China Business Blog and Podcast

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Length – 26:04

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…

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Length – 8:27

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.

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Length – 10:20

As we’ve been saying on this Podcast for a month or so now, China had a really good 2009.  While most of the world is thrilled to send 2009 off to the Group Home for Annoying Old Years and welcome 2010 in diapers, China is still doing victory laps for their 2009 performance, even though it was down severely from previous years.  There is a lesson to be learned here … in a room of ugly people, the average schmuck is a supermodel.  And trust me … I know how to do schmuck.

But as we all know, there is the story of what is happening in China, and then there is the truth.  Not to go all post-modern on everyone here, but the truth – if there is one Truth with a capital T – is probably somewhere in between and pundits aplenty are rushing to fill the blogosphere with their version.   For some reason, every time a talking head heaves an opinion on China into the public sphere, I have this overwhelming need to comment on it, to give the general public the beneficent view of my own brilliance and expert insight.  I know, you don’t have to tell me, I need professional help, I am fully aware of that.  I’ve tried therapy, several mood-altering substances and, as a last gasp effort, producing this Podcast, but I it hasn’t helped much.  The end-of-the-decade articles on China were killers … everywhere I looked there seemed to be an opinion popping up that absolutely REQIRED my commentary!  I consider it a mark of my immense self control and budding maturity that I was actually able to lead a somewhat normal life in the midst of all of that and did not spend all my time blogging back.  Thank you in advance for your kind words of congratulations.  I just live one day at a time.

But there is one article published way last October that I keep coming back to and, finally, cannot help but comment on.  It is by Rana Foroohar in Newsweek International is tantalizingly titled, “Everything You Know About China Is Wrong”.  The title alone compelled me to read and comment on it since, as China market strategy consultants, we go to market with what we call a “correct” view of China based on 25 years of experience so I was anxious to read it.

Ms. Foroohar elucidates several reasons why China is not the economic miracle that everyone seems to think it is.  Her opinions are not rocket science nor are they all that original … over the years there have been China-doubters aplenty who look askance at the phenomenal growth in China and wondered two things: a) is it really possible; and b) is it really sustainable??  But just because something is not original does not mean that it is not worth listening to (I give you anything recently recorded by Lady Gaga and the Jonas Brothers as proof positive of this) and I would encourage you to read her article (those of you listening to this Podcast can go to our blog for the link).  Overall, I agree with most of the statements that Ms. Foroohar makes and, in fact, I think she makes them very well; however, I would like add a couple of perspectives from the cheap-seats…

One of the myths that Ms. Foroohar attempts to deflate is “The Communists are brilliant economic managers”.  The evidence in favor of this belief is that, in 2009, China was able to maintain an 8% growth in the face of what is arguably the world’s worst economic meltdown ever.  The criticism is that this growth is driven by government investment in infrastructure and that, some day, China will have all the roads, bridges, tunnels, telecommunications networks and subways that it needs and won’t be able to make the transition to a privately-driven economy.  And it is argued that this last round of economic stimulus spending in 2009 just further deepened this problem.

This is not a new criticism and, in fact, economists, China watchers and the rabble of doomsday pundits have been making this statement since China first started their massive investment campaign in the early 90s.  For the most part, I would agree … focused investment on infrastructure is, by definition, not sustainable and, someday, China is going to have to broaden their economy to bring in other, more sustainable engines of growth.  However, I would add two caveats that would argue against being too concerned about this right now.

First of all, despite nearly 20 years of infrastructure investment, China has just scratched the surface of their total need.  China is a MASSIVE place and, while the infrastructure in the big cities of Shanghai, Beijing and Guangzhou is quite good, there is SO much more to be done in China’s Tier 2, 3, 4 and smaller cities (remember that China has over 100 cities with over a million population plus a seemingly endless countryside).

What I am saying is that the need for this spending – and the associated support it gives to the broader economy in terms of employment and supply infrastructure – is not going to end any time soon.  In fact, its probably going to continue strong for the next 20 years or more.  Yes, there are many associated problems with such infrastructure investment – the housing and real estate bubble is probably the most concerning – and China is going to have its ups and downs.  But this is not a small country we are talking about where you work hard for 10 years and everything is built.

