Friday, March 30, 2012

“Welcome to tour our factory!” A business trip to the Huangpu River Delta

As the train pulled into Changzhou city station, the view from my window was not of high-rise apartments or tall office buildings, but traditional, three-story tenements surrounded by small plots of farmland. Exactly 46 minutes ago, we had left Shanghai and traveled over 100 miles to a small city of 3 million people on the Northwest side of the Huangpu River Delta. It was a warm, spring day, and as I stepped off the train, a warm breeze blew across the platform. Wearing a smart business suit and aviators, I looked quite out of place among the Chinese businessmen in their leather jackets and peasants hauling large bags of who knows what off the train. “Welcome to Changzhou, Mr. Daniel!” was the greeting I received from the factory sales manager and the driver who would be taking me on my first factory tour of the week.

As some of you may remember, I made a decision several months ago to start a business trading solar water heaters between the US and China. I first discovered the Chinese solar hot water phenomenon when, driving through Zhejiang province back in 2008, I noticed that the roofs of almost every apartment building were covered with these strange looking devices. In fact, for decades China has been a world leader in this little-known renewable energy source. Tens of millions of buildings all over the country use these devices to make hot water, and as a result, China holds 80% of the global market. Now, as solar hot water is starting to become popular around the world, including in the US, the thousands of Chinese factories that make these panels are beginning to export their wares. All but the largest Chinese factories however, are too small to have overseas sales agents or to figure out the logistics of shipping to the US. At the same time, most US based solar installers are too small to source the solar water heaters they buy internationally, or to purchase them in bulk. Therefore, my business idea is quite simple: purchase inexpensive solar water heaters from these factories, and sell them to the contractors and installers in the US who put them on buildings.

But with literally thousands of these factories all over China, how does one go about selecting a factory to buy from? Well, the first step was to find out which factories’ products have been certified by the US-based Solar Rating and Certification Corporation (SRCC). Only solar water heaters with this certification are eligible for the 30% federal tax credit that is available to consumers who purchase these systems. In addition, SRCC certification guarantees a certain level of quality, ensuring that the systems won’t break down or have little output after being installed on the rooftop. In the course of my research, I found a strange phenomenon: the cities of Changzhou and Haining, both located in the Huangpu River Delta region near Shanghai, contained no less than 10 and 16 factories, respectively, with this certification. Furthermore, while there are several famous brands of solar water heaters in China, I had never heard of the names of any of these factories. Well, I knew where I was to be going on my first business trip…

So on March 21st, I boarded the high-speed train from Beijing to Shanghai, where I planned to spend the next week touring factories in the region. Traveling from Beijing to Shanghai is similar to the distance traveled from Boston to Washington DC – a good 12 hour drive by car in the US. The new high-speed train line that opened last June however covers this distance in just five hours. As we set out from Beijing, I watched the speedometer on a screen at the front of the train car climb to 100, and then 200, then finally settle just above 300 kilometers per hour (about 170 miles per hour). It was quite a sight to watch the countryside race by at a speed I’d only seen when taking off or landing in an airplane. In fact, for just around 80 US dollars, one can get from Beijing to Shanghai in almost the same amount of time it would take to fly (when considering the time it takes to check in and go through security at the airport). It’s difficult to think of China as less developed then the US in light of transportation infrastructure marvels such as this.
power plant as seen from the high speed train
on board the train as our speed climbs

In Shanghai I staid with my good friend from Tufts, Scott Goldman, who is working for Duke University in Shanghai, helping them to start a university business program on a brand new campus that Duke is building there. We had a good weekend out on the town with a few other friends, and then on Monday morning, I boarded another high-speed train for Changzhou. Once again, I was amazed at how easy the trip was. Although most factories are based out in the rural countryside, transportation infrastructure in China is arguably more modern than in the US, making the trip a breeze. I arrived at the first factory two hours after leaving the railway station in Shanghai, and after visiting two factories in the same day, I was shuttled to the train station and shipped back to Shanghai before nightfall. The next day I repeated this same schedule traveling to Haining, a city about the same distance from Shanghai, and quite near to the city of Hangzhou, where I spent the first semester of my junior year at Tufts studying abroad.

