Canada’s Pacific Gateway Strategy: Navigating the Silk Road

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To boost Canada’s 2005 Pacific Gateway strategy, the Harper government recently pledged nearly $600 million to eliminate road, rail and border bottlenecks to navigating the silk road.

The CEO is feeling a little rattled. It’s his first business trip to Japan and he must impress potential customers, which means demonstrating some newly acquired cultural know-how. At first things go well. He bows in accordance with traditional etiquette and proffers his business card with both hands. But something is amiss; his efforts are continually met with polite laughter. He asks his local agent why he is inspiring amusement rather than respect. Inspecting his client’s business card, the agent replies, “I think it’s because, on the Japanese side, your name reads ‘old brush head.’” Thankfully for this red-faced CEO, being lost in translation was only mildly embarrassing. But he was right to be concerned. Attention to detail is crucial in Asian countries, where doing business is often a formal, choreographed dance in which “yes” can mean “no” and saving face is everything. In this diverse regional market, one serious faux pas can mean the difference between deal or no deal. It’s an etiquette minefield out there. Given Asia’s challenging geographic, linguistic, bureaucratic, legal and cultural landscape, it’s not surprising that some B.C. manufacturers and service firms have watched its economic surge from the sidelines, shrugged their shoulders and turned back to more familiar territory south of the border. Things are starting to change. To boost Canada’s 2005 Pacific Gateway strategy, the Harper government recently pledged nearly $600 million to eliminate road, rail and border bottlenecks to Asia-Pacific trade. Among other projects, federally funded infrastructure improvements will include eliminating train crossings on the rail corridor to Deltaport, and constructing a new Pitt River Bridge and Mary Hill Interchange to replace a pair of swing bridges. However, according to the Vancouver-based Asia Pacific Foundation, we still need to resolve a truckload of regulatory and policy issues regarding the flow of goods and people in and out of our region, and we must invest heavily in research and development and higher education if we seriously want to participate in the Asian boom. Bureaucratic hurdles aside, we have started to play catch-up with competitors in Europe and Australia who have fallen over themselves to penetrate China and are now moving onto India and Southeast Asia. According to the Asia Pacific Foundation, China knocked Japan out of position in 2005 to become B.C.’s number-two trading partner: trade between the province and China reached $8.9 billion. In the past five years, the value of B.C.’s exports to China has almost doubled, and last year China ranked third as a destination for B.C. exports, behind the U.S. and Japan. In addition, a recent Asia Pacific Foundation survey found that two-thirds of Canadian firms expect to increase their investment in Asia over the next 12 months, and 82 per cent expect to do so over the next decade. More than 35 per cent of this future investment is destined for China, which includes Hong Kong, and Taiwan. Resistance, as the saying goes, is futile. If you’re a decent-sized firm with commodity products or high-quality consumer goods or services, you need an Asia Pacific strategy – not as a replacement for U.S. markets, but as another string to your bow. So what does it take? In an effort to better understand these complex markets, BCBusiness spoke to some knowledgeable expats heading a diverse group of local companies firmly embedded in Asian hot spots: China, Japan, Korea and India. Their heritage and cultural ties give these trade experts a competitive advantage, and their advice to those of you thinking of climbing aboard the juggernaut is this: make your play now or risk losing out on the biggest money-making opportunity in recent years. Passage to India Sokhie Puar and Bijay Singh are among a growing number of Indian expats and second-generation entrepreneurs to cross what’s known as “the human bridge” linking B.C.’s Punjabi population with its Indian heritage. The goal: for business people to get in on the ground floor of their native country’s upcoming economic explosion. “India is about 10 years behind China,” says Puar, president of SNJ Capital, a Vancouver- based consulting firm that provides financing and ongoing corporate services to Canadian start-up and second-stage manufacturing ventures. “In my view, it’s time to think outside the box and start laying the groundwork for future business connections. Frankly, it amazes me that more B.C. companies aren’t doing the same thing.” Since 2001, Puar and project manager Singh have taken several trips a year to India and other Asian countries in search of lucrative joint-venture opportunities, primarily for one of their larger clients, Delta’s JER Envirotech. Backed by the National Research Council of Canada, JER’s technology combines wood fibre or agricultural waste material such as palm fibre with high-grade plastic, turning it into a light, environmentally friendly composite board that can be usedin a huge variety of applications, including house construction, table tops, flooring and car dashboards. This green technology offers a new source of revenue for small farmers and may one day meet Asia’s desperate need for cheap, durable shelter. In the Philippines, Malaysia