Where novices can be stripped of all their clothing' Ontario company was cautious, but determined, in its search for a Chinese manufacturing partner Special to The Globe and Mail June 28, 2007 at 9:12 AM EDT HONG KONG Michael Desnoyers could see the writing on the wall. Moreover, the writing was in Chinese. Our largest customer said to us, Are you going to [manufacture in] China?

Because if you aren't, we're going there without you...

,' recalls the founder, president and chief executive officer of Etratech Inc., of Burlington, Ont. Though none too happy about the prospect of manufacturing offshore, Mr.

Desnoyers didn't need any more hints. Chinese production has gained a reputation for quality, speed of turnaround and lower cost that is increasingly difficult to ignore. The search was on for a way to establish a manufacturing presence in China for Etratech, which makes high-tech sensors and controls for items such as automotive parts, furnaces, air conditioners and boats.

As an astute entrepreneur who had built Etratech into one of North America's premier electronics companies, Mr. Desnoyers was mindful of the potential pitfalls of investing in Asia. In the words of his associate Alan Hume, director of Hong Kong-based Audio Mechanical Corp.

and a long-time observer of Chinese business practice, an unwary, unprepared investor in Asia will be very quickly stripped of all their clothing. Desnoyers had no intention of going home naked. Despite the allure of lower costs and high-quality production in China's free enterprise Special Economic Zones (SEZs), Mr.

Desnoyers was cautious. We didn't want a greenfield [start-up] operation in China, because we'd heard too many horror stories about those, he says. So he began searching for a suitable Chinese partner with operations in the booming high-tech region of Guang- zhou, part of Guangdong province, which abuts Hong Kong.

Since its reintegration with China in 1997, Hong Kong has proven to be a reliable and profitable entry point to the mainland, with about 40 per cent of China's foreign trade going through the territory. More than 150 Canadian companies have a Chinese presence or regional headquarters in Hong Kong, with some 450 Canadian firms represented through distributors, agents or local partners. But finding the right partner for Etratech was more easily said than done.

Since China's SEZs began in the late 1970s, their explosive growth has attracted foreign investment at a phenomenal rate, creating a boomtown atmosphere throughout the country. The major benefactor is Guangdong province. Guangdong is home to about 7 per cent of China's population but has an annual gross domestic product of about $330-billion (U.

S.), and accounts for the largest single contribution, 12 per cent, to China's GDP. Guangdong's GDP outstripped that of both Hong Kong and Singapore in 2005, and is forecast to surpass Taiwan for 2006.

The economic boom has sparked a list of developmental woes: traffic lineups at Guangdong's border heading toward Hong Kong's port, overloaded electrical circuits, environmental hazards and a growing labour shortage. The shipping bottleneck is expected to be eased by the expansion of Guangzhou's own port, which last year leapt to fifth place in terms of cargo volume among the world's ports. To find a way into this economic melee, Mr.

Desnoyers drew on business contacts, and introductions provided by the Hong Kong Trade Development Council, to create a shortlist of Hong Kong-based companies that might be amenable to a Canadian investment partner. A 2002 visit to Hong Kong took him to a number of mainland facilities, ranging from toy manufacturers to medical equipment suppliers, where he assessed production facilities and operations. From these, he winnowed a list of six he felt were capable of meeting Etratech's manufacturing needs, and began investigating each more diligently.

Meanwhile in Hong Kong, Audio Mechanical, a manufacturer of high-tech control devices with operations in Guangzhou, faced its own challenge. Its aging founder, Michael Cappon, needed to plan for his succession and the purchase of his majority position. Cappon and Mr.

Desnoyers was followed by several months of mutual scrutiny and a modest investment by Etratech in Audio Mechanical, securing a portion of its production capacity for Etratech. Cappon died suddenly in 2003, trustees had to settle both his estate and Audio Mechanical's future. Michael Desnoyers proved to be the right fit.

Etratech's investment has allowed Audio Mechanical to double the size of its production facilities in Guangzhou to 60,000 square feet; it employs 260 people, producing for both Etratech and other clients. The arrangement also allows for more travel for the Asian-based engineers and staff to meet clients and counterparts abroad, a process of relationship-building that is traditionally crucial to the Asian business culture. Etratech, meanwhile, has gained a competitive cost advantage by manufacturing in China, as well as the added marketing leverage that having an Asian facility lends for selling to North American companies.

But that hasn't diminished the value of Etratech's 24,000-sq.-ft. Burlington facility, which employs 80 people, mostly designers, engineers and marketers.

We are one-third the size here, but the greater efficiency of our equipment makes Burlington three times faster in production, Mr. The Ontario base keeps the company's sales staff close to their North American clients, he adds. But for Etratech's engineers and designers, the arranged marriage with Audio Mechanical has unleashed a flow of two-way learning.

The biggest challenge for both of our companies has been learning the other's culture and the way things get done, Mr. We try not to impose anything. When the Audio Mechanical people come here, they do it our way but when our people go there, we expect them to learn from the experience.

So what have the Etratech staff learned from their Asian partners? Productivity, speed of response, a more fluid negotiation style, the importance of relationship building, and a renewed appreciation for the value of very, very hard work are just some of the takeaways for Etratech's people, Mr. Still, it can be a challenge to change attitudes toward embracing the Asian manufacturing phenomenon, he adds.

For anyone who doesn't believe that this is a global economy - and that we in Canada are part of it - it's time to wake up and smell the roses.