Creative at Home’s manufacturer in China simply wasn’t doing the job. That was the assessment of president Rod Gray, who founded the hardwood flooring company—which sells its product in the Canadian and U.S. markets—back in 2003.
The arrangement between the Chinese manufacturer and Creative worked well for a couple of years. By 2005, however, Gray’s company, based in Burnaby, B.C., started to run into quality-control issues. Worse than that, he suspected that the Shanghai-based factory was using his company’s designs to sell its products to other customers. “The writing was just kind of on the wall,” he says.
Gray could have confronted the plant manager or tried to find a new contractor, but he feared these would be futile gestures. Instead, he decided to take a rather unorthodox route to offshore manufacturing—he would incorporate in China and purchase a factory of his own.
Importing products from China is one thing. Setting up shop there is quite another. Get Creative at Home president Rod Gray’s sage advice on how to do business with Bejing by signing up to download this free PROFIT Trade Tipsheet
“People told me that I was crazy,” he says. The idea of launching an enterprise in mainland China, where the communist government continues to impose strict controls, was unusual to say the least. But Gray realized that, with his own factory, he could not only control the quality of his product—he could protect his intellectual property, implement manufacturing efficiencies and better manage his Chinese factory workers.
“If you’re up for the challenge of setting up a factory,” he says, “you’re going to be way further ahead. Our competitors have a harder time developing new products, they have quality issues that are out of control, and it’s even harder to develop new stuff.”
Two years later, it was done. Creative at Home had established a wholly owned foreign entity in China with its own factory, and the strategy has already started to pay off. The company, with 20 employees and $8.5 million in revenue, has improved manufacturing processes while developing new product lines—all without fear of intellectual property infringement. Export sales to the U.S., which now accounts for 20% of revenue, are set to rise by double digits in the coming year.
It wasn’t so long ago that launching a foreign-owned Chinese company was prohibited, and Gray says many entrepreneurs may not even know that it’s now possible. Here are his best pieces of advice for business owners who might want to go all in on a Chinese manufacturing strategy:
- Start with contractors: Gray says it’s too difficult for a North American company with no experience or relationships in China to go in cold and launch a company. He recommends that entrepreneurs start the conventional way—by working with Chinese contract manufacturers and developing relationships. Once you’ve gotten the lay of the land, you can begin to address all the regulatory and cultural barriers that will inevitably stand in your way.
- Hire good consultants: Foreign direct investment practices in China specialize in helping Western companies launch businesses. “So they are kind of one-stop shops that will help you establish an entity and can give you legal advice and can help you select the right place to set up a business—because it can be daunting at first.” When Gray started out, he leaned heavily on his advisers at Dezan Shira & Associates, who recommended he create a “wholly owned foreign entity” (WOFE) in Hong Kong, which was then used to purchase a factory about an hour away from Shanghai, in the city of Jiashan.
- Find a manager you can trust: Trust comes at a premium in China, where corruption is rampant, both in government and business. One common racket involves procurement managers who will agree to buy supplies for more than they’re worth, in exchange for a kickback. Gray says he’s lucky to have found a Chinese manager he can completely trust. It’s a trait, he says, that is far more valuable than operational knowledge or managerial skill. “I could have hired somebody who is better at solving problems,” says Gray, “but he might be just ripping me off behind my back.”
- Brace for regulatory mood swings: The Chinese government has a propensity to change its mind arbitrarily and without warning. When Gray launched his business in 2007, the government was offering tax incentives for flooring manufacturers. Within two years, Beijing did a complete about-face, deciding that woodworking was dirty and resource-intensive. Business owners can wake up one day and find that common business practices are now illegal—“so you always have to be on your toes.” For his part, Gray says he was lucky to get his business established before the government deemed it “unwelcome.”
- Watch for U.S. anti-dumping regs: Creative at Home, which imports flooring from China and then exports it to the U.S., was blindsided by anti-dumping regulations in 2011. The U.S. International Trade Commission imposed prohibitive tariffs and prevented the company from executing on its U.S. expansion strategy for nearly three years. “It’s a real nightmare,” Gray says. Canadian companies exporting Chinese-made goods to the States should get expert advice regarding anti-dumping, he says. “We didn’t do any of that, and we paid the price.”
Before Creative at Home came up against its troubles with U.S. anti-dumping regulations, the company had been growing quickly—even through the recession, says Gray.
Just this month, in December 2013, the company finally—after years of submissions and applications—received confirmation that it qualified to be put on a “separate rate” list of preferred companies granted lower export duties to the U.S. market.
“We are going to be ramping up our efforts to get into the U.S. early in the new year,” says Gray. In addition, the company has a new product line and is looking to expand into Quebec and Atlantic Canada, where Gray has yet to set up a sales team.
In a year or two, Creative at Home’s president hopes he’ll have an even better success story to tell.