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Local Firm Set to Expand Chinese Operations

BY KATE PETERSEN

Six years ago, Mike Faulkner, then chief executive officer of Nimbus Water Systems, left the company to make a global impact.

He formed Oceanside-based Nimbus Water International, an independent company that, for a time, was the exclusive international representative for Nimbus’ line of portable water filtration devices, and still sells many Nimbus Water Systems products.

Nimbus Water International, via its new wholly owned foreign enterprise, International Environmental Technologies, LLC, has a manufacturing plant several hours northwest of Shanghai, China, in Wu Xi and 20 Chinese employees. Nimbus plans to move its manufacturing activities to a larger plant in Wu Xi in May.

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Faulkner, 48, was one of six panelists at the second annual Global Export Forum last month at Cal State San Marcos. The presentation was sponsored by the extended studies program at the school, which debuts its certificate in the global commerce program this spring.

Faulkner is one of a rapidly growing number of small-business entrepreneurs adding Chinese operations to their portfolios.

The World Bank estimates that exports now account for a full quarter of China’s gross domestic product, which has been growing at a rate of 10 percent annually in recent years.

According to a December report by the U.S. Department of Commerce, the total value of exports to China by small and medium-sized enterprises rose 416 percent between 1992 and 2003. The report, which includes the most recent available data on exports to China, indicates the number of small and medium-sized enterprises exporting to China surged 437 percent in that period, outstripping a more modest 127 percent rate of increase for large companies.

Faulkner said his company got into the Chinese market when it began buying injection molds there in 2001 at 10 percent to 20 percent of the cost of the same parts in U.S. or European markets. Before opening the factory in Wu Xi, where NWI pays a fraction of the rental cost compared with the United States, the filters were assembled in the United States and then re-exported. In 2001, the cost of hiring an unskilled worker in China was between $2 and $4 per day, a rate Faulkner said has risen modestly since. The advantage of moving production to China was clear.


Competitive Business

“Our goal was to level the playing field,” Faulkner said. “Our export markets were becoming very price competitive, with products being sold below our material costs.”

Faulkner said he expects a small profit at the end of this year, the second since NWI set up the foreign enterprise in China.

He is also excited about a new project, a line of bottled water beverages Nimbus Water International launched in November called California Cool.

“One of my partners in China has diabetes and was particularly interested in giving consumers there a healthy alternative to what is generally available,” Faulkner said. So Faulkner and his Chinese partners got a loan to open a distribution company, Shanghai de Chuang International Co. Ltd, and registered California Cool as a trademark. The beverages, which are carbonated and naturally sweetened in two flavors, Kiwi Strawberry and Mango Peach, are being distributed in a growing number of premium hotels, cafes and restaurants in Shanghai, and will be showcased at one of China’s largest food and beverage expos in Chengdu next month, Faulkner said.

At the forum, Faulkner showed photos of the current Wu Xi plant and the one his company is scheduled move into in May, as well as a photo of a smashed, ripped-open box of water filters, the consequence of what he jokingly called a miscommunication with his Chinese employees about bulk shipping.

Still, Faulkner said he is impressed by his Chinese counterparts and employees, some of whom have endured extreme poverty and political instability yet maintain a strong work ethic.

“Despite their history, most are very optimistic about the future and seem to be taking the dramatic changes in stride,” he said.


Enterprising Businesses

Small and medium-sized enterprises, commonly known as SMEs, are companies with 20 employees or fewer yet ones that account for 69 percent of all exporters worldwide, said Matt Andersen, another panelist and director of the U.S. Department of Commerce’s San Diego office. Moreover, he pointed out that 96 percent of the world’s consumers live outside U.S. borders. Such statistics make a China strategy important for small exporters looking to get a foothold in the Asian market.

For many executives such as Faulkner, the bottom line on China is the financial advantage they can gain by getting into its growing and highly populated market while production and export costs remain relatively low.

Eric Eng, a certified public accountant and chairman of the Carlsbad-based International Trade Advisory Board of the North County Chamber Association, enumerated some of the tax and financial incentives that small-business owners can leverage by using a Hong Kong holding company to facilitate manufacturing and production in China. Equipped with sound advice from regional trade experts and optimized tax planning, firms that use such a holding company can make China a veritable gravity-free zone for entrepreneurs by eliminating taxes on capital gains, sales and value-added taxes, and U.S. withholding on dividends, Eng said.

But he said the logistical and regulatory hurdles can be daunting to those who have not yet waded into commercial waters in China. However, with the large influx of SMEs into Chinese commerce have come more and more resources, such as the U.S. Commercial Service’s Web site, www.export.gov, and seminars and certificate programs such as the one offered at Cal State San Marcos.

“Having access to the information from these organizations and other companies who have worked through some of the issues can save a lot of time and headaches,” Faulkner said.


Kate Petersen is a freelance writer living in San Diego.

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