China Report

Improving the Odds of Success With Your China Strategy

By Dan Wastson, Blairgowrie Associates, Contributing Editor | October 12, 2011

Looking beyond the glitter of China gold, here is a no-nonsense look at what it takes to enter the China market where all too often the risks outweigh the rewards.

Throughout history there have been many instances of alluring success that has led many people to chase a perceived golden opportunity only to end up very disappointed. In recent times there has been a genuine gold rush atmosphere when it comes to Western companies eyeing what they perceive as the untapped market opportunities inside China. It seems as if every company has to have a genuine China strategy. 

According to recent studies, 400 out of the Fortune 500 U.S. companies now have a presence inside of China. As you might imagine, this hot pursuit of a China strategy has given rise to numerous China consultants/experts offering their services to assist with such an undertaking. In 2005 it was reported that Western companies were pouring more than $1 billion USD/week in new investment into China. Even with today’s poor economic conditions Western companies are still moving into China. I think it’s safe to state that a China Rush is still very much in play today.

History also tells us about another gold rush that happened back in the late 1800s. Similar to the current China Rush, the Alaska Gold Rush drew people from all over the world to the Klondike region of northwestern Canada following the discovery of gold there in 1896. The so-called gold rush was short lived, ending in 1899. It was mostly spurred on by media campaigns (newspapers) and suppliers of goods to the prospectors rather than actual success of those who were working in the so-called gold fields.

At its height of activity from late 1897 to mid-1898, there were estimated to be slightly over one hundred thousand people, mostly individuals with no prior prospecting experience, headed for the Alaskan gold fields. The Gold Rush period is remembered mostly for the hardship endured by the would-be prospectors. These prospectors have been immortalized by pictures of their ascent of the Chilkoot Pass in a seemingly endless single file and by books like The Call of the Wild.

Unfortunately, few Gold Rush participants struck it rich, and it is estimated that the total money spent just getting to Alaska exceeded the value of gold found during the actual Gold Rush period. This same sort of experience appears to be the outcome of the massive influx into China of Western companies who have chosen to pursue a China Rush strategy (i.e., a huge resource burn rate with limited if any payout). Of course, there are exceptions just as there were exceptions to the Alaska Gold Rush.

Your China Strategy

When formulating a China strategy the first question you need to ask is “Why”? It’s a valid question and one that should be used in a number of China related situations.
Understanding why you want to include China in your overall business strategy is essential to determining what it will take to be successful. The following is a brief listing of some of the answers I have heard regarding why a particular company wishes to include a China strategy in their business portfolio.

1. China’s economy is growing at a faster pace than any other country.
2. All my competitors are going to China. If it’s good for them, it’s good for us.
3. My board of directors said we need to be in China.
4. China has over one billion consumers.
5. Having a China strategy will improve our stock price.

Unfortunately, most of the companies who used these answers as to why they want a China strategy ended up very similar to those prospectors who rushed into Alaska, i.e., a failure to achieve expectations).

However, when I discuss with companies about why they are adopting a China strategy and they answer with any of the following I have noticed that they most often achieve some level of success with their efforts.

1. I’ve been there. I understand the culture and the market. Our company has prior experience doing business inside china.
2. Many of my long-term customers are going to China, they have asked us to continue with our supply to them but from an inside China location.
3. Our detailed market research indicates that our products fit and are needed in China.
4. We have a China-based partner with many years of experience in the same markets that we intend to pursue.
5. We have solved the route to market along with essential raw material supply and final product manufacture questions.

No matter what approach you use, there is inherent risk associated with business particularly when you venture outside your comfort zone such as entering a new region or country. There are no guarantees of success or failure. However, there are proven approaches, which appear to enhance the opportunity for success.

Deciding to enter the China market either as an offshore participant or from onshore is not a trivial undertaking. The resource burn rate and learning curve for most companies is truly significant. There are numerous obstacles that must be confronted and resolved in order to move forward.

China is no longer a third world country or an emerging economy. As the second largest and fastest growing economy in the world, soon to overtake the United States, it is a genuine force to be reckoned with. Within the past few years there has been a remarkable development inside China and the establishment of a significant middle class. 

