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CHINA INC.:
More than 1-billion to serve

[Photo by David G. McIntyre]
Wal-Mart, with nearly 20 stores in China and more to come, is bringing its mass merchandising formula to the world's biggest mass market.

By KRIS HUNDLEY, Times Staff Writer
© St. Petersburg Times
published July 14, 2002


China seems open for business, but a group seeking to export Florida lumber finds it tough to join in.

HOUJIE, CHINA -- The visitors from Florida stood with mouths agape in the Las Vegas-style nightclub. Sure, China was changing rapidly, but they never expected to see an irreverent spoof on Communism.

Down front in the cavernous club, spotlights shone on an African singer known as "Chocolat," who was wearing a drab green People's Liberation Army uniform. Goose-stepping down the runway, he parodied a well-known Communist anthem, Ode to Chairman Mao. The Americans were stunned, but the crowd of Chinese businessmen and stiletto-heeled hostesses roared with laughter.

The liquor is flowing, the women are willing and even the factory-polluted air seems intoxicating in this south China town. The Communist Party is still in control of this farming village turned manufacturing mecca. But it's the free-wheeling entrepreneurs like Chan Hoi Ping, owner of the glitzy nightclub, a new luxury hotel and several other ventures in town, who are the local big shots.

Day 1
China Inc.: More than 1-billion to serve

China Inc.: Super market

Memories of painful past fuel China's boom

Day 2
China Inc.: Global circuits

Solving the Chinese puzzle

Capitalism has come to China and the stampede for riches is on.

Since Deng Xiaoping told his countrymen 20 years ago that to get rich is glorious, China has been burning with entrepreneurial fever. While the rest of the world is mired in recession, China's economy is growing at more than 7 percent a year. A flood of foreign investment and relaxed government regulations have given China's emerging middle class more freedom, disposable income and a thirst for all things Western. With a market of nearly 1.3-billion people at stake, foreign companies have responded with an unprecedented flood of investment: more than $300-billion in the 1990s alone.

Chinese yuppies sip green tea Frappuccinos while chatting on their cell phones at Starbucks in Beijing. Young couples, allowed by law to have only one child, pamper their solo offspring with Happy Meals at McDonald's in Shanghai. And in the south China city of Dongguan, bargain hunters stock up on Budweiser and Pringles at the local Wal-Mart SuperCenter.

But foreign companies hoping to do business in China quickly learn that grabbing a piece of this market is not as simple as it may seem. Consider the Florida visitors, part of a trade mission in May organized by the Florida Department of Agriculture. Dubbed "Operation Splinter," the group explored the rather far-fetched possibility of shipping Florida wood products to China, which has clear-cut much of its forests.

[Times photo: Kris Hundley]
Wealthy locals, as well as expatriates, flock to modern housing developments on the outskirts of Dongguan. But most still live in poverty, with the average annual income below $900.

After two weeks visiting five cities and meeting with dozens of lumber wholesalers, mill operators, furniture manufacturers and government officials, the visitors learned that a market that seems ripe from halfway around the globe looks much different up close.

It's a lesson that dozens of U.S. conglomerates -- AT&T, Miller Brewing and McDonnell Douglas among them -- learned only after pouring millions of dollars into Chinese ventures without ever making a profit. But those experiences haven't stopped hundreds of multinational corporations from continuing to pour money into China's booming economy.

"What global investors are drawn to are big ideas and the chimera of fat, fat profits," writes journalist Joe Studwell in his recent book, China Dream. "Expectations and reality are grotesquely out of kilter."

And when expectations and reality collide, as they did for the Florida trade mission in the nightclub in Houjie and the lumberyards of Guangzhou, the results can be jarring.

* * *

Harry Rogers, president of Big River Cypress and Hardwood Inc. in Blountstown, is no novice to international trade. He has sold lumber over the years in Japan, Singapore and Malaysia, and has watched those markets dry up and die. Now he's seeing furnituremakers like Bassett Furniture Industries, which have been big customers for his hardwood lumber, close U.S. factories and import more products from China. Rogers, 52, is on the trade mission to see if he can remain a supplier -- shipping Florida lumber to China to be made into furniture shipped back to the States.

