by James Braeunig, Hedstrom Plastics

I am truly amazed! The rapid changes I have observed in China and its infrastructure over the last 15 years continue to astound me. The landscape has been transformed. In my early days of travel to China, I had eye-opening experiences as to how backward this country appeared and how poor the living conditions were for the Chinese people. At the time, it was not uncommon to be traveling over dirt roads that had very little grading. The airports were antiquated as well as dilapidated. Today, I am astonished by the vigorous development that has occurred since my first visit 15 short years ago. The country’s infrastructure, including roadways, airports, train systems, and frenzied construction of high-rise buildings and factories, has improved dramatically. The highways rival anything we have in the U.S., and the newly erected airports are very modern. In Shanghai, the high-speed train from the airport requires about 10 minutes to arrive in Pudong, the financial center of the city, as opposed to the hour or more it takes by car, depending on the ever-increasing flow of traffic. Most recently, I traveled on a high-speed train at 175 miles per hour from Shanghai to Nanjing. Instead of the 5-7 hours I would have spent sitting in the passenger seat of a van, the train got me to my appointment in one hour and fifteen minutes. What a time saver! In comparison, Ohio’s high-speed train that was under development had a planned speed of only 37 miles per hour.

In the same way that the infrastructure of China has changed, our business practices within the country have evolved. Initially, we followed the toy industry to China seeking lower-priced products that would allow us to better compete with foreign competitors or sales/marketing companies who were trying to penetrate our market. We engaged a Hong Kong sourcing company to help us find vendors, travel with us during visits to factories, and provide translation services. This buy/sell type of relationship worked well at first, but it became apparent to us that we needed to protect our U.S. market by gaining an ownership position in the playball factory responsible for making our products. We wanted to try to prevent getting blind-sided by customers going direct to the factory. Actually, this did occur, but, fortunately, it was after we signed a Joint Venture agreement that gave us partial ownership of that factory.

Forming a Joint Venture in China, which united U.S., German, and Chinese partners in the manufacturing of toy ball products, was undeniably an adventure. The differences among these cultures and ways of doing business were striking. I wasn’t sure we could have ever negotiated an agreement that would be collectively signed. Luckily, we found a well-connected, honest partner that knew the culture and recognized how to get things done within the environment. Negotiating a Joint Venture agreement in this setting takes every bit of “street smarts” you can possibly muster, as there are no hard and fast rules of ownership, property rights, rules of law, cash flow, etc. We take this legal framework for granted in our country. Everything in China, business in particular, is tied to personal relationships and in finding someone who can act as a guide to assist in maneuvering the intricacies of the culture. It is advisable to hire a good western lawyer living in Hong Kong or China that knows the system and has developed connections in the major Chinese cities, including Hong Kong.

Since a consultant believed direct investment in China carried too much risk, we chose to follow our conservative nature and be organized in Hong Kong. In addition, the rule of law that Hong Kong provided made us feel more at ease. Together, the U.S., German, and Chinese partners own this Hong Kong Enterprise, and this entity owns 100% of two WFOE’s (Wholly Foreign Owned Enterprises) in China.

Our agreement required 18 months of negotiations. However, negotiations involved more participants than just the three partners. We utilized the talents of a Mandarin-speaking business consultant, a U.S.-born Mandarin-speaking lawyer from Hong Kong who had offices in Hong Kong, Beijing, and Shanghai, and a German legal and business consulting firm in Shanghai to help us perform the Due Diligence. What an experience!

Creating the Joint Venture lead us to hiring our own staff to run a sourcing department. Having our own staff, which includes sourcing specialists, a logistics specialist, quality assurance auditors to handle testing and sampling, and a design engineer to help us procure rotational molds and other components within China, gave us the freedom to pursue new business while, at the same time, fulfilled our own manufacturing needs.

As you may or may not know, the Chinese Government owns all property, and it is required that business owners obtain a lease for any property with a predetermined expiration date. It is unclear what will happen to our agreement after this impending date, but it’s far enough in the future that someone else other than me will have to figure it out.

My guidance to you, if you intend to invest in business in China, is to be prepared to be “comfortable being uncomfortable!” You never will understand fully the inner workings of Chinese culture. So, don’t spend too much time trying to figure it out. I am not convinced that anyone outside of China really knows how this total process works. Spend your time reading body language, as it really is a universal language, and forming deep, personal relationships with your Chinese counterparts.

Don’t expect that the Chinese will embrace your work instructions or methods of production. They are convinced they can do it better and that you just don’t understand the culture. They will ignore the methods you have learned over many years. Spend less time trying to force your methods on them and let them experience difficulties with scrap rates, performance, etc. You’ll gain significant credibility if you can prove that your methods will solve their problems and allow them to “save face” with their partners. This may take two to three years of working very closely together. Try to avoid the catastrophic failures that threaten the organization, but keep in mind that you may encounter a few close encounters along the way. Stay the course and practice patience. You’ll need it!

It is never as good as it seems, and it’s never as bad as it seems. Remember that phrase. You have to keep this is mind when working in China. They are concerned about issues you won’t understand, and they have very little interest in the problems you try to explain. They will have to experience any problems first-hand to accept their significance. There are always issues, such as those that the toy industry experienced with lead/heavy metal/phthalate- testing failures and costly recalls.

