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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

I 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…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. Inability to bridge the valuation gap

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

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

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

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

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

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

I was quoted recently in an article in the New York Times on the growing demand of direct sales in China.  The article is very well done and I highly recommend anything that David Barboza writes on China … the man knows his stuff about China and he really does his homework.  One of our Five themes for China in 2010 and Beyond is “Distribution” and the direct-sales model is a very interesting one for China so I wanted to add a couple more comments here.

For those not familiar with it, “direct sales” is when individuals are recruited by a company to sell their products directly to consumers who are, typically, their friends and family.  There are many well-known companies that have used this model such as Mary Kay, Amway and Avon (those of a certain age will remember the old commercials in the U.S. whose tagline was “Ding-dong, Avon Lady calling!”).  As David’s article notes, direct sales have not always had smooth sailing in China as the government has been wary of allowing individuals to start up their own businesses (because, as we know, once people have money-power they want all sorts of other power).  I think that the combination of entrepreneurial sellers and adventuresome consumers are fertile ground in China for direct selling business models for two main reasons: first, direct-selling can leverage relationship-based sales which have a long history and solid cultural foundation in China; and secondly, direct-selling goes around the modern sales channels in China which, although growing in strength, are still very immature and often very difficult to work with.

One of the main reasons that China’s distribution networks have been so fragmented is that they have been based on guanxi or relationships which are simultaneously personal and professional.  In a traditional distribution model, this guanxi holds you back because you are limited in they amount of personal relationships that you can maintain at any one time.  In other words, if my hometown is in Wuhan, all of my guanxi will likely be from that place because I grew up with many of these people, our families know each other, we went to school together, etc.  However, if I try to expand that guanxi network out to, say, a city like Chengdu (probably over 1,000 km away from Wuhan) it will not be possible to develop the same depth of relationships in that region.

Historically, sales in China have been based on this guanxi … I get the sale, not necessarily because I have the best price or the best quality product, but because I have good guanxi with you.  However, this is rapidly changing in China: while good guanxi is a necessary condition to successful sales, it is by no means a sufficient one — I now have to bring good products to the market at good prices.  And for most industrial and consumer products companies, this is a good thing because it means that they can develop more “professional” distribution channels and get a broader sales footprint in China.

So let’s go back to the direct-sales model … this is a model that leverages (and even celebrates) guanxi-based sales.  Sales most often are made to friends and family (or the friends and family of other friends) and, while these product suppliers are certainly concerned to bring good quality products to market, I would argue that they are relying even more on the strength of their sales teams’ guanxi in their local area.  The strength of the direct-selling model is that it goes with the flow of traditional Chinese culture, not against it, by making each sale personal.  And all you have to do is multiply the large number of people in China by their growing disposable income and you understand why executives at companies such as Mary Kay, Amway and Avon are having a hard time controlling their excessive drooling.

The second reason why I think that the direct sales model will have some legs in China is that it goes around the typical sales channels for consumer products: retail stores.  This is a topic too large for one blog post but suffice it to say that China is in the midst of a sea-change in its retail channels, moving from a “traditional” model — dominated by mom-and-pop stores and small specialty stores — to a “modern” model dominated by the larger hypermarkets, “Big Box” and grocery chains.  If you look at China as a whole, a slight majority of consumer products are sold through traditional channels; however, the growth is in the modern channels and particularly in the so-called “hypermarkets”, chains such as Wal-Mart, Carrefour, Rt-Mart, etc.

Initially, consumer products companies were excited about this change … selling to many thousands of traditional outlets is much more difficult than selling to fewer (and larger) modern chains.  However, what everyone is realizing is that these modern chains, while good looking on the outside, are often very difficult to work with simply because they are so big and wield so much power.  The cost of doing business with them — what consumer products companies call “trading terms” — are often quite high in China compared to the rest of the world so while consumer products companies are often happy with the volume that moves through modern channels, they are not as happy with the margins (and multinational consumer products companies are ALL about the margins!).  These companies are often finding that the hypermarkets are not all that good at merchandising and marketing themselves so consumer products companies often feel that they end up paying a lot in terms of marketing fees and not getting all that much for it.