This driving force has resulted in the release of a huge pent up demand for consumer related products, which of course require numerous sources of raw materials and technology. In the past this emerging opportunity provided a slightly easier road for new entrants into the China market. Today, issues such as theft of technology (Intellectual Property) and China’s preference to have local companies in the market as opposed to new offshore entities have emerged as a serious obstacle for a number of Western companies. Any company wishing to enter into China today will find it much more difficult and more risky compared to what was in place a decade or two ago.

Do your due diligence

If you have answered the question why you wish to have a China strategy then you are ready to answer the second most important question, “What defines success for your strategy.” All too often companies pursue objectives without spelling out what the end point looks like, that is, what will be achieved if they are successful. If your China strategy works just as well for the local Burger King as it does for your company my suggestion is that you don’t have a well-defined strategy.

It’s important to define what it is you wish to accomplish including timing, resources required and of course the impact of pursuing such a strategy on the rest of the organization. Remember, nothing in life is free. If you have chosen to pursue a China strategy, something has to give elsewhere. The pursuit of a China strategy will draw on existing resources, which most companies feel are finite in nature. Unless you double down with your resource loading (i.e., add people, cost, etc.) then you will need to back off in other areas. The question you need to ask is, “Can we afford to back off from existing objectives?”
Before embarking on a China strategy there are some obvious actions you need to take.

• Develop a clear China Vision Statement (i.e., Your China vision statement articulates your dreams and hopes for including China in your business portfolio. It reminds the many stakeholders in your company of what you are trying to build in that part of the world). While a vision statement doesn’t tell you how you’re going to get there, it does set the direction for your business planning such that proper attention is given to the development of critical plans as described in the following.

• Develop a China Strategy Statement (i.e., You intend to capture what market share, using what resources in what period of time using what metrics to gauge if you are making progress. In addition, list all assumptions used to formulate such a strategy).

• Develop a China Impact Summary (i.e., the pursuit of a China strategy will have what impact on each existing company business structures/bottom line).

• Develop a China Implementation Plan (i.e., what actions are to be taken by what groups at what cost, at what timing).

• Develop a China Intellectual Property Protection Plan (i.e., how will you ensure that your IP is protected especially when the Chinese Government is continuing to put pressure on new entrants to share their technology with local companies? Technology theft in China is a genuine and real concern, you need to have a clear plan as to how you will handle this critical situation).

• Develop a China Resource Burn Rate Plan (i.e., what resources will be required in what timing and who will provide those resources at what cost and availability?)

• Develop a China Exit Plan (i.e., if things don’t work out, how will you unwind your China strategy, what will happen to assets, resources such as personnel, contracts, etc.). A number of companies have found it’s just as difficult to exit China as it was to enter. 

In the generation of the above plans careful thought must be given to staffing. Will you have dedicated personnel assigned to this pursuit or will you simply add-on this responsibility to existing infrastructure? If the latter it’s important to communicate with all personnel how their compensation will be calculated. Employees tend to gravitate and focus in those areas where they perceive their rewards emanate. Ambiguity or lack of clarity about compensation may lead to confusion and bad decision making by various employees/groups. If China is important treat it that way and make sure that your employees understand what is expected of them and in turn what the rewards and risk are that are associated with such activities.

Test your assumptions

If you have chosen to include a China strategy then you have based such a decision on various critical assumptions. Before moving forward at too fast of a pace it’s important to test those assumptions and weed out/modify those that don’t seem to apply. For instance, if one of your key assumptions happened to be that you could ship from the West Coast to China and clear customs on the other side at a particular cost structure and you find that the numbers have increased then you need to determine if this is a recoverable situation or a true stop point. The suggestion here is that you test each and every one of your critical assumptions and make adjustments to your overall China strategy to reflect reality versus assumptions. The time to do that is before you commit all your resources and proceed to a point in your strategy that may be difficult to unwind. 

History has shown that most companies underestimate their resource burn rate by as much as 25-40 percent, particularly in the early stages. It’s important to include some level of flexibility in your resource allocation in the beginning stage of your implementation phase. As such you need to ensure that the sources of your resources are compliant with such a situation.

Let the rubber meet the road

No company should embark on a China strategy without first having key personnel visit China to see and experience the culture and the perceived opportunity first hand. Not only will this help form a stronger commitment but it will dispel often held stereotyping of the country, its inhabitants and culture. Meeting potential customers, suppliers, agents/distributors and gaining an understanding of possible routes to markets along with the obstacles that may be encountered helps to strengthen your overall implementation strategy.

