China Business Blog and Podcast

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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!

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We are in the middle of a Podcast interview with Dr. Kim Woodard, the newest addition to the Technomic Asia team here in Shanghai.  Kim’s background includes setting up A.T. Kearney in the early days of China business and running his own boutique M&A consulting firm.  We brought Kim into Technomic to fill out our ability to provide end-to-end services for our clients doing deals in China.  While we saw a bit slow-down in 2009 for M&A in China (and, in fact, around the world), we see that things are really going to pick up in 2010 as companies are looking for aggressive growth opportunities.

In this Podcast, I talk with Kim about the practical do’s and don’ts of doing deals in China …

Our research manager at Technomic Asia, Frank Tsai, did his undergraduate double major in philosophy and mathematics, enabling him to do, what I call, “thoughtful computation” (as opposed to my liberal-arts-only undergraduate that only qualifies me to be “thoughtful” … oddly, I found there were very few employment trajectories from that skill set).  The maelstrom of numbers swirling about the China economic stimulus plan certainly calls for Frank’s skills in order to separate fact from fiction, so I asked him to blog about the China stimulus plan numbers.  This is what he had to say…

Say what you want about the Chinese authorities, but when they are determined to build something, it can usually get it done fast.  Go to a rural township one year and it’s a patchwork of dirt roads and asphalt.  Go there the next year, and not only are all the roads paved, but they’re lined by trees of all the same breed, shape, and height.  Ask around, and a peasant points into the distance and says that the government “uprooted all those trees from that mountain over there” (behind that river, across that valley!).  The irony of a lush roadside next to a naked mountainside is not addressed.

Pundits in the U.S. applaud the billions in infrastructure investment in Obama’s stimulus plan, but keep in mind that at 10 to 20 times the wages of those peasant tree-movers, we’re getting a lot less investment bang for our stimulus buck.  This has been the “miracle” of China’s breakneck infrastructure development (wowing first-time travelers to China, serious business people and casual tourists alike) in miniature: cheap labor.  Combine this with the “P&L impact” of the China stimulus plan we blogged about the other day, and it makes for some potentially interesting outcomes.

Given the easy mobilization of unskilled labor in China, to say nothing of China’s lack of pesky checks, balances, and legislative mud-fights, it stands to reason that their $586 billion stimulus plan is getting off the ground much faster and with much greater effect than all of the “shovel-ready” projects in Obama’s stimulus plan.  So, how fast has it been going?

According to the Chinese government, $57 billion (or one-tenth of the total stimulus) has already been spent as of the end of 2008.  Of this…

• about 69 percent ($39 billion) has been spent on rural infrastructure, roads, railroads, and housing construction
• an astonishing $90 billion has been budgeted for next year to more than double China’s rail network over the next decade, adding 25,000km of track
• construction has already started on a $13 billion gas pipeline from Xinjiang to Shanghai, and there are plans to start building at least four nuclear power plants this year.

As a result of these and other mega-projects, Yangtze River cargo throughput of steel, coal, and cement ticked up in January after suffering declines since last August, despite steep declines in manufacturing production.  Clearly, the stimulus is already affecting the real economy.  And, we would venture to say, its effect will be an order of magnitude greater than the $400 million for highway overpasses and upgrades in Kansas, or the proposed $3 billion just for a four-lane tunnel in downtown Seattle (Ed note: not that one might NOT want to be high above Kansas or far below Seattle!).

Aside from basic infrastructure, China’s stimulus will be spent in a variety of other ways, some familiar in the U.S. and others not so familiar.  Ten industries have been designated as stimulus beneficiaries: automobiles, steel, textiles, shipbuilding, petrochemicals, light industry, electronics, nonferrous metals, equipment manufacturing, and logistics.  Some will benefit from consumption subsidies, such as 13% off for peasants to buy mobile phones, computers, and home appliances.  Others, such as textiles and light industry, will get bigger export tax rebates.  Almost all of the industries will benefit from government commitments to invest in innovation and new technology, with multi-billion dollar funds already announced for the auto and steel industries.

The government is also taking industrial policy one step further, guiding consolidation in the fragmented auto and logistics sectors, and getting rid of excess capacity in steel, metals, and equipment manufacturing.  Industrial policy is not always spending per se (and it is important to keep in mind that the Chinese term for the stimulus, 振兴计划 (zhenxing jihua) or “rejuvenation plan,” does not necessarily imply spending), but China is clearly committed to a degree of market guidance that the Obama administration, even with rumors of bank nationalization, would never touch.  The Chinese authorities are thinking of the global crisis as an opportunity to enhance their industrial competitiveness.

