Sunday, 31 March 2013 22:45

How to expand your business into Asia

Emerging markets in Asia present significant growth opportunities for businesses, but they also pose many challenges in terms of culture differences and government regulations.

“One reason Hong Kong and Singapore have become popular as a first destination for companies expanding into Asia is because they have very good legal systems with good intellectual property protection,” says Mark Matuscak, President and CEO of Benefitdecisions, Inc. “Other key factors are a strong talent pool of local skilled labor, favorable tax rates and a central location that makes travel within the region easy. Companies may be targeting business in China but set up in Hong Kong first as a gateway. Then geographically and culturally you’re much closer to the Asian markets, and it’s easier to build on that.”

Smart Business spoke with Matuscak about what companies need to know from an HR and benefits perspective before expanding into Asia.

How do HR requirements differ when setting up a business in Asia?

The concepts are the same — payroll and benefits — but statutory requirements are much different than in the U.S. and they vary by country. For example, all employees in Hong Kong have a mandatory provident fund that requires a 5 percent contribution by the employer and a 5 percent contribution by the employee. In Singapore, there is a mandatory central provident fund and the average employer contribution is 15.5 percent; that’s a substantial difference.

There are also differences regarding minimum wages, employee compensation insurance, notice periods, holidays, sick leave and even the manner in which people are paid commissions or bonuses. In some countries, laws regarding maternity leave protect a woman’s job as soon as she declares she’s pregnant. Companies expanding to Asia shouldn’t underestimate the complexities involved with HR.

What are the tax differences?

It’s difficult to generalize, as it varies among countries. Since that affects the design for employee benefit packages, it’s best to get an all-encompassing target for wages and benefits. If you set $60,000 aside for a position, dollars can be shifted between items such as housing allowance, mandatory requirements, core benefits and salary.

Getting the right mix for the market is key to securing the right talent. Start with the existing benefits policy and conduct a benchmarking exercise to see what competitors in the area offer.

Can that be accomplished within a company’s existing HR department?

It’s always a good idea to work with someone with the expertise to understand the unique requirements, taxes, culture and laws of each country. For example, you need someone who can help design a staff handbook that’s congruent not only with the culture and policies of the organization, but is also compliant with local legislation. An HR outsourcing company can create a compliance scorecard that identifies all of the requirements of the various countries.

What issues need to be addressed concerning current employees who will be working in Asia?

There are a number of issues that need to be addressed. For example, the application process can take up to 10 weeks, so make sure an employment visa is obtained in a timely manner. Workplaces are often quite remote, so it’s useful to provide a support structure where employees can go for information about schools, etc. Identifying the issues upfront with an expert and strategizing how to handle them is the best plan to minimize unexpected delays or complications.

Are many companies considering expansion to Asia?

About 10 to 20 percent of middle market businesses primarily domiciled in the U.S. say they are looking to do business in Asia. All the indicators are that China will become the largest economy in the world by 2020, and India the third-largest by 2030. Businesses need to look ahead and develop their plans for growth. Many are entering into Hong Kong and Singapore now as part of their future strategy.

Mark Matuscak is the president and CEO of Benefitdecisions, Inc. Reach him at (312) 376-0431 or mmatuscak@benefitdecisions.com.

Insights Employee Benefits is brought to you by Benefitdecisions, Inc.

 

Published in Chicago

China’s economy is growing at a fast pace and its government has worked to attract foreign companies, which is opening opportunities for them to get involved in the country’s market.

“There is a demand and need by so many Chinese companies that have capital and want to expand their business but don’t have the technology a lot of U.S. companies have,” says Julia Zhu, senior counsel in Dykema Gossett LLP’s corporate finance group.

There are lots of matching opportunities for U.S. companies that have great technology but don’t have a market or the capital to expand their business, which she says creates a good environment for U.S. companies.

Smart Business spoke with Zhu about how to enter the Chinese market.

What do business leaders need to know about doing business in and with China?

First, it’s about the business structure you want to set up. Choosing a physical presence in the country or a procurement strategy depends on whether the company wants to produce goods or services in China for the domestic market. If the foreign company’s focus is on exporting, it might consider using China as a manufacturing base for finished goods or do production outsourcing, which means a straightforward procurement strategy. This can be good for foreign businesses new to Chinese markets while keeping the option open to setting up local production later.

What are some options in regard to business strategy and structure?

If the foreign business wants to set up a physical presence in China, two of the most popular choices are wholly foreign-owned enterprises and joint ventures.

Having a wholly foreign-owned enterprise means you have the sole responsibility for profits and losses. It takes less time to establish because the foreign company doesn’t need to find a local partner or enter into a joint venture contract. Also, this structure gives the foreign owner greater control over company operations, training and recruitment of employees, and better protection of intellectual properties.

With joint ventures, there are two types — an equity joint venture is typically used for long-term projects, and a cooperative joint venture is better suited for short-term projects.

Generally, joint ventures are preferred when a foreign company wants to enter industries for which the Chinese government has restrictions on investment. The government has a list of all the industries in which companies can invest only through joint venture structure.

A joint venture can also be preferred when a company needs a partner to share its capital burden. Chinese companies can have certain technological or distribution advantages, making a joint venture an attractive choice. Successful joint ventures are imbued with clear rules and clear strategy between partners.

There are some disadvantages, such as statutory features where Chinese law requires unanimous approval from a company’s board of directors for major issues, including capital changes and mergers and acquisitions.

How should location factor into a company’s strategy?

Location can be very critical to the success of foreign investors. They need to look at the nature of their business, as well as incentives offered by the local government, their logistical needs, import and export requirements, and government inspections and restrictions.

The theme now is to go west. The Chinese government has implemented tax policies as a strategy to encourage investors to go west. In some cases, qualified foreign investors can have tax holidays.

When people talk about investing in China, they often talk about first-tier cities, such as Beijing, Shanghai and Guangzhou. However, investors should consider second-tier cities such as Nanjing, Dalian, Wuhan and Chong-qing that have cheaper labor costs, greater government support and less competition.

What protections exist for intellectual property?

Intellectual property (IP) is a big concern for foreign investors. The government has taken measures to improve the IP environment. Although China’s IP environment is risky, many foreign businesses have found a way to work in it. The key is to take a proactive, strategic approach rather than a purely legal approach. Businesses should engage the legal system while reducing dependence on it. While traditional legal methods of protecting IP may not always be effective, copyrights, trademarks and patents should still be registered as an important starting point.

Some companies avoid manufacturing innovative, high-margin products in China and instead focus on mature commodity products with lower margins. Others might develop products in countries with better IP protection and bring them to China to guard certain proprietary details. You can also protect yourself with thorough investigation. Watch markets for products like yours, educate suppliers and employees regarding enforcement, and execute agreements to retain key employees.