However, the direct-sales model does an end-run around these channels and goes directly to the consumer.  The only marketing fees are the commissions to the sellers so, theoretically, both the margins and the volumes can be quite high.  Consumer products companies don’t have to deal with the retail stores nor do they have to work with distributors to those stores (a topic for another blogpost). In our work with consumer products companies, some of them — and some big names too — have secretly asked about direct-selling and whether or not they could do it.  To date, none of them have but that doesn’t mean that they are not thinking about it.

Now this direct-selling model is not all beer and skittles and in his New York Times article, David Barboza identifies some of the challenges that companies such as Mary Kay are facing (for one, direct sales companies are required to open their own “brick and mortar” retail stores through which to do they actual distribution of product).  Suffice it to say, there is no magic bullet in China retail … we are in the midst of a mini-revolution in China retail and all players — retailers, product companies, distributors and consumers — are changing faster than we can keep up with them.  However, given the sheer size and potential on the China consumer market, everyone is dumping massive amounts of investment and are exhibiting as much patience as they can.  Keep your eye on the direct-sales model in China … we could see it expand beyond the companies we typically associate it with and move into areas we never thought possible.

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.

Those who have been doing business in China for awhile are quite familiar with the differences between the State-Owned Enterprises (SOEs) and the Privately-Owned Enterprises (POEs).  For those of you not familiar with this distinction, let me break it down for you.  The POEs are just that, companies owned privately with little or no government involvement – they are often run by business-savvy executives with global business experience.  The SOEs, to put it succinctly, are seen as hulking, unprofitable behemoths chocked full of aging assets and run by 55 year old Party hacks in moth-eaten Mao suits and greasy comb-overs.  OK … maybe I am being a bit too hard on them, but the term “SOE” has been used as a pejorative descriptor more often that not.

After Liberation in 1949, the Chinese Communist Party brought all businesses under their control and POEs were, for all intents and purposes, completely eliminated in China (as was nearly all foreign investment when they were unceremoniously kicked out of China).  Through a series of disastrous events in the 50s through the 70s (the Great Leap Forward, the Cultural Revolution, etc.), the government proved that, not unlike their Soviet cousins, they were terrible CEOs – factories were inefficient, poorly run and churned out bad-quality junk that had no relationship to any market demands whatsoever.  That wasn’t as bad as it seemed because China retail and commercial trade was not yet standardized so bad products were also hard to purchase.  Go figure.

One of the many reforms that the Deng Xiao-ping administration started in the early 80s was captured under the Party phrase 民进国退 (min2 jin4 guo3 tui4): “POEs will advance; SOEs will retreat.”  What this meant, in effect, was that the Party wanted to get out of the business of being in business and started the long, mind-numbing, ulcer-inducing process of unwinding the complicated SOE culture … which included, for many people, guaranteed housing, education and healthcare.

Fast forward to the mid-2000s and you begin to see private Chinese companies really moving the market.  Thanks to China’s joining the WTO in the early part of this century, various sectors in the China market were opened to foreign investment, particularly retail and distribution/logistics.  This led to further (and more rapid) modernization of China’s business environment and it looked as if the SOEs were going to go the way of the dinosaur, only to be studied by business anthropologists who dug up their jerry-rigged balance sheets and padded expense accounts.

But don’t count the SOEs down for good … we see that there might be life in these old war horses yet, in part because the Chinese government and the Party (one in the same thing here) sees some advantages to keeping their fingers in the business world, particularly in areas that have remained the jurisdiction of the government such as automotive, oil & gas, media, etc.  Not to over-simplify things but these SOEs have two unique competitive advantages over their foreign competitors: first, the SOEs are not held to strict growth and profitability metrics and are encouraged by the State to get as big as possible, regardless of margin targets; and second, the government makes available an almost unlimited stock of growth capital through forced lending from the State-controlled banks.  Imagine if you, as a business executive, were told by your shareholders, “OK … here is the deal – we want you to grow this company.  Don’t worry about profits, just bring in the revenue … we have ways of dealing with the P&L.  And when you need money, just ask.  We’ve got plenty.”  Sounds like a dream scenario, right?