So, it’s never surprising that things are built fast in China, and the ambition of government planners has never been in doubt – but how much of what has been announced is really part of the stimulus, and not accounting magic?  We’ve all heard in the Western press that a big item in the stimulus is “earthquake reconstruction,” which clearly would have gone forward regardless of the financial crisis (though at a slower pace).  It’s easy to suspect that some big-ticket projects and industrial policies are “piggy-backing” on the stimulus to give their proponents bureaucratic momentum, thus greatly exaggerating the headline figure of $586 billion.  When the government officially allocates only $23 billion to “industrial restructuring” while sources from within various departments announce stimulus spending whose total far exceeds that amount, we know that something fishy is going on.  Despite the anemic pace of U.S. stimulus spending, there might yet then be something to be said for our own small-bore, yet essentially transparent approach.

I recently went through my seventh in a series of mid-life crises (my first was at age 19 and that’s what got me to Asia).  I wanted to do something “new” … branch out a bit in my interests and hobbies.  I considered a wide variety of things: brain surgery, nuclear physics and theoretical mathematics were at the top of the list.  But after further pondering, I hit upon one of life’s greatest lessons: “If you don’t understand it, don’t do it.”  But I love music and can understand basic rhythm so I chose “playing the drums” and have been blissfully happy ever since.  I got a cool new hobby and learned a valuable Life Lesson.  Double bonus!

However, I don’t think that this Life Lesson is shared by everyone, least of whom the former U.S. Federal Reserve Chairman, Alan Greenspan.  In a recent interview, he said – and I am quoting directly – that “he did not fully understand the scope of the subprime mortgage market until well into 2005 and could not make sense of the complex derivative products created out of mortgages.”  Um … I might not be exactly clear about your job description, Mr. Greenspan, but wasn’t that kind of within your pay grade, to understand such things?  I mean, at the very least, if you didn’t understand it, then maybe you should have found someone you trust who CAN understand it (and maybe even attempt to put it in terms that your measly 160 IQ could understand).

And this is my point (in case you were wondering whether or not I had one) – we get into trouble when we do things we do not fully understand OR when we outsource that understanding to someone who, themselves, is clueless (but has convinced us otherwise).  Pretty deep, huh?  As I pondered this fortune-cookie wisdom I, of course, brought it back to doing business in China and decided that this Life Lesson has been the petard upon which many a foreign company has been hoisted.

First, for the do-it-yourselfers out there – those who invented a product in their garage 40 years ago, created a company around it to bring it to market and built an entire supply chain with their bare hands – you are probably going to be hard-pressed to do that in China, unless you have another 40 years to work on it.  We see many DIYers come to China and, after a week’s trip, decide they have it all figured out.  They start a company, build a factory, hire a staff and then go to work.  But they are not working in familiar territory – they are, to extend the metaphor, in the land of credit swaps, sub-prime mortgages and a raft of other Toto-we-are-not-in-Kansas-anymore issues to bring on a nice starter-ulcer.

To be fair, the hardcore DIYers are few and far between and most everyone knows that they need someone in China with local knowledge.  So for those smart enough to realize that they are not smart enough about China and go looking for someone smarter, follow the immortal words of Hill Street Blues Sergeant Esterhaus: “Hey…let’s be careful out there.”  The number of people lined up to tell you that they understand China will stretch … well … around China (and I am probably going to be one of those standing in line).  So while you will need someone more “local” than yourself, you have to be very careful not to believe their marketing brochures on first reading.

I met with a guy the other day, a potential local partner for a business we are looking to start.  I am trying to be polite here (‘cause my momma done raised me right) but the guy was so utterly full of it that you could smell him coming.  A former boss of mine called these people “all hat, no cattle” – and this guy had a hat that was so big for him that it came down over his eyes, blinding him completely!  He waxed poetically about the “many projects” he had done but, when pressed even a little, crumbled into a pile of none-too-specific specifics and claims of people he knew that could vouch for him.  He did not know it, but we had done some checking on him ahead of time and one of his “good friends” who, he said, could attest to his wonderfulness was, in fact, the first one to alert us to the indirect relationship between his hat and cattle.

