We are very active in the fashion/accessory/luxury market in China. For a couple of years now I have been telling anyone who will listen that this is the hottest apparel market in the world. Well, we now have this A.T. Kearney report to back up what I have been talking about.

Hat tip to Mr. Robert Shecterle for the summary. To which I would add that in addition to the sales channels mentioned, we found that multi-brand stores, multi-brand boutiques and franchises are starting to creep their way into increasing importance in China. The dominance of the distributor, mall, department store and/or stand alone store model is starting to erode. Add to this the growing importance of e-commerce and concept stores. Part two of this post will discuss these new channels.

There is an an interesting top ten market list at the end as well.

China is now the most attractive emerging market for apparel retailers, according to A. T. Kearney’s latest Apparel Index, and already, several brands have aggressively entered the market.

PHV Apparel Group (perhaps best known for its signature brand, Izod) plans to open 3,000 stores in China over the next five years. Likewise, Italian retailer RDM has invested $910 million to develop five luxury outlet centers there, and Gap, Inc. opened stores in Beijing and Shanghai late last year.

According to A. T. Kearney, China’s growing middle class is expanding its buying behaviors beyond traditional venues.

“Retail formats in China are diversifying beyond traditional department stores. Chinese consumers are beginning to shop at venues such as hyper markets, specialty stores, outlets, discount stores and online,” Hana Ben-Shabat, a partner with A.T. Kearney and co-leader of the 2011 Apparel Index study, said.

The United Arab Emirates ranked second in the 2011 Apparel Index, driven by a population with a high disposable income and immense fashion consciousness. In addition, as A. T. Kearney points out, the expatriate populace and tourism also drive consumption in this market. Plus, the UAE is both a regional commerce center in the Middle East and a preferred market for entering the Middle East, as well as for testing new products and retail formats.

The Retail Apparel Index is calculated on a scale from 0 to 100. It includes analysis of the clothing market attractiveness (60 percent), levels of retail development (20 percent) and country risk (20 percent). Country risk indicators include political and financial risk, business readiness and business cost of crime, terrorism and corruption.

Here are the 2011 Apparel Index “top ten,” along with each country’s overall score:

1. China 61.4
2. UAE 58.9
3. Kuwait 48.6
4. Russia 46.4
5. Saudi Arabia 43.9
6. India 42.0
7. Brazil 40.1
8. Turkey 37.4
9. Vietnam 37.3
10. Chile 36.9

A full copy of the report is available at www.atkearney.com/grdi.

In the news this week was the story of a jury award of $2.3 billion to a division of St. Jude Medical against a Chinese medial device company started by a former employee. The details are specific to the case, but the news was enough to get Technomic Asia principal Michael Zakkour on one of his favorite topics, protecting intellectual property. Zakkour was traveling in the US on his way to southern China, when the China Business Podcast caught up with him for an interview on IP security strategies.

There are two main components to IP strategy for companies considering China operations, 1) a significant vetting process, the cornerstone of which is based on relationships that are proven over time; 2) a regularly enforced process to know who is working on the key areas of your product. This means organizations are notified when personnel changes in specified roles among their vendors.

Both are easy to articulate and difficult to execute. As China races to leave its low-cost manufacturing brand in the dust in exchange for being a global economic power, protecting the design and engineering elements that set your product apart is likely the most important aspect of your China strategy.

Three years ago, while in China, we were on the road with a client to source and manufacture high-end eyeglass frames. My project manager had pre-screened about twenty factories which we vetted and produced a list of ten sites for further evaluation and site visits.

I arrived in Wenzhou with the client for the first leg of the tour. Things were going well in terms of finding the right supplier. Some top of the line factories with just the right products and pricing. We had two agreements by the end of day two.

On day three my client insisted that we go visit a factory he found on the China suppliers directory website Alibaba.com After finding a potential supplier on his own, the client claimed their website looked great, they had dozens of styles to choose from, they stated they could do any kind of custom work etc, etc. I explained to my client that in my years of experience, it was unlikely we would find anything of value in such a visit and that without prescreening and vetting it might be a waste of time. But, he insisted, so I, realizing sometimes the best lesson is the one you learn first-hand, relented.

We drove almost 90 minutes off of our scheduled route. After getting lost several times we finally found the entrance to the factory.It was mid-August, about 90 degrees with 90 percent humidity. Dust was blowing everywhere and garbage was piled high all around the building.

We walked in the front door and found some curious “workers” on the floor. Namely, pigs, chickens and roosters. We were led up the stairs to the 2nd floor workshop where we found three people putting frames together. It turns out they were pieceworkers hired by another factory.

Politeness is a way of life in China, regardless of the time it may take. While drinking tea our conversation confirmed what our eyes were seeing much earlier in this journey. Then we left.

Sinking into the back seat of the car, and after a deep sigh, my client simply said, “I’m sorry”. Lesson learned and a better one I could not have stated as convincingly as half-a-day’s out of the way journey.

This is one of the more benign things that can happen to a company looking to source and manufacture goods from Alibaba.com or without a disciplined vetting process. It is therefore not surprising that recent news reports about the resignation of two top executives from Alibaba recently due to unfettered fraud on the website.

In the summer of 2005 we also visited a “factory” from Alibaba that a client insisted we see. It turns out it was a shell company that was supposedly manufacturing pet supplies. First words out of their mouth “I don’t think we can do business because our company is banned in the US for parts related to weapons of mass destruction. In that case, we thought better to skip the tea.

These stories and literally dozens of other I could recount illustrates what I have been telling individuals, start-ups, SMEs and even a few Fortune 1000 companies for six years. You can window shop on Alibaba to get a sense of pricing and product categories, but for anything else you need a plan for opportunistic through strategic sourcing, a sourcing professional and a presence on the ground in China to execute a multi-phase evaluation and vetting project.

We are working through a series of conversations with Steve Crandall, Vice President for Implementation Services here at Technomic Asia, based in Shanghai.  In Steve’s nearly 20 years of working in China, he has helped many foreign companies – primarily small and mid-sized ones – to establish operations in China.  We’ve been addressing a number of topics in this series, but today’s hits very close to home for a number of companies as Steve and I talk about the “China Price” syndrome …

For those who live or travel regularly to Shanghai, you have been the victim of the city’s wild abandon to prepare for the World Expo – new roads, bridges, tunnels, metro lines, bus lines, bike lanes, stoplights, security cameras … the list of infrastructure and hardware upgrades goes on and on.  Well, now that the Expo is finally here, many of us have been able to take advantage of that infrastructure … I, for one, am quite pleased with the new subway lines, making it much more convenient to get around the city.  However, the 9 squillion visitors a day to the Expo mean that there are just more people riding the subways and driving on the roads so a bit of the allure has rubbed off.