Well, it seems to be working and we are seeing a surge in some of these SOEs – in automotive, the so-called “Big Four” (First Auto Works, Shanghai Automotive, Dongfeng and Changan) are on a consolidation tear, encouraged by the government to acquire smaller, regional automotive companies, much like GM, Chrysler and Ford did in the early days of the U.S. auto industry.  The Chinese oil, gas and mining giants are actively looking outside of China for investment and, though they have been rebuffed by some foreign governments, are slowing expanding their global footprint.  Several of the larger SOE construction equipment companies are aggressively expanding, both inside and outside of China (as a side note, some say that this is why Carlyle’s acquisition attempt of construction giant XCMG did not go through last year … that the government wanted to maintain control in what they saw as a very strategic industry).  All of these SOEs – and many more besides – benefit from very easy capital lending requirements from State-run banks.

A recent article in the New York Times highlighted the pressures that Chinese banks are under to insure that they keep their lending capital accounts well-stocked and rumors are flying around China that the government is requiring China banks to raise their capital adequacy ratios.  Some might see this as a slowing down of lending.  However, I interpret it as just the opposite: the government wants the Chinese banks to keep good reserves of dry powder to be able to lend to those, predominantly, SOE companies that need growth capital.  It’s a “go slow to go fast” strategy if there ever was one.

All of this has led to private chats over dinners and drinks all over China that the government is trying to reverse their dictum of the 80s and say, rather, 国进民退 (guo3 jin4 min2 tui4): “SOEs will advance and POEs will retreat.”  While I seriously doubt we will ever see this in an official government document, the government’s practices are certainly encouraging this.  The SOEs are no longer run by Party hacks … their CEOs are often Western-business educated and understand very well both international commerce and the unique requirements of doing business in China.  They are dressed in Armani suits, have their hair styled and show up at the right parties, all the while maintaining their status in the Party-with-a-capital-P!

Just this past year, we’ve been involved in more competitive intelligence programs with our clients, helping them understand the ever-changing landscape around them.   It used to be that they were just interested in understanding their foreign competitors; however, more and more we see Chinese companies – and particularly SOEs – coming to the forefront of our clients’ concerns.  And given the competitive advantages these SOEs bring with them, everyone is very smart to be concerned about them.

So the question you need to answer is this – do you know your SOE competition?  Do you know who is backing them?  Who is running them?  Do you know what their growth strategies are and what their plans are to grow in the market?  Do you know what they think of you?!?  I can almost guarantee that they are no longer the lazy competitors you once knew.  You better understand them because they are a big threat, whether you know it or not.

We are in the middle of a discussion with Bill Powell, senior writer for Time and Fortune magazines.  In the first part, we talked about China and the rest of the world, how we try to make comparisons to what is happening in China with what we have seen in the past.  In this Podcast, I wanted to start off by getting Bill’s take on the challenges of covering China.  I prefaced my question by saying that, in our consulting practice at Technomic Asia, we are very careful not to talk about “THE” China market … there are, in fact, MANY China “markets” taking into account big cities, small cities, northern cultures, southern cultures, urban and rural, etc.  I asked him to talk about the practicalities over covering such a vast subject and the challenges he finds in trying to do so …

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!

Maybe I am being unfairly smarmy, but smarmy is sometimes the only club I have in my bag.  However, there is a potential flaw here in that, in the interest of coming up with the Index That Explains All, we are missing a TON of subtlety.  And trust me, I do the same thing … it is very human to want to find a Unified Theory.  Oh … and I am usually not very subtle.

But I think there are a couple of things we should be thinking of here …

First of all, a single manufacturing index is potentially misleading because there is not a single manufacturing environment in the world.  Sure, saying that “in general” Mexico is cheaper than China is OK, but you start breaking this down by manufacturing sector and you’d start to see a lot of differences.  The article says that Mexico makes a lot of sense for things like automotive components being shipped to the U.S. … well, auto manufacturing in the U.S. just got the rug pulled out from under them and they DRASTICALLY cut all sourcing.  And it would make sense that the first cut sourcing from China because, for landed cost to the U.S., it is not as competitive.  Look at individual sectors: alternative energy; wafer fabrication; food and beverage.  We might find the same thing but we might not.

Secondly, the business press tends to gloss over a key point of international business by focusing on EITHER cost savings OR growth, but never in combination.  The simple fact remains that, while China might be getting more expensive on a bill of material line-item basis, the pull of its growing markets is enough for companies to ignore one-sided thinking about costs and, instead, consider their entire businesses.  If I am an auto parts manufacturer and am thinking about the sales from a factory, I am going to look at my global sales opportunities … and if I am located in China where the auto market is still growing at double digits, I might be willing to trade a few points of manufacturing cost over a plant in Mexico where the markets in their sphere are receding faster than my hairline.  As we’ve said before in these pages, cost cutting will only get you to business heaven … all companies need to find a way to GROW!  And China is leading on the growth index in almost every sector, far greater than anything in North America.  I’d rather see an index on manufacturing costs to products shipped to China … this is where the growth is and where our eyes should be also.

