>> Management Theories
Sunny Designs, Inc.
An Adventure in China
To strengthen their businesses, increasing numbers of entrepreneurs are expanding into the international domain. One common motivation behind such moves is the hope of achieving gains in productivity by locating factories in countries where local conditions are favorable to these operations; however, this strategy is not without its drawbacks. Consider, for example, the case of Sunny Hwang, president of Sunny Designs, Inc., a manufacturer, importer, and wholesale distributor of wooden furniture with offices in Hayward, California. Hwang tells the story in his own words. Cheap and good has been my motto in doing business. I started my business in a flea market as a retail vendor and then soon became a jobber, then a direct importer, and finally a manufacturer. To get better value, I delved into the original source-manufacturing in China.
China is one of the best places for the manufacturing of wooden furniture due to the cheap labor, materials, and other costs. I could hire approximately 20 workers in China for the wage of 1 in the United States. The cost of lumber is about half, and rent is about 20 per cent compared to the U.S. There is also reasonable infrastructure available, such as transportation, electricity, and communication. There are many cheap products available from Chinese factories; however, the quality is greatly lacking in many cases. Therefore, low prices alone are not sufficient justification for doing business in China. As a result, I contracted with an agent who hired several inspectors to control for the quality and delivery of our furniture products.
Also, I established a partnership with a local Chinese manufacturer. However, none of these individuals were able to meet our needs. After the partnership failed, I changed my business strategy by taking charge of my own factory. I hired my nephew, who was trained in the U.S., to oversee building a new factory and take care of purchases from other Chinese factories. Because of the different culture and expectations, it was always a challenge to get along with government officials, who happen to hold most of the properties in China. They are eager to attract overseas investors, but primarily to increase job availability for the local people. We located our factory in a town near a large city where we had negotiated favorable terms with the local government officials.
However, after the company was launched, their attitudes changed. They began demanding what we considered to be unreasonable requests and would interfere with management decisions. Even purchasing lumber became difficult due to a lack of supply chains. Advance payments would be requested by the suppliers for security, which was risky because the lumber shipments would frequently be delayed and even sometimes never delivered. Within six months, the venture failed. The previous experience, while a failure financially, did provide us a better understanding about doing business in China. This time we found an opportunity to move to a building twice as large as the first one and containing equipment that we could use. The total rent was only half the amount we had paid for the smaller building. This time we were very careful in negotiating strict terms with the government officials. Consequently, hiring qualified workers became much easier, without interference from the government officials and the local workers. Purchasing lumber also became much easier and cheaper by developing relationships of mutual trust with a limited number of agents. It takes time to acquire trust from the Chinese.
The final result has been a much-improved environment for doing business: we can now produce quality products more cheaply. It was a long and tedious journey, involving a lot of hard work, expense, and some tough lessons. But the adventure into China has proven to be a good one. Sunny Hwang certainly recognizes the importance of knowing as much as possible about the challenges of doing business in a foreign country before getting involved there. An entrepreneur who is considering expanding into China-to connect with an outsourcing partner, to establish a production facility, or to reach a new market-should know the following key facts about the country:
• China's population of 1.3 billion people is the largest of any country in the world.
• China is one of the fastest-growing export markets for small and medium-size U.S. fi rms.
• Income disparities in China are great. Annual income in urban areas ranges from around $3442 per person in Shanghai (China's wealthiest city) to the more typical $1322 per year in other cities. Income in rural areas is much lower, with the average farmer earning a mere $413.
• The Chinese software market is growing at an annual rate of 30 percent.
• Use of the Internet is increasing dramatically.
• The demand for consulting services in China is increasing, especially those related to information technology.
• China has entered the World Trade Organization (WTO), a development that has raised concerns about intellectual property protection. Many hope that its entry into the WTO will force more vigilant protection of intellectual property rights and a crackdown on counterfeiting.
• Many Chinese consumers have cell phones and regularly surf the Internet (especially in large urban centers such as Beijing, Shanghai, and Guangzhou).
• Counterfeit goods (including clothing, leather goods, software, and CDs) are readily available in China at a fraction of the cost of brand name items.
• Chinese merchants usually do business only with vendors with whom they have established relationships.
1. What is the primary force that motivated Hwang to internationalize? Did he make a good decision when he located his manufacturing facility in China? What other countries should have been considered? Why?
2. What strategy option did Hwang select for his Chinabased enterprise? Did he select the right strategy?
3. Given the details of the case and the key facts about China, assess the opportunities for U.S. fi rms in China. What features of the country should be particularly attractive to small businesses seeking to expand internationally?
4. What challenges to doing business in China did Hwang experience? Given the key facts about China, list issues that may present distinct problems for small U.S. fi rms doing business there.