But still, we know we need a local partner for this business.  We know that we don’t know enough about it and need an “insider” to work with.  But we know that this is going to take some time to find, so we keep looking (I reference the myriad blogposts and Podcasts we have done in the past on how to find and qualify a partner).  The point is that we are not venturing yet into something we don’t understand, even though the “we” here are both locals and foreigners who have been doing business in China for 20 years.

Deng Xiao ping is famous for his saying that development in China will be difficult and “like crossing the river by feeling for stones” – the way will not always be clear.  However, this is NOT what Mr. Greenspan and the global financial community (including naïve and greedy homeowners) were up against – they did not know enough to find the stones, nor did they really know where the river was because they were not even looking.  Business in China is the same way – it is certainly not easy, but it is impossible to do with your eyes closed.

The Atlantic’s James Fallows hosts and the New York Times’ Joe Nocera offers commentary and analysis throughout the video series

Despite the global downturn, China still offers an economy that’s growing, with predictions for growth ranging from about 7 percent to 9 percent in 2009, stimulated by significant government investment. As such, China will remain a key market for growth as well as a major supplier to the world. To help management of Western businesses better understand how to tap China’s potential, Technomic Asia has partnered with the producers of “On the Frontlines: Doing Business in China” to create a pragmatic and street-smart business tool useful for China beginners and veterans alike.

A preview from the producers of “On the Frontlines: Doing Business in China”:

The “On the Frontlines: Doing Business in China” series consists of five DVDs full of insights from more than 150 interviews and one CD, sponsored by Technomic Asia, that contains research reports, book excerpts, a China Readiness Assessment and more. The video series is hosted by James Fallows, China correspondent for the Atlantic, who also served as editorial director for this project. Joe Nocera, business columnist for the New York Times, provides commentary and analysis throughout the series, as well.

With “On the Frontlines: Doing Business in China,” business leaders will quickly understand how to:

• overcome the cultural barriers to doing business in China,
• master the fine art of negotiating with the Chinese,
• succeed in making the deals you want to make in China, and
• avoid costly mistakes: business is different in China.

“On the Frontlines: Doing Business in China” is only available online and sells for $199, but the series can be ordered at a 25 percent discount off the retail price at www.chinadoingbusiness.com using the promo code “TechAsia2009.”

“One of our favorite sayings is ‘In China, everything is possible, but nothing is easy,’ and this documentary shines some light on why that’s true,” said Steven Ganster, one of the interviewees for this documentary series and the managing director of Technomic Asia, a China-strategy consultancy and a division of Tompkins International. “Although nothing in China is easy, a well-informed strategy to establishing a business presence is worth the effort. With most of world reeling from economic trouble, China provides opportunities to great to be ignored.”

(Original news release)

Over on his “Go Go Go! Supply Chain” blog, Jim Tompkins of Tompkins Associates writes about building strong relationships as the key to successful supplier relationship management, especially in China, which Tompkins calls “North America’s preferred overseas destination for low-cost sourcing.”

He writes:

[T]he most significant part of Supplier Relationship Management (SRM) — the actual Relationship — has either not been fully developed or has been insufficiently nourished in order to thrive. SRM goes to the heart of successful Supply Chain Partnerships, and in China, Guanxi is at the heart of any business, government or personal relationship.

…With suppliers, Guanxi is a general and deep type of understanding between two entities in which both are aware of the other’s needs and always take them into account. It’s an ongoing process and often flows on a more personal level than Westerners would consider a typical business relationship.

Read the full post here.

For more on guanxi, watch this 3:30 video put together by the creators of “On the Frontlines: Doing Business in China,” a DVD series Technomic Asia has helped produce. For more info on that, see here.

The debacle in the U.S. over the bonuses paid to bankers for driving their companies into the ground reminded me of something we faced in China.  In the mid to late 90s, I worked for a software company here, running their operations in East China and then taking over large account sales for the region.  This company had been here since 1989, the first foreign software company licensed to operate in China.  We were also one of the first foreign companies to institute a performance-based compensation plan where sales people got bonuses based on their sales success.  The radical part was that our bonus levels were the same in China as they were in other parts of the world – there were no differences between the commissions that a local sales person could make and their expat counterpart (nor were there differences in the Chinese commissions and the U.S. commissions).  Year after year, the top earners in the company were local Chinese and many of them became – rightly so – very wealthy.