Third, I don’t think we should be looking at this as a competition, a horse-race between nations where we identify winners and runners-up.  Some very grave errors have been made over the last 30 years by companies swinging on the Manufacturing Pendulum — first we move everything to Taiwan (and close down the U.S.), then we move it to China (and close down Taiwan) and finally back to Mexico (where we close down everything else and start all over again).  A mature global business thinks in terms of “and”, not “or”.  We should ALWAYS be thinking “China and Mexico” (and Poland and Russia and Brazil and…).

Fourth, I am very hesitant to base any view of global business on a survey done this year.  We are in the Twilight Zone in terms of our understanding of the puts and takes of the global economy … the floor has dropped out and we are suspended in mid-air, Wiley Coyote-like with an “Acme” anvil in our hands an a panicked look on our face.  Any survey of ANYTHING this year should have a big ‘ol asterisk on it making a disclaimer that the results may not have any relationship to a future reality.  Based on points 1-3 noted above, I think we are going to be seeing a lot of changes in these numbers in the very near future.

In no way do I want to minimize the findings here … it is very true that manufacturing costs have been on the rise in China for a number of years.  It is a fact of life.  But as those costs have risen, the world in and around China has changed drastically and companies should not only look at raw manufacturing costs to plan their global strategies.  First ask the question “How can we grow?” and then (and only then) decide where to put your operations.

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 …

Unless you have been living in a hole or the dark side of the moon for the past year, your life has somehow been impacted by the global economic slowdown.  You, a friend or a family member have lost a job; your municipal budgets are being cut; heck, your OWN budget is being slashed.  It has not been a fun year, even here in China where things are still moving along at a pretty good clip.

Though there are signs that things are getting better, I am not convinced we are totally out of the woods yet.  But just because we have no guarantee of where things might be going, that doesn’t mean we can crawl back into our hole or retreat to the backside of the moon … no, we need to keep moving forward.

And at Technomic Asia, that is exactly what we are doing.  For many years, our consulting practice has been involved with foreign companies doing all kinds of alliances in China: from joint ventures to licensing to distribution to acquisitions, we have helped our clients put their alliance strategy together and then execute it.  Up until about a year ago, we had been seeing a real upturn in acquisitions in China: the government rules for acquiring companies were loosening up and foreign companies were looking to China for new growth opportunities.  Then the bottom fell out of the economy and companies put all that activity on hold.

However, as things settle around the globe, multinational companies are looking for ways to grow and China seems a very good place to look for that growth.  And one of the methods they are returning to is growth through acquisition.

To capture this wave, we have brought in a new team member to Technomic Asia: Dr. Kim Woodard.  Kim has had over 30 years of experience in China, first coming here in the 70s in the earliest stages of China’s opening to the West following Nixon’s “Ping Pong Diplomacy”.  Armed with a Ph.D. from Stanford, Kim was soon a respected leader of foreign companies’ earliest advances into China.  Kim helped establish A.T. Kearney’s China practice and then went on to help big names such as John Deere and AMP establish their China operations.

Most recently, Kim had his own firm, Javelin Investments, to assist Western multinationals with acquisitions in China.  We wanted to bring Kim in to Technomic Asia to give us the ability to provide a complete M&A advisory practice – from initial strategy development all the way through to negotiation, closing and integration.

Given the returning importance of M&A in China, I wanted to have a series of conversations with Kim about M&A and, in his experience, what makes for a successful acquisition in China.  Attached is the first in a series that we will roll out in the coming weeks.  I hope you enjoy it!

Last week I posted the first part of an interview with Sayed Jafry of ThermoFisher where we discussed their decision to located the global headquarters for their environmental division in China.  Even though China is not currently a big part of their business, ThermoFisher management thinks that this will change and Asia – particularly China – will figure heavily into their business.  In Part 2 of my interview, we talk about the challenges in making China a global headquarters and how that is signaling some important changes in this market.

