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Canadian manufacturer fights hard for piece of Chinese market

| WSJ | Ben Dolven

It's easy to get the impression China's manufacturing boom involves making just about everything. For an illustration, meet Ron Ball. He makes escalator handrails, Ben Dolven reports.

SHANGHAI - Mr. Ball's Oshawa, Ont., firm, Escalator Handrail Co., was North America's leading maker of handrails by the time it set up overseas plants, first in Germany and then China. EHC's handrails can be found, among other places, in the Pentagon, the Kremlin and EuroDisney.

But Mr. Ball, the 62-year-old chief executive, isn't off relaxing by a serene Canadian lake. He bases himself in Shanghai, spending his days wrangling with Chinese rubber suppliers, working incessantly at quality control and braving the maze of Chinese import-export and currency regulations -- not to mention 14 hours a day in front of a computer running the global operation.

"This is the best part of the world, as I can see, at least for a businessman," says the laconic Canadian. "I have a hard time not getting into all kinds of other things."

Everyone wants a piece of the booming Chinese market. But everyone knows it isn't easy to crack, and the experiences of those who have plunged in offer lessons for anyone looking to profit from China's opportunities. China's big manufacturing centres, spreading out from Guangzhou, Shanghai and Beijing, are full of business people like Mr. Ball, who run small and medium-size companies. Their challenges are as important as those of the corporate goliaths that dominate headlines -- and often knottier: Small companies have less leverage over suppliers and fewer people to handle the reams of paperwork China requires.

EHC's China history is similar to that of many foreign companies that set up shop in the mid-1990s -- a rough startup period and early years of losses that turned around when relentless cost- cutting kicked in.

In 1996, the firm was scouring Asia for a site to serve increasing demand there, particularly from South Korea, and it took a bet on China. EHC registered that year as a fully owned foreign enterprise with about $2 million U.S. of capital. It rented an empty factory in May and it was producing handrails by December.

The company posted losses in its first two years. Its startup costs were high: Several of its expatriate staff lived in expensive Shanghai hotels. Training a Chinese workforce was tough, and then the Asian financial crisis kicked in and hammered demand from construction and public works projects just as EHC's Chinese plant was getting started. "There's no question that it took a lot more time and effort training people than what we had expected," Mr. Ball says.

So he moved himself to Shanghai in 1997 and has stayed. He set up training programs, got the company up to speed, moved staff into cheaper housing and gradually reduced the number of expatriates to the current count of one (himself). By its third full year of production, Mr. Ball says, EHC's China operation had crossed into the black and it has made a profit every year since -- even as prices for its products have fallen by more than 40 per cent over the past five years, and as costs for materials such as rubber and steel have surged more recently.

Last year, EHC's Shanghai plant produced 30 per cent of its worldwide sales: about $7 U.S. million of products, 40 per cent of them exported. And even as handrail prices keep falling, expanding demand keeps the factory running. EHC's Chinese sales are growing at about 20 per cent a year, Mr. Ball says, and each of the world's eight largest escalator makers is operating in the construction- crazed country.

Nor does Mr. Ball feel there has been any impact from the government's moves to cool down economic growth. He says, however, that he has been told to cut electricity use this summer because of the Shanghai area's severe power shortages.

But running a Chinese factory, even a profitable one, is no simple matter. Manufacturing in China is a relentless battle with costs and Mr. Ball has to fight it daily. From maintaining consistent supplies to fending off new competitors to repatriating profits, life isn't easy.

Consider what he says is the biggest factor in bringing costs down: localization of supply. Today, Mr. Ball figures he buys about 60 per cent of his materials in China.

Some, such as the high-technology textiles that reinforce a belt, still must come from overseas.

"The best way to save cost is to continue to localize," he says. "That is not an easy process. You really have to develop your suppliers."

This presents all sorts of challenges for a small firm, whose smaller scale of orders give it less leverage over a supplier. "Typically, we do not attract a supplier," Mr. Ball admits. "Typically we have to go find our vendor."

Take rubber, for instance. EHC has to order a specific mix of rubber that, in North America or Europe, wouldn't be hard to get. In China, though, "that kind of secondary industry doesn't exist," Mr. Ball says. "Here, you have to find people who are already making rubber for other industries." And given that suppliers know they are difficult to replace, price negotiations can get heated.

Once supplies are procured, the belts sold and the profits made, Mr. Ball still fights the constant battles of import-export bureaucracy and repatriating foreign currency overseas. Ask him about the day-to-day hassles that make life hard, and such paperwork issues are high on the list. On a busy afternoon in a Bank of China branch, for instance, he haggles at the teller's window in simple Chinese, speaking on his mobile phone to his other bank, trying to work out a currency conversion.

"It's getting better," he says, "but it's still not easy."