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 …

Following is part two of my interview with Steve Crandall, VP for Technomic Asia in charge of our small- and mid-sized enterprise (SME) practice.  Today we focus on the importance of hiring and retaining the right people in your China operations.

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

I would like to begin this post with an apology … its been awhile since we checked in here on the China Business Blog and Podcast!  Thankfully, it seems we have not been forgotten as we’ve received many notes from loyal listeners asking how we are doing … if everything is ok.  I can assure you that, yes, things are just fine here in Shanghai, China … in fact, its because things are going so well that I just have not had the time to get these Podcasts recorded and posted.

We’ve been working on a series of discussions on mergers and acquisitions in China with Dr. Kim Woodard, one of the leaders of Technomic Asia’s M&A practice here in China, and we are continuing that today.  It is appropriate that one of the reasons we’ve been so busy lately is that we’ve seen a big upswing in M&A activity for clients here in China … lots of strategy development and target identification, the early stages of an M&A program.

Well, today, we are going to talk about a stage of the M&A process that, we believe, is unique in China – we call it “deal cultivation”.   Remember that we’ve been talking about the relatively “young” market for M&A in China … we are still in our first generation of doing deals here and there is not a lot of experience floating around.  Therefore, it is critical that we help bring the Chinese companies along in the process, helping them feel OK about it while, at the same time, doing what we call “discovery” – finding out as much about the target as we can ahead of the more formal legal and financial due diligence process.

I started today’s conversation with Kim by asking him about deal cultivation and why it is so critical in China…

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 …

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 …”

In our recent Podcast series, we have been talking with Bill Powell, senior writer for Time and Fortune magazines, based in Shanghai.  In the last Podcast, we got into, what I thought, was a VERY interesting discussion about the uniqueness of what is going on in China these days.  Literally, what we are seeing in China is unprecedented … never before has an economy (and a society) grown and changed so much in such a short period of time.  Understanding it, let alone predicting it, is very difficult and we are all, in a sense, working without a script.  We talked earlier about what the U.S. and other Western economies could learn from China … to wrap up our conversation, I started by asking Bill what he thought China could (and should) learn from the West …

I woke up this morning with two words running through my head: “Reality TV”.  Kind of a scary thought, huh?  But what got me thinking about Reality TV is not the content, per se, but the business model: find a bunch of people, average schlubs, and film them acting as such; edit the content to highlight the schlub-iest moments and then put it on prime time television. Violà… instant ratings. Like all great ideas, I am kicking myself that I did not think of it first. Why, you might ask, should I consider myself so forward-looking as to think I should/could come up with that idea? Well, because what they call “Reality Television” I call “the average day in China.”

China is a country of “watchers”: people sitting around and simply studying other people being…well…people!?! One of the things that foreigners have to get used to here is what we would call “staring” … many here would call, simply, “observing the behavior of those around them.”  I suppose that makes sense … there are so many people there that free content is always available.  Several decades ago, just being a foreigner in China attracted attention. Go to the market, let a couple of Chinese words slip out of your mouth and you gained such a crowd on interested onlookers that you could put up a tent and charge admission.

Now, certainly, things have changed over the years.  But many years ago, I was a spectacle, even in a big city like Shanghai where foreigners were not very common.  I once asked a Chinese friend why everyone stared at me and he said, “Well, for thousands of years, all we’ve had to look at is other people who look like us … you are REALLY different, so we want to have a look!”  That was tough to argue with, I must admit.

So I have spent countless hours entertaining local residents here over the years. I should have had an agent negotiate a contract for me, thusly: “Mr. Kedl is willing to shop for vegetables every Tuesday and Thursday and to mispronounce a minimum of 17 Chinese words while doing so. The neighborhood will provide no less than 83 gawkers, at least 11 of whom will attempt to help Mr. Kedl negotiate the transaction and another 6 will comment on the proceedings. Mr. Kedl will receive 10% of the front end and two points on the gross plus all residuals on local TV news footage.”

Not much has changed over the years in terms of the spectacle I create when shopping. The modern hypermarket has made for some great leaps in shopping convenience: too many choices are jammed into too little space at too high prices and NO room to negotiate. The beauty about shopping in China is that total strangers will feel very free to look into your cart and check out what you are buying. Many of them will feel even freer to comment on your purchases, particularly if they don’t think you can speak Chinese: “Hmmm….look at that foreigner…what in the world would he need with a toaster oven, a pile of hangers and three apples?? And he should get himself a real nose instead of that two-car garage he has holding up his glasses now!”