Those of you who are long-time listeners to the China Business Podcast have heard us talk, endlessly, about ways that companies need to be looking at the potential opportunities in China, not just the actual ones … to look not only at the present, but the future of China.

I loved to play and watch hockey when I was a kid, and nothing was more thrilling than to see the great Wayne Gretzky play … it was magical, how he would always be in the right place at the right time.  Someone once asked him why he was such a good hockey player and he said, “because I skated to where the puck was going to be.”

And that’s the challenge, isn’t it … to start working in China today based on where it is going to be in the future.  In today’s Podcast, we have a very special treat … we are going to talk with someone who is actually putting this adage into practice.  Syed Jafry is the President of the Global Environmental Division for ThermoFisher Scientific, a very diverse, publicly traded company.  Syed and ThermoFisher are on, what I believe, is the cutting edge of global business and we sat and had a conversation in his Shanghai office on a rainy morning just before the National Day holiday.

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

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

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

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

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

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

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

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

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

Market Demand: Who is my Customer?

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

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

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

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

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

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

Distribution: Finding New Routes to Market

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

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

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

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

Competition: New Players in New Segments

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

I listened patiently to his griping and then came back with some alternative views (hey, the guy was not paying me to agree with him … at least I didn’t think he was!).  All the time, I was thinking to myself, “I can’t wait to actually get him to China so he can see things for himself.”

Finally, that day came … we had completed the first phase of work and wanted to present it to him and his management team face-to-face.  They came to China and we spent a day, huddled together in a conference room and then four days going out to see potential customers, competitors, government ministries, the works.  To say that Del was blown away would be a vast understatement – he was agog at everything around him, going 24-7 and moving at a frenetic pace.  The market information we showed about the complexities of the China market took him totally by surprise – at the end of the first day, he told me “Wow, I never knew this … this is incredible” (thereby confirming to me, once again, my chosen profession!).

I took him to the airport on his last day.  As we were having a final drink and gab session, I asked him, “OK, Del … you were pretty down on China before you came here.  What do you think now?”  He got this sheepish look in his eye and said, “Well, I still think that there are problems with their currency and they’re playing fast and loose with intellectual property … but I think that, if we get beat by them, it is not going to be because of this.  It is going to be because we’ll get out-hustled.  They don’t talk about ‘work-life balance’ here.  They never stop.  What they lack in efficiency and accuracy they make up in sheer volume of effort.  And that is scary!”

As I look around at the state of the world today, I have to think that Del was right: we in the West are in danger – particularly in such a down market – of getting out-hustled.  We can spend so much time complaining that things are not like they used to be that we ignore the fact that WE are the ones that made it that way and that we need to work our tushies off to do it again.  People in China are NOT stopping to complain that their growth has dropped precipitously either.  They are not expecting to find work where they grew up … they are willing to uproot themselves to go find a better life.

Don’t get me wrong … just working harder is not going to help us.  We need to change our systems, upgrade our companies, give a helping hand to those that need it.  But don’t think for a minute that we are going to be able to put in the same level of effort we did when we were a couple of generations into our upswing.  Nope, we are going to have to raise ourselves a few orders of magnitude and hustle along with our friends/partners/competitors around the world.  Guaranteed, they are not going to be slowing down any time soon.

No?  Really?  That is strange … because here in China, we are seeing some really weird stuff.  A report came out yesterday announcing that, in January of 2009, monthly automobile sales in China surpassed monthly auto sales in the U.S. — 735,000 new cars were sold in China last month against 656,976 vehicles sold in the U.S. (note the specificity in the U.S. numbers and the more general numbers in China … get used to it!).  Experts far and wide were very quick to point out that this is an anomaly and that, while China is the world’s #2 market for car sales, it has historically been far behind the U.S. market and still will need some time to catch up.  The overly-depressed market in the U.S. (last month’s car sales were down 37% from the year before) and the bleak consumer spending outlook contributed to last month’s perfect storm.  Net-net: we don’t have a new champion yet.