But all of these so-called improvements remind me of an old joke: a city slicker is lost in the countryside; eventually, he happens upon a local walking along the dirt road. The guy asks for directions back to the city and the local makes several unsuccessful attempts to explain the route. Finally, the local gives up and says to the city slicker: “Well, I guess you can’t get there from here.”

Needless to add, the point of this little jest is that there is always a way to get from point A to point B.

But not necessarily so in China. We may be all-too-familiar with the Confucian saying: “A journey of a thousand li begins with a single step.” Which is good advice (provided you know what the heck a li is), but it omits a crucial precondition. There first must be a road to walk on. Put another way, you may know your destination, but finding the path to get there is a whole ‘nuther matter.

Case in point: The Shanghai Pudong airport opened to much fanfare in 1999. Its size, capacity and architectural splendor was (and still is) truly world class. Anyone that calls Shanghai home can be proud of it … and even more so since they completed Terminal 2. What’s more, it was built in record time. However, the highway to the airport took a lot longer to complete. For the first year or two one had to pass through an obstacle course called Pudong, dodging pre-modern horse carts on the way to the post-modern airport. So while the destination was ready and waiting, there wasn’t a decent road to reach it.

Excepting the Maglev train, of course. Another marvelous example of modernity, which, unfortunately, had its own destination issues. True, on arrival at the airport the train seemed a welcome alternative to the long taxi line; one could whizz along at speeds of more than 400 km per hour all the way to Jinqiao, where … you waited in another long line for a taxi to get you home! Now don’t start writing me nasty letters. I am aware that the Maglev has since been connected to the #2 subway line and that getting to downtown from Pudong airport is now a breeze. But note the year: this happened in 2006, roughly six years after the airport opened.

The drive to modernize has had similar results in other areas. In keeping with the WTO provisions, China is opening up new forms of investment for foreign companies, though the process is frustratingly familiar.

Step One: The new rules are announced with much fanfare and praise from global punditry.

Step Two: One year later, the application procedures are announced, again with much fanfare and more punditing from the pundits;

Step Three: One year after that, applications are actually accepted by the government, with very little fanfare (by now the pundits have moved on to touting new developments, see Step One).

As I was saying, this process causes foreigners much rending of hair. Which in my case, I cannot afford because I cannot find my hair. For those of us that value convenience, efficiency and modernity, new forms of investment are useless unless we have means to access them.  Most foreigners (particularly Americans) have acquired the detritus of efficiency: daily planners, PDAs, alarm clocks, etc., all of which calculate time to the nanosecond. As such, a beautiful airport, or a beautiful new business opportunity, are anathema — without a means to reach them.

But before we get too huffy, keep in mind that we were warned of the dangers. Way back in the early 90s, Deng Xiaoping said that development in China would be “like crossing the river by feeling for stones.”

Today, we are standing on the banks of the rushing river we call Chinese Development looking across to the land of riches and eternal happiness on the other side. There are a couple of stones peeking out from the rushing rapids, but they look a bit slippery. So we need to tread carefully. Better still, we should watch while someone else crosses the river before us, to see where he steps. One day, there will be a solid bridge to cross, but in the meantime, many will fall in the water and be swept away.

Be that as it may, it’s silly to think that China should build roads (or bridges) for the convenience of foreigners. Like I said, no one made us any promises and if the existing road takes it toll on you, well, it tolls for all of us. In the meantime, buy a compass and a pair of hip-waders.

On his first trip to China, one of my clients reacted to this country, as most foreigners do, with a mixture of fascination and utter dread. He was overwhelmed by the size of the country and its dynamic (one might say, hyper-dynamic) society. Over dinner one night, he asked me my opinion on the fundamental difference between China and other cultures. Now, I never miss the opportunity to pontificate on any subject, especially one that I don’t understand completely (see any of my previous columns). So I offered him my view: The fundamental difference between China and the rest of the world, I said, is that Chinese people are born entrepreneurs; they have an near manic compulsion to start their own business.

Linguists believe that language is an accurate reflection of what a given culture considers important. For example, the Inuit are said to have 14 different words for snow – and so would you if you were knee-deep in the white stuff for most of your life. [Author’s note: I am from Minnesota, a state in the US where, for a good portion of the year, we, too, are surrounded by snow. However, unlike the Inuit, we do not have 14 words for snow; rather we have over 14 swear words for snow as in “that %$@# *&%$ &^%$# snow is so %$#! deep I cannot get my *&^% *&^$# car out of the *&^% driveway!!”.]

The preceding sentence reveals that Americans attach great cultural importance to the vice of impatience. Indeed, we are a deeply disturbed people, and pity the person (the next guy that cuts me off on the Yannan Expressway) who pushes us beyond our limit, which, quite obviously, is way below the world norm.

But I digress. The Chinese language reflects the entrepreneurial spirit of the people in a variety of ways. For instance, the term “start up”, referring to opening a business, can be expressed, alternately, as: 成立 (cheng li), 建立 (jian li), 开 (kai), 设立 (she li), 办 (ban), 创立 (chuang li), 创办 (chuang ban). There are more ways to express this sentiment, but I have forgotten them. What’s more, I cannot distinguish between the phrases; their subtleties are lost upon a lout like me. But one thing I do know, they all mean: “Let’s make some money!”

Should you remain unconvinced by the linguistic proof of China’s entrepreneurial obsession offered above, well, just step out on into the street. You’ll be instantly bombarded with pitches to purchase just about anything you’ll ever need (and much that you’ll never need). If you happen to be driving and happen to stop at a stoplight (unlikely, I know), then you’ll be assaulted by a dozen guys loaded with all things automotive: newspapers, lighters, phone chargers, steering wheel covers, Shanghai maps (because you look lost) and even world maps (because you really look lost). Now, I’m not saying that the Chinese are the only people with excessive entrepreneurial drive. But they do bring a degree of optimism and can-do spirit to the idea that most others cannot match. Indeed, they sometimes bring too much.

Awhile ago, I was walking through a street market with my kids. Within seconds, we were surrounded by hawkers. Now the interesting feature of street market vendors in China is the aggression with which they pursue their trade.  As you walk by the stalls, they will yell out “HELLO!!” followed by a recitation of what they are selling.  To wit: “Hello DVD!!”, “Hello CD!!”, “Hello T-shirt!!!”.  It can be a bit disconcerting, but one gets used to it … I suppose as one eventually gets used to a root canal or open heart surgery if one has had enough of them.