How else does the Chinese legal system affect business?

Legal compliance in China is different than in the U.S., where one has the narrow task of following existing laws. In China, legal compliance should not be viewed as a standalone legal requirement removed from corporate activities and results, but as a key driver of project completion and investment returns. For business planning, it’s helpful to divide those compliance issues into several categories, such as actions that cause a project not to be approved; internal operating issues, such as those pertaining to labor; external laws, such as bribery and breach of contract; and investment exit issues. By taking a broad view of compliance and conceptualizing compliance issues as a vital part of business performance, it is possible to formulate a compliance strategy that substantially increases the likelihood of success of foreign business.

Julia Zhu is senior counsel in the corporate finance group at Dykema Gossett LLP. Reach her at (213) 457-1830 or jzhu@dykema.com.

Insights Legal Affairs is brought to you by Dykema Gossett LLP

Published in Los Angeles

Back in 2003, the telecommunications industry was going through what Timothy Jenks describes as a “downturn and compression,” as large equipment manufacturing companies — his customers — increasingly consolidated and reduced their vendor base to manage costs. The result was that many companies in the telecommunications components industry, which NeoPhotonics Corp. occupied, were being put out of business.

“As a small technology company, clinically a start-up, it was difficult to gain mind share let alone market share at these very large companies as they consolidated their own operations,” says Jenks, the chairman, president and CEO of the San Jose, Calif.-based optical components supplier with approximately 3,000 global employees.

Jenks saw that the company needed to enhance its core value proposition in a way that would resonate with this core customer group and help it win its business. After spending a year looking at M&A opportunities, he and his management team soon found their solution in Photon Technology Co. Limited, China's largest supplier of active optical components at the time.

“It was complementary technology to our core technology and with an established customer base,” Jenks says. “We had both cash and technology and they had certain products, customer base and manufacturing capability. So together we felt that we would have all of the requisite elements to be an important supplier going forward in the industry.”

By acquiring Photon in 2005, the company now had the opportunity to become a global, one-stop shop for optical components, a value proposition that would click with the needs of its customers. But Jenks now had the task of taking the two companies with different languages and different cultures on different continents and creating one new entity consisting of 1,200 employees and more than 100 customers around the world.

Promote understanding

Before they could align everyone directionally and operationally, Jenks and his leadership knew that they needed to spend time with the employees in China to initiate a comfort level of understanding between both teams.

“In order to do that with very strong differences in language, culture and location, it took an awful lot of personal time and attention to develop mutual understanding,” Jenks says. “With mutual understanding, we could get alignment. With alignment, we could execute on the goals. With the goals being clear, we could make good progress.”

While Jenks had a number of people on his team and several from China who were bilingual, there were still communication differences and cultural differences that needed to be addressed in the new company.

“You need to be compassionate, taking the time and effort to understand our global brethren and what are issues from their point of view?” Jenks says. “Everyone is not the same but everyone is important.”

In-person communication in the preliminary stages of the merger was helpful for both leaders, who needed to establish a plan for integration. For about a year and half, Jenks travelled to China for one week or more every month to meet with direct reports and develop an approach of how to provide a clear direction to the key managers in the combined company.

“The face to face matters not just because it’s face to face, but because it allows people on both sides of the table to jointly see momentum,” he says. “If they see you once a month or once occasionally, there just isn’t much momentum.”

The benefit of being face to face with employees who are being acquired is also being able to see the realities of how people operate and manage the ins and outs of daily business. Jenks says that in retrospect he would have moved to China during this time, now that he’s seen the value of this personal time.

“Living in each other’s shoes by being together causes you to understand the issues that you’re facing not on too high of a level but much more day to day, hour to hour, the real issues that we’re facing and how can we jointly solve them,” Jenks says. “My experience is when people have the opportunity to face challenges together and find solutions together, that is what defines successful integration.”

Build alignment on new goals

This first phase isn’t about getting everyone to agree, but cultivating a comfort level and understanding between your two companies so you make decisions easier.

“We spent a lot of time and effort to understand each other, but we didn’t make it the biggest priority to gain consensus on decisions,” Jenks says. “It was to gain consensus on understanding, not consensus in decisions. Decisions had to get made and we had to move forward.”

The next step was getting the two companies to act as one global company, with one set of goals, one vision and one mission moving forward. Getting this alignment involved eliminating all of the previous goals from the individual businesses and creating one set of goals for everyone.

“The company in China wanted to operate on the global stage and the company in the U.S. wanted to be successful and deploy its technology globally,” Jenks says. “So putting those two nuanced sets of personal goals into one set of company goals was a challenge.”

After a merger, there may be a tendency for employees from either company to hold on to the old way of doing things. Where problems arise is when people become so attached to their previous goals that they don’t focus their efforts on new business growth.

“We had a company in the U.S. that was used having objectives that were local objectives, and we had a company in China that was used to having objectives that were Chinese objectives,” Jenks says.

So part of the strategy to get buy-in was to do away with any past performance goals that distracted people from the new global strategy. All financial incentives for employees in the future would be tied to global instead of local performance.

“It was to eliminate and remove all of those objectives and any references to them and replace them with goals so that people in China have to help the global result,” Jenks says. “People in the U.S. had to help the global result. Then even though they understood it, if they weren’t willing to embrace it, there wasn’t a role for them.”

Jenks and his team collaborated with the leadership in China to develop the new set of objectives.

“We actually spent a lot of personal time to write goals to be one company, not to be two companies, and to express with our managers our values that we would embrace and how we would operate,” Jenks says. “That included people from East and West in the senior most management to share ideas, share understanding, share goals and execution plans.”

Getting input from both teams is important, because it helps everyone embrace the new goals as their own, adding to the synergies in the combined company. Once your topmost leadership is aligned on the new corporate goals, you can proceed to build alignment throughout the organization.

“The key thing is that we did express a group of values to be one company and to focus on those global goals, which implicitly meant that staying on the fence was not an option,” Jenks says.

Again, talking with your people face to face to share the new strategies and goals is critical in getting everyone on the same page.

“It causes integration to happen faster, and people find energy in integration success that allows you to move to the next chapter together instead of moving to the next chapter staying individually who you used to be,” Jenks says.

Get the right people on board

Jenks knew that inevitably there were people in the U.S. operation that didn’t want to spend time working on business in China as well as people in China who preferred working for a Chinese company. There were some people who had the skills to succeed in the new environment but weren’t interested in the new direction.

“It was difficult for some people who are not necessarily comfortable living in a language that they don’t speak,” Jenks says. “Moreover, it may be uncomfortable for people who are linguistically gifted but then may have a larger burden because of their abilities.”

During a merger, you have to accept that there are people who will embrace the change and people who won’t. To an extent, the employees who won’t will self select.