My friends and colleagues in India only WISH that their government would have a similar commitment and authority to build infrastructure in their country … if they could, then I think India’s growth would quickly catch up to China’s.  But as it stands, there are so many internal politics in India that infrastructure projects often get stalled and never completed (there is a highway construction project in Chennai that I see when visiting clients there … and for over 5 years it has remained in the same state of incompletion.  There are people at the site and they look like they are doing something … but nothing seems to get done!).

Spending on infrastructure is not going to end any time soon … but the government can do something about the types of infrastructure they invest in.  The 2009 economic stimulus package of over $600 billion from the China government earmarked over $100 billion for what is called “social infrastructure” … hospitals, schools, etc. In the long run, the return on this type of infrastructural investment can be huge … and as I’ve addressed many times before in these Podcasts, China healthcare is in desperate need of life support itself and sustained investment here will do wonders.

Secondly, we need to understand – and even appreciate – the investment perspective that the China government takes in these projects.  Ms. Foroohar quotes a business professor who observed that, although there was a nice new highway built between two rural areas in China, there was no traffic on the road.

[let me just stop for a moment and ponder what it would be like to have a road somewhere in China without an immense amount of traffic on it … living in Shanghai where traffic is so bad we actually USE our fenders, that is a nice thought . OK … I am better now.  Thank you].

A couple of quick responses to this: is there infrastructure in China that is built without any thought to its eventual use – what in the U.S. has been called the “bridge to nowhere”?  Yes, definitely.  The number of pork-barrel projects here are directly proportional to the number of people schlepping the barrels … and we have nearly 5 times that number in China than they have in the U.S.  So yes, nosy business professors are going to be able to observe such examples of poor use of capital resources.

However, I think that the professor should relish in the fact that he can stand on that highway in complete safety.  Fast forward 10 years and I would venture to guess that this same professor would not be willing to stand in the middle of that road – there will be SO much traffic on it so as to turn him into a human speed bump.  In any environment, the population expands to fit the capacity provided and in China, this is doubly true.  Where I live in Shanghai, on the Pudong side, this was just rice fields a few years ago and now it is bucking to be a leading financial capital of the world.  There are putting up an 80-story building where just 20 years ago water buffalo grazed (giving a whole new meaning to the phrase “a bullish market”, I suppose).  The primary reason behind the real estate bubble here is that people are SO confident in their speculation that they are willing to bet large sums of money on property that will quote-unquote “some day” actually be worth more than the exorbitant price they just paid for it.  Oh, that and the fact that much of the real estate investment is being driven by people not using their own money but the government’s … but that is an issue for another Podcast.

So we should not be asking the question: “Is China’s spending on infrastructure sustainable in the long term” because it is, by definition, NOT sustainable.  Of course it isn’t.  We should, on the other hand, be asking the more difficult-to-answer question “what do you mean by ‘long term’”?  We are only 20 years into a modern business environment in China, and look how far we’ve come.  Of course, you don’t drive well by admiring the view in your rearview mirror (although that might explain some of the traffic problem here) so we need to look ahead.  My point is that, barring disasters of all types, China’s near to mid term looks pretty good and very sustainable.

Of course, there is a LOT that I do not understand about macro-economics and I am sure that I will get nasty letters from the Association of Super Smart Economists of just how wrong I am.  But to be honest, how accurate are those Super Smart Economists?  They are working off of models developed in other economies in other cultures at other times and have been woefully inaccurate in predicting even the things they supposedly understand well (ala the mortgage crisis).  The fact remains that we don’t have ANY case studies to guide us as to what might happen here in China … there has never been a country in history that is this large and has made this big of an investment in their infrastructure and government spending.  The U.S. and Japan are in the same direction, but they did theirs at very different times in history when the world was a VERY different place.  Yes, China will eventually have to pull out of this model … it cannot continue forever.  But we don’t have any good examples of a situation of this scale where this has happened.  As I have said before, in China, we are working without a script AND we are working without a net!