Equally important, you should exhaust your network of contacts to discuss the actual experience of others who have chosen to pursue a China strategy. Benchmarking can save you from duplicating the same problems that others have encountered in this effort.

Understand if your assumption about a chosen market entry is viable (i.e., will you be able to go direct to customers or will you need a distributor/agent?). What are the available routes to markets, which one will you choose and why? Who are the competitors and how are they structured and what routes to market do they use? Are your competitors making a profit and if not, why? What are the government obstacles you will face in the pursuit of your chosen entry?

Determine where and how you will enter China

There are numerous avenues open to a new entrant coming into China. The following is a listing in increasing order of control that your company has over the entry model. If your chosen entry strategy involves having an onshore infrastructure with local and expat employees then you need to spend time understanding what is required by the Federal and regional/city governments. Don’t assume that China requirements follow your country of incorporation policies, I can assure you that its different.

• Export – Your firm’s sales of goods/services produced in the home market and sold in China through an established entity inside China (i.e., agent/distributor/reseller, etc.). This entry model allows you minimum control over the entry model.

• License and Franchise – A formal permission or right offered to a firm or agent located inside China to use your company’s proprietary technology or other knowledge resources in return for payment. This method offers very little in the way of control over the entry model.

• Alliance – Agreement and collaboration between your company and a firm located inside China to share activities in the China market (i.e., manufacturing, distribution, marketing, sales, etc.).  Usually this agreement reflects a narrow range of activities and provides your company with a greater degree of control compared to those models described earlier. A great deal of effort and time needs to be focused on developing an exit strategy from this mode of entry.

• Joint Venture – Shared ownership of an entity located inside China between your company and a company located inside China. This is much more involved and broader in scope than an Alliance and usually involves shared ownership of assets and resources. This structure requires a great deal more management focus by both parties. Similar to the Alliance entry mode care and consideration should be given to developing an exit strategy. This entry model provides your company with a bit more control but it also increases the risk level.

• Wholly Owned Subsidiary – Complete ownership of an entity located inside China by your company to manufacture or perform value addition or sell goods/services inside China. As you can imagine, this entry model offers your company the greatest degree of control but also the maximum risk associated with your entry strategy.

Unfortunately, there is no valid rule of thumb as to which chosen entry method results in the greatest degree of success. This is due in part to reluctance on the part of most companies to fully divulge the result of their chosen entry strategy. Suffice it to say that whatever entry strategy you choose it should be one that fits your past performance (i.e., not be totally new to your company). 

China is not the place for most companies to learn a new entry model. Careful and deliberate study of risk/reward relationships should be undertaken with the eventual chosen entry mode pursued with well-defined expectations and metrics. China isn’t for everyone but like most market potentials it does offer the allure of potential success.

I am certain that the 100,000 prospectors who flocked to the Alaska Gold Rush did so because they were pursuing a rich return for their effort. Unfortunately, lack of training, resources and enormous hardship and competition resulted in the majority of them ending up with nothing to show for their effort. There are a couple of old expressions that sort of sum up what you need to do before choosing to pursue a China strategy: “All that glitters is not gold”; and “Look before you leap.” China does in fact offer tremendous potential for success but just as equally for failure.

The bottom line with the above suggestions

• Know why you are including China as part of your business strategy;

• Understand and know the limits of your risk taking;

• Define what constitutes success;

• Understand what the various entry models are and which one fits you best;

• Understand the associated risk/rewards associated with the pursuit of a China strategy;

• Test your critical assumptions before you commit to the pursuit of a China strategy;

• Allocate time and resources to visit China and to conduct an onsite, thorough investigation of the perceived potential and obstacles;

• Understand the true cost of pursuing a China strategy (not just allocated cost against the strategy but the cost to other objectives that your company may be pursuing that will be impacted by choosing a China strategy); and

• Provide adequate training for your personnel. Don’t assume that your brightest and best employees are the right pick for working in a multi cultural environment. China is a foreign country, pick your expats to be assigned based on their ability to work in that environment as well as their knowledge of the company’s activities.

Whatever entry model you choose understand that success will not happen overnight. Most companies have discovered that achievement of success in China takes much more time and resources than expected and that the perceived rewards are often lower than projected.

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