“Ultimately, strong performers and people that were good at execution were strongly encouraged to come over to the one-company side of the fence,” Jenks says. “If they were unwilling to do that, they left. That was perfectly OK. If these are not the objectives that you want to work on then there’s no reason why you should work on them, but then you shouldn’t work here.”

In the course of this kind of transformation process there will likely be turnover. As long as you are very clear about the new goals and direction, then you can be fairly confident that people who aren’t excited about it probably don’t have a role in your new company anyway.

“We had to look beyond the level of turnover and say we’re operating to a larger goal and the goal was to be successful and competitive on a global basis,” Jenks says. “That was embraced by a large majority of the employees in both locations. So having that dedicated and engaged group of employees was a really important part.”

To further engage and motivate people, make it clear that with the new vision comes new opportunities for those who are willing to put in the work. That could be everything from more career opportunities, travel opportunities or selling opportunities. Jenks made sure that the Chinese company recognized it now had access to the U.S. R&D and technology and let U.S. employees know that they could enjoy larger manufacturing and a better cost structure. He also knew the added capabilities of the combined company would particularly appeal to sales people as they sought out new business.

“Sales people are always interested in a higher, broader, deeper value proposition to offer to their customers,” Jenks says. “So there was a natural affinity in terms of our customer facing efforts, meaning sales people, whether they were from East or West, suddenly had a broader group of products because they had the merger partner’s products. They had a better roadmap of what they might be able to offer in the future and they had a bigger story to promote with a customer.”

The employees who embrace change are the ones who will do what it takes to make it successful. “I think it’s been a great experience for all of the people who have stayed with the company over the last five or six years,” Jenks says.

Since the merger, the company has grown from approximately $35 million to $181 million in revenue for 2010. In 2011, it completed another acquisition to purchase San Francisco-based Santur Corp., a privately-held components manufacturer with approximately 150 employees.

“So the principles used back in 2005 and in some subsequent deals are being applied again to develop as one company moving forward and to work jointly on what our goals and objectives are,” Jenks says.

How to reach: NeoPhotonics Corp., (408) 232-9200 www.neophotonics.com

Takeaways

1. Gain understanding by getting face to face.

2. Build alignment around shared goals.

3. Encourage people to buy in or opt out.

The Jenks File

Timothy Jenks

Chairman, president and CEO

NeoPhotonics Corp.

Born: Boston

Education: U.S. Naval Academy, B.S., Mechanical Engineering

Massachusetts Institute of Technology, S.M. Nuclear Engineering

Stanford University, Stanford, Calif., MBA

What is one part of your daily routine that you wouldn’t change?

A quiet morning moment for a cup of coffee alone with my wife

What do you to regroup on a tough day?

I like to have a brisk walk with my dog, but unfortunately most tough days don’t offer the opportunity to regroup. That’s why they are tough.

What do you like most about your job?

I like the global aspect of it. I have friends, colleagues, customers and suppliers all over the world and it really makes me feel like I live in a 21st century existence. My friends and family sometimes are astounded by the regularity in which I find myself dealing with other parts of the world, and it’s a fun thing. At the same time, realizing that what we do really makes a difference. The vast majority of the world does not yet have access to online content. There’s a lot left to do.

What’s the best business advice you’ve ever received?

Hire people you’d be willing to work for, because you may. If you’re picky who you work for and you only hire people that you’d be willing to work for, then you end up with good people.

And, build a business with good people. Good people tend to hire good people.

M&A tips for the next time around: One of the lessons that I learned is that if you’re going to spend an effort to try and merge two companies and you’re in a leadership role, the best thing you can do is move there. For example, doing a transaction with (San Francisco-based) Santur, the first thing that I did is I did take an office there.

Published in Northern California

[caption id="attachment_43474" align="alignright" width="200" caption="John B. Swisher, Chairman and CEO, JBS United Inc."]

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A few years ago, John B. Swisher and his team at JBS United Inc. were putting together his first joint venture with a Chinese company and language and culture differences were creating significant obstacles for both sides.

Swisher, founder, chairman and CEO, was used to establishing lasting relationships built on communication and trust. One relationship with a feed and grain company has continued ever since he founded his now $480 million animal nutrition company 55 years ago.

But the Chinese joint venture was suffering from miscommunications. Swisher, meanwhile, was very concerned about his exploration into the burgeoning swine, poultry and livestock feed markets in the Asian giant.

“What they wanted was our research, our experience, and they want us to train that sales force to be a capital partner there,” Swisher says. “That market is just growing so rapidly.”

Already producing six times more hogs than the United States, the swine industry in China showed unparalleled growth.

“An American name means a big thing over there, so we were trying to capitalize on our name and the skills we have,” Swisher says.

He just wasn’t going to give up, and he set out to find a solution, even if it meant asking everyone who would listen. And soon, the right person was listening.

“I was at a 4-H Foundation committee meeting, and I was sitting next to this young lady,” he says. “She was an attorney with a law firm, and we were just talking about the difficulties in China ? and she said, ‘Do you know that we have attorneys in China? And that they’re Chinese?’”

Taken aback, Swisher said, no, but he sure would like to talk to one. And he did. What evolved was a solution built after dogged determination ? and that chance meeting.

“Within a month we had that thing completed,” Swisher says. “The attorney understood the language, he understood the people, and he had a law degree from China and the University of Indiana. He was just able to put that together so quickly once he could understand both sides. We are still using him. To be able to understand the language, I think, is crucial.”

International joint ventures can be lucrative undertakings. Teaming up with another company distributes the rewards ? as well as the risks, but the pairing may be the major factor in a successful endeavor, which might have not been a success by either of the companies alone. Both sides have opportunities for growth and a return stream for years.

“With the joint ventures, you have a strategy to grow and primarily to attract that skill that you do not have in-house and for all practical reasons could not afford to have in-house,” Swisher says.

For JBS United, its first Chinese joint venture was the United-Liuhe Co. Ltd., which manufactured and marketed nutritional products to poultry and livestock producers in China.

JBS United recently sold its interest in United-Liuhe for an excellent return ? nearly tripling its initial investment. It is now undertaking a second venture with the principal investor in that first partnership.

Here’s how Swisher helped blaze the trail for joint ventures on an international scale.

Find a good partner

In any joint business venture, it’s important to find a partner who is not just knowledgeable and has deep pockets. But what are some other key factors in a partnership?

“It’s people that you can work with, that are honest and reasonable, because no matter what contract you write, there are going to be exceptions and there are going to be other things that happen,” Swisher says. “Out of 13 domestic and international joint ventures, we’ve been really successful with 11. We had two absolute failures. I think we misjudged the partners in those two failures.”

The partner-judging process is not unlike that used in seeking a new employee. Proposals have to be examined, research has to be conducted into past history and risks have to be weighed to minimize possible mistakes.