Twenty five years ago, when I first came to China, if someone were to show me a picture of what Shanghai would look like in 2010, I’d think they were smoking something.  NO ONE could have – or would have – predicted this.  Indeed, there were multiple doomsday preachers talking about the immanent collapse of “Red China” (I love that term, Red China … like it’s a theme color for the day!).  But here we are, still technically “Red” but, so far, no collapse.  Could it happen?  You bet.  But I assume that the only completely untrue statement is “I am 100% right” so it could also not happen.  And I am betting on the latter.

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

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Length – 18:21

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 …

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Length – 17:55

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 …

Keys to Growth in China – New Cities, M & A, Distribution

Raleigh, NC – December 31, 2009 — China will provide necessary growth for US companies in 2010. Kent Kedl, managing director of Technomic Asia in Shanghai, says there are five opportunity signs for companies to watch in China this year. Kedl highlights those areas below:

· Growth – The World Bank projects a robust GDP for China following an anticipated 8 percent growth in 2009. There will be few places in the world with this kind of growth.

· Distribution – Companies who are in China already need to find a better way to get their products to market. It is the classic case of getting products to market, which requires a transportation infrastructure and integrated supply-chains. The Chinese government stimulus and other programs are addressing infrastructure needs. The last two decades of manufacturing investment and export experience within China make this country keenly attuned to the benefits of integrated supply-chains. US companies are becoming familiar with cities like Dalian, Chongqing, and Hangzhou as well as 40 others as those areas approach double digit annual growth over the next several years.

· Consolidation – The majority of China’s industrial sectors are over-crowded and too fragmented. As the market matures and distribution consolidates, the companies themselves will consolidate.  Look for this to happen in automotive, primary metals (particularly steel and aluminum), consumer products (food and beverage, mid-range body care, all ranges of homecare).

· Mergers and Acquisitions – A separate and complex strategy unto itself is divided into two major categories, 1) into China and 2) out of China.

o Into China – Foreign companies need speed-to-market, and M&A is the best way to achieve coverage and market share.
o Out of China – This is still in the very early stages but we should see some mid-level deals done by Chinese companies overseas (not only the big energy deals).

· China’s Global Influence – China is emerging as a leader as the dust settles on the global economic crisis. Politics aside, China will continue to expand its shoulders upon which the rest of the globe will build their own economies.

Key Sectors to Watch in China
Kedl believes there are several key industrial sectors to watch in 2010 in China. They include: 1) Medical, particularly healthcare services, look for the privatization of hospitals, 2) Automotive, consolidation of OEMs, growing strength of dealers and dealer groups, stronger aftermarket parts distribution, and 3) Consumer products, particularly in the 2nd and 3rd tier cities.

Technomic Asia conducts primary and secondary research in China markets for Fortune 100 and midsize companies. Kedl was also deeply involved in a recent 2009 China Business survey done for the American Chamber of Commerce in Shanghai. According to Kedl, “This survey showed that even companies who are in China for 10 years need to reassess how they approach China because the country has changed from a provider of low cost production to a growth consumer market.”

In addition to research, Technomic Asia uses their research to assist companies develop strategies to participate in China markets and sourcing.

The China Business Podcast, hosted by Kent Kedl, will focus in greater detail on these growth areas in upcoming episodes in January, 2010. Listen to them at iTunes, Stitcher Radio, or at www.technnomicasia.com/blog. Here is the first podcast with an overview of these business opportunities to watch in 2010 in China.

About Technomic Asia
Technomic Asia, the Asian arm of Tompkins International, is a strategic consultancy with more than 25 years of experience helping clients plan and execute Asian growth strategies. Technomic Asia assists companies in entering the Asian market or in expanding their business by providing critical market insight, an understanding of business potential and assistance in designing the optimum strategy for success including M & A. Technomic Asia’s Steven Ganster and Kent Kedl are co-authors of “The China Ready Company,” a book that details the formation of a successful China strategy.

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Length – 14:23

OK… I am just going to put it out there: these last 10 years have kind of sucked.  Years from now, we are going to look back on the first decade of the new millennium and only the very strong among us are going to be able to avoid using a variety of four-letter words to describe it.  From the rise of terrorism to the meltdown in the global economy, these have been tough times.

