June 7 (Bloomberg) -- In December 2006, brothers John and Jim Fiocchi received an unexpected phone call from Golden Bright, their most important supplier in China. The Shenzhen plastic injection molder and assembler, which manufactured the plastic enclosures the Fiocchis’ two companies near Chicago designed and sold, had just been acquired by Highway Holdings (HIHO), a manufacturer the Chicago natives had never heard of.
With 90 percent of the Fiocchis’ molds and tools at Golden Bright’s factory, the brothers weren’t soothed by Golden Bright President Peter Wang’s assurances that everything would stay the same. By July 2007, more than 400 purchase orders hadn’t been shipped, according to John, so the brothers traveled to the Shenzhen factory to investigate. Their products were stacked outside in plastic bins, John says.
In the months that followed, the Fiocchis attempted to withdraw their tools and molds but allege that Golden Bright wouldn’t release them unless they paid $200,000. Roland Kohl, founder and chief executive officer of Highway Holdings, says Golden Bright once withheld shipments to force the collection of outstanding payments from the Fiocchis. “If we would have done anything wrong, they surely would have sued us in court,” says Kohl.
The Fiocchis had product from Golden Bright in stock, but it was dwindling. They scoured the region for a molder that could grasp their particular method of injection molding. They struck out. Most Chinese vendors “weren’t interested in low volume or quick turnaround,” says Jim. They found a couple of manufacturing partners that seemed promising, but the parts emerged mangled and mismeasured.
After hiring PricewaterhouseCoopers’s Shenzhen office, the Fiocchis determined that a wholly foreign-owned enterprise (WFOE), a Chinese investment vehicle that would allow the brothers to own all of a business in China, was the best way to keep product flowing to their U.S. businesses over the long term. While waiting to establish it, they got creative, signing a lease for a stripped-down factory on Feng Ping Road in Fenggang, a town not far from their old factory in Shenzhen. By November 2007, they had refurbished it and moved in, filling it with the molds and inserts they’d recovered from Golden Bright and new molding presses and tooling equipment. They hired a staff of 20, mostly poached from Golden Bright.
Within five months they had produced a year’s worth of supply of product for their enclosure companies. The Fiocchis say to operate legally they formalized their operation by setting up Feng Ping Tooling as a domestic Chinese company with help from a Chinese friend. “We operated as a domestic Chinese company until we became a WFOE,” John says. “I had people all around me who said I couldn’t. In China, when people say no, I know that means I’m on to something good. When they don’t know the answer, they say it can’t be done.”
Starting Feng Ping Tooling shifted their business focus. In late 2007, at a Cub Scouts pinewood derby outside Chicago, Jim Fiocchi befriended Jeff Giannelli, now president at mold manufacturer Cortina Companies. When Jim told Giannelli he and his brother owned a tooling company in China, Giannelli asked whether the Fiocchis could make some molds for him. The request was a revelation for the brothers. Not only did they have the capacity and know-how to meet their own demands, they could also do custom molding and tooling for other companies that sought U.S. quality at Chinese prices.
The brothers began marketing Feng Ping to U.S. injection molders and toolmakers in 2008, doing $300,000 in sales that year. That effort continued into 2009 and 2010. When they weren’t in China, they were knocking on doors, pitching their manufacturing services. Many doubted their claims, John says. “Nine out of 10 companies thought we were liars and there was no way the Fiocchi brothers owned a tooling and molding company in China.”
Dan Harris, a founding partner of international law firm Harris & Moure in Seattle, says he doesn’t understand what the Fiocchis mean when they say they owned a domestic company. “There are essentially three kinds of companies in which foreigners can have ownership,” Harris says. “A WFOE, which has to be 100 percent foreign-owned; a rep office, which has to be 100 percent foreign-owned; and a joint venture, which is owned by a foreign company and a domestic company. A domestic company cannot have any foreign ownership at all.” “China Inside Out” author Bill Dodson says he’s heard of foreigners using Chinese citizens to form a domestic company and then contracting with the Chinese citizen to be able to control the company, but warns “it’s dangerous, because the Chinese person who sets up the business has the license, controls the chops, and has the relationship with the local government officials.” Jim Fiocchi says he wouldn’t recommend the approach he took with his brother.
Still, by the end of 2009, they had sold 141 molds for other companies, doing more than $1 million in sales. In 2010, they sold 258 molds for about $3 million. (After the Fiocchis completed establishing their WFOE in the fall of 2009, they say they dissolved their domestic Chinese company.) This year they expect to sell 700 molds to customers like 3M (MMM), Caterpillar (CAT), and Georgia-Pacific for $10 million. “We went from two small businesses each doing $2 to $3 million a year to a wholly foreign-owned enterprise that does at least $1 million in sales a month,” Jim says.
While labor rates have continued to increase, as have energy costs, these elements haven’t affected profit margins much, says John, noting Feng Ping pays competitive rates above minimum wage to secure loyalty. The biggest challenge he points to is managing growth: As orders increase and Feng Ping’s 280-person staff expands, the factory is feeling too small. The Fiocchis don’t want to leave the immediate area where entire families have worked for them and they say they’ve built political connections. Plus, land is hard to come by in the increasingly crowded Pearl River Delta. “[China] has torn down mountains to make space [for industry],” John says. “We’re looking for a long-term solution that will fit the growth of the company.”
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