“No matter how good that résumé looks, and how good the interviews go, you’re going to miss something,” Swisher says. “You cannot spend enough effort to avoid making some mistakes.

“I’ve read stories on American businesses going to China, and all they did was send money over to lose,” he says. “It’s like anything else. Ultimately, it boils down to the person that you are partnering with and the skills and character of those people.”

While you may find a different language and culture may make reference checking and other research a little challenging, it is an important part of the decision-making process.

“It is critical that you know the people who you are doing business with, that you trust them, they are aboveboard and they are doing things right.”

Once Swisher and his team realized that networking efforts might be fruitful, their search began to bear fruit.

“The partners here had gone to graduate school with a Chinese national, and he came to us and said this was a really good company; these are really good people,” Swisher says. You will find, however, that a good reference just opens the door, and you will need a comprehensive vetting process and face time. Likewise, a Chinese business has to approve of your company.

“We met with them and our conclusion was the same,” Swisher says. “We’ve really had a great relationship for 10 years. We have been really pleased with the outcomes.”

“You have to become trusted and be brought in ? sort of as a brother,” says Don Orr, JBS United president, who spent four years to find the right partner for the company. “Somebody’s got to vouch for you in China. Then you’ve got to spend the time over there to gain their trust, and then it will work. You can get through these differences or rough edges that you need to smooth out.”

Once JBS United made its decision, Swisher made it a point to keep the two-way communication alive through final negotiations and continuing on through the business enterprise.

“You’ve got to do your part,” he says. “You’ve got to hold up your end. They’ve got to be sure of you, too. I think it’s like any other relationship. You work with somebody for a period of time and you get to know what they do, what they can do and if what they tell you is right, and so forth.”

After his experience in the first venture opened his eyes a bit, Swisher put to work some of the lessons he learned for his second venture.

“No. 1 is you want to be a financial part of the company,” he says. “Although we had money over there in the first venture, what we had was just a small part of it and separate from the company. This time we are going to have ownership in the company.”

Another point applies to clearly defined roles for each party. Each should assess how they will go about completing their purpose and deciding with whom they need to interact.

“I think this time, there is an understanding with them and an understanding with us far more on what our roles are,” Swisher says.

Get the right people

It’s almost a given that your management for a joint venture overseas should include qualified, native-born talent. There is no shortcut to finding a suitable person; it takes determination and patience.

Swisher felt so strongly that the company needed this type of individual to deal with the Chinese partners that it took years of searching.

“We hired a Chinese man, born, raised and educated in China, who came to the United States and got master’s and doctorate degrees,” he says. “Our president, Don Orr, went searching and found him up in Canada. He is now literally the one responsible for the Chinese venture. Of course, he can read and write the language and is trained and educated in nutrition. No question, he has been unbelievably valuable.”

Some of the keys to a successful search?

“You really have to be agile and rally your resources and start communicating,” Orr says. “Use all your resources here, everyone you know here in the United States and the universities. Go to those people who are allied in your industry and say, ‘What’s your connection to those institutions or industries in Canada, the U.S. and China?’”

Once Orr learned that Chinese culture favors conversation between the top officers ? not vice presidents ? of both companies, it cemented his goal to find a native manager. Another advantage of such an employee is that he or she, once on board, is probably more likely to test the waters of business expansion than your employee who doesn’t have any local background.

“Don’t think too narrowly when you consider what is this person going to do because he or she may open up many, many doors for you, which you didn’t know you would be going through,” he says.

You may be talking and interacting with companies that you didn’t even know existed, and it may help to pave the way for future business relationships.

Also of value is the fact that once you have located and hired one highly skilled individual, he or she may lead you to another. The contacts that they developed during their school years or early employment years can be invaluable.

“They can pick up the telephone, call the schools and say, ‘Do you have any students up there that are going to graduate?’” Swisher says. “All these guys know each other and the good news is they can help advise the student.”

In effect, you will have an in-house recruiter ? and a marketing agent. Word-of-mouth is one of the most convincing tools, as most companies know.

“They will know your company and they will sort of know who’s going to fit, who’s not going to fit, and why,” Swisher says. “They can describe your company and your activities to the students. So it helps both sides.”

“If you have a good reputation with those people, you’ll likely get some recommendations.”

Deal with the lows

Sometimes the best-laid plans can go awry, as the poet Robert Burns once said. You’ve lined up someone to do business with, he or she is bilingual and everything looks like it will work. Then something happens and the project never gets off the ground.

While not technically a joint venture, Swisher’s company attempted to set up a distributorship in Ukraine, working with a local businessman who spoke English and Russian ? and it died on the vine.

“It blew up,” Swisher says. “There was no question part of the problem was language and part was culture. We offended them somehow, obviously not intentional, but all of a sudden it became an issue we couldn’t overcome.”

What Swisher took away from that experience was that American business practices may differ from those in Ukraine.

“There was another company in Ukraine that contacted us and basically in that conversation we agreed to meet with them,” Swisher says. “This really offended our prospective distributor. We thought we were being up front, and he basically said if you go around my back once, you’re going to do it again. We could not get over that hurdle.”

In a case like that, it is best for you to dissolve the relationship. Chalk it up to the differences in culture and as a learning experience.

“Do not violate the original opportunity, even if you think a third party is only remotely connected,” Orr says. “Inform your partner first.”

When it comes to going your separate ways, make a concerted effort to have an amiable parting.

“We left as friends; that’s the best way, with mutual respect, realizing that the arrangement just wasn’t the best fit at the time,” he says. “That’s why you never burn any bridges behind you ? you may do business with them down the road.”

Luckily, losses were minimized on the Ukraine project. But two joint ventures JBS United had in the United States with Indiana companies went sour also, and while not causing heavy losses, they were failures attributable to incorrect conclusions. As with the international joint ventures, you need to evaluate the domestic joint ventures with the same scrutiny.

“First of all, we misjudged their talent,” Swisher says. “They were not as skilled as we thought they were, and they were not as reasonable as we anticipated. Those two things just killed those partnerships.”

But if you take a philosophical outlook, it will help put it in perspective.

“But, you know, to some degree, if you say two out of 15 is not bad, it’s sort of like hiring people,” Swisher says. “If you could hire 13 really great people out of 15 hires, you’re damn good.”

The Swisher file

John B. Swisher

Chairman and CEO

JBS United Inc.

Born: Danville, Ill.

Education: University of Illinois, bachelor of science in animal science. Honorary doctorate from Purdue University in agriculture. That was a real treat for me to get an honorary from a university. Well, I did attend Purdue for one graduate course, but never got a diploma from Purdue. They felt that what I had done for them for agriculture was worthy. It sure as hell wasn’t the money that I had given them.

What was your first job?