Things didn’t start well, of course, with the futuristic “Y2K” problem. It was, for the most part, just IT consultants crying wolf.  But to so completely lack faith in our own technology so as to doubt its ability to handle a digit change in the thousands column does not speak well of our confidence or our technology.

But, for me, what started things off on the wrong foot was our inability to agree with simply what to call this decade.  The “Aughts”? The “O’s”?  The “Naughts”?  Given the current state of the average American’s bank account, “the Nils” sounds like it’s the most appropriate.  But c’mon, folks … if we can’t even name the stinking decade, how are we supposed to handle the real issues.  Frankly, I am a bit ashamed that we Americans couldn’t come up with the marketing slogan that we could all hold hands around.  We are a country that brought you such ditties as Hooters, Cabbage Patch Kids and the Pet Rock.  And we can’t name a decade?  How embarrassing!

However, contrary to the desperation much of the rest of the world is facing, China had a pretty good decade.  From a GDP of about $2,000 per person when 2000 started, China is projected to be over $6,500 per person heading into 2010.   And unlike other changing economies such as the former Soviet Union, China’s political infrastructure didn’t go through a meltdown in the face of such growth.  Certainly, there were many doomsayers predicting the imminent collapse of China, but so far, these people with their Nostradamus For Dummies guidebooks have been, thankfully, quite wrong.

The Chinese authorities are, certainly, giving themselves a big Attaboy for their performance in this past decade.  Not only has their growth been the best in the world, but they’ve landed some pretty big gigs to show it off including the Olympics and the Shanghai Expo.  Fair enough, let’s give China their due … but let’s also look forward to the next decade and make some guesses ourselves as to what we might expect.

Here at Technomic Asia, we are celebrating our 25^th year in China … that is, if I might say so, pretty impressive for a boutique consulting firm where many of our peer firms have burned out long ago.  However, if you would have asked any one of us when we first started in China in 1985 to predict what China would look like in 2010, there is NO WAY that any of us would have come close to envisioning what I can see out my window right now.  Back then, I had to bring in coffee from Hong Kong and now I have three Starbuck’s stores and seven knock-offs of the same within a 10 minute walk of my office.  So predicting the future in China is not a science; heck, its not even an art.  I would liken it to a pin-the-tail-on-the-donkey game played by at a birthday party of some cargo cult voodoo priestesses.   Yea, its that much of a crapshoot.

But what the heck … its only my job to assess the China market and plan growth strategies for my clients, so I am going to go out on a limb here and introduce 5 themes for 2010 that I think will become even more important as the decade continues.   They are, in no particular order because they ALL are important and impact each other:

1. Growth

2. Distribution

3. Consolidation

4. Mergers & acquisitions

5. The emergence of China as a global power

As a year-end wrap up, I want to introduce each of these themes today and then we will re-visit them throughout 2010 and explore their progress (or lack thereof).  So let’s get to them …

The last decade has seen China grow in importance in companies’ global strategies … from just a blip on their radar screen at the turn of the century, China is now a major – if not THE major – strategic initiative for many companies.  And the reason?  Growth!  And its not just because, in 2009, China was the only market in the world to grow more than 8%.  The rumor perpetuated by politicians and angry journalists that China is ONLY a source of low-cost labor and a way for evil capitalists to export jobs from the U.S. is dead-wrong: China is a source of good-old top-line growth. In the midst of all the management theory bouncing around boardroom walls, it turns out that customers are important.  As a former sales manager of mine once told me, tongue firmly planted in-cheek, “Kent, I’ve done some research and have determined that 100% of our revenue comes from customers.  We better focus on them.”  And you know what?  China can be a great source of new customers for many companies.

We just completed the annual business survey for the American Chamber of Commerce in Shanghai and determined that over 60% of American companies were in China primarily to serve the China market … they were looking for growth!  As U.S. and European companies are emerging from the dark depths of economic depression in the past couple of months, I have increasingly had serious discussions with CEOs about ways to grow in China.  They have all said that they feel they have just scratched the surface of what they could – and should – do in China and they need to do more.