I was at my local hypermarket recently when one elderly lady tried to convince me – in animated sign language reminiscent of Helen Keller doing liturgical dance – that the milk I was purchasing was NOT the right milk and that, if I bought the one she was buying, I could get 2-for-1. I explained to her that my kids preferred this type of milk, but thanks for the advice. She walked away a bit confused, mumbling to her shopping companion “Why in the world wouldn’t he by the cheapest kind…and it almost sounded like he spoke Chinese!!”

But having a foreigner as the center of attraction is not necessary. Almost any activity on the street will garner attention from passers-by. The other day a motorcycle cop stopped a guy on a bicycle carrying a load (looked like three sofas and a cage of ducks). The cop dismounted his bike, sauntered over, Ponch-style, to the offending cyclist and stared at him. Immediately, a gaggle of pedestrians gathered around the two of them to see what would happen next. Not able to resist peer pressure, I joined the throng (it felt good to be the gawker as opposed to the gawkee). And you know what happened? The biker got a ticket.

The crowd went away happy, but I was left unfulfilled. No fight broke out. No blood was spilled. No threat levels went to Orange. A TV news anchor didn’t show up with his helmet of hair and don’t-believe-me-at-your-peril voice to intone, over a dramatic graphic sequence, What It All Means and Why You Should Be Very, Very Afraid. The dude just…got a ticket.

The West is trying to convince China that they need to change, to upgrade themselves to the “modern world”. Personally, I think China is doing OK, for the most part. However, if I were to be honest, I think China could add a bit more excitement to what is, essentially, a reality show here.  I mean, if all of life is open for others to sit around and stare at, you should really go for it …you know, punch it up a bit, get better ratings and maybe raise ad rates. Cops shouldn’t just give someone a ticket: apply a little OJ and first have a slow-motion chase through downtown (actually, it would be slow-motion here in Shanghai because you’d never get over crawling speed through the traffic). An overloaded vehicle tips on the highway? Splash around some fake blood and have five people go at it, Jerry Springer style. Over-crowding on the subways could be solved if we could all vote someone off every stop (my choice would be the guy with the scary comb-over taking up two seats) or the guy who keeps losing his mobile phone signal and keeps shouting “Wei?  Wei?” into his dead phone.

But I think the ultimate Reality Show here would be to demonstrate just how helpless some foreigners are here.  We could put a collection of them in a row house off Chang Le Lu, give them only CCTV, no access to DVDs or any restaurant that ends in “on the Bund”, take away their Ayis, drivers and secretaries and see who lasts the longest. Guaranteed to make Survivor look like summer camp for sissies.

Numbers, schmumbers. What is so surprising here? Given the global financial meltdown, were we expecting any less? The United Nations Development Program (UNDP) had already predicted that China would come in at 9.1% growth in 2008. Others had it higher, but what did they know? And prognostications for China’s GDP growth in 2009 are all over the map: A quick search found estimations from 5% up to 9.3%. Maybe “estimates” is too strong a word: how about “wild-arse guesses based on sketchy data and yet-to-be-proven models”? Too harsh? Sorry.

I don’t want to make light of this because this is some serious stuff. China’s growth is slowing, and this means that factories are closing and jobs are going away. An estimated 10 million migrant workers are out of a job. Imagine all of New York City and the surrounding boroughs standing in job fair lines and surfing Monster.com. But white-collar employment is, for the moment, pretty stable. In fact, it is even more stable than normal for this time when, typically, a sizeable portion of the workforce has received their year end bonuses and make a jump to another, better-paying position. People are nervous about the economy so they are not jumping for fear of losing what they might already have.

China HR issues aside, for the average foreign investor, what does China’s GDP growth number matter? Three things to pay attention to here:

1.  China is STILL growing. Maybe not as fast, but it IS growing. What part of this are we missing here? The United Nations — the same organization that correctly predicted the 2008 growth number — estimates that China will contribute more than 50% of the world’s total growth in 2009. Did you get that? One country, over half of the globe’s total growth in one year. If we weren’t looking wistfully in the rearview mirror at the wild-yet-fundamentally-unsustainable growth in China of the past couple of years, we’d be pretty excited about 2009.

