BUSINESS WATCH

China’s headlong rush to capitalism

A new deal with a Canadian firm shows China’s determination to raise its standard of living and to turn a profit in the process

Peter C. Newman June 12 1989
BUSINESS WATCH

China’s headlong rush to capitalism

A new deal with a Canadian firm shows China’s determination to raise its standard of living and to turn a profit in the process

Peter C. Newman June 12 1989

China’s headlong rush to capitalism

BUSINESS WATCH

PETER C. NEWMAN

China’s current political upheaval is being duplicated in that continent-of-acountry’s economy, as its born-again entrepreneurs rush to consolidate their own brand of capitalism. Canadian businessmen have been selling their wares to the Chinese for years, but now—pending resolution of the student revolt—the gates are swinging wide open. Most of the new contacts are in the form of joint ventures, propelled by China’s determination not only to raise its standard of living but to tum a profit in the process.

A recent example of this burgeoning trend is the deal signed on April 22 between the Guangzhou (Canton) Battery Industry Co. and Battery Technologies Inc. (BTI), an innovative high-tech battery firm in Mississauga, Ont. The 20-year partnership will operate under rules similar to any North American joint venture, with each participant sharing equally in risks, profits and losses. The Canadians will supply patents, financing and equipment for the new battery assembly line, while the Chinese are responsible for production premises, labor force and marketing facilities. China’s new spirit of free enterprise is evident in the wording of the contract. It specifically forbids the Canadians to coproduce batteries with any other Chinese partners and sets out a 17-percent net profit minimum on annual export turnover.

Wang Ren, president of the Guangzhou battery factory, is equipping the new $ 13-million facility, which is scheduled to come on stream within 24 months. The existing Chinese battery plant makes about 500 million nonrechargeable, zinc-carbon and primary alkaline units a year with a workforce of more than 3,000; the new factory expects to turn out half as many manganese rechargeable batteries worth more than twice the former product, requiring only 50 workers. Selling even twothirds of the expected 250 million batteries a year at a 20-per-cent markup would return the Chinese an estimated 100 per cent on their capital investment during the first year.

A new deal with a Canadian firm shows China’s determination to raise its standard of living and to turn a profit in the process

“The Chinese,” said Wayne Hartford, chief executive officer of BTI, “are developing their electronics and communications industries very quickly, but most of the rural areas still don’t have good electrical service. That’s why transistor radios that cost the equivalent of $2 are so popular, and flashlights, as well as cellular phones, are almost a necessity of life— all of which means there is a tremendous market for batteries. China is industrializing rapidly, but their labor rates remain incredibly competitive. The average worker in Hong Kong earns $3.50 an hour, while in South Korea the going rate is about $2.50. In China, it’s $1.50 per day.”

The BTI batteries, based on an Austrian invention, are claimed to be 50-per-cent less expensive than existing rechargeables, to last longer and be much safer environmentally because, unlike the currently available models, they contain no nickel or cadmium.

On top of the Chinese deal, BTI has just signed a similar contract with Oh Yang International Ltd., a $40-million conglomerate in South Korea which plans to export its surplus production to the United States. Meanwhile, a Buffalo-based group intends to make the BTI product in a new plant at Albany, N.Y., while

Kerr McGee Chemical Corp., a major American refiner of manganese dioxide, has initiated a development contract with BTI to apply its technology to car and boat batteries with hopes of eventually replacing the current lead-acid models. Groups from Lithuania, Hungary and India are also negotiating licensing arrangements. All this activity is particularly impressive because BTI has yet to produce anything but pilot-plant samples—although a full-scale prototype manufacturing operation is due to open in 1990 at Richmond Hill, Ont. As well, an Australian firm, Sherwood Overseas Co. PTY Ltd., has already built a plant under licence in Perth. Sherwood is already moving in equipment, and its officials say that they hope to begin production by the end of the year.

What has struck Hartford and other BTI executives most forcibly as they negotiate their way into Asian markets is the creative impulses of local banks. “Oriental economies,” said Hartford, “seem to work on a self-fulfilling prophecy. The reason the banks over there get so excited about venture-capital projects like ours is that their success rate has been so high—and the reason their success rate is so high is that they’re not afraid to provide capitalization without demanding deterrent guarantees.”

To finance their Chinese and South Korean ventures (or at least the portions not covered by Ottawa’s Export Development Bank), Hartford and BTI president James Miller called on an executive of the Standard Charter Bank in Hong Kong, which has been doing business in China for 138 years and which was one of the few outside banks to maintain at least one branch (in Shanghai) even in the harshest days of China’s Communist takeover.

After briefly analysing their business plan and licensing contracts, the Hong Kong banker took the pair to see Charles Wrangham, one of Standard’s managing directors. The Canadians left the building the same afternoon, with the bank’s pledge to offer the required funds at preferential interest rates—without any collateral or personal guarantees. The only condition was that the business plan they had presented stand up to banking officials’ scrutiny.

“The assumption in dealing with these people,” said Miller, “is that you’re going to do business together. It’s not like Canadian banks who start out by saying, ‘What was your grandmother’s maiden name and can we have your firstborn as collateral?’ In Hong Kong, they don’t just want to loan out money but are looking beyond that at the potential of funding a growing organization across the Pacific. During 2lh hours with the Standard, we got a lot farther than we have with Canadian banks in the past 2lh years. Here, they wanted 200-percent collateral, plus personal guarantees and a pledge for all of BTl’s assets.”

Canada’s trade with China and other Pacific Basin countries is expanding so dramatically that more and more Canadians are becoming exposed to the advantages of creative merchant banking. That could have all kinds of drastic consequences—and might even drag Canada’s banks into the 20th century.