A sub-topic under our “Growth” theme for this year will be companies’ expansion into China’s Tier 2, 3 and 4 cities – its not only important to be in China but you have to expand across markets here as well.  Remember that a Tier 2 city in China can still have nearly 8 million people in it so we are not yet talking about selling into rural areas … this is still urban marketing.  But gone are the days when  company could just set up a sales office in Shanghai, Beijing or Guangzhou and hope to do enough throughout the country.  We see many companies today making significant efforts to expand their China footprints and throughout this year we’ll talk with some of these company leaders to find out what they are doing and how they are doing it.

Closely associated with the “Growth” theme is our second theme, “Distribution” … I guess this is overstating it but if you want to grow, you’ve got to actually get your products to market.  Companies who are already in China need to find a better way to get more products to more markets.   Companies are discovering that China is a VERY large and fragmented market and your route-to-customer in one region will not be the same as in another region.  We’ve said it before in these Podcasts but you will never – repeat, NEVER – find one distributor to represent you all over China.  I don’t care what industry you are in, it ain’t gonna happen.  Sure, your distributor will TELL you that they can do it, but they cannot, at least not as well as you need it done to realize the growth that you need.  You will need to take over that responsibility yourself, to find the right combination of distributors to reach the right markets.

In 2009, we did a lot of work for clients to assess the strength of their own distribution, typically benchmarking their operation against their competitions’ (both local and foreign).  And more often than not, we found huge gaps … geographies not covered, certain sectors totally missed and important customers under-served.  These clients are using 2010 to rebuild their distribution.  Sometimes they need to tear things down and then rebuild them … but more often than not, they just need to identify the gaps and start to fill them.

Not only do we need to address the people part of the distribution equation but we also need to consider the supply chain infrastructure.  From sourcing to manufacturing to transportation to warehousing and, finally, to distribution, foreign companies in China are reassessing how they handle their entire operation.  Growth without a firm distribution and supply chain foundation is impossible so 2010 will be the year when companies will start to get very serious about improving both.

The third theme that I think will be important in 2010 and beyond is “Consolidation”.  As I just said, China is a large and fragmented market and a key contributor to that fragmentation is purely the number of players involved in any particular sector.  For example, China has over 100 automotive OEMs … not just 100 brands but 100 distinct auto manufacturers (a long way from what we used to call the “Big Three” in the U.S. which is now, depending on how you count it, probably more accurately described as the “Big One-and-a-Half”).  In pharmaceuticals, there are over 3,000 manufacturers in China and over 10,000 pharma distributors.  Most of these are what China calls “sub-scale” which is a polite way of saying, in effect, that they are too small to survive very long on their own and really have no opportunity to grow very much.

The Chinese government is strongly supporting consolidation and are, in many cases, selecting key companies (often State-owned) to move to the top of the food chain in this Darwinian, survival-of-the-fittest process.  I did a Podcast recently on the Big Four automotive companies (including First Auto Works, Shanghai Automotive, Dongfeng and Changan) and how they are looking to acquire companies inside and outside of China to bring under their rapidly expanding umbrellas.  Look for some major automotive moves in 2010.  In pharma, the government is forcing the smaller distribution companies to merge with the larger ones, so much so that the rumor on the street is that there will be only one distributor per province in the end.  Personally, I don’t see how this can happen, at least in my lifetime, so while the end state is unknown, it is absolutely certain that consolidation will be the trend.

Foreign companies playing in China will want to play close attention to consolidation trends in their own industrial sectors.  The competitive landscape will change greatly as consolidation takes place … your competitors will be stronger, wealthier and have a larger geographical footprint.  In many cases, consolidation will result in a broader product portfolio, making it more difficult for you to compete with them toe-to-toe.

Our “Consolidation” theme leads us nicely to the fourth trend, “Mergers and Acquisitions”.  Not only will local companies grow through M&A but foreign companies are increasingly looking at growth by acquisition, particularly those who have been in China for awhile.  There are multinational companies who came into China through a joint venture many years ago but who are now, for all intents and purposes, operating as a wholly foreign-owned enterprise (or WOFE).  Once they did the deal, they started growing organically, adding products and distribution territories so that, over time, they have built quite a good presence.

