China: ... but for British firms, the Eastern honeymoon is over

British investment in China has soared sevenfold in four years as companies seek low costs and new markets. But Teresa Poole visits one company that has shipped in a whole production line and finds that the move is not without its headaches.

Chen Jingyuan thinks himself very lucky. The 32-year-old graduate engineer used to work for a Chinese state-owned printing factory. But in 1995, Britain's leading supermarket plastic-bag manufacturer shut its factory in Telford, Shropshire, sacked the 150 employees, and shipped all the machines to south China. It was bad news for British workers, a big gamble for the company, and a great opportunity for the Chinese engineer.

Mr Chen was hired by British Polythene Industries (BPI) to work in the new joint-venture factory and sent to Telford to learn his new skills from the very people who were about to lose their jobs. "There was fresh air, and it was green everywhere and very neat," he recalled fondly.

These days, Mr Chen and 145 Chinese colleagues work on the production lines which used to sit in Telford. The Xinhui factory now churns out plastic bags at a rate of four million a day, carrying such familiar slogans as "Fresh from Sainsbury's" and "Keep Britain Tidy". Ninety per cent of the output ends up in British supermarkets, including Safeway, Boots and Mace.

BPI pays well above local salaries, and has had four applicants for every job. But Mr Chen earns just pounds 2,300 a year, compared with the pounds 21,000 or so he would cost BPI in Britain. At a nearby machine, 23-year-old Wu Jianming takes home about pounds 1,100 a year, twice what he earned before at a state cement factory but a fraction of a British operator's pounds 8,000 package.

It was these sums that doomed Telford, plus the fact that the raw material costs were 10 per cent lower in Asia. By 1995, nearly three-quarters of northern Europe's supermarket bags were already being imported by BPI's rivals, mostly from Asia. Last year BPI closed another United Kingdom plastic-bag production line, cutting another 104 jobs and moving more machines to Xinhui. The company's UK plastic-bag production is now down to 10 million a day.

But raw accounts are not everything, especially in China where the best- laid business plan is at the mercy of government cadres. There are now more than 2,000 Sino-British joint ventures in China, accounting for actual investment of US$4.482bn (pounds 2.85bn) by the end of September 1997. But pledged investment plunged last year, by about 40 per cent. It is not only the British who are wary; the Chinese government admits foreign investment this year will fall by up to one-third. The honeymoon is over.

When BPI set up in Xinhui, a city of 850,000 people amid the industrial sprawl of southern Guangdong province, there was culture shock on both sides. BPI is pleased with its investment, but John Bunnell, head of the retail division, is clear about the problems. "The delays caused by Chinese bureaucracy are difficult to understand at first. The pace is that of a marathon rather than a series of 100m sprints."

A change in China's national policy postponed the opening of the factory by five months. The joint venture agreement was signed in November 1993, just as China implemented a severe credit crunch to cool the economy. BPI invested pounds 3m for a 60 per cent stake while the Chinese partner, a Xinhui state enterprise called High Point, took 40 per cent in return for providing a newly built factory.

But Chinese bank loans suddenly dried up, and High Point could not raise funds for the building. Angela Wong, a successful Hong Kong businesswoman in her mid-forties, had introduced BPI to High Point, and was chairman of the new joint-venture company. She desperately tried to fix up funding and reassure BPI executives. "The BPI board had never been to China, and the shareholders did not understand why the project was not on time. That was the worst time I've faced in business," Ms Wong said.

In fact, for China, BPI has had a very smooth ride, thanks to Ms Wong, who identified a reliable Chinese partner and also had strong contacts with the Xinhui government.

For the Chinese staff, most of whom came from the over-manned state sector, the biggest shock was being expected to keep busy while on shift. "At first it was a bit tiring, but gradually I got accustomed to it," Mr Chen said. Staffing levels at Xinhui are the same as they were in Telford. "We are committed to exactly the same standards of health and safety, welfare and hygiene," insisted Mr Bunnell.

For BPI the learning curve has been worthwhile and more investments are planned. But, as the figures show, foreign companies are increasingly frustrated by the struggle of doing business in China. As Margaret Beckett, President of the Board of Trade, said recently: "Nobody makes money in China overnight."