and, very shortly, India (where a joint venture plant is currently under construction in the northern state of Himachal Pradesh), the composite board will be made from polypropylene and rice husks. These husks are normally burned in the fields and generate plumes of toxic smoke over nearby villages. With talks underway in China and several other Asian countries, Puar says it’s just a matter of time before JER becomes a major global enterprise. Like China, India badly needs new sources of energy; its economy is growing by eight per cent a year, swelling the ranks of the middle class. While power shortages are a problem in some areas of the country, Singh says their impact on industry is overblown: most companies have their own power plants on site or use back-up generators to maintain production. Both Puar and Singh believe India still has a way to go when it comes to building the infrastructure needed to support its projected foreign trade and investment boom, but the basic foundations are in place. “Because of the British influence, English is the official business language, which means communication is not as difficult as in some other Asian countries,” Singh notes. Bargaining is normal in India and companies expect and value flexibility in negotiation. “India also has strong accounting, legal and transportation systems and its cellular network is far superior to that of North America,” he says. “As you travel around you’ll see that every major corporation you can name already has a presence there. While you won’t see a Starbucks, across the country young people are flocking to a chain called Barista, which is India’s Starbucks clone.” [pagebreak] Singh recommends that newcomers in India contact the Canadian Embassy for help in business intelligence and negotiating the challenging layers of red tape, cultural hurdles and rampant corruption. Arrange all meetings well in advance, he suggests, and confirm later by phone. Don’t try to squeeze in three or four meetings a day as you would in Canada. In the cities, you will waste time stuck in traffic and when you reach your destination, you will often be asked to wait. Indians are quite casual in keeping time commitments. Because of the intense heat, business moves at a much slower pace. At certain times of the year, people only work two or three hours a day. You can beat the heat, Singh says, by travelling between October and March. According to the Asia Pacific Foundation, India is still an underdeveloped market for B.C. businesses. Several firms supplying natural resource-based products have a long history in the country, but India’s services and knowledge-based sectors appear to hold the greatest promise going forward. Puar worries that our need for instant gratification may prevent us from investing in Asia’s demanding emerging markets. “Doing deals in India takes patience and persistence,” he cautions. “It took us two years to satisfactorily nail down our first joint venture. Indians are tough negotiators but once you commit to a deal, they make excellent partners.” Seoul searching Charles Kim likes to keep a low profile. Since 1989, through his privately owned company Trans-Pac Fibre, he has quietly and successfully exported raw logs and building products from B.C. to South Korea, Japan and China. Last year, his leadership in this sector won him a seat on the province’s prestigious Asia Pacific Trade Council, created by the B.C. government to improve business links with the region’s burgeoning economies. In spite of his accomplishments and the scope of his operations – harvesting, timberland management, exporting, building materials and property management – publicity about him is non-existent, which is just the way he likes it. An intensely private man and a prominent member of B.C.’s Korean community, Kim was born in Seoul and moved with his family to Hong Kong, where he attended high school. He eventually landed in Toronto in 1970, where he obtained a degree in economics from York University. His entrepreneurial career had a rocky start. One of his earliest jobs was selling equipment to Middle East construction firms, mostly staffed by Koreans. While on business trips to Saudi Arabia, he noticed the country’s desperate need for lumber and saw an opportunity. In 1980, due to a slump in North American construction markets, struggling B.C. coastal sawmills were more than willing to custom-cut wood products to Saudi specifications. “It was perfect timing. I thought I was so smart,” laughs Kim. “In fact, it didn’t last very long. Interest rates started falling and with the big U.S. cities booming, the mills didn’t need me anymore. I lost my livelihood overnight.” After trading lumber for a Korean firm, he ventured out on his own and became the first North American exporter to successfully ship raw logs to Asia. To sustain the business, he acquired standing timber in B.C. and Alaska (he ships the latter to the U.S.). Today, Trans-Pac is one of B.C.’s most successful export companies, with offices in five locations. The company also has a wood processing plant in the works for Yantai, China, which will convert B.C. logs into specialty wood products for wholesalers in Korea and Japan. Given the enormous growth potential of China and India, and the long-standing importance of Japan to B.C. exporters, Korea seems in danger of losing out. Kim advises firms in this province to take a closer look: opportunity still knocks for those producing wood products and seafood products. Companies involved in