Lure of the Orient? Featured

10:02am EDT July 22, 2002

For several hundred million people in Asia-and for the thousands of American companies that hired them, bought from them or sold to them-the recession of 1999 started in 1997. Currencies collapsed, speculative bubbles burst, industries shriveled, a 32-year-old dictatorship was overthrown, and the consequent shudder sent through the economies of the world made many businesses wonder if "Asia" was synonymous with "crisis."

How curious it seems at this moment that the bright spot in that blighted region of the world would be... China.

"For small and growing businesses, there are a number of reasons to be bullish on China," according to Desmond C. Wong, national director for Ernst & Young, LLP's China Advisory Group, Chicago.

Wong suggests business owners ask themselves: Is the U.S. market for your products or services limited for the foreseeable future? Are you under heavy pressure to contain costs to maintain margins against fierce competition? Can your products be produced in a low-labor cost country and shipped to market at a cost advantage relative to your current cost structure? Do you have a technological edge to achieve cost efficiencies in China relative to elsewhere against your competitors? Would your product or service appeal to buyers in China or other southeast Asian nations?

"If you answer yes to all of these five, or any of these five," Wong says, "then you are past due to consider China."

"Economically speaking, China is sound but the region isn't," says Martin Regalia, chief economist at the U.S. Chamber of Commerce in Washington, D.C. China maintained the value of its currency, the renminbi or yuan, while neighboring countries shaved theirs. China's economic growth has slowed, from an ecstatic 10-plus percent annually to a merely robust 7 to 8 percent.

While questions persist, especially about the solvency of some of the country's banks, tens of millions of Chinese have joined its burgeoning middle class in the last decade, and hundreds of millions more are eager for labor at wages a fraction of even those offered by most neighbors. "The growth prospects in China still look very good," Regalia says.

Of course, considering Wong's five questions, the last-will your product sell in China?-is likely the most difficult to answer. "Your apple drink may attract 10- to 15-year-olds in the United States, but in China it may attract 50-year-olds," notes David Gudgin, sales and marketing manager for Euromonitor in London, England. Euromonitor's global market analysts have recently received research requests from American companies seeking Chinese markets for alcoholic drinks, tobacco, cosmetics and toiletries, household cleaning products, packaged foods and white goods (refrigerators, freezers and other large electronic appliances), among others.

"If confidence in the region had completely fallen away, nobody would be asking us questions about it," Gudgin says. Instead, Euromonitor recently opened an office in Singapore, so it could keep an eye on the region. "We find manufacturers are continuing to take China very seriously."

China still exports far more ($62.5 billion in 1997) to the United States than it imports ($12.8 billion in '97). But "anything an American manufacturer makes that requires a high labor content can be made in China," Wong says. "It's a rent-or-buy decision," he adds, explaining that while big companies may open an office and bring staff to China, smaller companies have the option to use the many U.S.-China outreach programs established on both sides to promote trade.

"Smaller companies are more likely to get results sooner, as long as they pick the right opportunities," Wong says, because they can negotiate using fewer intermediaries on their side, and this appeals to Chinese. The key to manufacturing in China is to exploit the cost advantage, he says. The key to selling there is to consider the culture, needs, disposable income levels and cache of your offering for Chinese tastes.

China is not for the risk-averse, Regalia cautions: "The Asia situation is going to negatively affect the investment environment in China," though Regalia believes China's growth rate will soon recover its double-digit heights. The chamber is monitoring the situation closely for its members. "They want to learn the easy way, not the hard way-by the easy way, I mean learning from others' mistakes, not having to learn from their own," Regalia says. China "will come back, and when it does, the people who got back in at the right time stand to make a lot of money for their risk."