We did intensive training for our sales staff on how to sell “solutions” (rather than just schlep software) and we instituted a process to walk prospects through the discovery and solution phases of a sales cycle.  We had a sales pipeline management process where we listed the sales prospects and where they were in the process.  This was all earth-shaking stuff at the time – such things were NEVER done in China where most sales were relationship-based (someone bought your product because you knew them or their families).  To do a “cold call” or sell purely on the basis of how you could help a customer solve their problems was very new in China.

But getting there was tough.  We were coming off of the old way of thinking in China, the “iron rice bowl” (铁饭碗 tie fan wan) where your compensation was not much, but it was guaranteed.  If you showed up to work, kept your head down, you got your three squares a day and government housing, healthcare and schooling for your kids.  Any bonuses were often in the form of a “13th month”, a guaranteed one-month salary at the end of the year in time for Spring Festival.  In running our performance-based comp plan, we had to work through this mentality, that it was not enough to just show up – you actually had to perform as well.  And we got HUGE resistance from our staff who thought that, because they “worked hard”, they should get the bonuses.  The ones that got it succeeded; but there were many that couldn’t hack it and they went back to their comfortable iron rice bowls.

So when I read a story in the news where bankers were being interviewed about their bonuses and why they deserved them, I had a feeling of déjà-vu all over again.  One banker said, “People come here because they want to work hard and get paid a lot for working hard” (my emphasis).  Some of them go on to say that, if they are not paid their bonuses, then that is “just like socialism”.

What???  I would say just the opposite – it is “just like socialism” when you get a bonus just for for showing up and “working hard”, not because of your performance.  I am sure it WAS hard work to sell the magical pixie dust that passed for financial instruments – hey, it was tough enough selling software in China when the same stuff could be bought on the street corner for 5 RMB!  Granted, these bankers rice bowls are made of more precious stuff than iron, but the principle is the same.  If you live by the sales comish, you die by it.  End of story.

After the CNY holiday, I am going to be meeting some of my former software sales staff for lunch.  I am DYING to hear what they have to say about these bonuses and, I am sure, am going to be pushed hard to explain just how this happened.  And, as I often do when I can’t explain, I adopt my best befuddled look (and it IS a good one!) and say, “Hey…what can you do?  They’re foreigners!”

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This podcast on guanxi is transcribed and featured as an “editor’s pick” on PodsInPrint.com. Download, print and take this podcast with you. Read it here.

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Today I chat with Andrew Hill, a good friend and fellow Minnesotan — and one of the founders of the Minnesota Club of Shanghai, of which I’m a board member — about relationships in China and their importance in business. Of particular interest are government relationships, an area in which Andy has decades of experience.

Andy came to China in 1989, a complicated time to be in and around China. Since then, he’s developed true guanxi with many people in China on many different levels. And while there’s certainly no science to guanxi, there is some advice we can share to help you understand this important concept.

Guanxi is a complex term that means a lot in China but doesn’t have a direct translation to English. In terms of government relationships specifically, the complexity of guanxi is magnified. This is due in part to the complexity of the federal-local government arrangement in China and in part because of the importance of strong government relationships in doing business in China.

For more on guanxi in China, see my earlier podcast “Guanxi for foreigners.”

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Many foreigners on their first visit to China learn some Chinese and try to use it whenever they can: xiexie (thank you), pijiu (beer) and xishou jian zai naili (where is the bathroom?) are just a few of the most important. But probably the most used — yet most confusing — Chinese word is guanxi, broadly translated as “relationships.” First off the plane we are told that China is a society built on guanxi, that it is important to have good guanxi, and that, if you are to do business in China, guanxi is the thing that may either make or break your venture.

The foundation of guanxi in China is human relationships. Why is this? Well, let’s try a social experiment: Put a bunch of people on a land mass with arable land too small to support them effectively; send them storms and floods, wars, pestilence and famine; let simmer for five thousand years. Now open the cover and pick out the key ingredient of that society, the unifying theme that seems to run throughout their history. Most likely, it will be “relationships.” How do you get food when there isn’t enough? You know someone with better access to food than you have. How do you protect your family from strong enemies? Band together with others to form a stronger group. Guanxi is the very basic phenomenon of human beings getting access to scare resources and understanding that they are stronger together than they are alone.