Anyway, one merchant was touting figurines of a little boy, who, after pouring hot water on his head, tinkles. The hawker shouted at me in the template style: “Hello, Pee-pee boy!”. Many heads turned, I assuming, hoping to see some tall foreigner in Depends fighting valiantly against incontinence problem. The man’s sales tactic might be a tad suspect, but there was no denying his enthusiasm. He knew that I wanted and needed a statuette of a small boy relieving himself. What he didn’t know is that his remark would take on a life of its own. When someone calls for me at home and one of my teenage daughters answers the phone, they have been known to shout: “Hey, Pee-pee Boy … phone!”

Of course, the entrepreneurial spirit exhibits itself in other ways, the notorious gauntlet tactic, for example. This ploy is based on the theory of sales by attrition. Street vendors seems convinced that you will buy from them if they form a gauntlet that you cannot avoid. By the time you reach the forty-seventh guy, you will be so worn down that you will purchase a DVD, CD or fake watch because you are finally convinced that life is not worth living without one.

Westerners believe that China’s low cost labor provides it with a global competitive advantage. While it helps, I believe that it is China’s drive to start new ventures – and to do so with such wild abandon – that presents a greater challenge to other economies.

The Pee-pee Boy tinkling on my desk is proof positive.

In our last Podcast, I had a conversation with Steve Crandall, Vice President in charge of Implementation Services here at Technomic Asia.  We talked about how important people are to a winning China strategy … how to look for them, recruit them, train them and keep them.  After we were done recording it, I asked Steve if he thought that maybe we were being too “basic” … that this was stuff that people already know.  He said, “People might know this stuff, but its always good to be reminded of it … knowing and doing are two different things.”

Well, it turns out that Steve was right … because since we posted that Podcast, we have had LOTS of comments on how useful the information was and how important it was to revisit the basics.  So to that end, we are going to go “back to the basics” again in terms of thinking about China and building your China strategy.  This is particularly critical during these times in the corporate business planning cycle … the silly season where bold strategies are considered and aggressive plans developed.  And China – given its centrality to most global business plans – is susceptible to such ridiculous hopes, dreams and schemes.  So let’s go “back to the future”, if you will, and think about our China strategies from the beginning.

Click on the links to listen to today’s Podcast …

Here on the China Business Blog and Podcast, we focus on being very logical and very practical … at least as logical and practical as China allows one to be.  Over the 25 years we have been working in China, we’ve seen a lot of experimentation, trying this and that to see what works.  We’ve even done a fair amount of it ourselves … and that’s fine for many multinational companies with deep pockets who can afford to try this and, if it doesn’t work, try that.

However, there is a group of companies for which this experimentation approach doesn’t always work so well … the Small- and Mid-sized Enterprise or as they are commonly referred to, the SMEs.  And that is the theme for a new series here on the China Business Podcast – The SME.

To discuss this topic with me, we are going to bring in the newest member of the Technomic Asia team, Steve Crandall, who recently joined us as Vice President in our Implementation practice.  We have been seeing a need lately to increase our capabilities in helping our clients execute their organic strategies in China – setting up manufacturing, hiring, establishing sales teams and pipelines, executing a sourcing strategy etc.  Steve comes to us with a long history in China, starting in the 1980s when he was a student here.  Steve went on to set up the first foreign owned car dealership in China when he set up Crandall Ford up in Tianjin (Steve comes from several generations of Ford dealers back in Ohio).  He then went on to start up several manufacturing and sales operations for SMEs in China, incubating them until the client was ready to take over.  After a stint at Ernst and Young where he had to wear a tie to work everyday, he came to join us.  Steve has been a good friend for a number of years and we are thrilled to have him in the Technomic Asia family.

There is no standard definition of the SME, just as there is no standard definition of the Multinational Corporation, or MNC.  However, generally, the SMEs are defined by their size – less than 500 employees – and their ownership – privately held or invested by a private equity company or other financial backer.  Now I’m sure I’m going to get some letters about this … because some subsidiaries of MNCs essentially have to stand on their own and really act like SMEs.  As my teenagers say: “Whatever!”  The key commonality here is that an SME is facing the same challenges in China as any other company here but they often have less global experience to work from and they typically do not have such deep pockets to do a lot of experimentation.  They have to get it right the first time.

Over the coming weeks, we are going to explore some issues that impact SMEs in unique ways such as HR, manufacturing, sales, operations, etc.  You will be hearing many of the same themes that we’ve been hitting for years here on the China Business Podcast … but we will be discussing them as they impact the SME and will explore several unique ways that we’ve seen SMEs handle these issues.

We begin the series today with the age-old issue of market opportunity …

I’ve been hearing from listeners that our last post cut out in the middle of the Podcast.  Sorry ’bout that!

Here is the re-post.  If you still find trouble, please email me at kkedl@technomicasia.com

Thanks!

Kent

So when our research manager, Frank Tsai, came to me and said that he could see some value in a review of the week’s news on China, I admit that I was a bit skeptical. It seemed to me like we were just anthologizing stuff already out there.  But as he kept talking and showing me some material, I came around … there is a TON of good writing on China and, while it is impossible to take it all in, it is important to try.  So we are going to try an experiment … every week, we’ll highlight some of the things that interest us about the news on China, adding comments where we feel we can add something or just setting it out there for you to take in.  We won’t stop the original stuff … that’s our bread and butter (and besides, its cheaper than therapy for us) … but let’s see how this goes.  Drop us a line and let us know what you think and/or clue us in to things that you think we should be paying attention to.

OK, here goes…

Living in a Bubble?

When your Chinese friends are making six figure (USD) salaries, and they say they don’t FEEL rich, even though the cost of living is almost invariably much lower in China, you know something is odd.  They feel that way because housing costs in Shanghai are 20 to 50 times annual income for the typical ($10,000/year) worker, and the better homes that rich Chinese executives want to buy are still 10 to 20 times annual income.   According to the China Daily, real estate prices rose at their fastest rate in two years in February, going up 10.7% year-on-year in 70 major cities, and undoubtedly even faster in major cities like Shanghai and Beijing.  Housing and housing-related purchases, according to the Global Times, now account for 40% of consumer spending, and have accounted for 20% of GDP since 1998.  While the government has recognized the risk that rising asset prices pose for inflation and social stability, and has signaled measures to curb the property market, some investment banks like UBS are, apparently, still bullish on Chinese property.  Needless to say, the continuing boom in housing-related purchases is great news for many foreign companies – from an IKEA, to home appliances, to decoration services, to home water purifiers.  However, we all get the feeling that “something” is out there and, at least among average people who have become “overnight millionaires” just by owning homes in Shanghai, there does seem to be the ominous feeling that values can’t keep rising.

