The Daily Telegraph – Business Section - Tuesday, May 23rd 2006

 

SALES CASE STUDY

 

Chinese demand turns rubbish to riches

 

A Norfolk recycler has found a burgeoning market in the Far East for the plastic, metal and paper we throw away. Philip Smith reports.

 

Last year Jo Pearson bought four skip hire companies. It is part of a master plan to secure a constant supply of the vital raw ingredient he needs to meet demand from a vast new market in waste materials.

He is not that fussed what is in the skips. His Norfolk-based recycling company can find a market for most things, but it is the paper, metal and plastic he particularly likes. For the used and discarded plastic, he has more than 1,000 Chinese customers ready and waiting to take delivery.

Pearsons of Thetford is looking to double its £4.5m turnover, thanks mainly to this burgeoning business from China. It is on track to do so: figures for the first two months this year show annualised turnover for 2006 at $8m. Now, with the necessary documentation in place, Pearsons is about to become a fully-fledged exporter in its own right, so without the need to pay agents’ commission, its profitability should also increase.

The company collects waste which it sorts, shreds and stores before selling on to reprocessing plants in the UK, Europe and the Far East with 60pc going overseas. Renting out the skips themselves is not that profitable. In the world of waste it is the contents that create the cash.

“There is nothing thrown away that cannot be recycled and resold,” says Mr Pearson, 43, the managing director and third generation Pearson to run the family company. “But for it to be economically viable there has to be the quantity and quality.” Quantity means supply – hence the skip hire acquisitions, while the move to tap China supplies the demand.

There is huge potential and it is the economics that make it so attractive. Low labour costs mean China can process waste plastic into the pellets used in recycling cheaper than the industrialised west. With a booming manufacturing sector of its own for export, there is a large local demand for the plastic. After two years of working through an agent, Pearsons is set to go it alone. “We have a Chinese licence to import and we have now got the UK licence to export waste.” Mr Pearson says. “I have spent the past year building up our contacts and we now have 1,200 places in China and Malaysia where I can sell our products. China is a fantastic market and we have a product that is in big demand there.”

Low transportation costs also allow Pearsons to capitalise. “I can send a 40ft container to inland China for less than I can send one to Scotland.” Mr Pearson says.

That is made possible by utilising spare capacity on ships on the Shanghai to Felixstowe route. “A lot of goods made in China are shipped to the UK. It costs $2,000 to send a 40ft container to the UK but as they return empty it’s only $850 for the return trip.”

Mr Pearson’s grandfather used the same principle of utilising spare capacity on a return trip when he formed the business in 1945. “He had a job delivering wines to a local military base on his bike. He realised that, rather than coming back empty, he could buy scrap metal from the base and sell it. “The business grew gradually, self-funded, and today employs 100. With a fleet of 48 lorries and some 2,500 skips, containers, bottle and plastic banks across East Anglia, it now sees an 8pc profit margin before tax.

With 120,000 tonnes of waste a year coming into its three sites, 65pc of which is reclaimed and recycled, Pearson is entering a new phase. “We are now moving away from being a small family firm to becoming a small corporate.” Mr Pearson says. That is where the company’s challenges lie; structuring the business to allow it to grow while developing the Chinese trade and preparing the UK plant to cope with the increased business.

“China is my baby. I’ve been in control of it and it’s been done at my pace. But the time will soon come when I need to employ an export manager.” Mr Pearson says. The company has recently created a management team to handle the day-to-day activities, leaving Mr Pearson and his father, Pat, 65, the company’s chairman to take a more strategic view.

That includes finding new revenue streams and Pearsons believes there is money to be made from converting waste into energy.

The plan also includes rapid growth. “Within the next two years we will probably have made further acquisitions,” Mr Pearson says. That is unless its lucrative Chinese trade makes the 60-year old business a target itself.

 

 

 

EXPERT VIEW

 

Mark Berrisford-Smith Senior economist, HSBC

 

China is unique. Never before has such a vast, undeveloped market grown so quickly. Together with India, it means one third of the world’s population is in the process of rapid industrialisation. China now accounts for 8pc of world exports of goods; in 1990 it was just 2pc. And in terms of volume of goods produced, China has about 15pc of the global economy.

It’s really within the past 10 years that China has seen big flows of inward investment and it’s creating a critical mass effect. It is no longer just the large companies looking to China. A number of SME’s now feel they have no choice and it’s often simply to remain competitive.

Many are finding their customers are producing in China and want the lower costs and speedy service that comes with having a supplier nearby.

To a degree, it does depend on your market sector but anyone involved in manufacturing or IT has to think about outsourcing, offshoring and selling to these markets. Companies need to consider the risk of not being in China.