Chinese expansion not for faint of heart

You might think Stephen Paniccia has it made in the shade.

After only four years of being in business with his wife, Allyson, the fashionable kiddy accessories they sell have been spotted on the children of celebrities such as Jennifer Garner, Hugh Jackman and Alyson Hannigan.

"We've had orders from Pink, from Kevin Costner and Dennis Quaid," says Paniccia, who has established relationships with 100 distributors.

But all of the sudden, despite the star-studded clientele, his business has been cut in half. Just 50 distributors now carry his Ladybugs and Lullabies line.

"It's due to slowdown in the U.S.," says Paniccia, who lives and runs his business in Cambridge, Ont. but also has a job in Toronto. "Our sales reps tell us they've never seen it this bad. They're telling us to get money up front before we ship any orders, because there are so many businesses that are going under and not paying their bills. They're saying before you ship anything out, make sure you get paid."

Ladybugs and Lullabies sells hair clips, belts, wristbands, hats and pacifiers ("hip accessories for cool kids", asit says on the website. Paniccia always wanted the products to be made in Canada'. But now, to keep his business thriving, he's contemplating what he never wanted to consider: moving production to China.

"Retailers want cheap and cheerful," he explains. "That's what they want to offer their customers, especially now with the economy the way it is. So that means having everything made in China as cheaply as possible. We don't want to go that route, but there's a point where you sometimes have to, and we're almost there. Some of our competitors already have."

As Paniccia talked, I found myself recalling a story we'd produced for Venture, CBC's long-running magazine program about entrepreneurs. Back in 2004, we followed a Vancouver chiropractor named Dr. Terry Zachary to China. Dr. Zachary had invented "the Handmaster", an exercise product aimed at athletes, musicians, and anyone suffering from a workplace repetitive strain injury, that wanted to improve their hand strength.

The report chronicled the exotic and challenging journey of a small business-person trying to find a Chinese manufacturer. One of the first things I recalled about the story was that Dr. Zachary had decided to find two manufacturersone for the ball that is a central design feature of the Handmaster, one for the rest of the rigging. It was a strategy he'd devised to ensure no one counterfeited his product no one manufacturer would have access to the entire product.

Counterfeiting is, of course, just one of the business issues in China.

And I wondered what advice Dr. Zachary might give Stephen Paniccia about his quest for a cheaper way to manufacture?

The answer:quite an earful, as it turned out!

"When people think I'll just go to China,' there's no just' about it!" says Dr. Zachary. (He's still a chiropractor, and is now selling his invention in 40 countries)

"Nowadays most Chinese manufacturers have an English speaking component, a young business person that knows English," he says. "But language is still somewhat of a barrier. Plus whatever you ask for, they seem to say yes almost as a default setting, whether they can do it or not. But there are so many variables when you walk in there."

Dr. Zachary's business partner Tom Spragge had a frustrating story to share.

"We developed a secondary product, a teardrop pillow," says Spragge. "It would prevent you from sleeping on your stomach. So we got some manufacturers in China, and we opted to have them shipped rolled up, and expand them here. It would cut the cost of shipping since 1000 pillows would fill an entire container."

But the plan didn't work. The pillows wouldn't expand. "They were unsalable, and had to be discarded," says Spragge. "We had no recourse whatsoever."

Whether the Chinese manufacturer should have been liable for the financial loss in this case is debatable, in my opinion, but Spragge says what is beyond argument is that the smaller your business, the less clout you carry.

"Their attitude is they're not going to worry about losing your business," says Spragge, who used the word "ruthless" to describe some of the manufacturers he's encountered. "Until you have the type of scale that has value to them, you're just a commodity."

Also, costs are rising in China. Although wages remain low by Canadian standards, you may have seen the news reports about workers demanding higher pay, including a growing middle class.

"We were getting finished product for 55 cents," says Spragge. "Now it's 85 or 90 cents. And we can't charge moreour price is set at what customers are willing to pay."

Even with that increase in cost, Spragge and Zachary estimate they would've had to pay more than $1.90 to have the Handmaster made in Canada, and that just wasn't an option.

"I'm a chiropractor, so I care about people a lot," says Dr. Zachary. "We couldn't have helped the people we've helped if we manufactured in Canada."

Tom Spragge offers a resource for Stephen Panicciaawebsite that lists various products and manufacturers.

He says a good way to start is by reviewing who is making similar products, and get a sense of the competition.

"We're well aware of the issues," says Paniccia, when I call him back to tell him what I've just heard. "A friend of ours had some issues similar to the ones you're describing."

He and his wife intend to make their decision about manufacturing after their visit to one of the biggest trade shows for children's products. It's in Louisville, Ky. at the end of September. If they get a sense that they can find enough retailers with an appetite for unique, high quality products made here, they'll keep manufacturing in Canada. Otherwise, they'll soon be booking tickets to China.

"We want to stay in Canada and make the product here. It's like a commitment that we want to make to our economy, and to our business," says Paniccia. "We want to give back to the community knowing what times are like right now. But we have to balance that against what it's going to take to stay in business."

I wonder if the uncertain economic conditions we have these days are going to inspire more small Canadian businesses to shift their production off-shore. It's definitely a way to reduce costs, and perhaps increase orders and even profitability. But as Dr. Zachary learnedand as Stephen Paniccia may find out first-hand very soonit's not for the faint of heart.