With the Olympic Games in full flow, China is capping its economic growth with an event of unprecedented scale. Oliver Astley talks to companies that do businesses in China and are aware of the potential and the pitfalls.

Political turbulence and failed economic experiments in the 20th century robbed China of its position as the world's biggest economy. Now, its immense labour pool, centralised power and willingness to do business mean that economists the world over look to China as much as the US to predict the direction the global economy will take.

China is known for producing primarily inexpensive consumer goods. During the past two decades, western manufacturing bases have inexorably shifted eastwards.

The history of one Derbyshire company is a prime example of this process. Alfreton-based safety footwear specialist Rock Fall began life in 1983, selling slippers on Ilkeston market. Back then, much of the footwear sold would have been manufactured in the UK.

As fashions changed, company founder and managing director Stephen Noon started sourcing shoes from the US. That was in the early 90s. He said: "We imported footwear from the US for about two years before switching production to Portugal, Spain and Italy."

Three years later, the company began selling Goodyear welted footwear for tradesmen and the construction industry. Manufacture was more labour-intensive than for most footwear and, with cheap manpower readily available in China, Rock Fall started working with Chinese factories in 1996. "It sounds terrible but at first it was cheaper to buy the leather in the UK, send it over to China for manufacture and then ship the completed footwear back."

The first factories that Rock Fall worked with were in the south of the country, in Guang Dong province, where there is a long tradition of footwear production. Since then, manufacturers have moved up China's eastern seaboard and the company now deals with six different factories, including one in Liaoning province, in the north-east.

"In the early days, the language barrier was a problem but now we have Chinese staff and the factories we deal with often have at least one Chinese university graduate who speaks English," Mr Noon said.

Eighteen months ago, the strength of the euro finally put paid to Rock Fall's relationships with European factories and now all its shoes are made in China. In autumn last year, it opened a small office in Shanghai, where two of its three Chinese employees are based.

"Having Chinese nationals talking to factories, checking quality and ensuring shipment deadlines are met saves a lot of time and hassle," said Mr Noon. "In 20 years' time, I believe that China will still be supplying our footwear. People are talking about manufacturing in India and south-east Asia but they are far behind and it is worth paying the extra few cents for the extra quality."

Although in a completely different industry, Derby software company AceCad has also realised that making the most of the opportunities in China entails having a permanent base there. After seven years of using a Chinese agent to market its software for designing steel structures, AceCad, based at the Wyvern, took the plunge 18 months ago and opened its Shanghai bureau.

Richard Brotherton, director of international sales and operations, said: "I feel Shanghai is a more amenable business location than Beijing. Beijing is more traditional, whereas Shanghai feels more go-getting and is closer in spirit to Hong Kong."

There are now eight staff at AceCad Shanghai and the number is set to double by the end of the year. China's rapid economic development has meant that the demand for steel structures has skyrocketed. AceCad software has been used for projects ranging from buildings housing Olympic events to structures for the power and gas sectors, the area in which the company generates most of its Chinese business.

The software package it sells is viewed as a high-end product in China. The design software retails at about £1,500 - double the annual salary of a senior engineer in a Chinese construction firm. That means AceCad is often dealing with companies that dwarf their UK counterparts. "The biggest steel companies in the UK will use 150,000 to 200,000 tonnes of steel each year. A new client of ours in China uses 600,000 tonnes and it is not considered that big by their standards."

Nevertheless, China is not the fastest-growing market for AceCad, as India is still developing faster. "The percentage of our turnover generated in China is under 10% but, to put things in perspective, it was under one per cent three years ago. India is further up the curve and the construction boom there is not kept in check by the government as it is in China."

Although the firm's Shanghai bureau is experiencing considerable success, there are certain business practices that AceCad shies away from. Mr Brotherton said: "Depending on which area of the country you are in, there are people who ask for gifts in exchange for business which might range from a carton of cigarettes to cash in an envelope. It isn't the top people but rather the middle managers who are responsible. The odd free lunch is fair enough but anything more we wouldn't have anything to do with."

He is also aware of the security problems associated with selling software in China. Intellectual property rights can be difficult to enforce in this country but in China, it is a different ball game. "There have to be treble tiers of security built into our products because we are a global company and could not afford to let pirated versions reach the market."

Businesses must not let the growth of the Chinese economy and the sales potential blind them to the potential pitfalls of doing business there. While embracing trade with China has largely been a positive experience for companies in Derbyshire, there are genuine risks that could put businesses in jeopardy.

Clayton Equipment, in Burton, specialises in building locomotives for the mining industry. The company is aware of both the opportunities and the problems of working more closely with China. Last year, it sold two locomotives to the Feng Feng group of coal mines in Hunan province. The value of the order was over 500,000.

Bob Overton, finance director at Clayton Equipment, said: "There is a huge market for mining equipment in China largely because they are becoming more safety-conscious."

The Chinese mining authorities want to reduce mine deaths to fewer than 5,000 per year. "Their flame-proof locomotives aren't really flame-proof and not fit to be used where methane is present."

In the past, Chinese mine operators have seen Clayton's locomotives as hugely expensive but, with the price of coal rising all the time and deadlines to meet to fulfil contracts with multinational companies, production days lost because of explosions are also very costly. "A couple of extra days' production per year would now pay for one of our locomotives but we still view the Chinese market with scepticism as well as optimism."

The Chinese are skilled at producing good copies of European equipment and so Clayton Equipment is wary about giving away too much information about its technology. A Chinese company set up as a direct competitor to Clayton could, with lower costs, drive the Burton firm out of business.

"The frames, wheels and axles we get from China anyway so it doesn't make sense to ship them over here just to ship them back there," said Mr Overton. "But the more advanced technology, like motors, gears and controls, will have to be manufactured here to ensure we maintain a competitive advantage."

Source: Derby Evening Telegraph

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