Capstone Turbine Corp., a Chatsworth, Calif., maker of microturbine power systems, set up a Shanghai representative office just last year. The Nasdaq-traded company has high hopes for China's sales potential, given Beijing's increasing focus on energy efficiency. But with $21 million in annual revenue last year, Capstone lacks the money and staff to set up a big on-the-ground operation on the mainland.

So when the opportunity arose to take part in a January 2008 clean-energy trade mission to China and India, sponsored by the U.S. Department of Commerce, management decided to give it a try. Capstone joined 15 other companies that embarked on a whirlwind 10-day tour with stops in Beijing, Guangzhou and Hong Kong. The modest price tag: $3,500.

The trip was jammed with meetings and receptions with potential distributors and customers, with days stretching from 7 a.m. to 10 p.m., recalls Jim Crouse, Capstone's executive vice president of sales and marketing.

"It would have taken us, one guy at our office in Shanghai, weeks if not months to make the same calls and schedule the same number of meetings. We gained access to department agencies that we knew of but didn't have any contacts in. It was definitely cost-effective."

To be sure, it wouldn't occur to most businesspeople to turn to the U.S. government for strategic advice. But services offered through the Commercial Service, a division of the Department of Commerce, can be a boon to American companies -- especially to small and medium-sized enterprises, or SMEs, short on staff and China experience. Says Crouse: "The Department of Commerce did a great job."

The Feds aren't the only ones in the China trade game. About 30 states -- including Maryland, Washington, Michigan and Pennsylvania -- have also set up China-based representative offices. Lately, a number of them have shifted their focus from aiding American companies to attracting Chinese investors back to their home states (see sidebar). But a few of the state offices do provide substantial consulting services, sometimes charging less than private-sector firms would charge.

That said, the U.S. government offers a combination of prestige and physical presence that states can't match. The Commercial Service employs a 157-??person staff in China, its biggest overseas post, with offices in five leading cities and trade contacts in 14 smaller markets, including Tianjin, Qingdao and Chongqing. Its services range from in-depth market research -- it has a large staff of industry experts -- to consulting on issues in intellectual property protection.

But what really sets the Commercial Service apart are its connections with Washington higher-ups who serve as diplomatic emollients, helping U.S. companies access high-level bureaucrats on the Chinese side.

Attendees of the clean-energy trade mission say the presence of U.S. Commerce Assistant Secretary David Bohigian, who also took part, opened important official doors on the Chinese side. Although China has been promoting the use of clean energy through financial incentives and other measures, foreign companies often need government approval to take full advantage of them.

Among the higher-ups Capstone delegates spoke to were officials from the energy bureau of the powerful National Development and Reform Commission, or NDRC, and provincial-level politicians from Guangdong. "We would have had difficulty meeting the same level or number of regulators and politicians without the help of the U.S. government," says Crouse.

Another participant in the clean energy trade mission, CEO Yale Wong of Seattle-based General BioDiesel, says introductions to NDRC officials and leading Chinese scientists were useful. "Without government leaders coming with us, we probably wouldn't have gotten those meetings," says Wong. "And it helped with the press, too -- we got a lot of media attention."

He contrasts the Department of Commerce trade mission with a tour he took part in in November 2007, sponsored by King County in the state of Washington. Though that trip was also useful, the government officials he met tended to be of more humble rank. "I notice if you take a mayor with you, you would tend to meet a mayor on the Chinese side," says Wong.

Like Wong, U.S. companies often first tap into China-related networks back home at the local level. Commercial Service specialists work out of 107 U.S. cities, offering research and counsel on exporting. The DOC's Web site is a clearinghouse of information for the mainland, including a list of trade leads. A related site features a calendar of China talks offering both general advice (as on IP protection) and detailed market research. (See box on page 20.) Recent seminars have focused on the growing market for dental equipment on the mainland and demand for industrial machinery in the Pearl River Delta.

On the ground in China, the Commercial Service tends to work with relatively sophisticated SMEs with export experience. For executives planning trips to the mainland, it markets a tailored "gold key" service. Besides providing market research and regulatory briefings, it can set up introductions with potential customers, distributors, trade associations and government officials.

The only introductions that remain firmly off limits: those to Chinese manufacturers that could siphon off American jobs. The service costs $685 for the first day and $340 for each additional day.

General BioDiesel's Wong says he's found the Commercial Service useful in introducing credible potential business partners, weeding out the less savory types that sometimes bamboozle newcomers to China. His company is negotiating with three Chinese firms to be joint venture partners. Wong met two of them during the energy trade mission, then stayed on for two more weeks to tour their facilities and get to know them better personally.

Highlighting the need for due diligence, he says General BioDiesel has employed two native Chinese speakers on the mainland to do preliminary research and report on the market. The company's law firm also subcontracted detailed background checks on both its JV partners and the company management.

Wong tells of a colleague who met a representative for a Chinese company at a conference, then later signed a JV agreement with him. Soon after, the Chinese partner vanished. "The company just took the agreement to go raise financing but had no intention of doing business. You see a lot of that," he says. Extra scrutiny from government officials can help avoid such problems.

Bryan Larson, Beijing-based first secretary in the commercial section of the U.S. Embassy, says it's not unusual for government advisers to run into red flags while recruiting potential business partners on behalf of U.S. companies. "At least half the due diligence reports I've edited over the past couple of months have come out pretty negative. Companies have to exercise extreme caution."

