Opening doors to massive market in Shanghai

Madhavi Acharya-Tom Yew, Toronto Star

Doing business in Shanghai hasn’t just opened doors for Mennie Canada, it helped the Canadian fibreglass door-maker become a world leader.

When Irwin Li started the Woodbridge-based company about eight years ago, he sourced components in China, as prices were more competitive there.

“We opened our representative office in Shanghai and eventually we started to do manufacturing for export. Today, we supply Canada, Europe, Australia, Asia and the Middle East, ” Li said. “We are everywhere.”

Shanghai, the largest city in China, is home to about 24 million people. That’s about two-thirds of Canada’s total population.

Its cultural influence, massive port and shipping infrastructure, as well as recent economic reforms such as the Shanghai Free Trade Zone, make it a natural entry point for Canadian companies looking to tap into the massive Chinese market.

“It’s the most modern city in China, and it’s very westernized from a business perspective. Many people speak English, ” said Denis L’Heureux, chief representative for China at Export Development Canada.

“It’s arguably the most vibrant city in the world, ” said Radley Mackenzie, board member of the Canadian Chamber of Commerce in Shanghai. “It continues to modernize and has reached an international standard that’s comparable to New York and London with world-class restaurants, great night life and business opportunities to boot.”

Experts say that automotive, industrial and engineering services, along with clean technology and agriculture, present some of the biggest opportunities for foreign companies in China.

Food products may hold huge potential for Canadian companies in particular, L’Heureux said.
China needs to import food, because it cannot produce enough domestically to support its massive population of 1.4 billion people. Because of pollution and incidents of contaminated and expired food finding its way to consumers, affluent consumers there are increasingly turning to imports.

“Wealthy Chinese are prepared to pay a premium for imported food, so there’s a lot of potential for Canadian companies, because we have an image of quality food and fresh air, ” L’Heureux said.

Established about a year ago, the Shanghai Free Trade Zone is an expanse of warehouses and docks in the city’s Pudong district. Trade experts say it is an economic zone that offers reduced red tape, streamlined customs rules and looser restrictions on some international financial transactions.

While some observers say the features have been too modest, others suggest that international companies may benefit.

The zone opens up new opportunities for foreign banks in areas such as fundraising and corporate investment, said Calvin Man, head of international business, commercial banking, for HSBC Bank (China) Co. Ltd.

“Companies can gain a first-mover advantage as measures in the pilot zone are later rolled out to other parts of the country, ” he said.

Canadian companies that are interested in entering the Chinese market need to be aware of the role of government, said Mackenzie, who is also senior consultant with APCO Worldwide, a business and government affairs consulting firm that specializes in the Chinese market.

“In China, the government is your potential customer, partner, competitor and regulator, all at the same time, so it’s an important stakeholder for foreign companies that are operating here, ” Mackenzie said.

L’Heureux advises companies on the importance of building trust in business relationships. “It’s very important for the Chinese to like the people they’re going to do business with personally. It takes time to get to that level of trust, but when it reaches a certain point, it just takes off.”

Hibar Systems Ltd. of Richmond Hill specializes in the design and manufacture of industrial automation. It makes the machines that other companies use to make their products. Its niche market is batteries. The company’s machines are also used to manufacture food, cosmetics and pharmaceutical products.

More than a decade ago, Hibar established what’s known as WFOE, or Wholly Foreign-Owned Enterprise in Ningbo, Zheijang, about 150 kilometres. south of Shanghai to provide technical support, sales and service to its growing customer base in the region, president and chief executive Iain McColl, said.

A WFOE is a popular form of foreign investment in China, because it allows for freedom in business management there.

“We needed an ongoing presence in China for ongoing technical service and support. It was tough to find that type of expertise in China, so we needed a presence whereby we could parachute in expertise from Canada, ” McColl said.

Doing business there has its challenges.

The Chinese government is putting in place more legislation and measures to protect foreign intellectual property in China, McColl said.

“The best way we’ve been able to mitigate the leakage of intellectual property is through continual innovation. If people get their hands on yesterday’s technology, it’s old and we’ve got something new and better.”

The company sees significant growth in business opportunities in mainland China in the coming years, particularly its niche markets of food, cosmetics and pharmaceuticals.

“We are just scratching the surface on these areas. China is changing from being a producer of low cost goods to now being a consuming nation.”

The changes affect everyone doing business in China. For many years, inexpensive labour and materials gave Mennie Canada an edge there. About five years ago, the company had nearly 300 employees. But then quality began to suffer, Li said. The facility needed a complete overhaul.

“Today, we produce double the volume, with about 95 employees and we are on the way to nearly total automation, ” Li said.

Mennie Canada now produces about 250,000 doors per year and brings in about $65 million in annual revenues.

“What China is going through today is what Japan went through in the 1980s and what Korea went through in the 1990s, ” Li said. “The focus is shifting from mass production to a focus on knowledge and quality.

“That’s how we win our market.”

Shanghai Facts

Population: 24 million
GDP per capita: About $14,800 (U.S.)
Government: The mayor is outranked by the Communist Party Chief in Shanghai in what is known as a dual party-government system
Main industries: Manufacturing, agriculture, finance
Minimum wage: 1,820 yuan, a month, about $290 (U.S.) a month
Opportunities for Canadian companies: Manufacturing, agriculture, finance
Canadian companies in the city: Air Canada, B+H Architects, Bank of Montreal

Surprising business fact:

Shanghai has a massive transit infrastructure, with its extensive metro system carrying as many as 5.6 million passengers in a single day