Working for a Living

Years ago, the rallying cry for multinational participation in China was “cheap labor!!”.  Well, while labor costs in China are still much lower than North America or Western Europe, we are seeing some changes here as well.   In recent months, factory wages have risen by about 20 percent, as many migrant workers have gone home for the Chinese New Year and decided to stay home, having found better (and often less arduous) jobs in their hometowns.  According to the China Economic Review, many factories have had to lure back workers with substantial raises and that the average wage for a migrant worker in Shenzhen is now about $200/month.  Despite fears of a labor shortage at the low end, however, college graduates at the higher end are facing dimmer prospects, as detailed in pieces in both the LA Times and the New York Times.  So it seems that demand in the labor market is becoming curiously U-shaped, with factory workers getting raises and the experienced managers seeing their wages double and triple in just a few years, while recent graduates suffer on subsistence pay, even at good companies.

Gloom and Doom

Year-end predictions are lots of fun … you get to talk eloquently about what just happened (and drop a few “I-told-you-so’s” in if you can) and then go all Nostradamus and predict a gloomy future.  If you are right, kudos to you.  If you are wrong, that’s OK because it means the gloom-and-doom didn’t happen and everyone is basically happy.  This could be the case in an article in the New York Times that came out last December that highlighted the three greatest dangers that could derail the Chinese economy are inflation, protectionism, and inequality.  Let’s see how they’ve been doing so far …

• Chinese economists have been sanguine about Febuary’s 2.7 increase in the CPI, and policy shifts are unlikely in the near-term.  However, we’ve seen instances where China moves pretty quickly against inflation should the need arise so that might be the source of their comfort.
• Pressure for protectionism against China could rise, however, in light of China’s 46% export increase in February and slim chances that the government will let the RMB will appreciate.
• Growing inequality is reflected in the growing ranks of Chinese billionaires, and in a sign that the government is concerned about inequality, it recently capped the compensation of bank executives in line with similar measures in the West.

Hmmm … seems they’re doing pretty well so far, but the year is still young.  Stay tuned for more.

Well … its been awhile since we’ve posted a Podcast.  Sorry ‘bout that!  I took the week of Chinese New Year off and tried to ignore my computer and email.  That was nice … but then I really paid for it coming back to work afterwards.  Now I have been able to dig out from everything and get back to our series of Podcasts on China M&A.

If you recall, I have been having a series of conversations about China mergers and acquisitions with Kim Woodard – a vice president here at Technomic Asia and one of the leaders of our M&A practice.  The theme we have been orbiting around is “reducing risk” … this is because the failure rate for China M&A deals is quite high.  We estimate that fully three quarters – that ‘s 75% for the CPAs in the crowd – of deals that reach the letter of intent stage fail to close.  So that means, for successful M&A, we need to focus on reducing risk at each stage of the process.

Today, we go back to the beginning and talk about, what we feel, is the most important stage in China M&A … target selection.  Here is a conversation that Kim and I had just this afternoon in our Shanghai office…

We just received a comment from a faithful Podcast listener which spawned some interesting ideas here at China Business Podcast World Domination Headquarters (located in beautiful downtown Shanghai).  Full disclosure here … the “faithful listener” that made the comment, Dave, is actually a good friend of mine.  So I guess this is kind of like responding to a review of an elementary school play made by your mother … but I will take it where I can get it!

In any case, the question was a good one.  Dave asked, “Tell me this, as you think about the last 20 years, do you see a noticeable shift in the energy and excitement the Chinese Governments (local and central) have for recruiting western companies to expand their businesses to China? In the collection of articles I see, and recent business development work, I get the sense that there is a growing indifference. Is the China domestic growth ‘engine’ becoming so strong that western investments have become ‘ho hum’?”

Great question and good timing, Dave.  Because not only is this a topic of conversation among foreign companies here, but the Chinese leadership is talking about it as well, although in somewhat less-than-direct terms.  Chinese President Hu Jin-tao just this last week made a speech that, I think, is going to be referred back to in years to come as marking a turning point in Chinese economic development.  As far as speeches by politicians go, it was … well … a speech by a politician, and a lame-duck politician at that.  Remember that President Hu is expected to step down in 2012 and hand over the reigns to new leadership.  The leading candidate is Xi Jin-ping, one of China’s “princelings” with a significant political pedigree here, but a lot can happen in the next two years so stand by for further updates.  So President Hu is looking down the road at early retirement and he is trying to find ways to cement his legacy.  He’s already tried a couple of things.  Mr. Hu was behind the tepidly-received 和谐社会 or “Harmonious Society” campaign leading up to the Olympics which attempted to get people to stop spitting on the streets and be nicer to each other in public.  No one here has paid much attention to this – as evidenced by my messy shoes and bruised body from riding the subway to work every morning.

So this past week, President Hu had a chance to speak at the Party School of the Chinese Communist Party … now when I say “Party School”, I am not talking about the University of Wisconsin or Bowling Green.  This “Party School” is the institution that trains all up and coming cadres in the Communist Party of China, or CPC.  They used to teach these cadres how to wear musty wool Mao suits and engineer their comb-overs to cover bald spots … but now, they have more serious things on their minds.  The topic of President Hu’s speech – oddly, not covered much by the mainstream Western media – was on economic development in China.  Here is the English synopsis from the CPC website:

“General Secretary of the CPC Central Committee, Chinese President and Chairman of the Military Commission of the CPC Central Committee Hu Jintao delivered an important speech, stressing that we shall seize the opportunity to undertake the historic mission to take speeding up the transformation of economic growth mode as the important target and strategic measure to deeply carry out and implement the scientific outlook on development to unswervingly accelerate the transformation of economic growth mode and constantly improve the quality and efficiency of economic growth and increasingly raise the international competitiveness and the risk resistance capacity of Chinese economy in a bid to get higher quality, larger space and broader road of development.”

Got that?  Yea … no wonder this was not picked up by mainstream media.  I am actually interested in this stuff and I started to doze off by the line about “unswervingly accelerate the transformation of economic growth mode” (as a side note, this might be good advice to give drivers here in China because they tend to accelerate in a “swervingly” manner … President Hu’s people can contact me if they want further advice on this one).  Anyway, the speech in Chinese was not much more thrilling (like political speeches in ANY language, the Chinese for such situations tends to be very flowery and over-laden with adjectives).