One of my early mentors in China told me, “Kent, if you want to get hit by a car, go play on the highway.” Now, apart from the questionable safety of his chosen metaphor, the fundamental principle is this: Go to where the action is! And in a global environment sliding into gridlock, China is a veritable super speedway of activity. Perk up, people — growth is growth and China is where its at.

2. The GDP growth number means ABSOLUTELY NOTHING to the average international business person. Sure, if you are one of the three hedge fund managers still standing and are placing bets based on global economic growth numbers, then a few percentage points of swing in the China macro GDP number would matter. But down here where real people live and work, the GDP number is just a distraction. The key is getting to the number for YOUR particular business.

Example: A client of ours is a supplier of building materials to construction companies in China. Despite the announcements of an economic stimulus plan to dump squillions of RMB into the Chinese construction sector, we estimated for our  client that construction, overall, will remain flat. Further, the category of product that they sell will be flat to even down a bit; however, our client’s best product line — one that focuses on increasing the energy efficiency of buildings — is going to be up this year because “green” is the new “growth” in China and our client is perfectly positioned to go gangbusters in this sector.  If they were to look only at the macro GDP number or even the construction number, they’d miss their opportunity — they (and you!) need to dig down to the details of your industry and product sector to find out what is really going on.

3. The China GDP number is, to a great extent, manufactured and, recently, is being strategically communicated to the rest of the world. I refer you to my blog post of a few days ago where I so wittily expounded on the Chinese authorities’ growing sophistication in not only managing their economy but in communicating it to the rest of the world.

Think about the story arc here for a moment: It was just announced that China’s economy actually grew 1.1% MORE in 2007 than we originally thought; and then, before we have had a chance to catch our breath, the announcement comes out that China’s growth for 2008 is a percentage point LESS THAN double digits. In a year where the world’s largest economy went up in flames of Armageddon-like proportions, China still had enough going for it to take a hit of only a few points. Once the collective hand wringing and brow-furrowing subsides, China is uniquely positioned to grow at their minimum of 8% in 2009.

And mark my words — you heard it here first — at the end of 2009 when all the tallies are done, China WILL have grown at a minimum of 8%. The Chinese authorities have their hands on both the controls (to juice the economy as they see fit) and the intercom (to communicate whatever they want to the global public). Who is going to contradict them? Economists? Put three economists in a room and you’ll get 5 opinions — and they are all using the same data. Other governments? Everyone else has too much of their own stuff to worry about to mess around with the macro numbers of China.

Despite the “dire” circumstances of China, there will be winners this year. Big winners. These are the companies that will ignore the macro numbers and will dive deep into the minutiae of what China means for their particular products, customers, channels and competitors. Leave the macro numbers to professionals who don’t seem to know any more than the rest of us do — theirs is fantasy football to the “real” game that the rest of us play every day.

The personal trait that seems to be most admired – besides his three-point shot and Blackberry typing skills – is his intellectual curiosity, his interest in getting tons of opinions to inform his own decision. Whether or not this personal trait can translate into governing style remains to be seen; however, for the moment, I think many are at least impressed with how impressed everyone seems to be!

The one thing I can attest to, however, is that this decision making based on intellectual curiosity style does work well in China. In fact, it might be absolutely necessary to a foreign company’s success here.

Curiosity is the key to even beginning to understand China (not that “complete understanding” is a destination on the China cognitive map). Unfortunately, the average Westerner’s curiosity extends to the end of their first week of their first trip here. Then they know everything. They are experts. They go on talk shows. They write books. They certainly don’t continue to ask questions. For the Omniscient China Expert with the Executed Single Entry Visa, asking questions is a waste of good breath that is better spend expounding on their own omniscience.

But there are those who know that their first step into China begins a journey of a thousand steps that lead, inevitably to migraine headaches and a healthy starter-ulcer. For these lucky few, the questioning never stops. As a consultant and professional China Know-It-All, it is (supposedly) my job to provide answers to my clients; to (ostensibly) give deep insight into the China market miasma that will (oh-my-gosh-I-hope-so) unlock its secrets and bring untold riches to them. And you know what, to be brutally honest, I think we are really good at what we do … some of the best out there.