telecommunications, biotechnology, transportation and logistics, educational services, tourism, film, TV and video gaming should also take a good look at Korea. The country still holds considerable promise, Kim says, both in its own right and as a conduit to China and other Asian countries. That’s because it represents a large, growing market with a highly disciplined workforce, a high standard of education and an overwhelming ambition to better itself economically and socially. While Koreans are more comfortable with Westerners than the Japanese, Kim notes that foreigners still face significant business and cultural barriers to entry. “Even though Korea is more transparent and its people have a better grasp of English than they did 20 years ago, it is still very hard for foreigners to get engaged,” he admits. With Canada-South Korea free-trade talks heating up, he suggests would-be exporters seek help from the Canadian Embassy, the Canadian Chamber of Commerce in Korea, KOTRA (Korea Trade Investment Promotion Agency) or the Canada Korea Business Association. “Networking is huge. The whole society is connected, which is why it’s helpful to be introduced by a third party, be it a private consulting firm or a government agency. You will need contacts and knowledgeable people who can help you with risk assessment.” In spite of its continuing emphasis on tradition and reverence for age and hierarchy, Korea has experienced considerable cultural change in the last 10 years, adds Kim. Its young people, who are flocking to Vancouver’s private English schools in record numbers, return home better equipped to understand Western culture and business practices, which will inevitably transform Korea’s trading environment. Kim says penetrating Korean, Japanese and tough Middle Eastern markets like Egypt was good preparation for his expansion into the rest of Asia. “China is the most difficult so far, but it’s a challenge that equates into an opportunity for me because I’m flexible and comfortable in many different cultures. When negotiating, I don’t just focus on my own objectives: I ask the people I’m working with what they need. I’m also used to being extremely patient.” [pagebreak] In the Red China’s thirst for power has Canadian fuel-cell entrepreneur John Shen rubbing his hands and seeing dollar signs. Shen and his industry colleagues believe China will embrace hydrogen-based options as it strives to solve its domestic energy crunch and dominate the global economy. Factor in the coming 2008 Beijing Summer Olympics and the 2010 World Expo in Shanghai, says Shen, chair and CEO of Palcan Fuel Cells, and the future of green energy is simply glowing. World attention on these events means the Chinese government is anxious to prove its commitment to cleaner air by sourcing alternative fuels to feed its red-hot industrial sector. When Shanghai announced a $1.5-billion initiative to operate 100 fuel-cell-powered municipal buses by 2007 and put 1,000 fuel-cell cars on its roads by 2010, Palcan went into overdrive. It ramped up plans to commercialize its smaller fuel-cell technology, with an eye on powering the region’s ubiquitous scooters and electric bicycles. The company, which recently relocated from Burnaby to temporary headquarters in Vancouver while it seeks funding, also plans to produce back-up fuel-cell modules that will generate enough power to keep elevators working during China’s increasingly disruptive brown-outs. “Chinese companies in the fuel-cell business receive a lot of support and money from their government,” Shen notes, “so if Canadian firms don’t move aggressively, we risk losing a huge opportunity.” In 2001, Palcan opened a metal-hydride storage manufacturing facility in Jiaxing and this year, as part of a second joint venture, it began producing 500-watt to five-kilowatt fuel-cell stacks at a new plant in Nanjing. In its first year it will build 5,000 units, but can boost production to 50,000 a year as demand grows from manufacturers in China and other Asian markets. Palcan’s strategy is to take on China first, then tackle Southeast Asia and Singapore. The company also has agents in Taiwan and Japan. Shen, who spends up to 15 days a month in China, is not a big fan of trade missions, believing they rush Canadians from city to city for meetings with low-level bureaucrats who wield no real power. “You should always meet with the top guy because he’s the decision-maker,” he insists. “Otherwise, you’re wasting your time.” To avoid getting lost in the shuffle, he recommends finding a good local partner or agent, doing due diligence before committing to a deal, getting sound advice on protecting your intellectual property and knowing when to offer a “gift,” or kickback, to the locals. Doing business in China, he says, is all about building strong personal relationships with government bureaucrats, as well as business and local leaders. Unlike in the West, little or no distinction is made between business and personal relationships. Respect and trust must be earned; this makes for a long, drawn-out process involving numerous meetings, most of which take place over lunch or dinner. Entire books are written on this art of the business relationship, known as guanxi (gwan-zhee), or connections. Like other Canadian technology players, Palcan has benefited from the relatively low cost of hiring Chinese engineers and researchers. Each year, a fifth of China’s five million university graduates major in science or engineering. And those students are adding language skills to their degrees. In 