China Counsel

Ulice Payne Jr. is seeing some dramatic changes in the trading relationship between the United States and China. Those changes could lead to greater opportunities for Wisconsin companies,
especially manufacturers. Payne is on the front lines of global trade, as his new company, Brookfield-based Addison-Clifton LLC, specializes in helping clients around the world handle international trade issues,
especially in and out of China. Before starting the company last year, the former president of the Milwaukee Brewers was a managing partner and chairman of the international business team at the Foley & Lardner LLP law firm in Milwaukee, where he helped national and global companies with international transactions. Payne regularly travels to China for business, and nearly half of Addison-Clifton’s staff works in Shanghai. Payne, who has visited 29 countries, recently shared some of his insights about doing business in China with Small Business Times reporter Eric Decker. The following are excerpts from that interview.
SBT: At a recent conference by the Wisconsin World Trade Center, the focus seemed to increasingly switch from how to export production and jobs to China to how Wisconsin companies can export their products and services to China. Given all the outsourcing in recent years, is the pendulum swinging a bit?
Payne: “Yeah, clearly. China has been a sourcing market for many years. With the WTO (World Trade Organization) ascension, a couple of things happened. They had to change their market model – open up. It was a non-free market economy. When they opened it up, they had to allow foreign products in. Before that, it was a closed market. You can’t get (your product) in. Even if the people want it, you can’t get it. Becoming a member of the WTO, the ascension agreement, if you want the most favored nation status, you’ve got to let people in. By doing that, that has prompted the opportunities for U.S. companies to sell directly. Before that, you could sell in there, but the duty rate was 100 percent. The Chinese consumer would see that, and they couldn’t afford (the product). There were certain things they couldn’t even let in there, because of technical standards. They were called non-tariff barriers. They set up the technical standards such that you couldn’t meet it. The tariff barriers are addressed by the MFN (most favored nation) status – every tariff has to be the same.
“U.S.-based manufacturers can market directly to China now because all of these barriers are taken away. And by opening up the market, the local consumer demand, it’s like now that they know what’s out there, they want it. And you go to Nanjing Road, it’s a very famous road in Shanghai, it’s like the Miracle Mile in Chicago. It’s got every top store you can imagine. The Chinese, they want it. You see them in Guess jeans, everyone’s got a cell phone and they’re wearing NBA shirts and jackets. Now that they’ve seen it, they want it.”
SBT: Along those lines, do you think that there are will be a growing number of Chinese investors or companies that will want to come over here to either buy an existing American company or at least buy an interest in a local company?
Payne: “There is that movement. We’ve gotten a lot of interest to do that. (One of our clients is) a seat manufacturer outside Ningbo. So there is a great interest in that, and there are great opportunities. When I’m in Ningbo next month, one of the things we’ll be talking about is distribution in the United States.
“I think there’s great opportunities for local companies to serve as distributors for Chinese manufacturers in the same space. In other words, you’re making hardware fixtures and selling them in the United States. You could become a very successful distributor for a hardware manufacturer in China who said, ‘I will contract with you, our prices are very low, you’ve got an advantage in your marketplace.’ But until now, those companies were not known to the U.S. distributors. Part of what we’re doing, we’ve been asked by China-based companies, can you help identify for us (U.S. companies that would be good distributors)?”
SBT: How many of your clients are Wisconsin companies?
Payne: “Six are from Wisconsin, two are from Illinois and three are from China.”
SBT: One of the common complaints we hear from local businesses is that Chinese companies looking to export to the United States do not incur the same types of penalties and tariffs that American companies face when trying to export to China. Do you feel like that’s any closer to being evened?