A bit of Karaoke may be required along with a few libations hoisted to the phrase Gum-bai, which translated means “Bottoms Up!” Get in shape, or you’ll have some days that you won’t feel like working! Watch out for the Mao Tai. It will sneak up on you, and you’ll wish you knew its strength before your first encounter. Don’t try to impose your morals or ways of doing business on your partners. It won’t work! You’ll never understand the inner connectivity of the banks, local governments, and connected individuals. The key is trust!

In addition to cultural differences, the advent of testing requirements, audits, and import standards has changed the face of international business practices. 15-plus years ago it was a “free for all” in terms of standards, material consistency, lead and heavy metals, social compliance, manufacturing methods, and so forth. The Chinese manufacturers learned to play the testing game by using “Golden Samples” that met all requirements before converting to less expensive materials for full production runs. Many toy companies suffered significant costs of recalls and unusable products due to lead contamination, etc. The negative publicity led to HR 4040 (The Congressional Act 4040 that redefines Toy Safety requirements) and the new CPSIA (Consumer Products Safety Improvement Act). Nearly all retailers have instituted testing on products prior to shipment to help ensure compliance. As always, the unintended consequences of these actions lead to very difficult and, at times, unnecessary restrictions, including insufficient time to work through existing inventories and the expense of having to discard product which had been acceptable for many decades prior to the newly enacted laws, some of which were without firm scientific results proving any health hazards. This rule alone has increased our annual testing costs from approximately $10,000 to well over $300,000 per year in order to be compliant with these new requirements.

In addition to toy safety, we are required by our licensors and retailers to meet all social compliance and worker safety standards. This task is accomplished by being audited and certified by ICTI, International Council of the Toy Industry. In the early years, the procedural application of these standards was not enforced. Yet, our partners and vendors told us, at the time, that we met all of the applicable local government standards. Because all of the documents were in simplified Chinese, we had to assume that what we were told was correct. Unfortunately, the Chinese Toy Manufacturers were only partially correct in their understanding and description of the American standards. On account of these ICTI and licensor audits, we were required to fully comprehend the standards and ensure compliance. Although we had always wanted to be compliant, we had no way of verifying compliance in this market. These audits forced us to be educated. The measures were set high, even going so far as to having to have the drinking water analyzed for compliance to standards that can exceed those of bottled water. The result of compliance was an additional $1,000,000 of expense per year to adhere to overtime hours and pay, social benefits, worker safety, and the like. Another expense we incurred involved having to install a large quantity of swamp coolers and ventilation devices to reduce the shop floor temperatures to comply with audit requirements. We had always wanted to be a good corporate citizen but were totally unaware of the ramifications. The learning process was difficult, but necessary, and it was a good outcome for our employees.

When the TIA (Toy Industry Association) required all of its members to pledge to buy from ICTI certified factories only, we pledged our support. However, there are times we contend with industry players that don’t comply with these standards. Therefore, we are forced to compete with suppliers who have substantially lower costs. On the other hand, our conscientious adherence to the standards means a safe work environment for our employees and higher quality products for our customers.

Homeland Security, due to the events of 9/11, has also entered into the picture. The U.S. department requires our factories to be C-TPAT (Customs Trade Partnership Against Terrorism) compliant. This is a plant security, anti-terrorism procedure that ensures the contents of freight containers being shipped to the U.S. do not contain dangerous materials. This is another standard that Chinese factories must meet and an additional expense involved with meeting requirements for importing goods to the U.S.

Another caveat in working with Chinese manufacturers is that the Chinese toy industry has had very little IT protection for products or processes. When we first entered China with our Joint Venture, we probably had 6-8 playball competitors. Now, we estimate there could be as many as 80 to 90 competitors. This has lead to cutthroat competition that remains very difficult to counter, especially for our Chinese partner. Many of these small competitors do not abide by ICTI and other standards that have steadily evolved as a result of the testing failure publicity a few years back.

I wonder whether our U.S. Roto-molding plants could pass these meticulous, comprehensive audits and standards. They would be surprised at the rigorous probing these audits demand. At the same time, I believe that it is possible for roto-molding plants to do so. Otherwise, we wouldn’t be considering such an endeavor.

Our next venture is to establish an industrial rotational molder in China to serve U.S., Canadian, and European multi-national companies in search of a localized molder to service the Chinese market. We want to provide the sophisticated technology, machinery, and technical staff necessary to modernize this industry with high-quality, precision parts. We intend to offer the same array of materials available in the U.S. roto-molding industry and solicit multi-nationals seeking precisely such a service within China.

Despite our initial reservations, the obstacles we had to overcome and the long learning curve involved with conducting business in China, the journey has been well worth the effort. The more time I spend in China, the more I appreciate the people and the culture that has evolved over thousands of years. Chinese citizens are really great, fun-loving people seeking to improve their lives and enjoy the benefits of hard work, just as we do. Although, we take some of the liberties for granted. Through our joint efforts, I have come to respect the differences among us, but, even more so, I have come to celebrate the similarities we share. I’m looking forward to what the future has to bring.

Jim Braeunig is President & CEO of Ball, Bounce, and Sport, Inc., which includes Hedstrom Entertainment, Hedstrom Canada, Hedstrom Plastics and two recently acquired rotomolding companies, Diamond Plastics and North Coast Custom Molding. Jim has spent 37 years in the rotomolding business and is a past President of ARM International. Jim was instrumental in the formation of a Joint Venture, founded in Hong Kong, that owns two factories in China. He currently serves as Chairman of the Board of Hedstrom Asia Ltd. that is located in the Shanghai area and is comprised of American, Chinese and German partners. He holds a B.A. in Chemistry and MBA degree.