So when I say something “weird” is happening, I am not referring to the data – what is shocking is that we are talking about this at ALL; that we feel compelled to say “though the data is right, its not what you might think”.  To even voice the position that China’s car market could even THINK of surpassing the mighty United States of Automobiles is just crazy talk!  When I first came to China in the mid-80s, there were so few cars on the street that you’d have to work really hard to get hit by one.  Bikes?  They were like mosquitoes and you were constantly slapping them away when they buzzed near you.  I am sure they had taxis, but I don’t think I even saw my first one in Shanghai until the early 90s (and being a dirt-poor teacher at the time, didn’t ride in one until much later!).  And now, here we are, talking about even the POSSIBILITY that China could overtake the U.S. in car sales.

These are CARS we are talking about, the very essence of what it means to be an American!  Baseball, hot dogs, apple pie and behemoths burning fossil fuels – those are almost constitutional guarantees if you are Born in the U.S.A.  An entire generation in the 50s grew up in automobiles (and some of their children were conceived in them).  Songs were written, movies made, books published about cars.  A national highway system cemented the American psyche as Big, Bad and Bold and the open road and cheap gas fueled a uniquely American sense of freedom – be anything, go anywhere, do anything.  To say that Highway 61 led to a neo-con Iraq policy might be hyperbolic, but it is not necessarily untrue.

To think that – at some point in the future – the U.S. will lose bragging rights as the “owner” of car culture is, to me, quite shocking.   If you would have asked me 20 years ago when this would have happened, I would have thought you were completely nuts – heck, even 10 years ago I would have thought you loopy.  But now, not so much.

Ultimately, though, this is not about cars.  This is about the phenomenon that is China and what the rapid growth of the auto industry here indicates – that, given time, China will be a global leader in just about any industry or business you could possibly imagine.  End of story.  Think about the most unlikely product or service for China to be a global leader – hair gel, pain relievers, financial services, basketball.   EVERY one of those is nearly guaranteed to have a huge market here (whether or not one can create a BUSINESS around that market is another question altogether).  And foreign companies that are waffling now on “shall we, shan’t we?” do something about China, to find their place here, mark their territory and start growing– well, these companies will soon find themselves pushed off to the side as the Chinese Monster Truck starts to really roll.

The crisis of both economy and faith that hangs over the U.S. now makes it even more imperative that companies figure out what to do about China, because it is only going to get more challenging.  Yes, China still has HUGE problems and MASSIVE gaps in their economy and the way they do business here – but they ARE growing and will continue to do so.   And like the foreign auto companies (GM, VW, Toyota) whose only bright spot is their China business, they had to get in 10 years ago to take advantage of the market now.

So the world is not completely crazy yet.  Pigs are not flying.  But give it time and they just might be driving…

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)

James Fallows, China correspondent for the Atlantic, serves as co-host and editorial supervisor for the series, and Joe Nocera, business columnist at the New York Times, provides special commentary throughout the series.

“On the Frontlines: Doing Business in China” consists of five DVDs and one info-packed CD-ROM that will show you 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
• Avoid costly mistakes: business is different in China

The six-disc set sells for $199, but if you order with the promo code “TechAsia2009,” you’ll get 25 percent off that price.

Today’s podcast features Steve Ganster, managing director of Technomic Asia. Kent’s not gone — just sharing the spotlight.

Download this podcast
Download audio file (20081215_china_matters_2.mp3)

A full transcript:

I wanted to take a few minutes to lift our thinking out of the chaos and calamitous scenarios bombarding us in the news today to revisit and expand on one of our earlier podcasts by my cohort Kent Kedl on the topic “Why China Matters.”

In that podcast, Kent encouraged us to keep our eye on the ball with respect to China — in terms of what it can contribute to both our top and bottom lines. He also warned us to keep our attention on China’s ability and increasing interest to invest in the West.

As many of you no doubt have heard, there are a range of scenarios being bantered around about a Chinese auto company buying GM. While I think there are many hurdles to this scenario, even its possibility should grab our attention. China will continue to increase its standing in the world economy and thus affect our business, negatively or positively, whether we like it or not. Therefore, it has to remain on our strategic radar.

In this podcast I wanted to give you some perspective on the “talk on the streets” from companies and observers actively playing in China’s market in order to get a read on their views of the opportunities and challenges facing western firms doing business there. I’ll also touch on the tactics and initiatives being considered as a response. These insights are assimilated from a range of sources, including our own Technomic team, our many clients (who comprise both large and small/medium sized firms both sourcing and selling in China), from local Chinese businessmen, as well as from our friends at AmCham-Shanghai.