However, they have gone about as far as they can go organically and, to speed up time-to-market and increase depth of market penetration, they are looking at acquisitions.  In the past couple of months, we have done some Podcasts on China M&A and will continue that again in the New Year.

Our fifth and final theme is a bit trickier and I put it under the heading of “China as a growing global power” … however, this requires some unpacking.  Here on the China Business Blog and Podcast, we tend to avoid so-called “macro views” and, instead, dig deep into the specific strategies and tactics that companies are using to succeed in China.  We don’t talk much about the goings-on in Beijing, the ins and outs of political leadership.  Its that not this is NOT important – it is – but such palace intrigue can often be quite far away from the day-to-day issues that company management faces in China and, for most of us anyways, we have very little direct influence on the seats of power.  Besides, our daily experience is in the trench warfare of markets, not hanging out in the rare air of the Zhongnanhai leadership.  And my momma always told me to talk about what you know…

However, I think we are seeing an emerging power and even “attitude” from Beijing that warrants mentioning and awareness.  Basically put, the Beijing leadership has been making more unilateral decisions lately and is doing so quite confidently that the rest of the world will not punish or even censure them all that much.  Just a few days ago it was announced that China executed a British citizen for drug trafficking, despite the VERY loud protests from the West that China should take some time and think about it.  The view from Beijing since the execution is that this is an issue of their “judicial sovereignty” and that the rest of the world should butt-out.  In the many articles I have read on this, the journalist inevitably mentions that Britain is China’s third largest trading partner and hints that British authorities are trying to “keep lines of communication open”.  Which means that, although they will whine a bit, nothing is going to happen to China because of their actions.

I mention this, not to criticize either side for their behavior – and I am sure there is lots of criticism to go around – but rather to highlight that we are moving into some new territory here.  2009 was a heady year for China … the Olympics, the fastest growing economy in the world, huge cash reserves, significant investments in U.S. t-bills all added up to an administration that, frankly, thinks they are pretty bullet-proof.  You can be sure that, increasingly, the Chinese government will be making more unilateral decisions and will be less and less sensitive to the opinions of other international players.  How it plays out is anyone’s guess … but suffice it to say that this will be a factor, starting in 2010.

One word of caution here – just because things are happening in Beijing does not necessarily mean that there will be a direct impact on what you are doing in your local area.   All governments move along their own timelines … and some would say their own dimensions of reality … and these timelines are often best measured using carbon-dating methods, things move so slowly.  So please don’t assume that I am prophesying doom and gloom … this is just another data point you will need to include in the algorithms you use to understand what is happening in China.

So there you have it … my predictions for the future.  Radical and cutting edge?  Probably not, but I am very certain that we will see these themes come into play and interact with each other this coming year.  As for each of you and your companies – include these themes in your strategic planning.  Assume that your competition is moving in these directions and challenge yourself and your China management to be able to articulate, in detail, how you are going to handle all of these, both defensively and offensively.

One of my favorite quotes about the future is from Alan Kay, the American computer scientist, researcher and visionary, who said “The best way to predict the future is to invent it.”  It has been true for the past quarter century I have been in China and will be so for the next 25 years – China is a unique environment where you can, literally, create your own future.  And this is what we at Technomic Asia hope for you in 2010 and beyond which is why we end every Podcast with our motto: “In China, everything is possible but nothing is easy.”  We wish you all a very Happy New Year and we’ll see you next time on the China Business Blog and Podcast.

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Length – 6:14

Most Americans live with the delusion that we blend in well in foreign cultures. We think that because we come from a melting pot culture we are, by definition and constitution, “multi-cultural” and, therefore, “any-cultural”.  As a card-carrying American (VISA card, I should clarify), I can tell you that this is wrong. While our distant ancestors might have come from somewhere else, the remnants of cultural sensitivity have long left the American cultural gene pool; indeed, they have showered, toweled off and returned home. The truth is most Americans, no matter their ethnic DNA, have regressed. We have adopted the American cultural mean and are therefore easily identified, particularly here in China. We walk tall, talk loud and surgically remove most of the tones from our spoken Chinese.