Sacking a pancake mix in 5-pound bags. I was 14 years old. I was even driving trucks at 14. You have to understand, in the World War II years, manpower was hard to come by.

What was the best advice you ever received?

Whatever you promise, be sure that you fulfill it, no matter how hard, how badly it hurts you. You’ve got to be good for your word. That’s from a guy named Paul Kefauver. It was early in his business. He was a customer, a really large farm in Indiana named Fuller Farms. Mr. Fuller had a lumber business down south, a big lumber business. He owned a farm, I guess his wife inherited the farm, and it was like 1,000 acres; it had all kinds of cattle and pigs. Paul was a professional farm manager and was just sort of one of those wise old men that you are lucky enough to come in contact with.

Whom do you admire in business?

John Stadler has to be at the top of that list. His family had a packing business in Columbus, Ind. His adopted father hired him to save that company, and he did. Then he built a packing plant for an integrator down in Missouri. Then he had a series of things, which includes starting one of the largest hog farms in the United States, plus a packing plant, plus a sausage plant. He has a knack of taking desperate situations and turning them around. He does it so easily that it makes me envious. To do something that is so difficult and to do it with such ease is my definition of a pro.

What’s your definition of business success?

To be able to manage a company through the bad times successfully. There’s an old adage about anybody can be a captain in a calm sea. Not many people can be a captain, a good captain, in a rough sea. In these last three years, so many people in business have had it unbelievably tough. I think you’ve got to be able to manage through the changes and adapt successfully to change. I think that as much as anything else I see is a hallmark.

Swisher on what a joint venture means: What the joint ventures have done is for is to be able to take a medium-size company and expand particularly the technical intelligence, and in our joint ventures we have microbiologists, for example ? it would’ve been really difficult for us to be able to attract and employ that type of intelligence and experience. So with the joint ventures, we have a strategy in effect to grow and primarily to attract that skill that we do not have in-house and for all practical reasons, could not afford to have in-house.

How to reach: JBS United Inc., (317) 758-4495 or www.jbsunited.com

Published in Indianapolis

Doing business in China is complex. It requires more than simply a global understanding of business and a need. Rather, it’s a combination of numerous factors — economic, cultural, geographic and political. So it should come as little surprise that those who understand it best are, themselves, complex.

Dr. Robert Lawrence Kuhn is one of those complex individuals. He’s authored or edited more than 30 books, including the first biography of a living Chinese leader published on the Chinese mainland. He’s been an investment banker and led a top M&A firm. He’s provided consulting services to Fortune 100 CEOs and entrepreneurs. And he’s also a well-known television producer who created and serves as host of the popular PBS “Closer To Truth” series.

For more than 20 years, Kuhn has worked with China’s senior leaders, advising them on economic policy, technology and science, culture and media, Sino-U.S. relations, and international communications. Simply put, he’s one of the world’s foremost authorities on doing business with China.

“Every company has a China strategy whether they know it or not because of China’s impact on the world,” says Kuhn, whose past business expertise includes time as co-owner and president of The Geneva Cos., an M&A firm that represented privately owned, middle-market companies and between 1991 and 2001 initiated and closed more than 1,200 transactions and conducted thousands of corporate evaluations. In 2000, Kuhn sold The Geneva Cos. to Citigroup and subsequently became senior adviser to Citigroup Global Investment Banking.

In 2005, Kuhn wrote “The Man Who Changed China: The Life and Legacy of Jiang Zemin,” which was China’s best-selling book that year. In 2009, he penned “How China’s Leaders Think: The Inside Story of China’s Reform and What It Means for the Future,” which featured Kuhn’s discussions with more than 100 Chinese leaders and officials.

Kuhn, also founder and CEO of The Kuhn Foundation, was a keynote speaker at Ernst & Young’s Strategic Growth Forum in November 2010. After his presentation, Smart Business sat down with him to discuss what executives should know if they want to better engage with the fastest-growing economic power in the world.

Dr. Kuhn, what should American business leaders be thinking about with regard to China?

It’s the second-largest economy, approximately 30 percent of the size of the U.S. But on purchasing power parity, it’s more than half the size of the U.S. Within 20 years, China will be the largest economy in the world.

There are a lot of issues in China in terms of imbalances and needs, and that’s causing a great industrial transformation. But there are a lot of opportunities. Senior leaders tell me — the leaders of the country — that there are some things that have changed in China, reform-related, some things that have not changed, and some things that will never change. What will never change is the need for economic growth and the need to serve the people.

As you look at the issues that China has, and the imbalances, you look at certain industries that will have huge opportunities — social services, health care and education, as well as energy. For smaller companies, particularly for entrepreneurs, there are great growth opportunities in China.

China is a market that has its own characteristics, its own cultural characteristics, its own way of doing business, and the fallacy is that this is only good for big business. China is actually trying to compete more with the big businesses and people over there are looking for more entrepreneurial businesses to partner with. So for American entrepreneurs to associate with Chinese entrepreneurs as they mutually fight the big companies in both countries, that is something that’s supported by Chinese leadership. So the opportunity is definitely there.

How should CEOs and entrepreneurs begin to identify those opportunities?

This is complex. The first rule I have is that you have to like doing business in China. If it’s something that you don’t like and don’t want to do, you really shouldn’t do it. The investment is more in time and your commitment than in financial resources. You have to meet people. You have to see a diverse number of people in your area.

One way to think about it is in terms of your industrial area. Another way is geographically, if you have certain geographic areas that you explore. You will need to have introductions with leaders and potential business partners in several different cities. Then you will see diversity. You will see diversity geographically, you will see it in your industry, whatever industry you are in, and you will begin to get familiar with talking to and getting to know the right people.

Obviously, you should have good advisers — people who know the ground. There are a dozen or so major accounting firms. Of course, (Ernst & Young LLP) is my favorite. I work with them. But all the big accounting firms and consulting companies have different facilities that can be utilized. There are many different ways to go about it, but you shouldn’t be blind.

Another principle is that you should be important. Whatever you do, whoever you are going to work with, you should be important to that individual. If you are an entrepreneur, you get somebody who is going to introduce you to the mayor of a big city. Suppose you get the meeting and you say, ‘Wow, that’s terrific.’ Really, it’s not, because you are not important to that mayor if you are only a small company. They may do it as favor to whomever introduced you to them. I could get you lots of meetings with a lot of people at high levels because they’ll do me a favor. But it’s really of no benefit because where does it go from there if you’re not important? So you always try to be important to whoever you are going to meet. If it’s another company, if it’s an official, you want to be able to bring something that’s important so that they really pay attention to you on a long-term basis.

So what makes you important to them? How do you know?

You have to have advisers, so that you know what the individual is looking for and a certain size company they’re looking to partner with. It’s not something that can be answered in generalities. Rather, it has to be in the specifics of the individual company. Look at it this way:  What does that company have? What is its competitive edge? How big is it? And what does it do?

