Leaders Seek Stronger Ties with China in ’08

The Chinese New Year isn’t until Feb. 7, but the world’s most populous country should be glad 2007 is behind it.

As host of the Summer Olympics in Beijing, China expectes to dominate world headlines in 2008, attract tourists and showcase its burgeoning domestic economy.

Anything would be a welcome respite from the kind of attention China garnered in the past year, which began with tainted pet food and ended with lead paint discovered on several popular children’s toys all sourced from Chinese factories.

The headlines internationally extended to Northwest Arkansas, naturally. That trend should continue this year while local players like executive recruiter Cameron Smith and Arkansas World Trade Center CEO Dan Hendrix attempt to strengthen business ties with China to grow high-paying jobs in Northwest Arkansas and to increase the estimated $238 million in 2007 exports from the state to the Chinese market.

As Wal-Mart Stores Inc. took public hits for underperforming in other international operations such as the Japanese chain Seiyu, the Chinese market is a bright spot for the Bentonville retailer as it accelerates expansion following the $1 billion acquisition of a 35 percent stake in China-based Trust-Mart in late 2006 and the approval of its 100th Wal-Mart store in late 2007.

“The more Wal-Mart stores that open in China, the greater the opportunities for U.S. exporters,” said U.S. Commerce secretary Carlos Guiterrez at a ceremony in Beijing marking the milestone. 

“With the U.S. and China working together for the good of both of our citizens, we will see our economies flourish, our peoples prosper and our companies, like Wal-Mart, contribute to jobs, opportunity and stronger communities.”

Wal-Mart also received the brunt of domestic criticism for the multiple recalls thanks to its status as the largest importer of Chinese goods in the country – nearly $20 billion – and the perceived culpability for low quality goods as an end result of its constant pressure to keep costs down.

The fallout from the September toy recall had local reach as some former third-party consumer product testing labs with offices in Bentonville are seeking new employment because Wal-Mart made changes to and dramatically expanded its quality control efforts.

“Some of these testing laboratories are laying off people now,” Smith said. “Wal-Mart has really put the clamps down on them. Wal-Mart is holding them accountable. I can assure you it’s happening because those people have come to me looking for jobs.”

Meanwhile, The Arkansas WTC hosted the Chinese general consul in late December both in Northwest Arkansas and in Little Rock, laying the foundation for relationships bearing fruit in the form of further opening Chinese markets to leading exports from the Natural State such as wireless technology, industrial motors and protein.

And always underlying the economic ties between the U.S. and China are the political differences between the two powers. The U.S. has continued to press for reforms in currency policy it says keeps Chinese exports artificially cheap and the trade gap expanding to a record $233 billion in 2007.

Since 2002, China has overtaken the U.S. as the top destination for foreign investment, partly because the government has eased regulations that previously required foreign investors to have Chinese partners.

“Overall, it’s a very complementary relationship,” said University of Arkansas political science professor Ka Zeng. “The U.S. has a lot of labor intensive products, and China has a large supply of labor. 

“It’s mutually beneficial in a lot of ways. Low-cost products benefit consumers. But it’s a relationship filled with problems.”

Ka, who grew up in rural China, attended college in Beijing and earned her master’s and a Ph.D. at Virginia Tech and Virginia, respectively, has taught at the UA since 2000.

“[The Chinese government] wants to contain some of the broader problems in Sino-U.S. relations,” she said. “From the American point of view, they want to keep investing in China. Americans continue to draw a lot of products from China.

“There is growing pressure from the business community to try to maintain a positive relationship with the country even though you see folks in this country moving for protection from cheap Chinese imports.”

Supplier Demand

The piece of plastic Cameron Smith held in his hand is cheap and made in Asia.

The information it holds is far more valuable.

Smith and his firm, Cameron Smith Associates, have made knowing the Wal-Mart supplier community their business and it is often said only half-jokingly that he knows more about Wal-Mart than some who work on 8th Street.

He’s spent 15 years compiling data on vendors, at last count numbering 1,218 in Northwest Arkansas. Smith’s latest project was to compile a list of Chinese factories which manufacture goods for Wal-Mart and/or its suppliers, complete with executives, addresses and phone numbers.

