Getting a grip on China

PHOTO: Getting a grip on China

The slowing down of China's economy, the world's second largest after the United States, might worry investors and policymakers alike.

A generational leadership transition, a potential property market bubble and a growing gap between the rich and the poor adds to uncertainties.

But OSIM International's Ron Sim is unperturbed.

"If people think China is going to collapse, they are in for a big loss," says the founder, chairman and chief executive of the lifestyle products firm that has over 270 OSIM outlets in the country.

China generates more than a fifth of the company's revenue, remains a very profitable market, and will be a key focus for OSIM in the next 10 to 20 years, he says.

Domestic demand is high and the potential for credit to drive spending has not yet been unlocked, he says, noting that 95 per cent of his Chinese customers use cash to buy his products - such as massage chairs, foot massagers and nutritional supplements.

As for the much talked-about slowdown, Mr Sim says that bad economic news is being "flushed out" now so China's new leaders next month have a clean slate to start their term on.

He expects more government stimulus policies next year to build up the infrastructure of second- and third-tier cities, to ensure wealth is better spread out there.

"That would create the kind of cash flow that's needed in the market right now. So we expect that China will be in a better shape next year. That's why we're putting in all our effort there.

"China is still a growth market. They are in a correction phase, they will get better. I'm optimistic about the first tier cities and I'm even more optimistic about the second and third tier cities.

"It's quite obvious that this market is so sizeable, so infant, so hungry. The vibrancy is crazy."

Driven by hunger and ambition

The hunger that Mr Sim sees in China could also be reflected in the oft-told story of how he started his own company in 1979 and grew it to a 4,000-strong outfit today.

Its latest third quarter results show a 49 per cent increase in net profit to $19.6 million, compared to a year ago. This is OSIM's 15th consecutive quarter of profit growth.

From January to September this year, revenue was $447 million. And the company is in a net cash position of $185 million.

At the beginning, Mr Sim just wanted to make a living. He quit school after his O Levels and become a household appliance salesman after his National Service stint.

He set up his first company in 1979 with four partners, which did not work out. He then started R Sim Trading Company, a retailer of household goods such as knives, hand-held massagers and foot reflexology rollers.

He was hit hard by the 1985 recession and learnt a lesson: The Singapore market was too small and the company had to build an external market.

Ambition to grow his company and the need to brand and develop his own products drove him.

In 1986, Mr Sim expanded his business to Hong Kong. The following year, Taiwan. In 1990, Malaysia, and in 1993, China. His company was renamed OSIM International in 1994. The letter "O" added the globe to his surname Sim, symbolising his global aspirations.

He went into China in November 1993 with Japanese retail chain Yaohan, which has since gone bust. He sold massage chairs, foot rollers and back massagers in a department store in Beijing.

At that time, China was poor and undeveloped, he recalls. "China was really communist, everybody is green, grey and blue, you know? The market just opened up, you're only selling to extremely rich people. People were buying combs, TVs, phones, cars.

Chairs were not the main priority yet."

But sales were "shockingly" good - US$100,000 in the first month, he says.

In 1994, OSIM opened its second store in Beijing. More followed in the next few years.

"Once you do well you build a reputation. People invite you to open up in their department stores," he says.

OSIM did well in China in the first few years, but struggled in the next couple of years as it faced a market downturn in the aftermath of the Asian financial crisis in 1997.

But over the last six years, there was a boom for OSIM as China's economy grew along with its buoyant property market.

There are now 274 OSIM stores in 45 cities, and more than 30 stores in Beijing alone.

Mr Sim says that he is careful to open stores with the right developers, and close them when they are underperforming. "If we wanted to be aggressive we'd have 1,000 stores by now. But we want quality stores that deliver. Sales per square foot is more important."

Paying the taxman and fighting imitators

Mr Sim is careful in one other area in China.

He makes sure OSIM pays every single tax there is to pay. This is because the first year he went into China, he faced "a lot of blackmail" from people trying to find fault with the company and asking for money.

"I decided, no, we will not deal with this, because we would contaminate our people and we'll always be beholden to and be sabotaged by people. We pay import tax, consumption tax, city tax, corporate tax, whatever tax, we paid every tax for the last 19 years.

"That's why we don't get into trouble with the authorities, we're not beholden to anybody.

We're probably one of the few (fools) to play clean, you see. But in that way we safeguard our long-term interests.

"That's the key reason why we survived 19 years in China. We don't go around and bribe. We can build relationships on the basis of lunches, drinks, singing songs, but we pay taxes accordingly."

Similarly, he adds that OSIM also keeps only one accounting book, instead of a separate book for the auditors. He has seen companies that kept two books die out after being blackmailed by a once-trusted person, he says.

As for imitators, Mr Sim says that he faced his fair share of companies selling knock-off massage chairs at half price. In the early days, firms would copy entire products. Today, they just cut-and-paste certain parts, he says.

"They are more mindful today because they have a stake, the company is more established.

If they copy you can sue them, chase them, block and stop the production. In the early days you cannot."

OSIM stays one step ahead of imitators through innovating constantly, he says.

"We're very fast. Every year we have a new chair, every quarter we have new products.

Even if you copy, by the time you come out we're already moving on."

Other than targeting the ethnic Chinese market in five key economies - Singapore, Malaysia, Taiwan, Hong Kong and China - OSIM is setting up franchise operations in Europe and other markets such as Brazil, Russia and South Africa.

"Operationally, I won't say it's difficult, because you're starting from scratch, there's no real competition," he says.

And as emerging markets climb up the income ladder, the pool of people interested in well-being products will only grow, he says.

"Look at China. In Shanghai there are 20 to 25 million people. Taking the top 10 per cent, that's over two million. The top of the 10 per cent, 200,000. And if we just take 10 per cent of that, sell 20,000 chairs a year just for Shanghai, and consider the rest of the cities, these are tremendous numbers we're talking about.

"People don't realise that we're only at the cream of the market, we haven't even come to the mainstream yet. Spa culture is growing, massage is growing, well-being is growing.

When the time comes, we expect the extrapolation to be much faster."

China does not slow down for Mr Sim, and neither will his business even as the global economy hits a bumpy patch.

"This is a very niche business. Asia by and large is growing, getting more confident, more affluent. The base is tremendously big.

Asia is going to be the core builder in terms of sales growth. Anything beyond that is a bonus."