In the past couple of months, China has been crowing about its 8% growth while the rest of the world is in the dumps and President Hu was responding to accusations that China’s economy was build on a foundation of sand … that government investment in infrastructure was going for short-term growth while ignoring long-term economic drivers such as technology innovation, consumer spending, etc.  Such accusations are not only coming from foreign sources but locals as well … the running joke in China is that the current leadership is pursuing the 保八计划 or “Protect the 8% Plan”, at any cost insuring that China reached that magic 8% growth that everyone thinks they need to avoid economic collapse.

This speech, I think, was intended to tell everyone that, “No, we really do have a plan here … we are not just going for short term development but we are trying to set China up for success in years to come.”  And how is that to be done?  Well, President Hu listed a lot of things: encourage the new energy sector; reform agriculture; support the growth of science and technology … heck, I think he even called for the development of a bubblegum to arrest male pattern baldness (a key concern for much of the world’s political leadership these days … they may want to pay attention).  But jumbled among the disparate ideas is a key phrase that President Hu used that responds – finally! – to your question, Dave.  President Hu said that China’s economic development is going to be driven, in large part, by “independent innovation”.

This phrase, “independent innovation”, is an echo of rumblings we’ve been hearing in China for some time.  Just last November, several Chinese ministries came out with the “Indigenous Innovation Product Catalogue”, a listing of approved vendors that government entities can purchase from.  The restrictions on this Catalogue are quite tight and makes it difficult for a foreign firm to get on the list, spurring many foreigners to accuse China of being “protectionist”.

Are they being “protectionist”?  I don’t know … that’s kind of a loaded word and it can be applied to other governments as well (similar accusations have been leveled at the U.S. for keeping China out of their oil, technology and agricultural sectors in the past).  But what they ARE being is “independent” … and that means, that, yes Dave, I think they are going to value foreign participation in China’s markets differently.  Not necessarily “less”, but certainly differently … whether or not it is “less” determines what we do about it.

This is a topic we are going to keep our eyes on this year and is closely related to one of the “Themes for 2010” that we identified in December of last year – China’s growing confidence in their own power and importance in the global economy.  But suffice it to say that foreign companies are going to have to pay even closer attention to the value that they are bringing to the China market.  We’ve been saying for some time that things have changed here … no longer can foreign companies just show up with money and cool technology and have China fall all over them.  Foreigners need to clearly articulate their value and to get local Chinese partners to agree to this value and to partner with the foreign company to bring it to China.  In the process, foreigners are going to have to give up this value to their Chinese partners … the risk being that you are starting to train your future competitors.

I am often asked if business is becoming “easier” in China – as in, “are the structural barriers to foreigners doing business in China becoming less?”  In general, I think this is true … China’s entry into the WTO has brought them in line with many global practices.  Sure, there are still questions of currency exchanges and the like, but I really don’t see these as being the greatest barrier to working with China.  I actually think that business is, in some ways, becoming MORE difficult to do in China because it is more difficult to determine exactly what foreigners bring to the deal; what we can do that China cannot yet do for itself?  You are right, Dave … we foreigners are becoming less interesting to China.  We need to work harder to find out what our value is to China and sell it to people here.  This is our game to lose.

We are continuing our series on mergers and acquisitions in China through a conversation I have been having with Kim Woodard, a Vice President here at Technomic Asia and a specialist in China M&A.  In over 30 years of doing business in China, Kim has done deals both from within the corporate environment – with companies like John Deere and AMP – and as an outside advisor.  In the last part of this conversation we talked about the five key risk factors in doing a deal in China:

1. The acquiring company chooses the wrong target for the wrong reasons.

2. Failure to connect well and build trust with the shareholders, management, and other stakeholders of the target company.

3. Inability to bridge the valuation gap

4. The target company fails to meet due diligence expectations on financial documentation or on financial and commercial performance.

5. The C-suite in the acquiring company gets worried about post-acquisition performance.

Let’s get back into the conversation as we now turn to the best way to manage these risks …

One of our themes for 2010 here at the China Business Blog and Podcast is “acquisitions”.  A typical market sector in China is very fragmented and very crowded – there are many players working in their own local areas.  From automotive, to healthcare to consumer products … they are all this way.  Both foreign and local companies will be looking to strengthen their positions in these markets by acquiring smaller players, bringing products, brands and distribution together to gain scale and more power in the market.

In early 2009, the global economic crisis knocked the wind out of the M&A market all over the world, and here in China, it was no exception.  Transaction volume fell off significantly as companies hunkered down to wait out the storm.  Well, though for many individuals around the world, the storm is still blowing, for companies and investors here in China, it is prime time to move … they have motivation to grow and cash to invest.  The challenge, as we will explore today, is managing risk.

Here at Technomic Asia, we have strengthened our M&A practice to include end-to-end transaction services and have brought in to the Technomic family one of the preeminent deal guys in China, Dr. Kim Woodard.  When Kim joined us late last year, we started a Podcast series on M&A in China.  Today we are going to continue that series as Kim and I talk about managing risk in China M&A.  And we start off discussing a very shocking statistic …

OK … we are on to Part 3 of our interview with the newest addition to the Technomic Asia team, Kim Woodard.  In this section, we get down into the nitty-gritty of doing deals in China.  Enjoy!

Nearly 18 months ago, I wrote an article for the British Chamber of Commerce in Guangzhou called “Continuous Market Entry”. A client of ours found that article and called to talk to me about it. It had been awhile since I looked at it so I did a quick review … and not only did I COMPLETELY agree with what I wrote then, I think it is even more important now! Lest you think that my ego has completely run away with me and that I have become my biggest fan (or maybe IN SPITE of that!), let me be clear – what I said then (and will say today) is NOT rocket science. In fact, because this is not rocket science – because it is quite logical and, at its heart, pretty simple – we tend to overlook it in favor of more complicated (and, we think, therefore more valuable) ways of growing our China businesses.

So in today’s Podcast, I would like to revisit this issue and explore it a bit deeper.

For most foreign companies establishing a business in China, the phrase “China market entry” is a one-time process of market assessment, strategy planning and corporate structuring. Once the business license is issued, there is a palpable sense of relief among the management team – “Whew, market entry is done,” they say, maybe hoisting a few congratulatory pints between then, “Now bring in the implementation team to get things going!” However, those that have been here for awhile understand that “China market entry” is not a one-time thing and that successful companies – i.e. those that are making money here – are continuously revisiting and refreshing their market penetration strategies.