The factory tours themselves were in many ways what I expected. Having read many books written for businessmen sourcing in China, and having spent the last year dealing with Chinese business practices during my corporate training assignments, I felt quite well prepared for what awaited me. In fact, the biggest surprise of these visits was how few surprises I encountered. After reading Poorly Made in China, an account by an American who’s spent the last 10+ years helping trading companies source contract manufacturing in China, I was half expecting the worst: fake production lines set up to hide the real ones, “five star” factories with charades where visitors are asked to wear lab coats and gloves, only to later discover that these are not in fact standard practice for the factory. What I saw however seemed quite realistic: small, somewhat shabby looking buildings that housed the factories; production lines that had some quality control systems in place, but were far from perfect; defective products sitting out in carts in the middle of the factory floor. The floors of most factories were also covered in broken glass from the tubes used to make the solar collectors. No gloves, lab coats or clean rooms. Probably the strangest sight I saw was a female worker on a production line wearing a blouse, high heals and makeup!
making solar thermal evacuated tubes

I also received mixed reactions from the factory owners. On some of the tours, I was only introduced to the owner at the end of the tour, and our interaction was brief. At one factory however, the owner spent nearly an hour talking with me about what made their factory special, and how enthusiastic he was to do business with me. At the last and largest factory I visited, I didn’t even meet the owner, as he was in Shanghai on business that day.

All in all, the visits were quite educational. The most important discovery however was the confirmation that my instincts about the solar water heater export market were correct: most of these factories only received SRCC certification about a year ago, and many of them do not yet have US customers, although they are eager to get them. It seems that I’m entering the market at just the right time.

As I write, I’m on the plane from Shanghai to LA, where I’ll be starting a month long tour in the US. This trip is partly a long-delayed trip home to visit family and friends, and partly a business trip to scope out the US solar water heater market and start finding potential customers. And hopefully, my instincts about the US market will be as on target as they were about China…

Saturday, March 17, 2012

Life in the third tier

As we cross the bridge spanning China’s largest river that runs through the heart of Changsha, for the first time I could see what China’s third tier cities really look like. Even in Hangzhou, what most would consider a second tier city, I had never seen so many buildings under construction. 30+ story apartment complexes and skyscrapers seemed to be sprouting up wherever I looked. Massive six lane highways were being paved through the middle of town. As we drove to the edge of the city, I could see rows of identical apartments stretching across the landscape, like American Mid-western suburbs, gobbling up farmland and transforming it into a concrete jungle…

My month living in Changsha gave me a glimpse into what life is like for the majority of the new urban Chinese. It also made me realize how much living in Beijing is like living in a developed country. Unlike Beijing, the changes taking place in these cities are massive.

The term “tier” is used to describe the level of development in Chinese cities. There are basically three first tier cities in China: Beijing, Shanghai and Guangzhou. These cities contain all the modern conveniences of a developed country: there are hypermarkets with imported foods from around the world, internationals restaurant chains like Starbucks, Coldstone and TGI Fridays, bars, pubs and other forms of entertainment, Apple stores and outlet stores like Adidas and H&M, luxury stores (lots of them) like Prada and Gucci, giant malls that would dwarf many malls in America, modern apartments and offices, large theaters, libraries, museums, art galleries and other signs of high culture. Each of these cities has a population between 20-30 million people and is among the largest cities in the world. Perhaps most notably, these cities are also full of non-Chinese from around the world and many people can speak English.
Apple mania: anxious customers push and shove outside
Apple's flagship store in Beijing to be the first to claim the new iphone

Second tier cities – like Hangzhou, where I spent the first semester of my junior year studying abroad – are just a little less developed, but still have most of those modern conveniences. They range in population between 5-20 million (with the exception of Chongqing, a second tier city in central China which most people outside China have never heard of but claims a staggering population of 30 million).