If it’s a business that is generating revenue — $20 million, $100 million, $1 billion — keep in mind that some people in China are paying to get connections with companies of a certain size.

Then, you have to find the people on the other side where what your company does and what you have to offer is important to them. You have to target the content for people interested in the content, and then the size for that project that is appropriate. If you are building a factory or providing a service, you have to know what people want and what would make you important to them.

Because of my background in corporate strategy and mergers and acquisitions and now substantially in China, very quickly I could look at a company and say, ‘Here’s what you should be doing.’

There are people who can sense that, and they’re the ones you need to be working with as advisers in order to do it the right way.

Does it take a lot of self-analysis by the entrepreneur or CEO to get it right? What I mean by that is when companies think about their market strategy — the niche market they serve, the problems they solve, the solutions they bring to the table and how they can position themselves to compete here — does that translate well to how you should approach your business strategy in China?

Everything you do that’s good business in the U.S., you should do in China. Then you have other things layered on top of it. Everything is applicable because that’s just good business sense — strategy, environmental analysis, strengths, weaknesses, opportunities, threats. You’ll see where you’ve got it right and what works for you. Then in China, you have an additional factor — government.

But it’s more granular than that — it’s geographies, it’s companies that are competing, it’s the marketplace. When you are doing business in the U.S., the other companies are your competition and you analyze the competition. But in China, especially for a smaller company, most likely whoever you end up working with will want to do some sort of a partnership.

It may not be an equity joint venture; it may be licensing or joint marketing. There are a lot of structural opportunities, and with those, you are going to form relationships with other Chinese companies. Those relationships are very different than the relationships you would form in the U.S., so in addition to the analysis that you’ll do about why you should be doing in business in China, you must realize that, unless you are leading a large company, you are going to be partnering with someone.

What happens if you don’t find a good partner?

Finding that right partner is critical, and it’s your biggest decision. There are a lot of good stories and a lot of horror stories. Sometimes, people make a decision to partner with one company and give them exclusive rights to all of China. That may turn out to be a good decision. Or, it may turn out that the industry you’re involved with is a very regional industry and that decisions are made regionally.

So if your partner is a company from Guangzhou or Xiamen or Guangdong province and you want to do business down with Shanghai, forget it. The Shanghai people are not going to want to do business with a company that has a partner from Guangzhou and is considered a regional player. So you really have to be very sensitive about what you’re doing and who you’re working with before you make your decisions.

So you really need to spend a lot of time on the front end, analyzing all the factors involved, correct?

Certainly a lot of front-end work is necessary in terms of meeting people, getting familiar with the companies, governments and regions, and understanding how it works. I always advocate taking multiple paths before you begin to even think about making your decision. You should be looking at three or four different approaches — that can be different potential partners, different geographies. I like to work with different geographies, and again, it has to be something where you’re considered important.

If you work in a province, unless your company is doing $700 million or more, you’re not going to meet with senior leaders of that province. You may be working on a municipal level. It depends on who the entrepreneur is. And, there are different associations in China that promote entrepreneurship as opposed to fostering government, state-owned enterprises.

There are a lot of different ways you can do this; you’ve just got to get a feel for it before you really start to make decisions. You shouldn’t marry the first girl you date.

Talk about the importance of understanding the cultural differences. I’ve heard stories about how treating business deals the way we would in America can be a deal killer.

There are some natural business instincts that we all have, and those are all good. But in China, you can’t expect to immediately get down to business. There has to be trust and loyalty built first.

Here’s an example of what doesn’t work:  One venture that I was involved with took a long time to put together. The people from the U.S. side had an old-school superiority attitude toward China. They would dictate that they were going to be coming to the city, landing at 1 p.m., expecting a meeting at 2:30 p.m., then at 6 p.m. they had a plane out. They expected that meeting to happen.

But it doesn’t matter whether you’re dealing with a government monopoly or a regional government that is powerful, doing things like that doesn’t sit well. That is really impolite in China — coming in and only expecting to have a meeting. Maybe (the potential partners) expect a dinner afterward, where you get to know each other. So that’s a little bit more of that cultural finesse that’s necessary so people feel good about building a relationship. You need to do that with several different groups as you go forward. It’s not something that once you do it, and then you do your deal, that you can forget about. It’s a commitment. And you need to keep coming back.

The most successful people in China from big companies are the ones where the CEO will come here multiple times a year. That’s the commitment you make.

China is very rigorous in terms of its matching of people that you do business with. If you are working in a city and you have the mayor of a small city — if your business is that size — the mayor will only meet with the CEO of the company. He can’t meet with the No. 2 guy. The No. 2 guy will meet with the vice mayor or someone of that stature. In China, it’s planned in a very socially appropriate way.

You mentioned trust. What does it take to build trust in a country like China, and how big a role does it really play?

It’s becoming more rule-of-law-oriented, but contracts do not mean the same thing here as they mean in the U.S. If a company doesn’t want to honor a contract for whatever reason, they can always find reasons to do so, and your choice is to sue. Suing actually has become more effective now. You can sue. It can be enforced that you can collect. Ten years ago, you couldn’t do any of that. But now you can.

That doesn’t mean it’s good to sue. You don’t want to get to that point. Still, you have to recognize that contracts are not meant to mean what they do in the U.S., and memorandums of understanding, MOU, don’t mean that either.

If you sign an MOU, we’ll say, ‘Wow, we’re going to get that deal done.’ But no, it really means that we had a nice meeting. That’s all it means. It’s a formalization that they can show to their boss, just like a call report — I met with this company, and I can report it to my superior

In that sense, there are different cultural aspects, though those differences are getting less distinct as China becomes more sophisticated. But some of those characteristics will remain a long time. Just as it takes awhile to build that trust, that trust is an entry barrier to others. If somebody else comes along and offers a tiny bit better price, if that trust is there, that won’t matter. Even that’s becoming less true in today’s China. Nonetheless, there is that benefit so that trust is something that can move a company’s ability to do business in China forward.

Everyone agrees that China is the next great superpower, but what does that really mean and what’s next in terms of the country’s evolution?

In every area of human endeavor — economics, business, finance, culture, science, technology, sports, media and military — China intends for its efforts to be among the best in the world. There isn’t a sector that they are not focusing on improving. In every industry of importance, any industry at all, China is going to be developing its companies.

Now, those companies are going to compete with each other, so there are opportunities to ally with some of those companies at whatever level you are working at, in order to help them on their rise. My favorite word in dealing with China is “alignment.” If you try to do exactly what you are doing in the U.S. just to compete and make your company as big as possible and as successful as possible, that ultimately won’t lead to true success in China. You have to think about alignment with government policy, the leaders with whom you do what is in their interest, so that you can align with that.