That said, most Americans are genuinely interested in what makes other cultures different …not that we necessarily respect those differences, but it is sure neat to know what they are. And what they are is very different from us. We are fascinated with the unique ways of foreigners because Americans have a generally-uniform culture. It is spread across 5,000 km of country and we all speak, roughly, the same language (except for members of our former government administration who tended to drop vowels and add syllables when discussing the situation in Eye-rak).

Then again, maybe our interest in other cultures is all a sham, nothing more than an attempt to assuage our collective guilt for foisting fast food and Britney Spears on the rest of the world (being responsible for both “Hit Me Baby One More Time” and a global addiction to trans-fatty acids is enough to make anyone desperate, I suppose). Whatever the reason, Americans are morbidly interested in how other groups of people behave, and how they’ve managed to retain their identities.

So for my American clients and friends that are making their first trip to China, I give them a crash course in “what to do” when they arrive. First, I tell them to present and receive business cards with both hands; secondly, always offer a guest something to drink; and third, if they drive, be sure to drive rapidly on crowded sidewalks, all of which are VERY culturally sensitive. The purpose of such cultural niceties is that it has meaning for both parties. The gesture of respect shown by offering your business card with two hands means a great deal to the Chinese, and at the same time it helps lessens the chance your card will drop on the floor which is definitely not a sign of respect.  The Chinese are quite pragmatic in these things.

My frustration, however, comes when foreigners start using cultural norms from our host country (China) when interacting with each other. For example, when I meet another foreigner and he hands me his card with two hands. C’mon … just get your card to me any way to you can: slide it across the table, flip it, fold it into a million paper cranes and fly it over, I don’t care. I am not Chinese so the two-handed thing means nothing to me and I don’t really need to know that you know how to do it, thank you very much.  Save it for someone for whom it really matters!

Things get really sticky when two foreigners from different cultures interact here, particularly when it comes to greetings. Meeting for the first time is pretty straightforward: smile, shake hands; get over the one-hand / two-hand business card thing and then you are home free. But develop a social relationship and things get hairy, especially between Americans and Europeans.

I think I speak for all Americans when I ask my European friends, in all sincerity: “What’s up with the kissing thing?” You know, that two cheek kind of thing when members of the opposite sex greet each other (or, I guess, when Italians greet ANYONE).  When do you do it? How do you do it (on the left first, on the right)? And it seems to me that no actual contact is made between lip and cheek – its more of an air kiss, is that correct? And am I right in assuming that French kissing, despite the name, is not appropriate when greeting a Gaelic friend? I’m just asking, here.  I don’t want to offend.

Like I said, this is where things get sticky.  For many Americans, the part of me that is “me” begins about 21 inches from my physical body (or 53 cm for the rest of the world that insists on using a system of measurement that actually makes sense). You get inside of that me-space and, unless I know you very well, I feel a bit uncomfortable. Mainly, because I don’t know where those lips have been (and I really don’t want to know so don’t bother explaining). Where I am from … the great state of Minnesota in the U.S.A. we really value our personal space.  Men on one side; women on the other and don’t get too close.  Its like some Amish throw-down.  Its amazing that enough physical contact even takes place in that state enough to keep the reproduction level roughly above that of the Giant Panda (who, for those interested, conceive roughly once every two millennia.  No wonder they are nearly extinct.  Let’s get it on, my furry friends … throw a little Barry White on the hi-fi, fluff up the bamboo leaves and get un-endangered!).