[Times photo: Kris Hundley]
Harry Rogers, president of Big River Cypress and Hardwood Inc. in Blountstown, sizes up a massive log in Guangzhou during a trade mission to China.

More than 14-million acres in Florida are forested and timber is a $9-billion business. Most of the state's commercial wood supply is southern yellow pine, which is harvested primarily from privately owned land for everything from construction materials to phone poles to wood pulp.

But the industry is troubled. Imported Swedish pine used for construction framing is selling in Home Depot for less than Florida-grown lumber. And a surplus of paper stock has driven the price for pulp so low that it doesn't cover the cost of cutting the trees.

That's a particularly nettlesome problem because pulp is made from 12- to 15-year-old pines, the first thinnings in a commercial forestry project. And if the pine plantations aren't thinned, the later, more profitable growth, suffers.

"And if forest lands aren't financially viable," Rogers said, "people are going to develop them, which will be a net loss for Florida."

From their offices in Tallahassee, the marketers with the state's agricultural department thought China might be one answer to Florida's timber problems. The Asian nation, which is slightly smaller than the United States, recently responded to decades of overcutting by banning logging operations in 18 provinces. And under conditions of the World Trade Organization, which China joined in December, tariffs on wood products are being reduced from 40 percent to 4 percent or less.

Florida officials were particularly keen on the Chinese market because in October 2000 they conducted a consumer survey in five major Chinese cities, testing the market for Florida grapefruit. The research, which followed the first shipment of the fruit into China, convinced the marketers that there was a fast-growing segment of the Chinese population that had money to spend and a taste for imports.

Their optimistic projections for citrus haven't yet played out as hoped. Chinese imports of Florida grapefruit, which sell for 60 to 80 cents each in Chinese supermarkets, rose this year only slightly to 3.2-million pounds, from 3.18-million pounds a year ago.

Kwong Leung, a Sarasota businessman who is a grapefruit broker in Shanghai and Beijing, said he doubled the number of supermarkets he supplied this year to 18, including nine Carrefour hypermarkets.

"The business is not yet profitable," Leung said. "But at least I didn't lose money."

The state's marketing staff, hoping to capitalize on their experience in China and pave the way for Florida timber shipments, organized a return trip to Asia in May. On the itinerary were tours of major Hong Kong port operations, a wood-frame housing project in Shenzhen, a plywood factory in Shanghai, as well as several lavish and accolade-laden banquets with local government officials.

But despite the toasts and gift exchanges, the brutal truth became clear with every factory and lumberyard visit. Florida wood, as a pure commodity, doesn't stand a chance in China under current conditions.

* * *

Less than 20 years ago, Houjie and the surrounding city of Dongguan were farming communities in the fertile Pearl River delta. But it wasn't long before the villagers noticed the riches their neighbors down the road in Shenzhen, one of China's first Special Economic Zones, were accruing by welcoming foreign investment.

Encouraged by local party officials, Dongguan followed suit. Though the government officially owns all the land, the locals have the right to lease the property, which they promptly did to eager investors from Taiwan, Hong Kong, Japan and the United States. Though it's not clear how the lease payments were divided among the general population, what is clear is that a cadre of citizens reaped a windfall. Foreign-owned factories, making everything from sneakers to household appliances to toys to clothes, were built on former farmlands practically overnight. Dongguan's population of 1.5-million surged with an influx of 5-million immigrant workers from China's rural provinces.

City fathers, alert to the demands of foreign investors, built modern six-lane highways connecting Dongguan to Shenzhen and Hong Kong. Local businessmen used their sudden riches to build luxury five-star hotels, spacious restaurants and entertainment palaces like Chan's, where visiting businessmen could unwind. Wealth begat wealth and stories of construction workers who became hotel magnates created an atmosphere of heady possibility.

Eager to put Dongguan on the map, officials and local businessmen seized on the area's concentration of more than 3,000 furnituremakers to promote the location as the furnituremaking capital of China.

A 9-mile Furniture Boulevard, lined with furniture showrooms, was paved over the town's dusty red clay. Twice-yearly conventions were held, attracting thousands of foreign buyers and quickly outgrowing the original meeting space. Last year, the local government and entrepreneurs financed the construction of a new, $62-million convention center. More than twice the size of Tampa's exhibit hall, the project was completed in 10 months and is already being expanded. With its sweeping metal roofline and gleaming glass front, the GD Modern International Exhibition Center looks like the Starship Enterprise, plopped down in a field of rice paddies.

In Houjie, the Florida delegation met with the 2-year-old chamber of commerce. Officials scoffed when asked if members had to belong to the Communist Party. "This is strictly commerce, not political," said Guo de Qiao, who serves as secretary-treasurer of Houjie Chamber of Commerce, as well as secretary general with the Dongguan Communist Party.

During a visit to two furniture factories owned by Hong Kong businessman Dickson Leung, the group saw workers in sandals with no safety goggles, gloves, masks or ear plugs working huge saws, sanders and presses. Dickson Furniture Factory has 300 employees who are housed in company dorms and fed at the plant's canteen. Workers' pay averages about $125 per month.

Though Dickson Furniture exports much of its product to the U.S. market, very little of its raw materials comes from the States. "We're very price oriented," Leung said.

It was in Houjie, during a tour of the rambling Xingye Timber and Plywood Market, that it first became apparent Florida lumber imports faced an uphill battle. Striding through dozens of dealers' stalls, Florida lumberman Rogers saw beech planks from Europe, enormous blocks of teak from Burma and pine from Sweden. Very little of the inventory was from the United States. Stopped in his tracks by a bundle of unusually wide boards, Rogers guessed that they had been milled from a 400-year-old tree. "That's the rain forest you're looking at," he said.

Rogers' speculation was confirmed at a log depot in Guangzhou, the bustling provincial capital about an hour's drive northeast of Dongguan. There, along a tributary of the Pearl River dotted with floating sampans, were massive cuttings from the jungles of Burma, Malaysia, Cambodia and Brazil.

Inside the nearby wholesale market were 20-foot lengths of exotic hardwoods. In many cases, their sides had been hand-axed into flat planes, turning the wood into square lengths rather than logs so they could circumvent the prohibition against exportation of endangered species.

Jeff Doran, a lobbyist for the Florida Forestry Association, tried to keep the group's hopes for trade alive. Over dinner at a mountaintop restaurant, he convinced Qin Xiao Ping, the woman who runs the Guangzhou lumberyard for foreign investors, to pay shipping costs for a free container-load of Florida pine. His hope: If the wood gets into the country, the dealers will find a use for it. Rogers had his doubts.

His skepticism was reinforced at the group's next stop, the Fu Ren Wood Products Market in Shanghai. After a lunch of miniature squid and rice noodles, two of the market's dealers politely listened to Doran's presentation on the quality and versatility of Florida's southern yellow pine and cypress.

But when he asked if the dealers would be willing to cover the shipping cost for a container-full of free Florida wood samples, the niceties ended.

Low-cost Russian pine, transported by train from Siberia, is doing the job of Florida wood at a better price, the two men said through a translator. Wood chips for pulp are also coming from Russia for less than the cost of cutting the wood in the States.

Forget using wood for home construction, they advised. In China, the poor live in wood and mud huts; the nouveau riche move up to concrete homes. Nor is Florida-made plywood likely to be imported to use as forms in concrete construction; cheaper, domestically made alternatives exist. And selling Florida logs for use as power poles is also an unlikely scenario. In China, wooden poles are being replaced with concrete.

The dealers' hard-eyed assessment of the market for Florida wood seemed to deflate any hope for trade. But just as Rogers was ready to leave the room, one of the dealers button-holed him with a request. There might be an interest in red oak from Florida for use as architectural molding in high-end homes, he said through an interpreter.