Sometimes, what seems to be suboptimal from an alignment point of view is actually far better. There are many situations in which getting a smaller percentage of the company will actually turn out to be a greater wealth builder for you, for your company, than if you had a higher percentage, because it incentivizes the other side. You always want to be a resource that that other company uses.

People have stereotypes. They say, ‘Well, how can you trust the Chinese?’ They come at it from the viewpoint that the Chinese were all one entity that gets up in the morning and has a conference call about how to fool the foreigners and get all of their money. That’s, of course, ludicrous. What in fact is happening is that the different Chinese companies within fiercely competitive markets will try to use you as a vehicle, not to cheat you in any way. They don’t care about that. What they care about is competing with their other mortal enemies in that industry.

So if you can help them compete with the other people in their industry, that’s what they are interested in. Even on a provincial or city basis, they compete with each other — cities within provinces, within provinces. All of that is much fiercer in China that it is in the U.S. There’s some competition between states, but nothing like there is in China. So the idea is that you want to be a resource in the right way to one of those main competitors so that they see you as a resource. Then you become valuable, maybe even more valuable than you would in the U.S. And in those situations, even if you have a smaller percentage of the deal, structured properly that can be worth a lot more.

How to reach: The Kuhn Foundation, www.closertotruth.com

Published in Akron/Canton
Tuesday, 01 March 2011 10:43

Manufacturing outlook

Uncertainty.

If there’s one word that describes the manufacturing sector moving forward, this is it.

“There’s macroeconomic uncertainty, public policy uncertainty, uncertainty in terms of the value of Chinese currency, and that is going to make the business sector — particularly in manufacturing — very cautious when it comes to capital investment,” says Edward Hill, dean of the Maxine Goodman Levin College of Urban Affairs at Cleveland State University.

There are signs of better days ahead, with more orders coming in and North American factories running at higher capacity than in the past few years.

“A big barometer for manufacturing is auto sales, and auto sales just took a dive the last couple of years, but it’s picking back up and demand is back up,” says Eric Burkland, president of The Ohio Manufacturers’ Association. “The good news is, the economy has clearly turned and demand is picking back up, but the cost pressures globally remain just incredible, so that dampens the hiring.”

Chuck Hadden, president and CEO of the Michigan Manufacturers’ Association, says that things are slowly turning around.

“We’re one of the sectors that are doing a little bit more hiring out there — not a lot, but we’re starting to get some hiring,” Hadden says. “There was a lot of uncertainty toward the end of the year — what was going to happen with federal taxes, elections, and that uncertainty is now gone. We know what’s going to happen with those things, and now people can start moving forward, and I’m optimistic at the direction we’re going.”

While no one can say for sure what the next 12 months will bring for manufacturing, there are two things that the experts agree on: Success in the sector will be driven by diversification and innovation, something Jim Nicholson, vice president of chemical maker PVS Chemicals Inc., will attest to.

“This year, we are really working on continuing to expand our customer base — we’re looking for new markets that we traditionally have not served and adding those markets to our customer base, and we’re making investments in new kinds of people, with different kinds of experience, specifically related to market and marketing,” Nicholson says. “We think this is going to be a pretty good year for manufacturing.”

Diversify

Diversification has been critical the past few years and will continue to play an integral role this year.

“If you’ve made it through, you’ve probably figured out a way to diversify your company from one product to another product so you’re not reliant on one business sector,” Hadden says.

But he says it’s time to take it a step further in 2011.

“Let’s diversify your customer base so you’re not totally reliant on one customer in that business sector,” Hadden says. “Find ways to expand your business that way, still doing what you ... do best but find more customers. It’s a big world out there, and there’s no reason why we can’t be competing in a lot of markets out there.”

He says one of the keys to effectively doing this is to look beyond America’s shores.

“Our biggest growth opportunity for us as manufacturers that we haven’t taken advantage of is finding customers in other countries that we can help supply,” Hadden says. “I think that’s the biggest tone that we’re going to try to set this year. We all know we can’t rely on one or two customers anymore. … If you’re making a part here for an auto company, why can’t you be making it for someone in Germany or Japan or India?”

Hill agrees that diversification overseas is important because of the growing demand that will come from those markets.

“There is a lot of opportunity out there, but the opportunity is going to be based first on international markets, particularly in growing, developing economies,” Hill says. “It is really important for American manufacturers to really pay attention to international markets.”

For example, one of the biggest markets that American manufacturers need to be involved with is China, but it’s not because of cheap, offshore manufacturing.

“They should be looking seriously at China, because it’s an incredibly growing demand and middle class that’s going to drive global sales for years,” Hill says.

Diversification also means that you have to look at other ways to position your expertise and capabilities in the market.

“Companies are continuing to look for new markets and new ways to use their knowledge and their capital for new products,” Burkland says.

But when you look at the global economy and look at your industry and look at your business, you could get dizzy from seeing everything that could potentially happen. That’s when you have to choose a few things to focus on in your diversification efforts.

“Survey, and then pick a couple that are likely winners,” Nicholson says. “Trying to do everything is logistically impossible.”

The way Nicholson and his company decided was by looking at the products they know really well and then looking at applications where they felt their products weren’t well represented. Finally, they looked to see if they could move into those markets with their products.

“Again, [it’s] trying to leverage what you know into a new market. It’s very hard to get into a new market where you know nothing about the product and where you know nothing about the market,” Nicholson says. “You have to choose to either serve a market where you know something about the product or serve a market where you know something about the market and need to develop the product. There’s too much risk and investment to try to solve both those problems at once.”

Innovate

One of the other keys for manufacturers to find success this year is to focus on innovation.

“That’s the trick today — cut costs but don’t cut innovation because innovation is the path toward future profitability,” Burkland says.

Giorgio Rizzoni can explain why innovation is so critical. Rizzoni is the Ford Motor Co. chair in electromechancial systems, as well as a professor of mechanical and electrical engineering and director and senior fellow for the Center for Automotive Research at The Ohio State University. He says that if you and a friend have the same laptop, in theory, you both have the same battery in that laptop, even though you could each get a different capacity out of that battery.

“You sort of adapt to whatever you have,” Rizzoni says. “It doesn’t matter, from a consumer perspective, that that one battery in your computer or cell phone has whatever performance it has, and if the variability is plus or minus 10 percent, who’s going to tell, right?”

While it may not matter in electronics like your laptop or your cell phone, it does make a big difference in larger items where batteries are needed, such as electric cars. In one of those, you have hundreds or thousands of battery cells.

“Some of them can range up to $15,000 a pack,” says Suresh Babu, associate professor for materials science and engineering and director of the NSF Center for Integrative Materials Joining Science for Energy Applications at The Ohio State University. “A pack means many batteries in it. That means you have to make sure these batteries last longer.”