2008, 600,000 Chinese in Beijing will be on hand to communicate with athletes, officials and tourists from over 200 countries in “any major language.” Among them will be 400,000 university students that China claims will be proficient in English. In spite of the cultural differences, the Chinese like working with foreigners, says Shen. While you don’t have to learn the language, you should read up on cultural differences and visit more than once or twice a year. And never assume anything: the Chinese tend to extend negotiations well beyond deadlines and even when a deal is close, they may try to renegotiate terms. On the downside, as China’s economy grows, so does the level of social unrest, leaving some Canadian firms wary of its opaque, authoritarian system and increasingly well-coordinated and violent protests. Shen agrees that the Communist regime faces huge internal problems in the next 20 years but feels the Western media tend to exaggerate their potential impact. While there are risks to entering the China market, he stresses the country will do everything it takes to achieve economic dominance and become friendly to international business. According to the Asia Pacific Foundation, the risks are especially worth taking for B.C. firms involved in wood products, building and architecture, minerals and metals, energy and environment, transportation, communications, manufacturing and technology, educational services and retail. “If you can get the support you need, this is a very good time to make your move,” says Shen. Way of the Samurai When Kazuko Komatsu rescued B.C’.s largest privately owned brewery from closure in 1991, industry insiders said she wouldn’t last six months. Her competitors had no idea who they were dealing with. A diminutive dynamo who won’t reveal her age, Komatsu, who holds the Order of B.C., comes from an ancient sake-brewing family and is a descendant of the samurai, Japan’s aristocratic warrior class. Arriving in Vancouver from Kobe with her family in 1977, she proceeded to carve out her own place in a number of B.C.’s traditionally male-dominated industries. She sold natural gas to Japan, ran a fish exporting business and sourced timber for the Japanese market. When employees of Prince George’s Pacific Western Brewing Co. asked her to step in and save their jobs, Komatsu was impressed by their passion. “I reviewed the company history and saw there were some big problems, mainly relating to quality,” she says. “I felt that with the right investment and such a strong, loyal workforce, I couldn’t fail.” In her first five years at the brewery, Komatsu imported a German brewmaster, upgraded equipment, revamped packaging, developed new products and expanded production into export markets: Japan, Argentina, Russia, China and the U.S. Today, Pacific Western is the No. 3 imported beer in Japan, after Heineken and Budweiser. It specializes in custom-branded or private-label beers for export, including a premium organic lager. It has also launched Aqua Pop, a new line of natural sparkling spring water designed as a niche product for the Japanese youth market. “After the economic bubble burst in the early 1990s, Japanese buyers were looking for the lowest possible prices, which really disappointed me,” Komatsu recalls. “Now that the economy has improved and consumers are spending once again, buyers are prepared to pay for quality products, especially something that’s new or a little different.” That’s why, she says, the company pushed to get ISO (International Organization for Standardization) and OCIA (Organic Crop Improvement Association) certification. In 2006, Japan is once again a vibrant, prosperous country with the world’s second-largest economy. With $15 trillion in savings burning holes in their pockets, Japanese consumers are expected to spend hundreds of billions of dollars on food, clothing, travel, entertainment and a wide variety of other consumer goods and services every year. According to the Asia Pacific Foundation, the picture looks especially rosy for B.C. firms involved in wood products and prefabricated homes, fisheries, food and beverages, high-end retail, aluminum and high-tech industries. Komatsu, who is constantly deflecting buyout offers from bigger breweries, has a house in Tokyo and visits three or four times a year. She counsels anyone planning to do business with Japan to mind their manners, which means delivering consistent products on time and at a good price. If you aren’t ready to take on the market, Komatsu stresses, don’t do it, because if you fail you won’t be forgiven. The Japanese tolerate foreigners, according to Komatsu, and appreciate thoughtful, cautious executives who understand that their Japanese partners must be comfortable with any new venture. Language won’t be an issue when dealing with large companies, but even if you don’t need an interpreter, you might need a national in your corner to interpret conversational nuances. Building relationships takes time and effort, she adds. “You can expect to be entertained by your customers, but things aren’t quite as they were 20 years ago. Instead of spending long evenings drinking in Ginza [Tokyo’s legendary nightclub zone], buyers are more conscious of their health and want to get home to their families.” Komatsu advises Canadian exporters to visit trade shows and seek an agent. “But don’t decide too quickly,” she cautions. “I would advise finding a smaller company that can do a good job marketing your product. It might be better to limit your commitment.”