Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
ZheJiang HuiFeng Warp Knitting Co. – China
Prepared by Ning Jia and George Foster
Founded in 2002, ZheJiang HuiFeng Warp Knitting Co. Ltd (HuiFeng) is a privately-held company that specializes in the production of various tricot fabrics. The company’s total assets exceed RMB 60 million with 38,000 square metres of production facilities.
HuiFeng currently has more than 50 product offerings, including suede, aloba, velboa, tricot, printed and foiled suede, corduroy and mesh fabric. These fabrics are widely used in home textiles, garments, shoes, car seats and other areas. HuiFeng is equipped with 20 advanced high-speed Karl Mayer warp knitting machines imported from Germany, with annual production capacity above 20 million metres. The company holds both import and export trading rights, and has sales in Europe, North America, the Middle East, Japan, South Korea, South-East Asia, Hong Kong SAR, Taiwan and more. The company has received ISO9001 and ISO14001 quality certifications.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable growing company? How did it change over time?
Q2: What were the major growth accelerators for your company in the early years of high growth?
Shen: “I was able to exit the first venture with a decent payoff, and I basically invested all of it into HuiFeng to set up the manufacturing plants and facilities, purchase manufacturing equipment and hire managers for key positions. Having sufficient start-up capital significantly reduces the pressure to make decisions that trade off long-term benefits for short-term gains, and enables us to focus on important strategic activities, such as research and development, human resources and quality control.
“Favourable government policy was another major growth accelerator. Early in 2006, the State Development and Reform Commission (SDRC) released the “Notice on Several Opinions on Accelerating Restructuring to Facilitate the Upgrading of the Textile Industry”, the “Circular on Relevant Policies to Promote Chinese Textile Industry to Shift to New Ways of Growth in Foreign Trade and Support Chinese Textile Enterprises to Go Global”, as well as the 11th Five-Year Plan for the textile industry. These policies are intended to help Chinese textile enterprises pursue technological innovation, enhance their competitiveness and establish foreign sales. Our company was able to enjoy some these favourable policies.”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
Shen: “Market accessibilities, sufficient supply of human capital and favourable government policies are all important aspects of the entrepreneurial ecosystem that played an important role in the growth of our company. In addition, Zhejiang province, where our company is located, is known for its entrepreneurial culture. Many small and medium-sized enterprises in China, especially in traditional sectors, were established in Zhejiang. The local community is highly supportive of entrepreneurial activities. Local entrepreneurs are also very supportive of each other. I think that having the social support and respect for entrepreneurship is very important.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges.
Shen: “One challenge is low government operating efficiency and lack of transparency. The government approval process usually takes a very long time and involves multiple departments, sometimes with conflicting instructions and/or policies. And sometimes you need to have the right connection to obtain or expedite government approval.”
Q5: At what stage did you invest significant resources seeking to grow your company internationally/beyond your domestic country or region? What factors were pivotal in deciding when to seek growth internationally and where to seek that growth?
Shen: “Given the government encouragement of Chinese textile companies to go abroad, we were aiming to enter foreign markets early in the life of the company. We started to generate foreign sales in 2006. Two factors were pivotal in deciding into which country to enter. One is whether the market is big enough in that country and whether it is accessible to us. Second is whether there are large exchange rate fluctuations between China and that foreign country. In the past several years, because the RMB has been appreciating against foreign currencies, it has a fairly significant negative impact on our revenues.”
Q6: What were the biggest challenges in building growth internationally? How did you meet or adapt to those challenges?
Shen: “One major challenge is high import taxes, especially in European countries. To maintain a reasonable profit margin, we have to cut back costs and improve operating efficiency through the use of formal management control systems and streamlining our production process. Unfortunately, the labour costs in China have been on the rise in the last few years, which significantly increased our cost of goods sold. In addition, the domestic market is also highly competitive. The lack of sufficient management bandwidth to oversee both domestic and international operations is another challenge.”
Q7: What major role, if any, did key aspects of the ecosystem in the country(countries) you first sought international growth either promote or impede your ability to grow in those international markets?
Shen: “The first foreign country that we entered into was Turkey. We also have sales in Brazil, Mexico, Japan, the United States and several European countries. Generally speaking, developed countries such as the US and European countries typically have higher quality standards and import tax rates than developing countries, which impeded our ability to compete and grow in those markets.”
Q8: Seeking international growth often has both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in seeking international growth.
Shen: “A high moment was when we successfully entered into Brazil. Currently 40% of our products are exported to Brazil. A low moment was when we encountered setbacks in Turkey. The textile market in Turkey is highly competitive, so we are a price taker, not price setter. The import tax rate is also very high, which significantly limited our profit margin.”