is creating strange bedfellows," Bank says.

PICKING AND CHOOSING. Within months, he formed a 50-50 joint venture with that Japanese outfit, in an economic zone in an industrial park in Suzhou. The metal-stamping factory produces components sold to motormakers in China, primarily for export to the U.S.

Then, in 2004, he set up a second joint venture, to make molded plastic parts outside of Hong Kong with a Chinese supplier he had met through one of his YPO pals. To get those two partnerships, he probably inquired into 20 businesses. "At the beginning, it's all a lovefest. Then you find the quality is bad, or they don't deliver," he says. "There have been a lot of dead ends."

Today, China accounts for less than 10% of Phoenix Electric's annual sales. Bank employs 100 people combined at the two factories. He has not cut his U.S. payroll as a result of his new Chinese facilities, but employment is likely to grow in the Middle Kingdom and stay stagnant in the U.S.

"UNDER ASSAULT." Bank says he himself has invested less than $1 million in China, relying on his partners for more capital. He has also cut down on his investment risks by shipping old machines from his Chicago factories to China, where, because the Chinese don't need to worry about the latest in labor-saving technology, they're good enough. Bank has traveled to China six times now.

Why did he make the move? "The American motor business itself is under assault from foreign competition -- the Chinese especially. Our customer base is moving over there, and our customer base is losing business to Chinese motor manufacturers. So we wanted to have a manufacturing presence to supply our customer base and to supply potential Chinese customers."

It's almost impossible to compete head-on with Chinese manufacturers, Bank says, so he has had to join them. Wages are just too low in China: His factory workers typically get 50 cents to $1 an hour, for a nine-hour day, six days a week, with no overtime pay or paid breaks. In the U.S., his workers get $10 an hour, plus benefits.

SKINNY MARGINS. Despite the financial advantages of working in China, "it's not a miracle," Bank says. "It's an opportunity. It's not a ticket to riches."

The risks are also great, he points out. "As a small company, you can't afford to make mistakes. Your capital is coming right out of your pocket. If you make a mistake, it could mean the very survival of your business."

The competition is fierce, according to Bank. "The profit margins are razor thin. There's overcapacity in almost every single industry in China, and the barriers to entry are almost nonexistent. You have guys who will open up garage shops with used equipment. The Chinese are geniuses at using old, discarded equipment."

EXTORTION THREAT. Efficiency, however, is a different matter. The bureaucracy remains cumbersome, and infrastructure lacking. Quality often comes only as an afterthought. Around the Chinese New Year, many workers go back to their ancestral villages, and the economy more or less shuts down. Afterward, many simply don't come back.

Provincial authorities often try to shake down foreign companies, says Bank. His advice: "As a small company, you've got to stick to the economic development zones, because that's where the Chinese government will take care of you and protect you from the vagaries of the provincial governments. Once you're out in the provinces, all bets are off."

There's also a huge risk of Chinese knocking off your products and stealing your intellectual property. "But you can't be afraid to go into China because of that," he says.

NEXT WAVE. He doesn't think the China juggernaut can be stopped. "Chinese manufacturers continue to move further and further downstream," he says. "First it was component parts. Now it's finished goods. It's not that Maytag (MYG) goes and buys motors from China. It's that the entire refrigerator is made in China and shipped directly to a Sears (S) or Wal-Mart (WMT)."

And it won't end with manufacturing, he believes. "The next phase is going to be more R&D and engineering over there." And companies ignore China at their own peril, he says. "You've got to have some sort of China strategy, no matter what your company size is. If not, you're withering on the vine." By Michael Arndt in Chicago


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus