Some China firms outsourcing to USA to cut costs

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States are aggressively trying to lure companies looking to grow. Incentives and a weak dollar are spurring investment.

DONGGUAN, CHINA -- Liu Keli couldn't tell you much about South Carolina, not even where it is in the United States. It's as obscure to him as his home region, Shanxi province, is to most Americans.

But Liu is investing $10 million in the Palmetto State, building a printing-plate factory that will open this fall and hire 120 workers. His main aim is to tap the large American market, but when his finance staff penciled out the costs, he was stunned to learn how they compared with those in China.

Liu spent about $500,000 for seven acres in Spartanburg -- less than one-fourth what it would cost to buy the same amount of land in Dongguan, a city in southeast China where he runs three plants. U.S. electricity rates are about 75% lower, and in South Carolina, Liu doesn't have to put up with frequent blackouts.

About the only major thing that's more expensive in Spartanburg is labor. Liu is looking to offer $12 to $13 an hour there, versus about $2 an hour in Dongguan, not including room and board. But Liu expects to offset some of the higher labor costs with a payroll tax credit of $1,500 per employee from South Carolina.

"I was surprised," said the 63-year-old president of Shanxi Yuncheng Plate-Making Group. "The gap's not as large as I thought."

Liu is part of a growing wave of Chinese entrepreneurs expanding into the U.S. From Spartanburg to Los Angeles they are building factories, buying companies and investing in business and real estate.

Individually, these deals pale next to high-profile investments such as the $5-billion stake China's sovereign wealth fund took in Morgan Stanley last year, or state-owned oil giant CNOOC Ltd.'s $18.5-billion bid to acquire El Segundo-based Unocal Corp. in 2005.

But unlike the suspicion or uproar those moves generated -- CNOOC withdrew its offer amid U.S. political pressure, and the Bush administration and other governments have pushed for a "code of conduct" for sovereign wealth funds -- private Chinese businesses such as Shanxi Yuncheng are being wooed by states hungry for investment and jobs.

Last month, Wyoming's governor toured firms in China's coal-mining country. Georgia's leader brought a team of 40 on a mission to boost trade and attract investment, and Alabama's governor paid a visit too.

"It's like a land grab," quipped James Rice, Tyson Foods' China manager and a board member of the American Chamber of Commerce in Shanghai, who has attended some of these states' functions in China.

A bit of apprehension

Many Chinese entrepreneurs remain wary of entering the U.S., uncertain about restrictive visa rules, language and cultural barriers and the political environment. Recent tensions related to Tibet and the Olympic torch relay have spurred calls in China to boycott Western companies. But no one says that's slowing the march of Chinese companies into the world's biggest economy.

"They don't want to miss this opportunity to bottom-fish in the U.S.," said Mei Xinyu, an economist at China's Ministry of Commerce, referring to the depressed asset prices in a sluggish American economy.

Flush with cash, many Chinese companies want to compete globally. Others feel they've hit a wall in the domestic market and need to go out to expand sales. And the Chinese government is urging them on by loosening previously cumbersome restrictions, in part to help Beijing reduce a lopsided trade balance with the U.S. and make the most of its massive foreign reserves.

"At seminars and talks, government authorities are saying, 'You're a capitalist; you should be going out,' " said Fred Hong, a Pasadena lawyer who has worked in Guangzhou for 15 years advising Chinese companies.

One of Hong's clients, a Wenzhou man who operates two printing factories in China, recently signed a deal to spend $1 million to buy a 60-worker plant in the City of Industry that makes magnetic cards. Hong said the man's factories had produced strong profit in the last several years, leaving him with a pot of cash. With the dollar having lost nearly 10% of its value against the Chinese currency in the last 12 months, the yuan can go a lot further in the U.S.

Changing direction

For years, investment between the U.S. and China flowed one way, with American firms spending billions in the Asian nation. But the Beijing government's $5-billion stake in Morgan Stanley and $3-billion investment in the private equity firm Blackstone Group brought China's overall investments in U.S. firms to $9.8 billion in 2007, up from $36 million the year before, according to Thomson Financial.

By comparison, U.S. investment in China was $2.6 billion last year, down from $3 billion in 2006, said China's Ministry of Commerce.

But many Chinese entrepreneurs prefer to keep a low profile, and experts say those figures don't include a lot of investment activity happening under the official radar.

Karen Shen, Washington state's trade development representative in Shanghai since 2000, used to focus on promoting exports of Washington-made goods and produce. Now she's helping the state's companies and officials hook up with Chinese investors. Tech companies in China are keen to buy or launch businesses near Redmond-based Microsoft, she said.

In February a Beijing company, ISoftStone Information Service Corp., went to a Seattle suburb and bought a small technology research and design firm, Akona Consulting. For ISoftStone, a leading outsourcing firm in China, the acquisition was a way to stay ahead of Chinese rivals. For Akona, the tie-up was a way to grow faster.

Chinese manufacturers, particularly those that import parts or raw materials from the U.S., are also looking at setting up assembly operations in Washington. They would save on shipping costs, Shen said. What's more, land, labor and business-operating costs are soaring in China.

Shen said the president of a Shanghai machinery maker told her that opening a plant in eastern Washington might be more economical than expanding in Shanghai's free-trade zone.

"The president told me the assembly line [capability] and quality would be much higher" in the U.S., she said, adding that he hadn't made a final decision.

More than 30 states in the U.S. have staff members or representatives in China, according to the Council of American States in China. With the U.S. economy slumping and unemployment rising, even some tough critics of China and outsourcing are courting Chinese money.

In March, a Missouri delegation included the governor, two U.S. senators, the mayor of St. Louis and two dozen other officials and businesspeople. Their aim: to get Air China and Chinese officials to back Missouri's bid to create an air-freight hub in St. Louis.

California's efforts to attract Chinese investment have been more hodgepodge. Gov. Arnold Schwarzenegger came on a trade mission in 2005, and state legislators and city governments have visited from time to time to promote California products. Sacramento has no permanent trade office in China.

Nevertheless, the state's proximity to China, diverse economy and large ethnic Chinese population are a big draw for many businesses in China. In one of the deals last year, China Minsheng Banking Corp. agreed to spend as much as $317 million to buy 9.9% of United Commercial Bank of San Francisco, which serves the Chinese American community.

Capitalizing on growth

Few states have been as aggressive in reaching out to China as South Carolina. In recent years, 10 Chinese businesses, including appliance maker Haier, have expanded there and created about 2,000 jobs, said John Ling, managing director of South Carolina's China office. That's a fraction of the textile jobs the state has lost to Asia, but it's a start, he said.

Shanxi Yuncheng is Ling's latest catch -- but it took two years.

The company's owner, Liu, was reluctant. He had built his printing-equipment business from the ground up in Yuncheng, an industrial city of 5 million in central China.

In the early 1980s, Liu traveled to Germany and, with a $250,000 loan from a state bank, bought a world-class machine that would make the copper cylinders for the gravure method of printing. Within a decade, Liu's company dominated this niche for commercial printing in China.

Today, Liu owns more than 80 gravure cylinder-making plants in China and 20 more in a dozen countries, including Mexico, Brazil and Vietnam. He has more than 10,000 employees, and sales last year surpassed $250 million. Why, he asked himself, should he take the risk of setting up a factory in the U.S.?

Besides higher labor costs, Liu worried that his company and managers would not be welcomed and feel a backlash from the bad publicity about cheap and unsafe Chinese goods.

But the more he thought it over, the more it made sense. Shanxi Yuncheng wasn't going to grow much faster at home. Its expansion into Mexico four years ago showed him he could succeed outside Asia.

Although Shanxi Yuncheng's labor costs in Mexico are about double China's, managers said, the company undercut rivals by offering quicker delivery and better quality and prices. The company now controls about 30% of the gravure printing market in Mexico, and its Mexico operations are its most profitable.

"Being a Chinese company, customers in the U.S. may associate us with low-tech," said Liu. "It will take time. People's perception can only change little by little with hard work."

Liu, the son of farmers, has never been to South Carolina but sees his company's move into the U.S. as a source of pride.

"It's a lot of pressure going to the largest market in the world," Liu said. But he thinks it's certain to help his business become more competitive. "That's one of the real benefits from this expansion."

don.lee@latimes.com