The prevailing wisdom is that although China is the fastest growing market in the world, it is difficult for non-Chinese companies to make money there. Chinese companies have the home advantage, including language, culture, name recognition, marketing and distribution. Not to mention lower labor and costs. Virtually all western companies want to go in, but all the news and magazine articles tell us about is the prevalence of piracy of intellectual property. Recently, US Commerce Secretary Don Evans, at a press conference in Beijing, held up a pirated DVD of the movie “Kill Bill”, which had just been released in US theaters that week, and which he purchased on a Beijing street for one US dollar.
Under those circumstances, how can US companies make money selling their products and services in China? Except for commodities, which Chinese factories want to turn into products, it seems that China just wants to sell to the west. Do western companies stand any chance at all of making money out of this tremendous growth market?
It depends.
The key is how you structure your business relationships. My experience is that most companies who enter the China market for the first time have starry-eyed ideas of selling their products to China’s 1.3 billion consumers, and think that they will just live off their China earnings. Other technology companies with their own patented technologies and copyrights think that the Chinese government will license their products and chipsets, and their share price will go up nicely just on the basis of a deal.
Then, after spending years and millions of dollars, they resign themselves to failure, and say that the Chinese market is unfair because of piracy or lack of enforcement. Never mind that there are Chinese software and technology companies that make money; that just proves the Chinese government gives Chinese companies preferable treatment over western companies. And that is what most Americans and Europeans think.
But the reality is very different. The simple fact is that every major western company now has a significant manufacturing sales and marketing presence in China. If nobody is making money in China, then why do so many companies continue to spend money investing in China? Obviously some of them are making money, and they are making enough to justify continued investment in China.
China has long had a reputation as a difficult market to conquer. But, as China plugs into the global economy, and shows the most rapid growth of all the major economies, it’s an economy businesses simply can no longer afford to ignore. While China is known best for its cheap exports, it is also a major importer of goods and services, with imports outpacing exports. Compared to the same period in 2002, imports in 2003 have risen 40.5%. Recently, in order to reduce the trade deficit with the US, China announced that it would send trade delegations to the US and step up imports of American products. For the first time, businesses which had never previously thought of selling to China have started thinking of it as a major market. In some sectors, China may even become their single largest market, outpacing even the US market in size.
What do businesses need to do to succeed in China?
--Get Local Knowledge-
No matter what your products and services are, chances are that there already are other local companies already in the same field. Chances are you cannot beat them on price and distribution. If that is the case, then why get involved in an expensive and time-consuming marketing battle with them? What are your company’s strengths, and how can you leverage them? The first question you should ask is “Since we are outsiders, we are operating at a disadvantage selling in the Chinese local market. How can we get good business intelligence, so that we can minimize the disadvantage in the shortest possible time?” The simple answer is to get someone on your side who knows the language and culture, and has had a successful track record selling products and services in China. It’s important to remember that knowing the language is not enough; after all, the Taiwan and Hong Kong markets are very different, even though a non-Chinese may think that they are similar.
--Think About Your Strategy -
Short-term thinking will not work in China; the companies which have succeeded have spent considerable effort building up their network of partners and relationships. A lot of ground work needs to be done first, including getting good on-the- ground intelligence before you make your first move. The first question Chinese buyers ask is “How long has your business been in China?” Your answer is an indicator of the commitment and importance you attach to the Chinese market, and will influence how you are perceived. Remember, Chinese routinely think long-term, and they don’t forget anything. If you make a bad first move, you’re going to spend a lot of valuable time just cleaning up your reputation. In the meantime, your competitors are racing ahead. Most western CEOs and boards do not have China experience, which is why they are reluctant to get involved in strategy formulation. The frequent result: short-term tactical moves, which often play into the hands of competing Chinese, Japanese and European companies which think long-term. Some companies’ think that they can make up for lost time by greasing the palms of the right people. That approach may have worked 10 years ago, but now that China has a much more developed and open society, it is no longer the case. Nobody wants to take the blame for a project where the product is bad. And if the Chinese media finds about it, they will sound off about it. If you build up a good China team, make sure that you offer good incentives for them to stay with you. Otherwise, they may leave to join your competitor, or start their own business competing with you. And they will take all that valuable knowledge and experience with them. When it comes to China, don’t think short-term. You can’t afford to.
--Find a Local Partner You Can Trust-
Most technology and entertainment companies see China as another distribution partner, and treat all their Chinese partners as channels, licensees or customers. Then, they act surprised when their products are pirated. The smartest firms instead get a Chinese partner (sometimes the government, or a government ministry), set up a joint venture, and develop new technology or standards which they license throughout China. And they make sure that their Chinese partner shares in the earnings. This changes the incentive: before the Chinese partner was just a channel distributor customer , but now the Chinese partner shares in the earnings, and has a profit motive in pushing the new technology standard. At the same time, the western partner gains access to a low-cost, high quality labor pool and growing consumer market. The companies which are most popular in China develop new infrastructure and technology standards which no one else has. For the Chinese, this brings prestige and face, as they want to have the latest technology and projects. The magnetic levitation train connecting downtown Shanghai to Pudong International Airport is the perfect example. The Chinese government helped put together the financing package, Siemens of Germany was the lead contractor, and the 40 kilometer line was constructed in a record year and half. Chinese premier Zhu Rongji and German chancellor Gerhard Schroeder went to the dedication and took the first ride, which cut the trip from 40 minutes by taxi, to less than seven minutes. Now, German companies are in a good position to get favorable consideration for other major transportation projects. But what about losing earnings because you are sharing with your Chinese partner? Get over it. China’s a big market with enormous potential, and it’s better to get 25 percent of 1.3 billion than zero. That will still be much more than you make out of most of your other markets. And, if you are thinking of expanding in other markets outside China, you can negotiate a larger share, especially if you have a good international sales and distribution network.
--Hard Skills vs. Soft Skills-
China has a great pool of talent to draw from, and every year, more overseas Chinese return, bringing their capital, expertise and experience back to China. It is overly simplistic to think that your functional experience will guarantee you a lead and help you to maintain your relationships. In hi-tech industries, just to cite an example, the technology lead in the US is only 1-2 years ahead of China. In certain areas, such as SMS (short message services) for mobile phones, China is ahead of the US. The trend is toward added importance for soft skills and personal skills to open up and keep relationships in China. Inevitably, this means understanding the local language and culture to maintain your business relationships. Remember, if you have a good China team, be sure to keep them. Make sure that the key personnel have a chance to bring their talent up to the executive and maybe even board level.
--Use China As Your Leading Test Market-
European and Japanese retail multinationals routinely send their management track stars to China for training. International management teams work closely with Chinese staff and local management, and gain by learning from each others’ experience. Compared to their home markets, China is growing much faster, and is much less regulated. This gives China a great advantage not only for developing your international management stars, but as a market to develop and test new products. Then, if a product is successful there, it can be pushed out in other markets. The net effect is a win for everyone.
Copyright China Business Strategy
Paul Denlinger is a writer, speaker and business consultant and has helped companies build more than US$4 billion in market presence in China.
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