Payne: “Yes. Again, that’s what used to be. That was before the WTO ascension agreement. When (China) agreed to join the WTO, they had to basically make structural changes to the market economy. It’s like phasing in. I think some of those tariff barriers and non-tariff barriers have to change. And they do. And the world is watching. There is a schedule. You can’t just flip a switch. There is a progressive schedule of these changes. And there is a constant review and reporting about these changes. It’s like, textile quotas is on the way. For example, until Jan. 1 of this year, there were quotas on Chinese textiles – and now that’s gone away. If you were a U.S. producer and therefore you are buying something like seats for cars or pants, before I wanted to make products and I could find a source for cheap in China, but I couldn’t buy it because the U.S. government had a limit on how much you could. A lot of time, the quotas would run out in October. When they hit, you’re done.
“The market is changed because of the WTO ascension. The U.S. companies have also had these tariff and non-tariff barriers as well. The consumer got hurt because (instead) of paying 50 cents for a pair of socks, we’re paying $8, but they’re still 50-cent socks. Without quotas, you can still get 50-cent socks.”
SBT: What are some of the key obstacles that Wisconsin manufacturers might face when looking to expand into new markets in China?
Payne: “The first is a cultural piece. Because low-cost labor is there, but that price is increasing. The price for materials – there has been such a consumption of raw materials in China – the prices for those materials is up. The formula for your costs of goods sold continues to change. Labor rates are going up, and the costs of materials is going up. Managing those two elements is critical. Before, you never thought about it. Labor was real cheap. It still is, but the cost is increasing. Second is you’ve got the situation with materials. All raw materials are up – iron ore, coal, everything, chemicals and everything used to build, construct or develop. If you are in China, it’s going to cost you more. Your model is still good, but it’s going to have to change. For example, all of the production typically in China is on the east coast. Maybe you’ll find, the further you get from the coast, the lower your cost.”
SBT: But then you’re going to pay more shipping costs.
Payne: “Exactly. So your model must change. Maybe you coordinate with somebody else who’s five miles down the road who’s got a ship to Shanghai port, and you coordinate your shipment. So it’s going to take more of a strategic (approach) like you do in the United States. It’s not just that I’m going to go to China – now that I’m here, do I know what’s happening in China and how do I make sure to monitor and control my costs when I am in China? So, the model has to be a bit more strategic than it’s been thus far.”
SBT: Anecdotally, you seem to hear a lot about the types of businesses that are successful in China. It seems like a lot of service industries have been very successful there. Bally’s has opened many clubs there. Pizza Hut, McDonald’s and Kentucky Fried Chicken have done very well there. Is it a case of the manufacturing companies not telling their success stories that much? Are service companies or manufacturers doing better business there?
Payne: “It’s really hard to say. I don’t know. It’s so individual. Some companies have been there for years. Part of it is market-driven, clearly. From a macro perspective, if you want to be successful in China, you have to become pseudo-Chinese. I’ve found that in most places around the world. I’m on my 29th country, that as much as any culture, there’s such a history with China. China’s had different people rule it. If you look at Chinese people, their complexion goes from light to dark. It’s a vast country. Ancient history. You can’t look at this market as a homogenous market. You have to look at it for what it is and become Chinese.
“You must fill their shoes, which requires you to read some history. It requires you to understand why they eat everything from the animal. If I invite you to my home to eat dinner – I lay out my spread, and you eat everything on your plate because your mother taught you that. The problem, though, is that because things have been so sparse for so long in China, a lot of food wasn’t available. But a sign of real friendship and caring is when I would kind of give you a feast. I gave you my best. Now, when you ate it all, it’s like it wasn’t enough. It didn’t satisfy you. It hurts my honor. My honor was to give my all to you, and I laid it all out and you just scarfed it all up.
“Those are very simple and subtle things. If you go to dinner there with your partner, don’t eat it all. Because they are so steeped in tradition, in China they still hold true to many traditions. It’s not just your business, it’s a cultural piece. The micro-economics thing, I can’t answer. But the biggest thing is the macro-cultural thing.”
SBT: Some companies try to set up their own operations in China. Others have formed joint ventures with Chinese companies. What are some of the advantages or disadvantages to each of these approaches?