Besides its consulting and corporate matchmaking work, the Commercial Service has lately embarked on a big new push: Highlighting opportunities for U.S. companies in fast-growing second- and third-tier cities.

In these cities, which include the likes of Chongqing, Xi An and Wuhan, rent and labor costs are far lower than Shanghai and Beijing. American goods have greater cachet, too. And local governments eager to create jobs are often willing to offer better investment incentives than could be found these days in the big first-tier cities.

Second-tier cities offer access to "an increasing middle class with increasing spending power, where people are demanding quality goods," says Eric Wolff, a principal commercial officer at the Commercial Service. Wolff, who was transferred from Beijing to the Sichuan capital of Chengdu, says the latter is a city where "in many sectors people can still come in and define their market" rather than having to wrest market share away from more established players.

Last year he counseled a retail fast-food company that decided to set up its first China office not in Shanghai or Beijing but in Chengdu, with its better growth potential.

And in a nod to changing realities, in November 2007 the Department of Commerce organized a tour for seven South Carolina companies. The primary destination, aside from quick stops in Shanghai and Beijing: the largely unsung cities of Chongqing and Tianjin.

While the Commercial Service can set up companies with background and initial introductions, it's not intended to provide ongoing assistance. The goal is to link U.S. firms to reputable agents and distributors, as well as lawyers and accounting firms, that can carry on day-to-day.

In a few cases, though, state rep offices on the mainland can take up where the Commercial Service leaves off. That's especially true of those state offices that operate out of China-based consulting firms, which are accustomed to providing more handholding.

Take the case of the University of Maryland's Robert H. Smith School of Business. In 2005 it launched its
executive M.B.A. program with key help from the Maryland Center China, which to this day manages all its Shanghai
operations.

With a 12-year history, the Maryland Center is the oldest state office on the mainland, having served roughly 400 Maryland companies. Housed in a 10,000-square-foot office space, the center acts as an incubator for about 20 Maryland companies. As chief representative Ning Shao describes it, the center functions as a hybrid consulting firm and executive office.

The Smith School, now one of the Maryland Center's biggest clients, pays the salaries of five full-time center employees. In setting up its E.M.B.A. program, the Maryland Center staffers not only recruited the Smith School's first class of students, but have even smoothed the government relations path by liaising with Ministry of Education officials.

Steve Feld, executive director of professional programs for the Smith School, counts the program a success: It just launched its third E.M.B.A. class in Shanghai, with 33 students. He estimates the school has been able to invest about $1.5 million in the executive program over three years instead of through a big up-front investment, so it's been able to offset rising costs with growing tuition revenue.

Feld praises the Maryland Center's creative marketing work. When the Smith School was recognized by two publications as offering the most valuable E.M.B.A. in China, Shao made a few calls and arranged to have Nobel Memorial Prize in Economics laureate Thomas Schelling, a professor at the University of Maryland who often spends time in China, accept the prize at the awards ceremony. "They made PR hay out of it," says Feld.

States sometimes lack the budget and inclination to provide in-depth nurturing of homegrown companies abroad. Yet in the vein of the Commercial Service, some quietly offer services of real business value.

There's a surprising amount of entrepreneurial help to be found in the last place a company might think to look: the government.
 

Courting Chinese investment

Not long ago, Chinese companies courted U.S. companies for investment dollars. But the dynamics have flipped in the past few years. Now it's American officials, often at the state level, who are wooing Chinese firms. Michigan and Tennessee, for example, have both set up offices in China and are working to attract inbound investment from that country.

The takeaway for U.S. companies: If you're seeking to offload assets or secure a capital injection, don't discount the potential for your own state to act as investment banker.

Yvonne Warmbier-Ramp, director of the 10-year-old State of Michigan China Office, says it now spends about 90% of its time identifying potential Chinese investors--usually private-sector, cash-rich firms--and bringing them on trade missions to Michigan.

Michigan's auto market is a natural draw. Just this January, Neapco Drivelines LLC, a Pennsylvania company majority-owned by China's Wanxiang Group Corp., bought Ford Motor Co.'s drive-shaft business. "A lot of Chinese companies want a partner on the ground in Michigan, whether it's a joint manufacturer or a supply partner in some kind of complementary business," says Ramp. "Often, within China, companies may have a very narrow product range and customer base, so they'd like to expand their market."

There's plenty of interest on the part of Michigan companies. In one county alone, about three dozen companies have already voiced interest in meeting a 15-company Chinese delegation scheduled for a spring visit. Ramp, who's headed the Michigan office on the mainland for the past decade, says she used to help local automotive companies that wanted to export to China. But the requests for help have gotten fewer, partly because U.S. auto firms have already tapped existing opportunities in the relatively young Chinese auto sector.

"The big companies and the companies with the wherewithal to do business are already in China," Ramp says.

Other states are also less interested in boosting local companies abroad than on winning inbound investment from China. "Our main focus is attracting [foreign direct investment] for Tennessee--anything associated with creating jobs," says Li Weaver, director of the Tennessee China Development Center established in Beijing in October 2007.

She says the office can offer general advice on common business practices but that Tennessee companies that need in-depth help in a particular industry are likely to be referred to the Commercial Service. - K.C. Swanson

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