In a similar way, a manufacturing theory that originated in Japan called “Kaizen” – roughly translated into English as “continuous improvement” – advocates that quality improvement is not a one-time thing: do it once and you’re done. Rather, quality should be a constant concern for everyone in the manufacturing environment and companies should always be evaluating how they make their products and how they can improve them.

We look at what we call “continuous market entry” in the same way: it is an attitude and a process whereby companies approach their on-going China market assessment and strategy planning as if they are facing it for the very first time. This approach is especially important for companies that have been in China for awhile, typically 5-10 years (or even more). Our market strategy consulting firm has been on-the-ground in China since the mid-80s and helped many of these companies on their first market entry. We are now working with many of them to “re-enter” China by taking a fresh look at today’s market conditions and then crafting an appropriate response.

Continuous Market Entry: “Re-asking” Questions
Going “back to the beginning” is nothing new. Sports professionals talk about maintaining their love for the game by remembering what it was like to play as children on the playground. Therapists recommend couples to find ways to keep their relationship fresh by imagining that they had just met. Buildings are renovated, torn down to the foundation and rebuilt, as if new.

For those who have been here for some time, it is difficult to go back to the beginning because we cannot help but look at China through the lens of the lessons we have learned from the past, through our successes and failures. Most of us would not want to return to the naïve attitudes we had when we first came to China: how easy we thought it would be, how smart we thought we were ourselves. No, many foreigners here “walk with a limp” and we would not trade our battle scars for anything.

So when I talk about continuous market entry, I am by no means advocating naiveté and downright stupidity (there is already a whole lotta that here among foreign companies entering China!). What I am encouraging us all to return to is the exploration of the many questions we had about the China market and how we could be successful when we first came here. Deep down, we knew that we didn’t know much, and we were hungry for information and any bit of insight that could give us a leg-up in our market entry. It is this non-stop asking of questions that lies at the heart of continuous market entry.

There are three categories of questions that I would like to briefly address here: questions about market demand, distribution chains and competitors.

Market Demand: Who is my Customer?

One of the first questions anyone asks when getting into a new market is, logically, “who will buy my product?” A simple question, no? Well, no…at least not in China! Identifying, with any level of precision, who in China would buy your product and what product features, functions and pricing would satisfy was very difficult in the “old days.” Getting access to potential buyers was difficult: travel was hard, phones didn’t work, we didn’t have the Internet or email. Secondary data, when available, was very thin and was too loaded with political overtones to be very accurate.

However, many early foreign entrants showed up with their products and – wonder of wonders – they sold some. Sometimes they sold a lot! Slowly but surely, the foreign companies that survived developed a customer base that kept them in business. The smarter ones moderated their expectations, following a fortune cookie I once read: “Set your goals low and you will always attain them.”

But many of these companies became satisfied and somewhat complacent with their success, even moderate success. Slowly, they stopped asking themselves the questions that got them there: Who is my customer? What do they want? What else can I provide them? They slid comfortably into defining their China market as “the segment in which I am successful” rather than “all the segments I could possibly address.”

In recent years, segmentation of many markets in China has become much more complex and fragmented. Take the automotive market: there used to be only a few kinds of cars to choose from with very few private buyers. There are now well over 100 brands of cars in China with hundreds of models to choose from in a dizzying array of quality, price and performance tiers, all being purchased by private owners. If you are selling into this market now, you better understand, in detail, what your opportunities are in each segment, for each kind of buyer.

All foreign companies – and particularly those that have been here awhile – need to understand the details of their market segmentation and to identify, clearly, which segments they should pursue and which they should leave alone. For the latter, this is not easy. A client of ours in consumer products with over 10 years in China is currently going through a ground-up market assessment, looking at the market as if they were not yet here. Our early strategy meetings were full of statements that started with “based on our experience…” or “we know that…”. They have now moved into a stage of asking questions of the market and exploring ways of looking at it that they have never done before. The deep market probes we are doing among customers, distributors and competitors are guided by these questions and we are looking at how our client’s products are used in the market, not how our client sells them. This, in turn, has led to new ways of segmenting (and selling to) the market that is resulting in some real growth.

Another client of ours is trying to look at new ways of serving the customers they already have. Because they were so early into the market, they pretty much defined their sector … and while they have certainly found success and happy customers, their strategy has been more focused on “what we have to sell” rather than “what our customer wants to buy.” Now that there is more competitive in the market, our client is going back to their long-time customers and are asking, in effect, “what if we weren’t here … what would you want??” It’s a tricky thing and we are getting some resistance from some divisions in our client from people to have an “if it ain’t broke, don’t fix it” mentality. However, the CEO and senior management, thankfully, have a different view … they see the market changing and know that they will soon face customer demands that they cannot fulfill. They need to get out ahead of those demands now, understand them and plan for them.

Distribution: Finding New Routes to Market

Not only have veteran foreign companies in China lost touch with their customer segments, but they often miss key distribution routes to those customers. It is logical to think that if my customer is “A” then the way to reach them is “B”. However, as markets have changed and segmented, so have routes to those markets and it is healthy to continuously review one’s distribution strategies.

A client of ours brought a product in over 12 years ago and used some Hong Kong distributors to do so. At that time, the Hong Kong distributors knew the market as well as anyone and besides, there simply were not any “local” distributors. In fact, many foreigners at that time did not differentiate between those from Hong Kong and those from the Mainland, naively calling them all “Chinese”.

Depending on the industry and channel, there are now many local distributors that are quite mature. They know their markets, they often know technology, and they certainly know how to sell to local buyers. In the case of our client, their Hong Kong distributors are now actually losing deals to local distributors because the local buyers consider those from Hong Kong to be “foreigners” who don’t understand local markets. I am in no way saying that all Hong Kong distributors are a bad idea in China today – but I am saying that what was appropriate several years ago may not be appropriate today.

Companies pursuing continuous market entry are re-mapping distribution channels at the same time they are re-segmenting their markets, all the while trying not to be biased by the distribution channels they worked so hard to establish already. It is not an easy thing to do, but they are critically analyzing the “reach” of their present distribution and are assessing whether or not it is as broad or deep as is required. We have done many projects over the past year to objectively map just how far a foreign company’s distribution is reaching. In all cases, we found that penetration was not as great as the distributor was telling our client nor was it often even in the right channel. These discoveries didn’t necessarily lead to our clients replacing distribution; rather, they were able to add partners to get into areas they had no access to. Only an attitude of continuous market entry led them to such conclusions.