Rogers gave the dealer a low-ball price on a container-load of the hardwood and promised to be in touch. "They've already shopped wood markets around the world," Rogers said of the Chinese dealers as he left the meeting. "They know our business better than we do."

In the van on the trip back to Shanghai's Crowne Plaza Hotel, Rogers and Doran decided their best bet would be to work with architects and home designers to promote Florida wood as the home decor material of choice for China's monied elite. The next day in the Shanghai airport, Rogers picked up copies of several Chinese-language home magazines. Tucked among the glossy color pictures were dozens of photos of rough-hewn wooden chalets, with rooms decorated with pine paneling and hardwood molding.

After the discouraging meeting at Fu Ren market, the lumberyard's owners tried to salvage some business over a dinner hosted by the Florida delegation. Send us a log cabin kit, they told Rogers, and we'll use it as a showroom and split any profits from the sale. American products have to be promoted if they want to find a market, they argued.

After learning that a Canadian company promised to provide Fu Ren market with log cabin kits for $12,000, Rogers told the Chinese businessmen he'd e-mail them some price estimates. But he has no illusions about beating the Canadian price or the feasibility of putting a Florida log cabin on Shanghai soil.

"If they want to buy one, fine," he said. "If they don't, fine."

* * *

At the trade mission's final stop, in China's capital of Beijing, the group met with officials from the state-run China Timber Distribution Association. Their welcome was warm, but their intent was laser-focused.

Will you buy our plywood, asked Lin Xiaping, a woman who is vice secretary general of the government committee. Are you interested in building a plant here? Will you send us your logs?

Doran patiently explained that Florida doesn't have logs of the size needed in China, nor would his association's members be willing to export the raw materials that keep their mills and lumberyards operating.

But Doran remained hopeful. A story he pulled off the Internet that morning told of China's massive reforestation effort and its needs for seedlings. With millions of Florida pine seedlings being plowed under each year for lack of a market, Doran thought he'd finally found a niche.

The Chinese officials conceded that yes, they are in need of seedlings, particularly rapid-growing species that would grow fast enough to be sizeable by the 2008 Olympics. There's just one problem: China has a ban on the importation of U.S. softwood seedlings because of problems with worms attacking the mature trees. But Zhang Kai-chun, a professor at Beijing Academy of Agricultural and Forestry Sciences who had joined the meeting, held out hope that there may be a way around the ban.

As the meeting ended, the Chinese officials mentioned that they've met with dozens of foreign timber delegations and worked in the past with the American Forest and Paper Association, the national trade association. Their biggest timber import deal, Lin said, was last year with a Canadian lumber company.

"You need to build some samples of your wooden homes," said Lin. "And gradually the Chinese people will accept it."

After thanking the government officials for their time with gifts of the agriculture department's "Florida Fresh" lapel pins and posing for the obligatory group portraits, the Florida delegation filed out of the run-down government office building, empty-handed, but ever gracious.

* * *

Two weeks after returning to his North Florida lumber business, Rogers was philosophical about his China trip.

"I didn't come back with aspirations of doing business there next month," he said. "But it's too big of a market to ignore."

He's doubtful the red oak business will pan out, believing European hardwoods like beech and white oak will remain a less expensive substitute. But Rogers, who has been in the lumber business for more than 30 years, knows that things change.

Next March, when the tariff on finished U.S. lumber exports drops from 40 percent to zero, Rogers expects Florida pine paneling, siding or cabinet parts could be competitive with other exports in China. "Most of the lumber I saw in China was of pretty poor quality," he said. "When the tariff goes, I think we can be competitive price-wise but do a better job of quality."

Other conditions could change as well. The value of the U.S. dollar could continue to drop, making imports from Florida more competitive. International pressure could curtail the flood of rain forest lumber into Chinese ports. Political unrest and instability in nations that are now prime exporters to China could force manufacturers to turn to more reliable and renewable sources of wood in the U.S. and Canada.

Rogers intends to keep in touch with dealers in Hong Kong who have contacted him since his trip, biding his time.

"Right now it's not in my best interest financially to do business over there," he said. "But I want to keep my name in the pot."

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