Front Lines is a guest viewpoint section offering perspectives on current issues and events from people working on the front lines of Canada's technology industry.
Small and mid-size companies in North America have been slow to investigate China as part of their business models when designing, developing, and assembling electronics-based products. While the large players (Alcatel, Nortel, etc.) have been in China for years, it was perhaps initially too risky for smaller companies to pioneer. Today that's no longer the case — the time is right for every North American manufacturer to find its way in China.
We ventured into the Chinese market three years ago to form relationships on behalf of our customers, who are small- and mid-size manufacturers of low- to mid-volume electronics products. We believed that, given the right model, smaller organizations could also benefit from China's low labour costs. Our experience has been entirely positive and it reveals some dos and don'ts for entering China as a smaller player.
Behind the Red Dragon
Before a company can begin to form a plan to enter China successfully, it must first comprehend why China is an indomitable force in our North American economies today. Imagine an already densely populated country having to grow by 9 per cent GDP per year just to keep its population from starving. This is the case in China, which is driven by an entirely unique combination of political, social, cultural, and economic factors.
Despite incredible population growth, China's government makes it a priority to ensure jobs for its citizens. Every small town has rows and rows of small shops all manufacturing some piece or product required for government-initiated infrastructure building in its locale. But it is most visible in the Pearl Delta Region, the country's hub of economic activity and the area on which we focus in our business.
Shenzhen is growing at a rate of 15-20 per cent GDP per year and you can't turn around on a Shenzhen street without seeing the construction of new roads, factories, or residences. This infrastructure building is in support of the area's rapid development of many kinds of factories — all of which employ, house and feed labourers, rather than taking advantage of automation. In China, labour is cheaper and just as efficient as technology, and more important to the country's economy.
The pace of change in this region of China is staggering. I visited in January of this year. In two short years, my contacts' English skills have improved to the point where we no longer needed an interpreter during my week of visits to many factories. In that same time, our operations in China have become quite sophisticated, now providing original design manufacturing (ODM) and rapid prototyping services in addition to components sourcing, board assembly, and quality assurance.
This flurry of progress exists side-by-side with old communist habits. I experienced this while visiting an MSN news site in my hotel room. When I clicked on an article about China's latest missile tests the content was blocked. All Internet traffic in China enters and leaves through a few fat pipes controlled by the government and monitored by the largest Internet policing force in the world.
While China is roaring into the global economy at dizzying speeds, its reasons and rewards for doing so are far different from the mentality that we in North America understand.
It Pays to Get Personal
Many manufacturers in the West misunderstand what doing business with China is all about. Nearly everyone has heard or experienced first hand some horror story about sub-standard parts sourced from China or intellectual property theft. In these stories, China is a "black hole" — a nation of pirates with an impenetrable business culture and an opaque economy. Rarely do the stories reveal a more balanced truth: that smaller — and even some larger — organizations' first forays into China are often critically flawed.
The most common error I encounter is a desire to reap the benefits of "cheap Chinese labour" without a willingness to actually go to China and learn the lay of the land. Many of those horror stories begin with a company deciding to source its own parts from China over the Internet.
We have gained insight into the problems that can result. Imagine receiving a shipment of thousands of parts, but all with the wrong dimensions. Even when working with China, you get what you pay for — the cheapest possible part is not necessarily the right part. Barriers in communication, time and distance can lead to major oversights. A local presence and strong quality assurance practice is mandatory for Canadian companies who do business with China — particularly considering that any new relationship with a partner in China will be on pre-paid terms.
Underlying false starts like these is a misconception here in the West that the only value China can offer is "cheap stuff." But China has much more to offer, including rich and effective business relationships … relationships like that can't be formed over the Internet.
It also amazes me how few Canadian companies doing business in China think to seek patent protection there, although China has an established, three-tiered patent process. This is another aspect of the services that we attend to on behalf of our customers, and it is useful to do it in person.
In China, trust and one's word remain stronger forces than legal documents, and the best patent protection there today may well be to have strong relationships with local factory owners and a local presence to maintain those relationships. Yearly visits to our operations in China — and to personally meet with factory owners and inspect their facilities — are core aspects of our business model in China. Between visits, we remember our Chinese partners and suppliers with common niceties such as holiday greetings — things that one would do with any North American partner.
Rethinking Canada's Role
Although even small Western manufacturers can no longer ignore China, the debate over whether China is a "necessary evil" continues. Is China a threat to North American economies? Is its rapid entry into the global economy a threat to employment and other opportunities here in Canada?
I believe it is a threat as long as we continue to not give China its due respect. The West regards China as an expendable labour force at its peril. The fact is, even as a relatively small player, our business is valued by the Chinese factories we deal with (some of which are very large, producing tends of thousands of batteries a day, for example). And, they are excellent to deal with under most of the same conditions of business that we have in North America: trust, mutual respect, win-win negotiating, and personal relationships.
For Canadians who are uncomfortable with what this may mean, it is time to rethink our own role in the global economy. Certainly, our sparse and geographically dispersed labour population will never compete with that of China's.
But consider this experience. In one of the factories I visited, they were manufacturing a shopping cart caster for a Western buyer. The special caster was brilliantly designed to lock up if the cart traveled beyond a certain radius from the grocery store. This is not an idea that any Chinese could have had — the need for and use of the product is light years away from China's reality.
In Canada, we excel at innovation. We're well educated, well-heeled consumers, and our physical, cultural and linguistic proximity to major markets in North America and Europe makes us ideally suited to innovating and marketing our innovations. Canadian companies do have to go to China. Their success will depend on how they choose to do it and their expectations about what business with China means.
Dr. Michel Jullian is President of OCM Manufacturing in Ottawa. michel.jullian@ocmmanufacturing.com