Smith has already been offered a half-million dollars for the CD containing more than 9,000 companies, but he said it’s not for sale at any price.

The list is the end result of a year when Smith led a conference in China dubbed “Working With Wal-Mart Worldwide” pitching the benefits of being in Bentonville through his new company Global Supplier Development.

Thousands of people who moved into Northwest Arkansas to work for supplier teams and the various industries who serve them fueled the area’s growth boom of the past 10 years.

Nearly all were domestic companies and the slowing housing market indicates that stream of new residents is flattening out as those companies who saw a need to be close to Wal-Mart are now here.

Speculation for ideas where Northwest Arkansas can sustain its growth made Smith’s May conference easily the most publicized effort to strengthen Arkansas-Chinese ties in 2007.

Although 50 percent of the hardline merchandise sold in Wal-Mart is from China, only 15 China-based companies currently operate supplier offices in Northwest Arkansas. For those looking for future sources of new jobs, it’s a short leap to see the potential of Chinese suppliers setting up shop in “Vendorville.”

While Smith and his delegation, which included Hendrix, received a warm and inquiring reception in China, anyone thinking this China “wave” will happen overnight doesn’t know Chinese culture, Smith said.

“Chinese people do not do anything quickly,” he said. “They put a lot of thought and it’s got to make sense. They’re doing their due diligence. They’ve come over and we’ve given them a tour of the town. Several are looking at candidates right now.”

Ka said the bottom line will be the difference for Chinese companies.

“It’s a matter of business strategy,” she said. “What is the cost-benefit? They will make the calculation on that basis.”

Lacking Logistics

A growing middle class and rising labor costs in China are forcing more and more factories farther inland from traditional coastal hubs. Area packaging companies serving suppliers who source labor for production or displays to Asia have recognized a need to have personnel overseas to shepherd programs from manufacture to the distribution center.

“It’s gotten easier, but it’s still hard. It’s still a communist country,” said Scott King, CEO of Kendal King Group Inc., a Kansas City-based packaging and marketing company with a staff of 10 in Bentonville and three in China.

Aisle Think of Rogers began running packaging projects for suppliers with China-based employees in 2007 and Wing Hung Ltd. is a China-based company with offices in Bentonville since 2006 managing both hardline and softline products.

KKG has overcome numerous hurdles to smooth the process. Order “fulfillment” – the packing of product onto a display before it is shipped to the U.S. – was a new concept to the Chinese, as was combining multiple products from multiple sources into a single unit for export.

Working with the Chinese government has allowed companies like KKG to get approval for these supply chain efficiencies.

“There’s no substitute for having boots on the ground and being fully up to speed on laws,” King said.

“It’s one of the bigger challenges from project to project. With the regulatory process, it’s not just about designing a quality display – it’s about making sure there are no snags or hiccups in other aspects.”

Snuggling Up

Wal-Mart also likes to avoid snags and hiccups, and while it maintains its public position that it does not require suppliers to have offices near its headquarters, the testimonials Smith compiled from those companies here speak to the benefits.

Smith said he’s been contacted by “several hundred” companies with interest and he is actively working with 11 companies placing employees in Northwest Arkansas.

Haynes Ltd., a sponsor of his China conference, gets first dibs on placing any new employees in office space.

 “It’s been proven over and over again, when you’re here snuggled up next to your buyer, the needle moves,” Smith said.

Del Iliria, the team leader for Alco Electronics, works for one of the 15 Chinese companies here now and is a category adviser for ConAir. He said the benefits extend beyond the vendor-buyer relationship.

“It’s how you engage with all the support teams like product development and replenishment,” said Iliria, who usually communicates with company headquarters in Hong Kong each night.

“Wal-Mart would like someone that’s truly engaged in the business on a daily level.”

Wal-Mart must go through third-party brokers when purchasing many Chinese goods, which adds a layer of cost and goes against the Wal-Mart model of dealing directly with suppliers.

“Do I think it’s good for Wal-Mart? Yeah. Do I think it’s good for the Chinese to be here on a local level? Yeah,” Iliria said.

“You can service Wal-Mart better, grow your business and stay more engaged in the business. That’s why a lot of suppliers are here today.”