The hard reality of the global economy weighed heavily on Ashtabula Rubber Co. four years ago. Its key customers, under competitive pricing pressures, were searching for low-cost manufacturers in Asia. Some of their customers were setting up assembly operations in China, where labor wages and general business expenses are lower than in Western nations.
This scenario, quite common for many Northeast Ohio manufacturers, motivated Ashtabula Rubber Co. to launch a China-based business. The privately owned maker of highly engineered and customized rubber products for the transportation, power, appliance and water industries decided to take a two-fold strategy.
While building its China plant, Ashtabula Rubber found a qualified Chinese rubber company to supply low-cost products. In about a year, Ashtabula Rubber’s plant was up and running in Shunde, in the Guangdong province of Southern China.
“The strategies helped Ashtabula Rubber retain all of its customers, and the plant became profitable after just one year in operation,” says William Sinn, president and CEO of Sinn & Company, a consulting firm that helps U.S. companies open businesses in China.
The plant has also expanded its product lines to meet growing demand from other customers. Ashtabula’s growth plans include attracting Chinese customers and more U.S. customers with operations in China. The company’s Chinese facility has also not hindered its stateside plant, which continues to thrive.
“For many manufacturers, especially for industrial core manufacturers, having a strategy to do business with or in China is essential for their survival,” Sinn says. “China is still an industrial country, so there are many opportunities for Northeast Ohio manufacturers.”
Because of China’s high-growth economy, many large Northeast Ohio companies have set up shop there, including Lorain-based health care equipment manufacturer Invacare and Fortune-500 industrial corporations Eaton and Timken.
But today, even small and middle-market companies have jumped into the ring — particularly those with annual revenues of $50 million to $800 million, says Christopher McCracken, a partner at Cleveland-based Ulmer & Berne LLP.
McCracken receives about three to four inquiries per week from businesses about low-cast labor in places such as China. China is attractive because of itsless expensive work force, as well as its rapidly growing middle class, which has an insatiable appetite for products and services, says McCracken.
In fact, the upper middle class earns about $12,500 or more annually, and that figure is expected to triple by 2025, according to a report by the consulting group McKinsey & Company. (When accounting for purchasing-power parity, a household income of $12,500 buys a lifestyle in China similar to a household earning $40,000 a year in the U.S., the report notes.)
This means the Chinese middle class will be looking to have the lifestyle of middle classes everywhere, says Jeffrey Bader, director of the John L. Thornton China Center at the Brookings Institution in Washington, D.C. As the keynote speaker in the Commercial Real Estate Deal Maker Forum in Cleveland this month, Bader will address the rise of China and its impact on the U.S.
“There was no such thing as a mortgage in China until 10 years ago,” says Bader. “Now, most people in cities have mortgages. These people want to buy furniture and furnishings for their homes. So there are all kinds of [opportunities] ."
Opportunities, however, also create challenges. For example, many businesses are concerned about protecting their intellectual property rights in China. The country is the No. 1 source of counterfeit products seized at U.S. borders, accounting for 80 percent of the total value of seized products, according to U.S. Customs and Border Protection.
“In the past, China has really been like the Wild West,” says McCracken. “Although the Chinese government does not condone intellectual property theft, it wasn’t a top concern prior to the country’s admission to the World Trade Organization in 2001. As a result, China’s laws and court systems were lax on IP theft.”
But McCracken anticipates a decrease in IP theft as China’s experiences with the rest of the world continue to evolve. “The Chinese courts are getting better, and they are trying to do more to cut down on IP thefts.”
There are signs that the central government and many regional governments are committed to dealing more proactively with counterfeiting and copyright piracy. In fact, a recent U.S. Chamber of Commerce report indicated that Chinese cooperation with U.S. industry and law enforcement authorities has increased.
To protect themselves, businesses should review how their intellectual property is protected in the U.S., which can help extend protections under international treaties, McCracken says. He suggests businesses keep their trade secrets in the U.S. rather than transfer those secrets to a Chinese facility.
Labor shortages are another growing challenge for businesses in China, because it often leads to wage inflation.
The mean annual wage for urban Chinese employees skyrocketed by nearly 19 percent last year, according to China’s National Bureau of Statistics. It was the fastest growth in six years and higher than the 14 percent average of the previous six years. Although China’s manufacturing labor costs are still low, with workers averaging $2,853 a year, energy and material prices are also rising. These expenses, coupled with higher taxes and stricter enforcement of labor and environmental standards, are causing some manufacturers to leave China for even lower-cost countries such as Vietnam, Indonesia and India.
Despite its challenges, China’s expansive economy is expected to have a significant impact on Ohio and the U.S. for years to come.
China has overtaken the U.S. in manufacturing output, according to a report by the Heritage Foundation. China’s manufacturing output was worth $2.72 trillion in 2006 — slightly higher than America’s $2.7 trillion in manufacturing output. In addition, U.S. exports to China have increased by more than 200 percent since 2002.
“That, by far, is our fastest growing export market in the world,” says Bader. “Economists estimate that the jobs created in the U.S. from export is somewhere in the range of 700,000.”
Nonetheless, trade with China has taken a severe toll on American jobs: the U.S. lost 2.3 million industrial jobs from 2001 to 2007.
While those jobs will never return, new jobs are expected to be created by Chinese companies that invest in the U.S. Consultants say the growing wealth of Chinese businesses and entrepreneurs will lead them to open U.S. subsidiaries or buy American companies.
“Chinese companies want to learn about the technologies that help drive the success of American businesses and industries,” says Sinn. “There isn’t a lot of U.S. business technology that has been transferred to Chinese companies. The only way they can learn that is by coming to the U.S. and doing business here.”
Last summer, economic development groups such as the Beachwood Chamber of Commerce, Team NEO and BioEnterprise successfully courted GammaStar Medical Systems Ltd., a Chinese-owned subsidiary. The company moved into an office in Beachwood in May and has four employees. GammaStar, owned by GammaStar Medical Group Ltd. of Shanghai, makes the Gyro Knife, a device that destroys cancerous tumors with radiation without harming healthy tissue.
Vince Adamus, CEO of the Beachwood Chamber of Commerce, says GammaStar moved to Cleveland because of its medical industry and venture capital opportunities for biomedical firms. GammaStar also received state and local tax incentives. “There are plenty of opportunities for us to bring Chinese capital and investments to our region,” says Adamus, adding that the chamber is planning a trip to China next year.
In addition to building business connections, Cleveland also is creating educational and cultural opportunities with China.
Zhou Wenzhong, Chinese ambassador to the U.S., spoke before the Cleveland City Club in January. He also had a series of meetings with business leaders and announced Cleveland State University’s Confucius Institute, a center for teaching the Chinese language and culture.
Earlier this year, Kent State University announced that it signed education cooperation agreements with seven leading Chinese universities. The agreements establish undergraduate and graduate degree programs, joint research projects in art, business, biology, chemistry, communications, design, education, liquid crystals, media and music, as well as faculty and student exchange programs.
McCracken believes that Cleveland’s connections to China will continue to grow for years.
“I think there is going to be an increasing amount of investment activity by the Chinese in the U.S., and some of that investment could take place in Ohio,” McCracken says. “It’s going to be up to us to make it happen.”