Risky Business

Like many U.S. exporters, Candace Chen believes that no country holds as much potential as China. But after six long years of contending with bureaucrats, counterfeiters and kidnappers, the 28-year-old president of Power Clean 2000 Inc. is understandably weary.

Since late 1991, Chen’s South-Central Los Angeles business, which makes machines and solvents that remove carbon from car engines, has plowed more than $2 million into China. Power Clean had two good years there, but then knockoffs wiped out the company’s sales and, in one instance, blew up a car, for which Power Clean got blamed. It only got worse in 1996, when a band of thugs in Shanghai abducted Chen’s father, demanding that he sign a ransom note and that Power Clean get out of the country.

Chen, a diminutive but tough woman known as the “queen of decarbonization” in China, has not given up. Determined to make a profit in China, the Taiwanese-born lawyer and keeper of her small family business has filed lawsuits abroad and complained vigorously to senior trade officials in Beijing and Washington. “I’m still optimistic,” she says.

Lured by China’s vast potential market, a growing number of small businesses in the Southland have ventured to the country in recent years. Some have succeeded, thanks partly to contacts made through the U.S. Department of Commerce. And now more businesses are turning to China in hopes that it could help offset plunging sales in other Asian countries wallowing in financial crisis.

China, with plenty of foreign reserves, relatively little short-term debt and a market and currency less accessible to outsiders, has not caught the current Asian economic contagion.

The latest trade data is also promising. California’s exports to China jumped 39% in 1996 to almost $2 billion, and they were up 11% in the first half of last year, even as exports to Japan, South Korea, Singapore and Malaysia slipped badly and the state’s total exports grew by just 2% in the first half of 1997. As of mid-1997, mainland China was California’s 16th-largest export market--and climbing.

But the experiences of companies like Power Clean show just how treacherous exporting to China can be. Despite continued economic reforms and the lowering of trade tariffs, China remains one of the toughest markets to crack. Companies large and small are thwarted by trade barriers and red tape, and sometimes criminals.

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There have been some notable retreats from China lately; Caterpillar Inc. gave up on a diesel engine plant in Shanghai because of the slow-growing market, and Ameritech Corp. dropped a cellular phone venture because of regulatory hassles.

In some ways, small businesses may have an advantage in that they can make a quieter entrance. But they also have less ability, financial and otherwise, to navigate China’s vast bureaucracy and distribution channels. Success often depends on hooking up with the right quanxi, or “special relationship,” which can open the way to government agencies and ultimately access to China’s growing middle class. Poor personal contacts can lead to ruin.

John Olsson, president of Baby Tech International, a Laguna Hills maker of pacifier thermometers, thought he had struck gold a couple of years ago when he signed contracts with a broker in Beijing and one on a South China Sea island. He met the brokers through a Chinese American in Houston. The contracts called for Olsson to provide several hundred thousand pacifier thermometers, but after shipping off 10,000 units, Olsson says, the orders suddenly stopped.

“There was no way to enforce the contracts; the people just disappeared,” he says bitterly. Olsson is searching for new ways to find distributors in China, a country he says his firm could really use because sales to the rest of Asia--which account for a big chunk of Baby Tech’s $500,000 in sales--have all but dried up. “I want to crack that market very badly,” he says of China.

At least 150 companies in Los Angeles and Orange counties today export merchandise to mainland China, most of them small businesses with annual sales of $10 million or less, according to the World Trade Center Assn. of Los Angeles and Long Beach. They include a number of aerospace parts suppliers, which have ridden into China on the coattails of corporations such as Boeing Co.

Transportation equipment, computers and other electronic goods account for the bulk of California’s exports to China, followed by farm crops, paper products and chemicals. Among the fastest-growing exports to China are petroleum and coal products, and demand appears to be rising rapidly for merchandise aimed at cleaning up the environment--an area that should provide ample opportunities for California companies.

“China is now waking up to the need to protect the environment,” says Hang-Sheng Cheng, a retired Federal Reserve economist who heads the 1990 Institute, a San Francisco group that is dedicated to studying China.

Cheng says imports of American goods to China should continue to grow because of Chinese tariff cuts, expected to drop to an average of 15% by 2000. In the long run, he says, the return of entrepreneurial Hong Kong to China should spur liberalization on the mainland. Cheng also is confident that China will weather the Asian economic turmoil, although some experts think China will devalue its currency to compete with lower-priced goods from Southeast Asian countries, where currencies have tumbled.

