Md. mines China boom

THE BALTIMORE SUN

Each time Richard C. Brown arrives in Beijing, he looks up at the skyscrapers under construction with envy.

The president of Grace Performance Chemicals, a division of W. R. Grace & Co. of Columbia, is trying to expand sales of the company's cement additive in China, a country with 1.3 billion consumers in the midst of a building boom.

Lured by cheap skilled labor and seemingly infinite market opportunity, China is the modern day gold rush, and Grace is not the only Maryland prospector in one of the world's fastest- growing economies.

State companies exported $284 million in goods and services to China last year, a 27 percent increase over 2004. That's just a sliver of the $7.1 billion total exported by Maryland companies in 2005, but with China's economy projected to grow an average of 9 percent a year through 2010, the potential is evident.

"The lure of China is pretty clear," said Anirban Basu, chairman and chief executive of Sage Policy Group Inc., a Baltimore economic consulting firm. "It's a massive market."

And exports aren't the whole picture, said Bradley Gillenwater, investment and trade specialist for the Maryland Department of Business and Economic Development's international operations.

Many Maryland companies make money from investments in China, but those earnings aren't reflected in the export numbers. Spice maker McCormick & Co., of Sparks, manufactures products there that are sold directly to the Chinese market, and Baltimore architectural firm RTKL Associates Inc. benefits from millions of dollars in Chinese contracts.

Maryland was the first state in the nation to establish a trade office in China in 1996, with its main office in Shanghai. It opened a smaller one in Beijing last fall.

Now, with 40 employees, China is the largest of the state's trade operations in nine countries. The Shanghai office currently is assisting 26 Maryland companies full-time and will move this summer into a new 22,000-square-foot office, triple its current space.

But doing business in China can be a challenge. Foreign companies face not only language and cultural barriers but piracy of intellectual property, counterfeiting and political interference.

"You have to go into China with your eyes open," said Brown, of W.R. Grace, which opened a new China headquarters in Shanghai last fall and employs 235 throughout the country. "You can't think you're going into the United States 50 years ago."

Even the most successful American companies have stumbled. Wal-Mart learned that while selling dog meat in China is profitable, it outraged animal rights activists back home. Anheuser-Busch faced a public-relations nightmare after Chinese counterfeiters slapped the brewer's "king of beers" label on suds that made people sick. And Google is currently under fire for cooperating with the Chinese government in censoring its new search engine there.

China was a natural for McCormick, given that the country and India are the world's biggest spice suppliers, said Roger T. Lawrence, the company's vice president of worldwide quality assurance, who spoke at a recent forum about doing business in China. But the company didn't go into China assuming a supply chain could be developed overnight, Lawrence said.

McCormick first established a presence in Shanghai in 1988 through a joint venture and sent employees there to co-develop plants and train Chinese counterparts. While everything from climate to lighting is controlled in U.S. warehouses, Lawrence said it was not uncommon for Chinese to leave warehouse windows open, allowing in mold and insects.

"In the United States, it has to be as clean as your kitchen," Lawrence said. "That's not necessarily the case in China."

The long-term investment paid off. Today, China represents $100 million in annual sales for McCormick, Lawrence said, and the company owns plants in Shanghai and Guangzhou (Canton).

Those who have been there agree that being successful in China depends largely on the "guanxi," or the relationships companies build with Chinese business counterparts and government officials. And it requires patience, they said.

"It's easy for businesspeople to be wowed and seduced by the headlines," said Steven Drake, a Silver Spring consultant who's helped companies such as Wal-Mart, Anheuser-Busch and Baltimore's Laureate Education operate in China. "There's a knee-jerk reaction to say, 'We've got to be there.'"

Drake admitted he's made his own mistakes there.

He first went to China as an executive with Fleishman-Hillard Inc., figuring the St. Louis firm's worldwide reputation as a public relations consultant would ensure success.

"We learned that really didn't matter," he said.

His Chinese partners balked at how much the firm paid its young Chinese employees. He said one recent college graduate on his staff was making $400 a month, a fraction of what her American counterparts earned but nearly three times what her father took home.

Drake said it caused problems for her because she still lived a traditional lifestyle at home, with her parents.

"American businesspeople need to be sensitive to those issues," Drake said.

At the same time, Chinese companies won't pay American rates for services.

When Michael Violette, president of Washington Laboratories Ltd. in Gaithersburg, first traveled to China seven years ago, he was struck by how enthusiastic they were. His company tests electronics for manufacturers to make sure they comply with Federal Communications Commission requirements, and the Chinese were eager to learn how to enter the U.S. market.

"We had people coming up to us saying 'Sell my product,' " Violette said. One man handed him a bag of what looked like either salt or an illegal substance, he said. It turned out to be silicon. "Everyone wanted to do trade."

He said he initially consulted for free to establish relationships there, but found it difficult to start charging his Chinese partners because they expected him to continue donating his services. And when he could bill, he could charge only a fraction of what he would normally get in the States.

Still, Violette thinks China is a great market opportunity. Next month, he will lead a small trade mission there and will film it for a documentary.

"They innovate very quickly and produce very quickly," he said. "It's the reason we can buy a DVD player for $40 at Wal-Mart."

RTKL is seeing China's rapid development first hand as the country rushes to complete infrastructure projects before the 2008 Olympics in Beijing.

RTKL partnered with the Beijing Institute of Architectural Design and Research to design the Chinese Museum of Film, part of a new entertainment district near the airport scheduled to open around the 2008 Games. The firm is competing for a government contract to build a large train station that will connect trains, buses and subway lines.

Like McCormick, RTKL's success was built over time. The firm first went to China through the state's trade office, and later established its own office in Shanghai in 2001. It became a wholly owned foreign enterprise under Chinese law in 2003, and now has a staff of 37. All but five are Chinese.

Despite having the broadest of the three licenses allowing foreign companies to conduct business in China, RTKL can't operate there as it does here. Its architectural plans must be stamped by a local Chinese design firm - and government officials - before construction begins, said RTKL Vice President J. Scott Kilbourn.

"What gets built in a city is very much under the control of the local governor," Kilbourn said by phone from the Shanghai office.

Living there helps him understand the culture and market. For example, he said building residential spaces above stores would be acceptable in South China but a "disaster" in Beijing, where people prefer to live away from the commercial district.

Kilbourn said there is so much business in China that the firm can be choosy. RTKL gets as many as five requests for proposals a day, but his staff pursues only a couple a month, he says.

Brown, the Grace executive, has high hopes for his cement additive in China, where people joke that the construction crane has become the new national bird. The international company has faced the same challenges as smaller Maryland firms in China, but is willing to spend the time.

"The Chinese went from no phones to cell phones," Brown said. "The speed at which they get to parity is light years."

allison.connolly@baltsun.com

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