Dealing with the Dragon

Some Alabama companies are afraid of The Dragon. Some are offering a cautious welcome. And some remember that any respectable Dragon guards an enormous pile of treasure.

Last year, China jumped into second place among Alabama’s world export markets, with a 142 percent year-to-year growth in 2010.

China tops the list of countries importing Alabama chemicals, bringing in $554 million, but even that figure doesn’t match “transportation equipment”—the category that includes Alabama cars. China imported $579 million worth last year.

China is an important destination for export goods shipped through the Port of Mobile—especially grain, coal and forest products. And Huntsville, which used to see empty containers headed west to pick up another load of imported goods, now sees full containers both in and out bound.

Some Alabama business owners are wary of Chinese competition, which has been remarkable since the Asian giant joined the World Trade Organization 10 years ago.

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“I think everyone in the U.S. is competing against China, ” says Hilda Lockhart, director of international trade for the Alabama Development Office.

Trade promoters such as Tony van Aken, director of international trade with the Mobile Area Chamber of Commerce, see in China a market that’s just too big to ignore. He’s personally participated in four trade missions to China.

Van Aiken makes no apologies for jobs outsourced to China’s cheap labor market. It’s what brought American industry from the North to the South in the first place, he says.

Some Alabama companies have developed trade arrangements that let them take advantage of lower labor costs, while keeping the added value at home.

Recent Chinese investments in Alabama include buy-up of Teledyne Technologies Inc.; a new pipe plant, Golden Dragon Precise Copper, and plans for 20 senior living centers.

Outdoor furniture maker Summer Classics has a major plant in Alabama and sells its furniture through its own outlets around the U.S. and Canada. But much of the manufacturing is outsourced to China and South America.

It’s just part of the high-style business model, says Summer Classics owner Bew White. Fabrics—about 20 percent of the business volume—are made in the U.S. because other markets can’t match the quality and style. Frames are made in China, which has the flexibility to adapt rapidly to changing needs.

“We can show a design and they can make a sample and it’s stunning how fast they make it, ” says White. What might take a month in Mexico takes a day in China.

Summer Classics uses “captive factories” in China, he says—factories that work exclusively for his firm and have staff members from his business.

Now he’s worried about rising labor costs in China—up about 15 percent. But moving on to a lower-labor-cost market is not likely, he says, because of the difficulty in moving infrastructure.

White has been to China 27 times and says that relationships are the key to good business. “You’ve got to talk and you’ve got to become friends, and that’s hard when you don’t speak the same language, ” he says. And though he enjoys his China trips, they’re all business, he says. He’s never seen the Great Wall.

Worries about securing industrial secrets keeps Mobile-based N-Tron from doing much manufacturing in China, says founder Bill Rowan. He is now a consultant with the company, which makes hardened industrial Ethernet networking equipment.

“Reverse engineering is something you need to worry about in many of those countries and Asia in particular, ” Rowan says. “That’s why it’s pretty important that you work with somebody that’s trustworthy and protects your hardware and software.” The work N-Tron has done in China has been for big companies, such as General Electric, he says.

Working through state and national trade programs is a big help, Rowan says, and he particularly recommends the U.S. Department of Commerce for help in finding trustworthy business partners in China.

Irresistible market

For a number of Alabama companies—from carpets to SUVs to systems software—China is a lucrative market that can’t be neglected.  

Mobile County’s Masland Carpet’s high-end, high style carpets are very popular in China, which has been a great market for the firm since the mid-1990s. “After Canada, China has been our largest export market, ” says Robert Munisteri.

Munisteri’s favorite illustration of the ironies of world trade is that the Mobile Convention Center, just 10 miles from his company’s home in Saraland, has Chinese-made carpet throughout, while the convention center in Dalian, China, just north of North Korea, sports Alabama-made Masland carpet.

Although China exports carpet to the U.S., it is not in direct competition with U.S. made carpet, says Munisteri. Chinese carpet is woven—an older technology that’s very labor-intensive. The last U.S. factory that made woven carpet was in Mississippi and closed more than a decade ago, he says. Masland imports a small amount of Chinese-made carpet for some of its residential market.

China is a sales target for Masland, “a relatively easy market for us to sell into, ” says Munisteri. “There are some barriers to imported products to protect their own industry, but it’s less than Germany or Korea or Japan. They are above average in acceptance of imported products. We never have a problem getting paid. Communication is relatively easy.

“They have a small indigenous carpet industry that is sound and growing, ” he added, “but they are receptive to foreign products, particularly American, and they will pay a premium for it.”

Alabama-made, high-end autos follow high-end carpets to China. The Chinese especially prize Mercedes vehicles. When former Gov. Bob Riley visited China on trade missions, recalls ADO’s Lockhart, the Alabama team made sure he drove around in an Alabama-built Mercedes.

Huntsville-based Intergraph—maker of some of the world’s most sophisticated engineering and design software—just announced that the China National Offshore Oil Corp. selected Intergraph’s SmartPlant Foundation for engineering management on offshore platforms and oil fields.

The Chinese market is transforming trade in one of Alabama’s most traditional agricultural crops. China trade is “the biggest thing ever to happen to the pecan industry, ” says grower and state pecan expert Bill Goff.

China’s pecan imports went from 2 million to 83 million pounds almost overnight. That’s a bumper crop of dollars for growers like Goff, who exported his entire yield to China for the past two years. But it’s a benefit to all growers, he says. If the price goes up, even growers who don’t export get more money for their nuts.