Payne: “If you’re setting up one of your own, it’s obviously a much broader commitment. That typically is one of the last steps they take. Because of the tax consequences, the obligations to pay labor benefits, that’s a totally all-in kind of approach. Typically, that’s the second- or third-stage option. The JV (joint venture) is the most practical, but often times, the most tenuous to negotiate, because unless each joint venture partner brings something unique to the table, it can be difficult. For example, a Wisconsin manufacturer with a machine tool and the expertise, and a company in China has a low cost labor, but they might also have expertise. It becomes a question of who really does have the best expertise on an ongoing basis. And often times, especially in the case with China, the best thing a Wisconsin or U.S. company can provide is machinery or provide some software that can help the manufacturing process.”
SBT: Something that they wouldn’t have available to them over there?
Payne: “Correct. But the idea is to force the production, that’s where people have the problems. A JV works, it’s a great option, it’s a great sort of first effective step.”
SBT: Do you think there is a slowdown of Wisconsin or U.S. firms looking to outsource to China? Or is it continuing at the same pace as it has been at the past 10 years?
Payne: “I have to check the statistics. Generally speaking, the numbers are increasing in transactions with China, I think, across the board. Generally from the state, they’re increasing. Certainly from the national level, they’re increasing. Again, I think that one of the biggest opportunities I see on the horizon, starting already really, is China now buying, China now consuming. It’s not just an outsource, it’s a market to trade. That’s where the flow is going. All it used to be was going from China to here – for buying – a trade imbalance with China. It’s still there. On the other hand, you see more Wisconsin companies being able to sell for consumption in China.”
SBT: How big of a problem is China’s refusal to stop tying its currency to the value of the American dollar?
Payne: “There’s been a lot of discussion about that. Clearly, that affects prices, and it affects the cost of goods. And an under-valued currency basically gives China an advantage in the pricing of its goods and services. On the other hand, that’s something that’s like the weather to me. Why worry about something I can’t control? The key is, whatever it is, how it affects our product or business. I think that ultimately, they’ll get there. They’ll get there when the market economy is so strong that they can absorb whatever effect the market has on them.
“From a client’s perspective, it takes the equation out of calculating the soft currency risk. Any time you’re involved in cross border transactions (you want to factor) what is the currency of transaction, and if it’s fluctuating and variable, that creates a foreign exchange risk. In dealing with China, you’re at 8.2 for the most part, period. You take that risk out of the equation. So that’s a good thing.”
SBT: One of the things we’ve heard a lot about is the lack of enforcement of protecting the intellectual property rights of U.S. companies over there. Is product piracy still as widespread as it has been in the past, and is the Chinese government going to start working on that?
Payne: “Clearly for some time now, protection of IPR, intellectual property rights, has been a concern for U.S. companies, Wisconsin companies and companies from around the world. Piracy has been the primary business concern for non-China companies. And part of the ascension to the WTO were promises and plans to, one, enforce the laws that are already on the books. And you’ve seen some more of that in China. There’s talk about it on the ground. That’s the first thing – just enforce the laws that you have. Secondly, help to look at some of the ways that they can improve the protection of IPR. Because ultimately, that could affect their ultimate growth as a country. So, I think the first question is about enforcement, but it is the primary business concern of most U.S. companies.”
SBT: Have there been any changes to U.S. customs practices that have made things either easier or more complicated lately?
Payne: “The wood pallets compliance standard, which says any wood used for the shipment of goods, they must have a seal on it indicating that the proper fumigation has occurred. And that is either through a chemical treatment or a heat treatment. We keep seeing that the U.S. is starting to enforce that from China. And China is starting to enforce that from imports from the U.S.”
SBT: So it’s going both ways?
Payne: “Yes. It’s very important when you talk to transporters, freight forwarders, they should know better and make sure that the proper certificate is in place. We’ve seen that affect certain shipments of clients to China.”
Addison-Clifton LLC
Managing member: Ulice Payne Jr.
Address: 13555 Bishops Court, Brookfield
Web site: www.addison-clifton.com
Area of expertise: International trade issues
Employees: 11
‘Ride the dragon or feel its fire’
MMAC’s China Council tries to pave way for sister city relationship
By Eric Decker, of SBT
One year ago, the leaders of the Metropolitan Milwaukee Association of Commerce decided they needed to facilitate business relationships between companies in southeastern Wisconsin and China.
