A U S company finds good reasons to manufacture in China and not just source there

America is a major consumer of products that are fabricated in China. What would it be like if an American company owned the manufacturing plant?

So far, so good, according to Kinedyne Corporation, the cargo control equipment manufacturer based in Branchburg, New Jersey.

Earlier this year, Kinedyne began producing in a $25-million plant that the company built in Nantong, China.

“Five or six years ago, a joint venture between a U S company and a Chinese firm was the way to go,” says Jim Klausmann, president. “But that has changed. It is possible now for U S companies to build here and own the building.”

The ability to set up shop in China is helping companies like Kinedyne control how their products are manufactured and sold.

“We want to be able to control all facets of the manufacturing process,” Klausmann says. “It's common for a U S manufacturer to find a Chinese vendor to produce products for him only to eventually have him cut corners. We don't want to take chances, and you can't always tell when a supplier is producing to your specifications.

“Furthermore, in the past, we have had contract manufacturers produce patented products for us in China. While the patent protects us in the United States, it is hopeless to keep people from making your product and selling it for themselves in another country. By opening this plant, we can protect our product and our quality.”

The process of getting the plant up and running went relatively quickly. Kinedyne obtained the land in November 2007 and broke ground in May 2008. By the end of 2008, the building was completed. Plant equipment began arriving in January 2009, and by July, the plant was in production.

In China, property is literally government property. Individuals, including citizens of China, build on land that is leased long-term from the government. Such is the case with Kinedyne, where the company has a 99-year lease for the property on which the plant is constructed.

At least for the time being, a 99-year lease is enough.

“Given the changes that have occurred in China recently, I can't imagine what this country will be like when our lease is up,” Klausmann says.

Think of China, and it is easy to think of explosive economic growth, particularly in the manufacturing sector. But the country is experiencing other changes as well. Among the many changes that Klausmann cites:

• Workers' rights

  During the past two years, the government has enacted a significant amount of rules regarding how companies must treat their employees. Companies are required either to provide housing or to transport employees to and from the job.

“Labor is not a inexpensive as it used to be,” Klausmann says. “It's up about 80% as a result of the regulations. Plus, with the boom in the Chinese economy, you are definitely competing with other companies for the best employees. We have had difficulty getting skilled labor. We knew it was going to be competitive because of all the new manufacturing plants that are going up here.”

• Environmental regulations

  Much has been said about the air quality in China, but Klausmann says that the permitting was comparable to what one might expect in the U S.

“Anything discharged into the air or water is tightly regulated,” Klausmann says. “We had to go through an environmental assessment before we were able to build. Once construction started, inspectors were here frequently to make sure everything was being built as specified.”

Klausmann estimates that Kinedyne spent $2 million on its waste treatment system. The system handles water used in the company's plating and e-coat operations, as well a metal polishing. The result of the system is waste water clean enough to drink, Klausmann says.

Getting into the zone

Kinedyne selected the city of Nantong, a port on the Yangtze River, because it had an economic development zone that would allow the company to zinc plate metal parts.

“It was important to us to be part of an economic development zone,” Klausmann says. “This one allows metal plating, which is difficult to find.”

China has 12 economic development zones. Companies that manufacture there get several advantages, including:

• Tax breaks

  Tax rebates are offered for the first 3-5 years that a company is in business.

• Labor

  Assistance is provided for recruiting the employees that are needed.

• Language

  Officials involved in economic development zones tend to be proficient in English, reducing communication difficulties.

• Power

  Economic development zones get priority in a nation were electricity is not always available.

“We are guaranteed a steady flow of electricity,” Klausmann says. “When we were not in an economic development zone, power outages were frequent. Sometimes the outages were the result of maintenance, but they also were due to allocation. When you are in an economic development zone, allocation of electricity is not an issue.”

Letting off steam

In China, electricity is important, but it is not the only way to power a manufacturing plant. Steam also serves as a utility, and government regulators have a say as to which process is powered by electricity and which uses steam.

Steam comes into manufacturing plants through large diameter pipelines that can be seen crisscrossing industrial parks. As the steam enters the plant, it passes through regulators that reduce the operating pressure.

“Before coming to China, we didn't know that steam is an option,” Klausmann says. “Now we use steam for our plating operations and our e-coat line — anything that requires a lot of heat tends to be powered by steam.”

Kinedyne has yet to go through a winter in its new plant, and the company has been advised that the relatively mild climate of Nantong makes heating the plant unnecessary. But management says that it will monitor employee comfort in the coming months. If the decision is made to heat the plant, steam will be the method of choice.

“It's reasonably priced, and the supply has been very reliable,” Klausmann says.

Kinedyne sees its move as an effort to be more competitive on a global stage. The company recently installed a new ERP (enterprise resource planning) computer system that links its China operation and other operating points in the U S, Canada, and Mexico with headquarters back in New Jersey.

“We did it because we have to step up our manufacturing operations,” Klausmann says. “We aren't just competing against manufacturers in the United States. Sometimes we have to compete against companies in other parts of the world, companies that used to be our vendors. We are doing that by vertically integrating our entire manufacturing operation so we can control the cost and quality of every component that goes into a Kinedyne product. To compete effectively, we have to do things that set ourselves apart. When you are on the global stage, you can't be just like the other guy.”