But I digress …

This is the month when many people around the world celebrate Christmas … a holiday that, arguably, has been internationalized mainly because it has been Americanized (and by that I mean “consumerized”).  I would encourage those from other countries to join in the fun and celebrate with all we Americans. I think you will find us open, friendly and on the good side of naïve. But if possible, before greeting us as comrades, please provide a warning. Something like: “Excuse me, clueless American friend, I am going to greet you with a friendly air-kiss. I come in peace. Do not be alarmed or try to defend yourself. And I will go left and you should go right …”

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Length – 13:17

We are at the end of a two-part interview with David Thomas, Founder and Managing Director of Think Global Consulting, based in Sydney, Australia.  In the first part of our interview, we explored the long – and often complicated – relationship between Australia and China.  As members of the Asia-Pacific Rim group of nations, there is a lot of activity going on between the two countries … and, as we’ve seen in the media this past year, not all of it has been smooth sailing.  I started off this last part of the interview by asking David to talk a bit about some of the Australian firms that are finding success in China and what their attitudes are today…

Technomic Asia Conducts Research for AmCham Shanghai Report

Shanghai and Raleigh, NC — December 16, 2009 — Technomic Asia jointly released the 2009 China Business Report with the American Chamber of Commerce in Shanghai (AmCham Shanghai) this week which revealed China as one of the few growth areas for US business around the world. Kent Kedl, vice president and general manager of Technomic Asia in Shanghai, said, “This does not surprise me even in the midst of a ‘mostly global’ recession. The survey shows, contrary to the conventional wisdom that China is only a source of low-cost labor, in fact American companies are finding incredible growth opportunities in China.” This year’s survey showed that nearly 60% of American companies are investing in China for the revenue created by the China market. “After 25 years of working with companies on their China growth initiatives, we are seeing these companies realize some big pay-offs,” said Kedl.

“American companies are finding that their performance in China is the bright spot in an otherwise challenging global picture,” said Brenda Foster, president of AmCham Shanghai. “This is creating a level of optimism among American companies investing in China that we have not seen for many years. Even though this is a very difficult time in the global economy, China remains quite strong and our report shows that American companies are poised to take advantage of market opportunities.”

Technomic Asia partnered with AmCham Shanghai to produce the survey, now in its tenth year. “AmCham Shanghai was delighted to work with Technomic Asia, which helped develop and administer the survey and led the analysis,” said Foster. “Their long experience in the market here and their deep knowledge of foreign investment in China brought our survey’s insight and impact to a new level.”

A key finding of the survey is the factors related to a company’s success in China. The following factors were found to be significantly related to a company’s profitability in China:
• Size: especially those with more than US$10 million in revenue
• Experience: especially those with more than five years in China
• China revenue relative to global revenue: companies who derived more than 5% of global revenue from China
• China priority: companies that set China as their #1 priority in global investment plans
• China sales footprint: those companies with sales offices in two or more cities in China

Nearly 45% of the survey respondents have been in China for longer than ten years and, says Kedl, “It is clear from this survey that experience counts – China takes some getting used to and the longer companies are here, the more they learn and the more successful they tend to be.” Kedl sees companies continuing to focus on growth in 2010, expanding their penetration of markets into Tier 2 and Tier 3 cities.

In this survey, more than 64% of companies said in 2009 they were profitable to very profitable, “a phenomenal statistic given the state of the global economy” says Technomic Asia’s Dr. Kim Woodard, one of the leaders of Technomic Asia’s Mergers and Acquisitions practice. “I am encouraged by the five-year outlook from survey respondents,” added Woodard, noting that nearly 90% are optimistic about China’s market. Woodard suggests this number is a supportive indicator of the increase in inquiries Technomic Asia is getting about mergers and acquisitions in China. “We are seeing those players who are confident that their five-year growth strategy must include a major stake in China planning their next move,” says Woodard.

Technomic Asia also produces the award-winning China Business Podcast which will have a series of episodes related to the 2009 China Business Report. Those shows are available on iTunes, and Stitcher Radio as well as the Technomic Asia Blog. The China Business Podcast has been in production since 2005 and was the first podcast about conducting business in China.

About Technomic Asia
Technomic Asia, the Asian arm of Tompkins International, is a strategic consultancy with more than 25 years of experience helping clients plan and execute Asian growth strategies. Technomic Asia assists companies in entering the Asian market or in expanding their business by providing critical market insight, an understanding of business potential and assistance in designing the optimum strategy for success including M & A. Technomic Asia’s Steven Ganster and Kent Kedl are co-authors of “The China Ready Company,” a book that details the formation of a successful China strategy.
Media Contact: Albert Maruggi
612-325-8126
amaruggi@providentpartners.net