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But Cheng says part of the problem for U.S. companies is their lack of knowledge--or willingness--in negotiating China’s trade barriers.

“Personal contacts are extremely important in China,” he says. “It is a subtle form of bribery, doing favors for company executives in China. We Americans are not used to doing that.”

John Kott of Kott Koatings Inc., a maker of glazes for refurbishing bathrooms and kitchens, says bribery wasn’t an option for his company, based in Foothill Ranch in Orange County. So for about four years, Kott encountered a succession of roadblocks in trying to move his products from Hong Kong to Canton. For months, Kott was stuck at customs, filling out one form after another, usually requiring the same information but in a different order, he says.

“You were lucky if you went to customs and found the same person. They didn’t recognize anything you brought before.”

But this year, Kott broke through. His company has already sold $500,000 worth of coatings to China, and he is expecting to do $2 million worth of business this year--about 40% of the company’s overall sales in 1997. The turning point: a series of meetings recently arranged by the U.S. Commerce Department, which linked Kott with Chinese trade officials in Beijing, Shanghai and Canton.

“If it wasn’t for them, we wouldn’t be there,” Kott says of Commerce agents.

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Candace Chen of Power Clean 2000 credits U.S. officials with helping free her father, George Chen, 61, after he was shoved into a dark blue sedan and abducted while on a business trip in Shanghai. Candace Chen still recalls that spring morning in 1996 and the frantic call from her mother, who said her father was being held in a locked office in Shanghai’s Pudong industrial area. His abductors demanded that Chen sign a note saying he owed an unspecified sum to a business associate. Candace Chen, who was then in Los Angeles, began contacting all the government officials she knew in China and Washington. That same day, a security detail with the U.S. consul general’s office in China freed Chen.

The Chens made the decision to focus on exports to China in 1991, after George Chen read a magazine article about the short life expectancy of police officers in China because of air pollution. “That planted the idea,” Candace Chen recalls.

The elder Chens were furniture exporters in Taipei, but they wanted more for Candace and her brother, David, now 36. So in 1978, the family immigrated to Los Angeles. Candace majored in English literature at Irvine Valley College and then went on to law school. Her brother pursued studies in chemistry, and the two of them sold real estate part time. But when David Chen devised a machine to remove carbon from a car’s fuel-injection system, intake valves and combustion chamber, he got a patent for the product and the Chens launched their new business. The family decided that Candace would run it, with David handling the research side.

To get started in China, the Chens and their partners in Beijing and Shanghai spent 18 months wining and dining officials to get their stamp of approval on more than 100 regulatory and licensing forms. The Chens then invested $2.2 million, their own savings and borrowed money, in joint ventures with Chinese firms in eight cities, including Shanghai, Nanjing and Canton.

Candace Chen remembers the amused faces of businessmen in a male-dominated industry as they watched her hook up the wires that would run the cleaning solvents through a car engine. More than once, she forced herself to down shots of 80-proof liquor in the businessmen’s tradition of ganbei. But it all seemed worth it. In 1994, the company’s first full-year sales in China reached $1.8 million, then $2 million the next year. Newspapers in China dubbed her the “queen of decarbonization.”

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But as 1995 faded, the company’s sales suddenly plunged. Yet the Chens continued to see machines and solvents with their labels proliferate. They were knockoffs, not the genuine products shipped from the Chens’ 20,000-square-foot Los Angeles facility. The counterfeit solvents weren’t working as well as genuine Power Clean products and, in at least one case, they caused a car to blow up. “They blamed it on us,” Candace Chen says.

She blames the counterfeit products and the kidnapping of her father on one of her joint-venture partners, Shanghai Taxi Co. She has filed lawsuits in criminal and civil courts in China, but so far to no avail. Shanghai Taxi, a unit of conglomerate Yong Zhong Engine Cleaning Co., has counter-sued, which for the moment has frozen about $200,000 worth of Power Clean products in a Beijing warehouse.

U.S. government officials have hinted that perhaps Chen should forget about China. But the soft-spoken Chen refuses.

“We put in a lot of money and time there,” she says steadfastly.

With both governments now familiar with Chen and her company, she figures Power Clean’s prospects are stronger.

“Our name is there,” she says, adding that, for all of the problems caused by the knockoffs, they have nonetheless perpetuated the company’s name.

“People are still using Power Clean 2000,” she says, “but it’s no longer made in the U.S.A.”