A recent San Diego Union Tribune article, entitled, Santee go-kart maker cuts costs with shop in China, but move still tricky, is a great example of how small manufacturers can thrive in China. The article’s theme is that China outsourcing is not just for big companies and its focus is on Electra Motorsports in Santee, California, and its owner, Kevin Heath.

Last year, Electra set up a machine shop in Shenzhen to manufacture electric go-karts. Electra now employs 20 people in Shenzhen and setting up there cut its operating costs in half. Heath’s original “dream was to have this great American workshop,” but, according to Heath, “by the time workers’ comp [compensation] and everything else is done with me, we could have a $3 million or $4 million business and still end up with nothing.” Electra’s cost for machinists to build the go-karts has gone from $50 to $60 an hour to $5 to $6 an hour. Of course, its shipping costs are far higher and obtaining the factory, business licenses, export permits and other approvals “was a very complicated and tedious job.”

The article goes on to note the recent surge in small and medium enterprises (SMEs) setting up operations in China and talks of how venture capital (VC) firms are telling their small start-up companies to have a global strategy. “They are saying, ‘We want to see now how you’re going to reduce costs and increase your efficiencies.'”

Smaller companies have historically been cut out of China because they lack the resources necessary “to keep up with changes in governments, laws, intellectual property and piracy,” but that “has changed in recent years.”

Electra’s Shenzhen machine shop is about 10,000 square feet right now, but Heath plans to add 18,000 square feet and offer his low-cost manufacturing services to other small businesses.  Electra has already started making foam surfboard blanks for a local (California) surfboard maker and conveyor belt equipment for a San Diego construction-equipment company. Sales last year amounted to $1.2 million, Heath said.

We too have been seeing increasing numbers of American and European small and medium sized enterprises (SMEs) leveraging their China knowledge to make money off other American/European SMEs seeking to take advantage of China, but without their own capabilities to do so. China is very difficult for small companies inexperienced in the ways of China business and many of these companies can save money and reduce risk by dealing with the pioneers already doing business in China. Our own law firm does this to the extent that about a third of our China work comes to our China lawyers from American and European law firms that do not have their own China legal practice.

I would love to hear of other examples of companies who started doing business in China for strictly “internal” reasons, but ended up using their China knowledge to expand into manufacturing, outsourcing, or consulting for “outside” companies.

What are you seeing out there?