Third tier cities are considerably less developed and internationalized. Most provincial capitals around China would be considered third tier. These are the cities that are going through the most rapid change and will probably absorb a large amount of the 300 million Chinese people expected to migrate to cities in the next 20 years (to put that in perspective, imagine the entire population of the United States migrating from the countryside to cities in 20 years).

Like Changsha, most of these cities have a have a larger commercial district than a major US city like Chicago, Philadelphia or Houston. Besides the tall buildings and sprawling highways though, the only sign of modernization is a shopping district in the center of the city with some luxury stores, a Walmart and Carrefour, a few coffee shops, bars and clubs. Once you get outside this relatively small area, the clash between these new cities and the traditional Chinese way of life becomes evident. Landscapes are transformed before your very eyes in a frenzy of modernization madness. Everything and everyone is speeding forward in high gear, all 1.4 billion people clamoring to get away from the farmland and to snatch up a piece of China’s newfound wealth.

The attitudes of the people, too, reflect this optimism. Everyone I met in Changsha seems to have dreams of a better future. The families for which I was teaching are quite representative of China’s new middle class. They grew wealthy mainly through the export business and finally saved enough money to buy apartments in the city and purchase their own cars. The wealth accumulation doesn’t end their, as those apartments will likely double in value in the next 10 years. While none of the parents are very well educated and can’t speak much English, they have dreams of their children going to school in America and some day having even more opportunities available to them. The ability to speak English and to have an international education is seen by many Chinese as the way out of the working class and into a new arena of prosperity. Their dream is in some ways an American dream, but with Chinese characteristics.

Wednesday, March 7, 2012

The Fog of Development

Looking out my window, I can barely see the buildings just across the street. “I was suppose to be escaping this by leaving Beijing,” I think to myself. Still, even down in a third tier, provincial city in the heart of Southern China, one cannot escape the relentless fog that covers this country. And when I say fog… well, if you’ve been reading the news about China building a coal fired power plant every week, or if you paid any attention to my blog before this, you know what I’m talking about.

So, how did I get from being in trouble with the police to living in Southern China? Well, it’s been quite a turbulent six months, and since many of you already know the story, I’m not going to dwell on it. Let’s just say I hope I never end up in Chinese court again.

What some of you may not know is that while I was suffering through court settlement hell, I was lucky enough to become acquainted with a beautiful Chinese lady who helped to take my mind off some of my troubles. While she wishes to remain anonymous for various reasons, I will say that she is a banker, and so she was able to “finance” a few weekend trips for us over the last few months to some of the more remote and tropical parts of China. That was enough to at least take some of the sting out of a difficult situation.

Then something happened that was quite… well, as my former mentor Sherman Teichman might say, serendipitous. Or as my mom would probably say, it was the law of attraction.

No sooner had I paid the settlement to the court, than I got an email from one of the school’s I recently started teaching for. They were looking for someone to move to Changsha, the capital of Hunan province, for a month to teach SAT prep to a small group of high school students. I’d be teaching six hours a day, but the pay was substantial: nearly three times what I would make in a normal month. I replied to their email 16 minutes after it had been sent, and within the hour I was signed up to move to Changsha. Just like that. When opportunity knocks, especially in this country, you’ve got to grab it by the horns.

And finally, here I am, five weeks later, preparing to fly back to Beijing in two days. While those days of teaching crawled by, when I look back it really seems like I just got here. This experience has given me a glimpse of what it’s like living in a real Chinese city; a third-tier Chinese city, where you still feel like you’re in a developing country. Where a new gated community and six-lane highway ends, abruptly, and gives way to farmhouses. And where, just like every other city in China, the fog of development hangs heavily. Of course, the locals don’t notice the fog. They only notice the new cars, houses and shopping malls. But maybe that fog will be lifting soon…

This entry is the first in what I’m hoping will be a series of shorter and more frequent posts than before. I hope you’ll stay tuned.