Fluidmaster Plans Move Into China

For years, Robert AndersonSchoepe has been squeezing pennies out of America’s best-selling toilet valve. He has invested hundreds of thousands of dollars in labor-saving machinery, streamlined the production lines at his two California plants and shifted his most labor-intensive work to a factory in Tijuana.

But the president of Fluidmaster Inc. is running out of ways to cut costs at his San Juan Capistrano-based business. And now his biggest customers -- companies such as American Standard Cos., Kohler Co., Wal-Mart Stores Inc. and Home Depot Inc. -- are moving into China.

As they venture across the Pacific, AndersonSchoepe is ready to take the leap himself, preparing to set up a jointventure production facility in China with another leading U.S. manufacturer of toilet parts.

During his first trip to China three years ago, AndersonSchoepe was bowled over by the round-the-clock construction transforming Shanghai, Beijing and other big cities.

“When we see that, it’s opportunity,” said the 51-year-old chief executive, whose late father, Adolf Schoepe, founded Fluidmaster in 1957. “Every one of those apartments has at least one or two toilets in them.”

China, once viewed as a low-cost producer of furniture and faucets for export, is experiencing a housing boom of its own.

Foreign companies, spurred by Beijing’s easing this year of investment restrictions, are jumping into the $50-billion-a-year home improvement market. B&Q; of Britain, the largest foreign-based home improvement retailer in China, has more than 40 stores. In August, U.S. market leader Home Depot got the government’s go-ahead to open stores in China.

To enter that promising market, AndersonSchoepe decided, Fluidmaster needed to acquire an existing facility with customers and local market knowledge.

But the three largest domestic companies were manufacturing seats and valves, and he had no interest in mastering a new area of sanitary product expertise. So he teamed with Bemis Manufacturing Co., the world’s leading maker of toilet seats, to produce and market their wares throughout Asia.

In an interview last week at Fluidmaster’s corporate headquarters, AndersonSchoepe and Norman Giertz, 50, president of Bemis’ proprietary products group, said they might eventually export from China to the United States or other parts of the world.

But they insist that the chief reason for the move was to serve China, something they say they can’t do economically from a U.S. factory because of higher operating costs and steep Chinese import duties and taxes.

In addition, the executives said, the shift to “just-in-time” production is forcing U.S. suppliers to establish operations close to their customers so parts and finished goods can be delivered at the last minute.

“Whenever you’re selling products across oceans, you have less flexibility,” AndersonSchoepe said.

Although much of China’s population still lives in rural areas, where the standard-issue white flush toilet with rounded seat is a luxury, there is a growing middle class that wants more sophistication in its bathrooms, Giertz said.

Chinese home decor, he said, is heavily influenced by Europe and Japan, markets in which customers are very particular about their toilets. In the United States, for example, a home improvement store might offer 50 varieties of toilet seats; a similar store in Europe would offer 150 designs, shapes and colors. Chinese also are showing interest in the high-tech bidet toilets with heated seats and bottom washers and dryers that are popular in Japan.

“We see that market as very impressionable,” said Giertz, who sold industrial power brushes and farm equipment before joining Bemis of Sheboygan Falls, Wis., 18 months ago.

Foreign products have an edge in the highly competitive Chinese market because they are viewed as better built and more reliable than domestic competitors, said Ira Kalish, a retailing expert at Deloitte Research in Los Angeles. Because piracy is a big problem, he said, Chinese customers prefer to buy those big-ticket items in foreign-owned stores that are likely to carry the “real thing.”

“As these stores proliferate, there will be more and better opportunities for U.S.-branded suppliers to sell in the Chinese market without having to worry about piracy,” he said.

Counterfeiting is a concern for Fluidmaster and Bemis, which have come across pirated versions of their products -- copied down to the box designs, catalogs and instructions. To guard against intellectual property theft, they plan to transfer only the least-sensitive technology to their China operation in the beginning.

After an 18-month search, the two executives believe they are close to completing a deal that would give them a 100,000-square-foot facility employing about 12,000 people. The acquisition would be in the neighborhood of $24 million.

But they were reluctant to name the acquisition target, saying there were too many things that could still go wrong. Doing business in China is like dealing with Jell-O, Giertz said. “You think it’s one thing, and then it changes into something else.”

The chief hurdle has been getting accurate financial information about Chinese companies to lessen the chances of costly surprises, Giertz said. He said he and colleagues were warned by their attorneys and accountants that Chinese companies often don’t accurately report sales figures to avoid paying taxes and sometimes alter employment records to minimize benefits payments to the government.

The unpredictable nature of Chinese business was on full display Oct. 16, when the U.S. companies were forced to cancel a ceremony at Fluidmaster’s San Juan Capistrano offices honoring a delegation from China led by the mayor of Zhongshan.

Two of China’s top toilet parts makers, Meitu Sanitary Ware Industry Co. and Aimas Sanitary Ware Co., are located in that sprawling industrial city. The third, WDI Plumbing Inc., is in Xiamen.

Fluidmaster and Bemis had hoped to use the Chinese delegation’s visit to unveil their China plans. However, at the last minute, Zhongshan’s mayor sent word that he didn’t want any fanfare, and the event was shelved.

“One thing we’ve learned in China,” Giertz said with a shrug, is “you have to remain flexible.”