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China Opens Trade Gates, Welcomes Local Ingenuity

As manufacturing makes China wealthy, opportunities for trade are shifting beyond simple import-export and into the realm of investments and partnerships that promise access to demand for products that has simply never existed before.

“Like all industrial nations that want to mature, the Chinese are looking beyond manufacturing,” said Eddie Rodriguez, an attorney and managing member with Mintz Levin Cohn Ferris Glovsky and Popeo P.C. “There’s a lot of interest in sharing and acquiring know-how and creating business relationships with American companies.

“They would like to create more technology and know-how coming out of China — to evolve into high-tech, auto manufacturing and making high-end goods, as any maturing market does,” he added.

Camille Sobrian, chief operating officer of the local science and technology accelerator CONNECT, agrees — and believes San Diego is positioned to meet and create new market demands.

“They are changing from a manufacturing economy to an innovation economy, with the government’s leadership,” Sobrian said. “We are looking at innovation in San Diego that would be commercializable in China, that would create solutions in emerging markets.”

For example, China is committed to building 10,000 hospitals in the next decade, along with countless schools and roads as well as moving millions of peasants to a dozen big cities.

“They are looking at clean-tech for energy, at electric cars, at wireless and life sciences and medical devices,” Sobrian said. “There is tremendous opportunity for companies that can find trading partners.”

Connecting Across Pacific

Local companies already have footholds in China. San Diego-based wireless giant Qualcomm Inc. earns two-thirds of its revenue there, Sobrian said. Renewable energy firm Verenium Corp., formerly known as Diversa Corp., of San Diego, is collaborating with BITeomics, a biotechnology company also known as Bio Integration Technology Inc., of Dalian, China. BioAtla, another San Diego company that develops protein therapeutics, has a research facility in China, for example.

“The Chinese government at top levels is promoting foreign investment in the central regions of China, and the state level follows the national lead,” Sobrian said. “There’s a huge middle class in China that wants to live like a middle class — there are gated communities and demand for luxury goods as never before.”

China’s problems, such as the emergence of obesity along with the environmental and public health tolls as a result of weak regulation and poor air quality, present opportunities for U.S. innovation ranging from clean-technology energy to health care advances.

In 15 years, experts predict that the Chinese middle class will nearly triple from 300 million people currently to 800 million people.

All of which is good news for San Diego companies with the moxie and cash to think about expanding into China.

But the traditional trade methods, make it here and ship it there, often don’t work very well. Banking is just beginning to crack the wall that kept money from moving easily into and out of China — a problem that has discouraged investment into China — and the foreign investment of Chinese venture capital.

“In the past, companies have had to leverage their U.S. assets to establish operations and then find they are cash-light for U.S. expansion because money made in China was very difficult to get back out,” said Don Starkey, vice president and relationship manager at Union Bank N.A. “Union Bank, because it’s wholly owned by Bank of Tokyo-Mitsubishi, can now lend to U.S.-based companies with assets in China. Citibank is the only other U.S.-based bank that can do that.”

The inability to get banks to recognize Chinese investments as tangible assets kept many companies out of China, and the inability to control the practices of Chinese partners made simply licensing technology a poor option.

“It has been a huge stumbling block for midcap market companies because they’ve had to job out and lose control of their product,” Starkey said. “More globalization in banking means more opportunity for midsized companies to capitalize on foreign assets to grow.”

Money Flows More Smoothly

With both the Chinese government and banks supporting easier movement of money in and out of China, the pool of Chinese investment capital — estimated at $100 billion — is far more open to U.S. companies, according to Lee Sands, managing director of Sierra Asia Partners.

“The Chinese are not interested in buying companies wholesale, they are not interested in making the mistakes Japan did in the 1980s,” Sands said. “They are interested in investing in midcap U.S. companies with an eye toward joint ventures, partnerships and relationships that create a platform for Chinese operations.”

The Chinese, Sands said, have the same problems and concerns looking at U.S. companies and markets that U.S. companies have looking at Chinese markets.

“You need a guide of some sort, law firms and accounting firms that can help figure out which people, which companies, which deals to trust,” he said. “This is a rare time in history when there will be sustained and substantial growth in their market.

“The best game is partnership where your company and a Chinese company share an interest and growth and profit,” he added.

The trick of taking U.S. business into China seems to be in approaching the deal with flexibility and experienced advisers, according to William Molloie, who leads the pharma/life sciences practice at the San Diego office of PricewaterhouseCoopers after a three-year stint leading the technology practice in the accounting firm’s Shanghai, China, office.

“We advise Western entrepreneurs that there’s a lot of opportunity if you come into it prepared that things are done differently than here,” Molloie said. “Sensitivity to the differences heightens the opportunity.”

Challenges to Overcome

Molloie tells the story of a job candidate whose parents accompanied him to his job interview at the firm. Molloie was aghast and was about to eliminate the applicant when a colleague explained to him that this job interview, for the candidate and his parents, was the honor of a lifetime. The parents had invested in their son’s preparation for an accounting career since grade school.

Opportunity is rampant, Molloie said, for businesses that make the effort of building relationships.

Peter Cowhey, a professor and dean at UC San Diego, says San Diego businesses face three categories of challenges when they look at the Chinese market.

“First, the exchange rate is not favorable for U.S. exports,” Cowhey said. “Second, China is a very complicated market in every aspect, including distribution, local rules and regulation and just knowing how to negotiate.”

The third challenge has to do with intellectual property. Most observers agree that protections for U.S. companies, while improving, are not equal to U.S. protections.

“Despite some improvement, China is still weak on enforcement that is critical to (U.S. businesses’) success, and that extends to the Chinese government where there are still reports of buying one copy and sharing it with everyone,” Cowhey said. “And standard setting often excludes U.S. technology and that stacks things in favor of Chinese firms.”

San Diego businesses also tend to be big in products that require certification or are subject to regulation. Technology and medical devices are good examples.

“Regulation can be difficult and onerous,” Cowhey said. “But there are very big returns if you do succeed — a San Diego company has the No. 2 position in water purification for high-tech manufacturing, for example.”

Marty Graham is a freelance writer for the San Diego Business Journal.

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