Competition: New Players in New Segments

When many of the “old-timers” came into China, they were some of the first foreign companies entering the market and their ability to differentiate themselves was relatively easy. Price and quality differences were very apparent: the quality and price of the foreign product was very high and the Chinese competitive products were, if they existed at all, typically low price and low quality. It was often easy for foreign companies to charge a premium of several hundred percent because a certain portion of the market was looking for quality and was willing to pay for it. If a foreign company was bringing a product or a technology to the market that had never been seen before, they found buyers (often other foreign companies) willing to pay anything for it. Ask them who their competition was, they would say “no one”…and they were basically right.

A client of ours was in this situation. The capital equipment they brought into China was brand new in the market; there was nothing like it here. Our client considered it “world class” quality – and indeed, they lead most of the rest of the global market in this product category. Their immediate market entry was very successful. There was a small part of the market that would pay any price and our client was always pushing their manufacturing capacity to supply their customers.

However, as the market matured, two things happened: first, more buyers came online who began to see the use of this particular product and thought it would be helpful. However, these buyers were not rich foreign companies but were often privatizing local companies who were looking for “China quality”, not “World Class quality”. Secondly, more competitors – many of them local Chinese companies – rose up to supply these segments with that “China quality” equipment, leaving our client in its own “World Class” bubble.

Recently, our client has been looking at the China market with a fresh perspective and is realizing that the market has not grown beyond them, but has grown up below them. They still have sales in the premium segment of the market, but the sweet spot of the market has shifted to the middle range and competition there is quite fierce. Our client has been going back to find out how their competition is serving this market and how our client can begin to compete. We have had to work together to eliminate the phrase “we have never done it that way before” and still have some distance to go; however, waking up to a market rife with strong competition has changed the way our client is looking at the market and planning their future strategies. Our client no longer claims they have no competition in China!

Another client of ours in consumer products is looking at the challenges facing them in China in today’s very unique retail market. For the non-retail jockeys in my listening audience, the retail challenge in China today, in a nutshell, is the tension between what is called “traditional trade” and “modern trade”. Traditional trade are the mom & pop shops, local retailers serving a particular neighborhood … think the corner hardware store or the neighborhood grocery store… small, familiar and convenient. Their product stocking practices are hit or miss, their pricing is not too aggressive and their quality is sometimes suspect, but their customer service is fantastic. They have been serving the same neighborhoods, sometimes for generations.

Modern trade, on the other hand, are the “super stores” and “hypermarkets” … think Home Depot in the U.S. (or B&Q in Europe) and Wal-Mart. These are the stores that go to market based on their huge selection, their good quality and their low prices. They are not always convenient to get to, but they are a “destination” … you go there, fill up your car (or bike basket) and go home happy.

China is going through a massive transition from traditional to modern trade … where people are going from shopping at the corner grocery store to making a trip to Wal-Mart or Carrefour. While the VOLUME of total retail sales is in the traditional channels, the GROWTH is in the modern ones. And consumer goods suppliers must manage the tension that exists in serving both of them.

Our client is struggling with this … and so we are in the process of doing a benchmarking program to look at how some of their competitors are handling some of these problems and then looking at how these challenges are addressed by peer companies – companies working the retail space but not in the product space of our client. We are seeing some VERY interesting results so far. The biggest benefit is that it kind of levels the playing field. We all tend to complain that what we are facing is unique (and many try to get their bosses to see that, given the uniqueness of the situation, they are doing pretty good!). However, when you look at how your competitors are facing the very same problems you are, you take away these excuses. You benchmark your current performance against theirs and you see where you really stand. You also can sift through a lot of approaches to the same market – some of them are good and some of them are not (and some of them are downright illegal!). But you are not creating strategy in a vacuum here … you are looking at the market realities and are honestly assessing yourself against them.

Conclusion

In conclusion, I certainly do not want to give the impression that a continuous market entry perspective is easy nor is it a cure-all for what presently ails stagnant foreign companies in China. However, for many of us who have been in China awhile, we are victims of our own success, even if success is defined as “still standing.” We have found that returning to the fundamental questions about customers, distribution chains and competition really does begin to help break us out of old ways of thinking.

For those newly arrived in China, I would like to encourage you to start now your process of continuous market entry. For the moment, hide your business plan and the feasibility study you used to get your business license. Get your key sales and marketing staff in a room and ask each other the tough questions about customers, routes-to-market and competition and press yourselves to answer them (or at least establish a plan to come up with the answers to them).

If China has taught us one thing in the past decade, it is that this country and its markets will not stop changing, growing and adjusting to global conditions. The successful foreign company in China will adopt a similar attitude knowing that when they stop entering the market for the first time, it will be their last time.

Thanks again for listening. And remember our motto: “In China, everything is possible but nothing is easy.” We’ll see you next time on the China Business Podcast.

China’s rapid development in the past 15 years can leave one feeling a bit dizzy.  My first time in Shanghai in the late 80s – in town for an escape from the small central China city where I was living and teaching – was heady enough.  There were only 10 taxis in the entire city and you had to get around on diesel fume-belching busses or by foot (and it was a battle between the aerobic benefits of walking and the heart-stopping inhalation of diesel exhaust).  Now its tough to step in the street here and avoid getting hit by a cab (unless, of course, it is raining or you are late to a meeting or you have two heavy boxes you are trying to schlep to a client … and then there are NO taxis to be found in the entire city.  Go figure).

So when China seems like its returning to the bad old days, it is a bit shocking, particularly when this return is signaled by increased regulation from the Party.  There have been a series of steps over the past year that, in hindsight, are heading in a direction that could be of concern to everyone who does business in China, local and foreigner alike.  Late last year we saw the government put extra restrictions on Carlyle, the financial investor, as they sought to buy out XCMG, one of China’s leading heavy equipment manufacturers.  Carlyle eventually let the deal die because the limitations were so onerous.  At the time, everyone clucked about “protectionist policies” but eventually chalked it up to China wanting to guard an industry that could figure into national defense (ala the U.S. blocking the Chinese oil giant CNOOC from investing in a U.S. offshore oil company a couple of years ago).

The next big restriction was for visas for foreign visitors wanting to enter China just before the Olympics last year.  Thousands of businesses were impacted by this and many Olympic events were sparsely attended because people just could not get here.  Again, apologists for China cited so-called “legitimate” reasons for this … in this case there were serious security concerns.  The reality was that China was playing a game of CYA – “Cover Your Anterior-region” – and was willing to go overboard on restrictions in order to insure that nothing happened while the spotlight was shining so brightly on them.  Sure, it bothered me too but I guess I understand erring on the side of caution – my own country’s Transportation Safety Administration recently busted my daughter on a routine check at an airport … she was relieved of a fingernail clipper, ostensibly because she might use it to hijack the airplane to Cuba (where she would need said clipper because you simply cannot buy them there).  In the immortal words of Fleetwood Mac: “Oh well.”