And that’s where innovation is critical. If you have that 10 percent variability in those batteries, it makes a huge difference and is a serious liability to the car and its cost of maintenance.

“There’s an old adage that a chain is only as strong as its weakest link,” Rizzoni says. … “There’s an analogy there — if you have weaker cells, they will bring down the body of the entire battery pack so the ability to manufacture cells with a high degree of repeatability and quality is a very important thing.”

Improvements to these batteries aren’t happening on an annual basis either — they’re changing monthly. And the saying is that as the automobile industry goes, so does the rest of manufacturing go, and the auto industry is innovating at a rapid pace, so by rule, the rest of manufacturers will be, as well.

But innovation in the automobile industry will go beyond making better batteries. As it strives to reduce the mass of its vehicles, it’s looking for lighter-weight materials to help, and finding lighter materials will also help other manufacturers.

“The more you’re able to find new ways, lighter ways, more resilient ways, more flexible ways, more whatever the characteristics of the materials, that leads to opportunities in product innovation,” Burkland says.

Rizzoni says some of the new materials that are getting implemented in automobile manufacturing are plastics, aluminum, magnesium and high-strength steel. But new materials also mean more changes in the industry.

“One of the challenges that has surfaced when you start working with similar materials is that now you’re trying to join a piece of plastic to a piece of steel, for example, so joining techniques become, possibly, a real challenge,” Rizzoni says.

This is where you have to look at what you traditionally do and throw it out the window. Kevin Arnold is the business development manager for advanced energy for the EWI Energy Center, which helps manufacturers in the energy sector and other industries improve their productivity, time to market and profitability through new, innovative technologies. He says, for example, that if GM built every battery for its electric vehicles to Six Sigma standards, which for years was the gold standard of quality, none of the cars would run, because they would all have bad welds in them.

“You’ve got to get so many decimal places out of quality,” Arnold says. “This is a challenge. That’s part of the growing pains we’re seeing now is that what was considered good enough for many years is now not quite good enough, so it’s looking at the fundamentals, understanding and controlling them and ongoing monitoring to ensure that you’re within limits.”

Look at the processes in your organization and find ways to make them better — even if it’s something that’s been the same way for decades.

“What manufacturers have to be open to is don’t take processes that seem simple, like welding, for granted,” Arnold says. “Welding is a fundamental manufacturing process that’s been around for 100 years, but it’s often one of the least understood processes and one of the first that could go out of control and cause problems. Ensuring that they have the right expertise on staff to look at their processes, understand the variables and understand that what they’re doing is with increasing levels of scrutiny.”

The experts recognize that the money is likely not there in your organization for you to throw out your assembly line and start with something newer and better though, so that’s why they’re working to help manufacturers find ways to cost-effectively innovate.

“All of [the processes] have to be mature,” Babu says. “Mature means not only from the science aspect but also from the industry aspect — how can we implement them in an existing manufacturing line. That’s the biggest challenge.”

But it’s a challenge worth exploring because the way to succeed this year is to push your product and process innovation efforts to the limits.

Resources: Center for Automotive Research — The Ohio State University, (614) 688-3856 or car.osu.edu; EWI Energy Center, (614) 688-5000 or ewienergycenter.com; The Maxine Goodman Levin College of Urban Affairs at Cleveland State University, (216) 687-2000 or urban.csuohio.edu; Michigan Manufacturers’ Association, (800) 253-9039 or www.mma-net.org; NSF Center for Integrative Materials Joining Science for Energy Applications — The Ohio State University, (614) 247-0001 or www.matsceng.ohio-state.edu/faculty/babu; The Ohio Manufacturers’ Association, (800) 662-4463 or www.ohiomfg.com; PVS Chemicals Inc., (313) 921-1200 or www.pvschemicals.com

Looking ahead:

Manufacturing has led the economic comeback, but will it last?

When you look at the brightening economic picture, manufacturing has played a major role in the comeback. The biggest question facing the sector is simple: Will the good times last?

Robert Dye, vice president and senior economist for PNC Bank, says the odds are in favor of manufacturers, but there are still risks.

“It is my expectation that we continue to see strong growth but not as strong in the last year or so,” Dye says.

The overall recovery in the U.S. will eventually reach across all economic sectors, including service and construction.

“When I look at price conditions for manufacturers, I’m concerned about a profit squeeze as energy and higher commodity prices drive producer prices up,” he says. “Those prices will not be able to be passed through to the consumer at this point. Even though there are currently strong profits, there is potential for profit erosion down the road.”

Companies that make consumer goods should also see better times ahead.

“I do expect the consumer sector to show ongoing improvement through 2011, as we saw consumers bounce back in 2010, with strong retail sales and a strong holiday shopping season after three disappointing seasons in a row,” Dye says. “Measures of consumer confidence are improving and job creation should improve through 2011. Manufacturing sectors that will be able to take advantage of that will be the consumer-focused sector.”

There are also potential risks in the consumer sector, as well: Foreign debt woes could increase the value of the dollar, hurting exporters, unemployment is still high, and the housing market is still weak.

“We are still in uncertain times, and manufacturers will face cross currents in the year ahead, but most of the wind will be at their backs,” Dye says. “But the lingering risks are still with us.”

How to hire in 2011

While most manufacturers are seeing things on the upward swing, hiring can still be a difficult decision as you continue lean operations. Likely, you’re down to a core group of people who you trust and can rely on to do a good job, so if you have a good core and you want to hire, you have to take an approach that most manufacturers have never taken.

“If they do have to hire, it will be slowly — one or two at a time — and they’re not looking at the skill base they have, but how do they fit in with the rest of the people,” says Chuck Hadden, president and CEO of the Michigan Manufacturers’ Association. “Can they work as a team? Is it someone everyone else will get along with? Those are all crucial things they’re thinking about beyond can the guy or the woman do the job.”

Hadden says you have to take more time in your hiring now if you want to be successful.

“Your HR person does the interviewing, but maybe you include a couple people from the floor, and they sit in on a couple [interviews] and listen to them,” Hadden says. “It used to be, when I was growing up, somebody’s grandfather or uncle would get them a job in the place and they’d take off. It doesn’t work that way anymore.”

He says to make sure you look for people who are willing to learn and want to continue to learn through technical school, additional training or whatever the company may call for.

Jim Nicholson, vice president of chemical manufacturer PVS Chemicals Inc., says you also have to trust your managers to make good hires.

“The key on the hiring process is to have confidence that your managers can hire well,” Nicholson says. “Spend time and effort training your managers on how to hire well, and make sure your managers spend enough time on the process and have choices and present choices, so that they can get input from their fellow managers and hire the best person for that role.”

Doing these things will help you as you look to add bodies in 2011 and the years to come.

Published in Akron/Canton