Expansion: Turning the tables to conquer China: A furniture maker reinvents itself

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IT IS a long way from the East End of London to the Far East, and a big jump from furniture- making to running hotels. But one British company has managed the transformation, and is encouraging others to follow its lead.

Cathay International, which began life 70 years ago making furniture in the Lea Valley, has established a joint venture with the Beijing city government to own and operate the four-star Xiyuan Hotel. It will also develop the rest of the city centre site over the next six years. The Beijing government has contributed the land, the hotel and pounds 1.5m cash in return for 40 per cent of the joint venture company.

Managing a smart hotel on the edge of what is planned to be Beijing's new financial district is a big departure from Cathay'sroots. But it did not happen all at once.

In 1988 James Buchanan, the present chairman, led a group of investors in an attempt to rescue Stonehill Holdings, then a loss-making furniture manufacturer.

Although successful at first, the rescue team was hit by the recession and closed the factory in 1990. In a complete change of direction, it began to acquire industrial land next to the factory site. The result is the 28-acre Stonehill Business Park.

However, the company was still heavily overgeared, and the directors looked about for otheropportunities. Several of them - including Mr Buchanan, a chartered accountant - had Far Eastern experience. So they began to examine possibilities in China.

As they quickly realised, you cannot do business there without a Chinese partner. 'You can't just walk into another culture and expect to succeed in business,' says Mr Buchanan. 'And China is so different from the West. You can't even understand the facial expressions or the hand signals.'

The partner they found was Wu Zhen Tao, a high-powered Beijing businessman with close links to the Chinese government. Perhaps partner is not quite the right word - he has effectively reversed his interests into Stonehill. After a pounds 28m rights offer that closes this week, Mr Wu's vehicle will own 57 per cent of the company, now called Cathay International, of which he has become chief executive. Mr Buchanan is happy to be owning a smaller slice of a bigger pie. 'We got on very well from the beginning. They were the most amicable negotiations I have ever had.'

Mr Wu came on board earlier this year and wasted no time in setting up the Xiyuan deal. Mr Buchananwas impressed by the openness of the Chinese partners. 'Ask them a question and they gave you the answer. They were also very decisive. The negotiations themselves were relatively rapid. The lengthy part was re-analysing the accounting and administration systems so that they conformed to Western standards.'

Western buyers in Eastern Europe are well acquaintedwith this hurdle. Before being able to value assets, they have had to unravel arcane accounting systems in which profit and loss, often enough, are simply irrelevant. But this has not been Mr Buchanan's experience.

'The Chinese certainly understand all about profit and loss,' he chuckles. 'And while their accounting systems may be different, they are actually very sound and, in many cases, more conservative than ours.'

The physical assets also stood up to appraisal. A surveyor flown out to inspect the hotelsaid it had the best reinforced concrete pouring he had seen in 20 years.

While the Chinese tend to get used to certain Western oddities, such as disclosure requirements, the Brits must also adapt to various Chinese conventions. For example, there is no freehold land tenure in China, and companies must content themselves with being granted land use rights for a specific period. In place of carefully worded insurance policies and building warranties, a letter from the government merely promises to rebuild the hotel if it falls down.

Mr Buchanan points out that the Chinese authorities are keen to privatise, and to create new, profit-driven business structures. They are good, tough negotiators who know how to look after their own interests, he adds. 'My advice to other Brits who want to deal there is to be polite and courteous, say what you really mean, and stick to your guns.'