To do that, the MMAC formed its China Business Council, which is planning to lead a trade mission Sept. 14-21 to the city of Ningbo, located about 80 miles south of Shanghai.
Tim Sheehy, the association’s president, came up with the idea for the China Business Council after a trade mission to China last year with Wisconsin Gov. James Doyle.
“Tim had gotten a lot of input from (MMAC) members and board members on the impact of China on their businesses,” said MMAC vice president Peter Beitzel. “And when he went there with the governor, he saw that it was quite a force. He said, ‘We will either ride the wave or be swept under.'”
Ulice Payne, who is serving as co-chair for the council, was on the mission with Sheehy and also recognized a need to establish the council.
“We pulled together the different people from Wisconsin companies who we knew were in the country at the time,” Payne said. “We listened to their experiences, and we realized that a lot more people needed to be here and listening to this.”
The council’s membership includes about 100 businesses.
The trade mission in September will focus on Ningbo. The Milwaukee trade delegation has taken early steps to form a sister city relationship with the Ningbo.
Beitzel said Ningbo’s relationship with Shanghai has been viewed as similar to Milwaukee’s relationship with Chicago. Ningbo has a large number of high-tech companies and features a deep water port, which is good for international shipping. However, it is smaller than Shanghai.
The trade mission is intended to serve small to mid-size Milwaukee-area companies that are interested in some type of business relationship in China, but still need some guidance, Beitzel said.
“We will offer it to companies that haven’t been there before,” he said. “They will be introduced to people, and we’ll show them around. We will try to have every single person get something out of it.”
Milwaukee Mayor Tom Barrett has expressed interest in the trade mission and has said he would like to go, but scheduling issues may complicate his travel plans.
The annual convention of the U.S. Hispanic Chamber of Commerce will be held in Milwaukee Sept. 14-17, and the mayor also may be busy preparing the city budget, which must be presented to the Milwaukee Common Council near the end of September, mayoral spokeswoman Carlene Orig said.
The trade mission may include an official invitation for Barrett from officials in Ningbo, said Robert Kraft, chief executive officer of OpenFirst LLC and the other co-chair of the China Business Council.
“The mayor has been very supportive,” Kraft said.
“He wants to go,” Orig said. “Right now, it’s difficult to say whether he will or won’t go.”
Barrett wrote a letter to the mayor of Ningbo last year, expressing interest in establishing a sister city relationship between that city and Milwaukee.
Before the trade mission, the MMAC’s China Business Council will make its first formal presentation during the Wisconsin International Trade Conference on Tuesday, May 17, from 8:30 a.m. to 6 p.m. at the Italian Community Center in Milwaukee.
“We also hope to have an announcement about the immigration zone status,” Beitzel said.
The Milwaukee immigration zone status is being reviewed by the U.S. Department of Homeland Security, Beitzel said. If the request by the MMAC and City of Milwaukee is approved, it will speed up the immigration process for Chinese citizens looking to relocate to Milwaukee to create a new business here.
“The purpose is to create jobs and attract investment,” Beitzel said. “China, like Japan, is at a point where it wants to build plants in the U.S. And we want to be ahead of the game, not behind it.”
Kraft said the immigration zone status could have major long-term impact on southeastern Wisconsin’s economy, Beitzel said.
“I hate to speculate, but if we got 10 (people), that would be big,” he said. “Our thought is that it would be kind of like when the Germans came to Milwaukee in the 1800s, and liked it and sent letters back home. We’re hoping to get a compounding effect over 10 years. We’re planting the seeds now for the next 20 years.”
Trading in China is increasingly becoming a focus for Wisconsin manufacturers, many of which attended a seminar titled, “China: Ride the Dragon or Feel its Fire,” at the Wisconsin Business & Technology Expo presented by Small Business Times April 21.
April 29, 2005, Small Business Times, Milwaukee, WI