But the reason we are good is not only that we provide good answers – it’s that we have people who go out to the market who ask really insightful questions. Lest this post descend into a Confucian couplet worthy of its own fortune cookie, let’s bring it back to what it might mean for you, dear reader. It means this: NEVER STOP ASKING QUESTIONS! If you are blessed with good advisers – consultants, lawyers, accountants, mothers – and are getting good China advice from them, consider yourself lucky. But don’t stop there. Take in what they say…and then challenge it. Get a second, third and fourth opinion. Be like a three-year old in China: ask “why” and keep on asking until someone wants to give you a cookie to shut you up. Then take the cookie and ask why again!

Because somewhere in China, your strategy-of-choice is going to work. Somewhere it is going to NOT work. Just because someone succeeded (or failed) in their joint venture, doesn’t guarantee you will be on the same track. When one case study proves that XYZ is the “only” legal agreement to execute with a distributor, another will prove even more convincingly that and ABC agreement is best. China is a big place; big enough to both accept and reject a frustratingly large number of really good ideas.

The Chinese use a phrase to describe foreigners who supposedly understand China so well: 中国通 (zhong-guo tong) or “China Expert”. Too many foreigners take it as a compliment – I have learned to interpret it as thinly-veiled, tongue-in-cheek name calling, like “Nice move, Brainiac!” It is the only ironic thing that I have heard Chinese say … because no one – not even natural born citizens – are experts here.

I am encouraged because my next president seems like a guy who doesn’t hazard and answer until he asks tons of questions. Who knows, if this whole Ruler of the Free World thing doesn’t work out for him, there might be a role for Mr. Obama in our company. Seems like he’d fit right in. Besides, Team Technomic is in dire need of a good shooting guard.

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A common question among the foreign community in China is “Do you speak Chinese?” Well, my answer is yes, but with a somewhat metaphysical qualification. Yes, I speak Chinese, however I’m unsure that when I do that I am really “me” — or even human. Because to the non-philosophy majors (i.e. those with a real education) “metaphysics” often means “confusion,” allow me to explain.

To my Chinese friends and co-workers, I am neither funny nor witty in Chinese, though I like to think I am (maybe mistakenly) in my native language. I am certainly interesting, in the same sense that monkeys are amusing when taught to use simple sign language. I can talk, but it is not communication. It is desperation. Some people say I am “bright” because I can pick up the language or “clever” because I can mimic an accent. Yet I don’t consider those attributes “human.” This reason being, communication has nothing to do with fluency and everything to do with culture.

In China, to be human is to use the Chinese language and to use it properly. Anthropologists have discovered rudimentary Chinese characters scratched into turtle shells and cattle bones many thousands of years old. To be Chinese is to be attached to this history by some unseen umbilical cord that feeds you and keeps you alive. To really speak Chinese, one must incorporate that history.

The idiom, and its linguistic cousins, is shunned in the English language — as a high school English teacher said to us, “avoid cliches like the plague!”

However, in Chinese, to speak the language properly, one must correctly use cheng-yu, idiomatic parts of speech passed down over millennia that define what it means to be Chinese. In China, you are “human” not because you sound human but because you are able to link yourself with the rest of humanity (i.e., the Chinese).

When you speak or write in Chinese, your audience is much broader than the receiver(s) of your immediate message. The Chinese ancestors hover about your conversations and they are disappointed when you miss an opportunity to refer to a present situation in light of the past, for it is the past that is their primary concern. These forbears still communicate with the modern generation and they are strict teachers, ready to rap you on the knuckles with the ruler of historical linguistics should you neglect their lessons.

One can think of communication not as a process of passing a “message” from sender to receiver but rather as a way of sharing meaning. A conversation can be a “sacred ceremony” wherein meaning is shared and reality is created, altered and negotiated. According to this perspective, my primary purpose for communicating is not to get someone to do something (although that may also happen), but it is to tie myself to that person, to share something beyond the words of the liturgy and to the spirit of the relationship. To be able to take part in that ceremony, one must be a “believer” in a linguistic sense. In Chinese, the meaning, history and feel of the words must reside in your soul, not in a dictionary.

So yes, I guess I “speak Chinese,” but not as a believer. In Chinese, I am a heathen, like noted atheist Madeline Murray O’Hare reciting the Common Book of Prayer — you know what the words mean, but you are not quite sure what she means. Which is why I prefer to communicate in English, because when I do I feel a weight lifted from my shoulders, a great linguistic burden placed there by the whim of natural geography and about 10,000 years of Chinese history. Suddenly, I am no longer a talking monkey — I am human again.