For years, the Chinese ate walnuts for their health benefit, says Goff, who teaches horticulture at Auburn University. Then they learned that pecans are even better for you—promoting longevity, in a culture that reveres age. Add the rising affluence of China’s new middle class and a good exchange rate, says Goff, the market “just snowballed.”

Theoretically, the Chinese could grow pecans in China, he says. But even if they started today, it’s typically seven years before there are nuts on a new tree and 10 before it produces appreciable crops.

“I have more pecans, personally, than they grow there, ” he says. The 450 acres he tends at Riverbend Pecans north of Lowndesboro produce about 400, 000 pounds of pecans. He and his son Matt, his partner, have just added 12, 000 trees and expect their yield to increase to 600, 000 pounds. Not counting the additional trees he grows in Georgia, says Goff, there’s no questions he is Alabama’s largest exporter.

Increased trade affects shippers, too.

At the Alabama State Docks in Mobile, ships carry grain, coal and forest products directly to China and containerized products – auto parts, for example – through shipping hubs and on to Asia.

Containers ship weekly, break bulk goods about once a month and bulk whenever there’s an order.

“Coal is a robust market now, ” says Jimmy Lyons, director and CEO of the Alabama State Port Authority, because Alabama’s high-grade metallurgical coal is key to China’s burgeoning steel industry.

One problem the port faces is that more containers go out than come in. “We’re a producer state, but a relatively small consumer state, ” says Lyons, “so the number of containers coming in is not sufficient to take care of all the exports.” The port is actively recruiting distribution companies that would import consumer goods, bringing in containers that local exporters can use to ship goods back.

There’s no seaport in Huntsville or Birmingham, but China trade is important there, too. Containerized freight has rolled through Huntsville’s International Intermodal Center for many years, says Rick Tucker, executive director of the Port of Huntsville.

The big change is that goods are now going both ways. “We’ve shipped empty containers out for a long time, ” says Tucker. “Now we’re seeing more containers going out loaded. A few years ago, 60 percent of our containers were empty outbound, now it’s starting to level out.”

The best indicator may be international freight carrier Panalpina. The Swiss carrier, which maintains its U.S. hub in Huntsville, started a weekly air cargo flight from Hong Kong to Huntsville last October. In May, they added a second flight plus a Huntsville to Hong Kong service.

However attractive the China market, trade experts advise those who would trade with The Dragon not to enter the market hastily.

Take advantage of connections like ADO, Chamber of Commerce-based initiatives and the U.S. Department of Commerce and its U.S. Foreign Commercial Service, suggests Tony van Aken of the Mobile Area Chamber. U.S. businesses need to find the right representatives in China, because they can be held accountable for their agent’s missteps. Most companies dealing in China say the biggest hurdle is finding the right people there and building the relationship.

ADO’s Lockhart also recommends the Confucius Institute at Troy University—a great place for Alabamians to learn about Chinese life, customs and industry.

Turnaround is fair trade

But don’t expect The Dragon to stay home.

Chinese businesses have made headlines in the past year, especially in South Alabama.

In December, Teledyne Technologies Inc. announced it was selling its Mobile operations to a Chinese-government-backed business, Technify Motor (USA) for $186 million in cash.

In March, Golden Dragon Precise Copper Inc. announced it will build a 400, 000-square-foot copper tube plant in Thomasville. It’s scheduled to open in late 2012.

In May, construction began in Foley on the first of 20 assisted living centers planned around the state by Country Place Senior Living, financed in part by Chinese investors.

HK Motors, which announced plans for an enormous eco-friendly car plant in North Baldwin County, is still chugging along with its ambitious capital-raising goals, says Rob Drinkard, who leads the Alabama Center for Foreign Investments. He advises Chinese investors on using the federal EB-5 visa provision, which awards work permits for foreign nationals who invest at least $500, 000 in a business that creates 10 jobs.

EB-5 is popular in China, but it’s also popular in the U.S., says Drinkard. “Most of the traditional financial sources have dried up. People can’t just go to the bank and get a loan; the funds aren’t there.” The nursing home project has 50 overseas investors, he says.

Chinese investors are also buying land, says Lockhart, especially coal mines, and land for growing timber, cotton and other commodities—ensuring their source of raw materials. But the state does not keep track of such sales.

Trade with China, and especially Chinese investment at home, is likely to be a long-term relationship, says David Hutchison, director of business development for ADO. “The Chinese have a lot of money and are looking for investment opportunities, ” he says.

Foreign direct investment is crucial to Alabama’s economy, says Lockhart. If we didn’t have the jobs that have come from Germany, Japan and Korea and other nations, “our state would be hurting as far as good paying jobs.  They come in and are very aware of being good corporate citizens, ” she says.  “Some people may say they’re taking away jobs but they’re not, they’re giving us jobs.”

Whether as business rival, business partner, marketplace or investor, trade with China seems to be here for the long haul.

“I refer to China as the Wild East, like we had the Wild West, ” says Rob Drinkard. “It was wide open and anything goes. They are growing so fast and so many people there are making so much money and looking for places to invest those funds. It’s crazy – crazy in a good way.”

Nedra Bloom is a freelance contributor to Business Alabama. She lives in Mobile.

By Nedra Bloom

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