HANGZHOU, China—Shercon Inc. is further boosting its presence in China with plans to open another manufacturing site in the country in February to concentrate on serving the domestic Chinese market.
The Cypress, Calif.-based molded goods maker will invest about $3 million to construct a facility in Guangde in Anhui Province, which is one province inland from the firm's current manufacturing site in Hangzhou, said Shercon CEO Keith Ennis. Shercon will own the plant whereas the Hangzhou operations are leased.
Shercon plans to start some production from the Guangde site in February, with capabilities very similar to those at Hangzhou, he said. Eventually, the complex will have 86,000 square feet of manufacturing and warehouse space, 10,500 square feet of office space and dormitories for 150 people.
By the end of the first year, employment should be about 100, Ennis said, and grow along with the business.
Most of the initial $3 million investment will go toward construction to get the operation up and running, according to the company executive. Most of the equipment will be similar to that at Hangzhou, with the primary machinery being compression and transfer molding, along with some die-cut and mixing capability. The majority of the equipment will be new, though some will be moved from Hangzhou.
There are three main reasons for the new factory, Ennis said. First is that Shercon needs to increase capacity as its business continues to grow.
He didn't reveal the company's revenue totals but said growth has been steady at the business, with year-to-date sales up 18 percent through August over 2010 totals.
The second reason to set up the Guangde plant is tax-related, he said. The Hangzhou complex is located in an export processing zone, so Shercon has a tax advantage when exporting product but a disadvantage when selling into the domestic market.
For 2010, Ennis said 67 percent of the company's output was shipped back to North America for sale, with 22 percent to Asia and 11 percent to Europe. But business in China is becoming a larger part of Shercon's sales mix.
“The plan is to move production in Hangzhou that's for products destined for the local Chinese market into the new facility,” he said.
Lastly, the availability of labor is becoming tighter—and thus more expensive—in larger cities such as Shanghai, Ningbo and Hangzhou, so Ennis said labor costs at the new facility will be less.
Growth in China
It's been about nine years since Shercon set up its wholly owned foreign enterprise operation in Hangzhou named Hangzhou Shercon Rubber Co. Ltd.
Shercon's history dates back to 1946 as a company that specialized in masking products, but Ennis led the firm to diversify into custom molding of higher-end goods.
Growth in the last six years, in particular, has been quite marked. The firm has expanded from one to three buildings in Hangzhou totaling roughly 170,000 square feet. Employment there has grown to 440 from 100, and the operation now touts 78 molding presses, including a 1,200-ton press, an injection molding unit and a shuttle press, the firm said.
It also has three mixing lines with total capacity of 2,000 metric tons of material a year. Shercon's largest-volume elastomer is EPDM, and the molder also uses nitrile, natural rubber and silicone, Ennis said.
Much of the early years were spent building a team in Hangzhou that could operate independently, from developing the product and material recipe, designing the tooling, and taking the component into production, he said.
Many of the people Ennis initially hired—including senior technical staff, plant manager and quality manager—have stayed and grown with the company.
“One of the biggest challenges starting out was building credibility with the customers—particularly the automotive customers—because we were a new supplier on the scene,” Ennis said.
But the company has made great strides in that area, with automotive now accounting for 58 percent of business, he said, followed by industrial rubber goods at 30 percent and the traditional masking products at 12 percent.
Shercon now has an independent sales team in China that concentrates on selling domestically and into other parts of Asia and Europe.
A technical sales staff of about 45-50 people continue to be based in North America to concentrate on sales there.
The firm also has warehouses in Cypress and a new one in Louisville, Ky., to ship products throughout North America.
Ennis said business growth often has come from gaining an order from a global company in one region and—after providing high quality goods and service—getting business for the customer in other areas.
For example, a new order with TRW in Ningbo led Shercon to win business with TRW in Italy and the Czech Republic, and from there into Mexico and, finally, the U.S.
Product development also has been a key to Shercon's growth. Over the past half-dozen years, the firm said it has developed more than 800 automotive and industrial parts covering a wide range of applications.
“Having this development team here is critical to our growth,” said the Shercon CEO. Ennis still spends most of his time in China but during 2012 plans to leave more of the day-to-day operations to his team so he can concentrate on face-to-face meetings with potential customers in Europe and North America.
Technology catching up
While Shercon has concentrated on setting up its operations with top-notch technology and processes, industry in China is making much progress each year, Ennis said. “You still see some very low-level companies, but you also see companies that are developing good systems, good procedures and can produce a quality product.”
Shercon maintains an advantage in a couple of areas, he said. With North American customers, it has a head start because it has U.S.-based sales engineers, along with the two U.S. warehouses.
And in China, by being a foreign-owned company, it has an advantage because its experienced team is familiar with what foreign customers want.
Ennis said that means a staff with good communication skills that have both verbal and written English capabilities, along with an understanding of technical and quality requirements.
While the cost of labor keeps going up as good workers become scarcer, he said Chinese labor costs continue to be much lower than that in Europe or the U.S. Each February, the government announces an increase in the minimum wage, with this year's being about 20 percent, Ennis said.
Still, he said labor costs for a skilled production worker run about $500 to $600 a month—up from $180 to $220 six years ago—while an experienced engineer's salary is about $1,500 a month, compared with roughly $800 to $1,000 in 2005. An entry-level engineer commands less, he said.
While those rising costs take away some of the built-in advantage, as Shercon runs the same products year after year, the firm improves its efficiencies, he said. “We're developing a tighter process, so we can offset that increase in labor cost with the improved efficiencies that we're achieving.”
And as long as Shercon can maintain that cost advantage and offer a team that rivals any based in the U.S. or Europe in terms of skill or ability, Ennis is confident the company will continue to grow.
“With that combination, customers will keep coming, and the businesses will continue to be interested in developing business with us because of the location here in China,” he said.