China, the next frontier for American businesses, is no Wild West.
Larry Lieberman, whose Ronkonkoma company manufactures custom lighting fixtures in China for an American clothing retailer opening stores there, has learned the lay of the land by now, but he didn't pick up the rules overnight.
With a population of more than 1.3 billion and increasing consumer wealth, China has an obvious allure for Long Island businesses like Lieberman's Vision Quest Lighting. A 2012 McKinsey & Co. report says China will be the world's largest growth market for years to come. According to the U.S.-China Business Council, New York's exports to China tripled from 2003 to 2012, bringing in $4.2 billion last year.
But local companies shouldn't venture into the China market without extensive finances and guides to help navigate foreign terrain, experts caution. "A bilingual agent or employee in China can make a big difference," said Savio Chan, chief executive of the Great Neck consultant group U.S. China Partners, adding that having the right adviser in the United States is important, too.
Lieberman concurs: "You really need someone who understands the system, someone who has feet on the ground."
A chance meeting
For Vision Quest, the first guide was Steven Hou. Lieberman met Hou in 2006, when he emailed a Chinese lighting publication in search of an interpreter for a national trade show in Hong Kong.
"Four days later he quit and started working for me," Lieberman said of his agent in China. Hou helped Vision Quest find factories to manufacture large quantities of labor-intensive lighting components at a competitive cost. For five years, while the exchange rate was strongly skewed toward the United States, the company imported 30 percent of its lighting fixture parts from China.
In 2011, Abercrombie & Fitch, one of Vision Quest's largest clients -- the firm has illuminated everything from KFC restaurants to Hilton hotels -- announced plans to open five Hollister stores in China. Abercrombie asked the Long Island company to supply more of the same faux-rusted track fixtures that were lighting its American stores.
Vision Quest redesigned the lights to meet Chinese safety standards and submitted a prototype to the Chinese government in early 2012. After approval came in September, a factory in Guangzhou began assembling parts, many of which arrived from Long Island.
Why not just ship the lights from the United States?
"It's a tremendous amount more [in] taxes and duties than if you were to build it there," explained Bob Kliegl, an account executive for Production Resource Group, an international entertainment technology company that referred Abercrombie to Vision Quest.
In October, the Chinese factory started distributing 3,500 fixtures to the clothing stores on credit. It was only when Vision Quest tried to bill the retailer that the small business hit a big snag: Lieberman hadn't known he needed to sell his wares through a company licensed by the Chinese government.
Enter guide No. 2: Savio Chan.
Advice on the system
"Customers ask for invoices to offset taxes," Chan explained of China's value-added-tax system. "If you don't have the right setup, you can't produce the invoices."
Chan found Lieberman an interim solution, an established Chinese company through which he could sell the lights idling in his warehouse. Meanwhile, Vision Quest's partner, PRG, began to invest the time and money it would take to establish a wholly foreign-owned enterprise licensed to sell lighting fixtures in China.
"It can take anywhere from six months to a year," Chan said of the process, "so you have to be prepared ahead of time."
Registration also takes a lot of capital, said lawyer Dan Harris, whose Seattle firm assists smaller companies setting up Chinese manufacturing operations.
He estimates the legal fees for forming a Chinese company, registering trademarks and drafting employee contracts and manuals as averaging $35,000.
"If you can avoid setting up a company in China, then you want to avoid it," Harris said. "Not only do you have these legal costs, but then you have to pay what's called minimum capital," from $100,000 to $300,000 deposited in a Chinese bank account.
Vision Quest's China business represents 4 percent to 5 percent of sales; the company still does 95 percent of its manufacturing at its 17,000-square-foot Ronkonkoma facility. Although Lieberman said his sales in China have been profitable, the company's trajectory isn't necessarily a model for all Long Island small businesses: "It's got to be a small business that's ready to move a volume of product, or the dollar figures have to be large," he said.
Lawyers, CPA needed
So what should a local company intent on cracking the China market keep in mind?
"You want to hire the right lawyers and CPA to advise you," firms that have experience setting up corporations in China, Chan said.
Americans should note that China has a "first-to-file," not a "first-to-use" system when it comes to intellectual property, Chan added. If you bring your product to the market before filing your trademark at the Chinese patent office, a Chinese national can register and own it.
Harris also recommends that U.S. business owners list reasons for termination in employee contracts and manuals written in both English and Chinese. In the United States employers generally can dismiss workers without a justified reason, but "in China, if I fired you for wearing a blue shirt, you could sue me, I'd have to pay penalties, and rehire you," he explained.
Despite the Chinese rules that American business owners find counterintuitive, Lieberman views China as an entrepreneurial territory with great potential: "You've got a huge customer base in China, and I wouldn't be surprised in the next 10 years if [U.S. exports] to China explode."
AT A GLANCE
Name: Vision Quest Lighting in Ronkonkoma
President: Larry Lieberman
Year founded: 1996, in Lieberman's East Setauket basement
Employees on Long Island: 30
First sale in China: 2012
Units installed in China: 4,000
Revenues for 2012: $4.5 million