But then this year, things have been getting even more tight, it seems.  We started the silly season off with Coke being denied their acquisition of the large Chinese juice manufacturer, Huiyuan.  The government was oddly silent on the specific reasons for the denial.  There were some mumblings of avoiding “monopolistic” practices which, in a way, was legitimate as the merger would create a beverage company that would rule in two key categories: sodas and juices.  But many legitimately pointed out that China’s industries are ripe for consolidation and that, following pretty much any other economy as its developed, there are, as time goes on, going to be fewer but larger players in the market.  There is speculation – no none of it published, as far as I have seen – that the government is pushing Huiyuan to themselves become more acquisitive … to go out and start buying up smaller beverage companies to grow larger themselves, in effect creating a competitor to Coke.  Typical of China, the old adage is flipped on its head: “if you can’t join them, beat them.”

Just this last week, two things have happened to make me even more concerned.  The first was the release last Friday of the new Postal Law in China which everyone in the logistics and delivery sector has been anticipating like Christmas morning at the Bill and Melinda Gates household.  However, much to the chagrin of foreign delivery companies like FedEx, UPS and DHL, the law bans foreign companies from participating in domestic express delivery, citing the original 1986 Postal Law that limits domestic delivery of regular mail to the government-owned China Post.

1986?  In China in 1986 it took an entire day to mail a letter!  We had to, literally, make our own envelopes, painstakingly cutting out a template from paper and then using paste thoughtfully provided by the post office to glue them together.  Then you had to let them dry before stuffing them with your letter.  You ended up with glue all over, trying to cram a sticky mess in a drop box with fingers webbed like Aquaman.  And if you wanted to send a parcel in China, fuggitaboutit!  You had to purchase white cloth and make your own bag in which to put your items.  Seriously, I am not making this up.  Around the post office were stores selling fabric, needles and thread and you had to form your own sweatshop on the steps outside the post office to assemble your package for mailing.  I had flashbacks to 7th grade home-economics class, nearly failing for improper needle threading and insufficient stitch tightness.  Who knew that I was actually learning life skills that would come in handy some day??

Anyway, I digress …  This new and unimproved interpretation of the Postal Law is going to be a serious setback to the entire postal system in China.  Plainly speaking, the foreign delivery companies have, for the most part, cracked the code in express delivery in their home markets.  Pretty much anywhere in Europe or North America, if I want something delivered by 10 a.m. tomorrow morning, its going to get there.  I might have to take out a second mortgage on my house to do it, but dang-it, its going to get done!  Now, I don’t for a minute think that any express delivery company would be able to quickly transplant their system in China … China is too big and too complex to do that simply.  But the China postal system could certainly use some external influence and best practices … mailing a letter by regular post is a hit-or-miss thing these days.  The Chinese authorities cited security reasons for keeping the foreigners out … I guess news of the express-delivered anthrax a couple of years ago in the U.S. freaked some people out here.  But seriously, can the Chinese postal system do any better??  I guess in one way they can – with such a dismal delivery rate for their mail the insidious package can’t do any damage if it never reaches the intended receiver.  Let’s hear it for incompetence!

The last indicator that something’s up is the rumor – at this point unsubstantiated – that China is going to once again be very restrictive in issuing visas this summer and into the fall.  This year marks two very important anniversaries in China: the 20 years this June since the Tiananmen Square movement and 60 years this October since the founding of the People’s Republic.  Like with the Olympics last year, China wants to keep out anyone who might make a placard and march on the streets, shouting their support of any one of a number of banned issues.  Hong Kong’s South China Morning Post published a story last Thursday saying that Beijing has said that all “F” business visas issued after April 15th will expire on September 15th.  An F visa is for short-term stays of less than 6 months.  The paper quoted several China visa agents who said that applications for F visas beyond September 15th would be put on hold until there were more clarifications from the government (who, like any government, avoids clarity like the plague).  Again, there have been no confirmed announcements of this, just newspaper articles … so let’s not wig out until we have to.

But shy of wigging out, I think there is some indication for concern here. There is DEFINITELY a protectionist wind blowing in China and with it could come a storm that could hit us all.  There are two sides of this coin here:

First, remember that Chinese regulations are often published but never – or are selectively – enforced (on a side note, the converse is also true … China has been known to enforce rules for which they do not allow the publishing of the official law … I have heard stories of people being prosecuted for breaking a law and were refused the request to actually read the law on the basis that the law was a state secret).  What this means is that there are varying levels of sensitivity in China – if you are a big company and are doing big things in China, the light shines more brightly on you and you have to take more care to cover your bases.  All the big Fortune 500 companies working in China spend squillions of dollars each year in lobbying efforts in Beijing and in the various localities in which they do business.  This is just good business practice (hey, they even do it in Washington!).

But for many companies, they work hard at doing a series of smaller things in order to stay below that radar and to not attract attention.  In any M&A deal we do in China, one of the biggest commercial due diligence questions to probe is how the regulating authorities will treat the new entity once it has foreign ownership.  Chinese companies can get away with things that foreign companies cannot, simply because they are foreign companies (and, contrary to popular practice, having local staff often does not protect you … the spotlight is just brighter on you when you are a foreign company).  So the lesson here is to explore all the possible regulatory implications of what you are doing in China … not just the laws on the books but to talk to all the authorities who touch your business to get their read on what might actually be enforced.  Your business leaders here – your general managers and CEOs – should be spending a large amount of their time schmoozing with the authorities here.  If they are not, you are exposed.

The second thing to remember is, simply, that China is different – it is a one-Party system and that Party is primarily concerned with maintaining their singular hold on power. On a global scale, it is not the riskiest place to do business – that honor is held with dictatorial grip by some southeast and African nations.  But it is comparatively riskier than doing business in the West.  Walk the streets of Shanghai and you can often forget that – the signs for Western products and services make it seem like New York with a really big Chinatown.  But its not.  China is different from other markets.

And, truthfully speaking, I often forget this.  Therefore, I have made myself a May Day resolution (my New Years resolutions having drowned in the Ocean of Poor Self Discipline long ago) – I resolve to be more observant of some of the macro-regulatory moves here and to not be so flip and dismissive of them when they do happen.  I firmly believe that China is moving towards more openness … my last quarter century hanging around here is proof of that.  However, these changes progress at glacial speed with short-term freezes and retreats in the midst of forward movement.  Whether what we have been seeing recently is such a momentary freeze or the tip of a larger iceberg remains to be seen.