First let me acknowledge that all is not rosy in China either. Most firms are planning for lower growth (though you will note they do use the term “growth”) and, as you would expect, they see recession in Europe and the U.S. Credit is tight and the market for public offering of equity is very difficult. China’s stock market has also tumbled. Competition is becoming even fiercer with resultant price/margin pressure.

This margin pressure extends throughout the whole supply chain. So local management see as the keys to success a major focus on cash and cutting costs while trying to maintain and even develop their human capital, attempting to keep morale up. They are looking to be more innovative and to excel in their supply chains. We continually hear the buzz words, “get lean,” “best practice” and “China is the best place to be.”

Digging deeper

Let’s probe a couple of these areas a little more deeply and identify some specific measures and initiatives being implemented by those companies taking a more proactive position in these tough times.

Supply chain excellence remains a central theme with a focus on inventory reduction, scrap/waste elimination, capacity rationalization and better/smarter purchasing. As mentioned, credit risk management is a high priority as is the preservation of cash. One thing the Chinese businessman has taught me over the years is that “cash is king,” or emperor as the case may be.

Importantly, and a central point I want to get across, is the continued emphasis on growth. China, despite some slowdown, still offers attractive possibilities to expand the top line, even in this world recession. To achieve this, companies are trying to get smarter in their commercial strategies, selecting high value/high margin projects, targeting higher growth industries and especially import substitution (perhaps a warning here for those of you feeling comfortable with your export channels into China’s marketplace). Additionally, they are maximizing access to global and regional accounts, trying to exert as much account leverage and influence as they can.

The central theme here is proactivity. In these turbulent market conditions, disruptive strategies can be very effective, especially if your competition is distracted by such mundane things as survival.

Let me also address a question that I hear constantly these days: Is manufacturing leaving China? I know how to say the word “no” in about 10 languages, so consider it said. Now, is China’s manufacturing profile changing? Absolutely! We see some attrition where manufacturing is very people intensive, has low margin and is highly polluting. The government seems content to let this type of manufacturing either survive on its own, or migrate to other Asian countries like Vietnam. We are seeing little abatement in manufacturing FDI coming into China.

Look what at China offers manufacturers:

1. A strong and deepening supply chain and infrastructure
2. A major and continually growing domestic market in addition to export potential
3. Large volume scale and its benefits to cost competitiveness
4. An ample workforce that can be trained and empowered
5. Significant latent productivity to be gained by further process improvements
6. A very supportive pro-business government

Talk to Westerners who have dealt with government, employees and unions in Vietnam, India or other developing southeast Asian nations. This may open your eyes to the positive things China offers.

As we have repeated over the past year, China remains a strategic market for a dual-strategy approach: tapping the local market while developing secure and competitive sourcing for both domestic and international markets. And to quell the rumors of China’s impending demise that I see reported in the U.S. media, note the following:

• According to the “2009 Economic Blue Paper” released Dec. 2 by the Chinese Academy of Social Science, a central government think tank, China’s GDP is expected to grow 9.8 percent or so this year and should be able to be maintained at a growth rate of some 9.3 percent in 2009. The minimum GDP growth rate for 2009 as set by the government is 8 percent. Anything lower than this is not acceptable to the government, whose top priority is to maintain social stability. So I can imagine that the Chinese government will do whatever is possible to accomplish this “break-even” growth rate for 2009. The government has both the will and the means to make this happen, and we have seen no hesitation in the past for them to take action.
• If you like mind boggling numbers, note this one: Pledged investment by the central government for 2009/2010 is RMB 4 trillion! My calculator doesn’t have so many decimal places, but I reckon that’s almost $580 billion. Local governments are committing substantial funds, as well, which could significantly increase or even exceed this already massive figure. The central government even earmarked almost $15 billion for investment projects for the 4th quarter of 2008 to pad GDP a bit. As the Summer Olympics this year showed us, China can do things on a mind-boggling scale.
• The EIU forecasts that by 2030 China will have over one billion middle- or upper-class consumers and be second only to the U.S. in economic output.

So, yes, China will have its struggles, but it ain’t going anywhere.

Finally, let me leave you with a few take-aways in terms of actions you might consider with respect to China as you review your 2009 strategy:

• A clear theme among our client base is “smart growth.” This means being aggressive but more pointed in your projects and target markets/customers. To be effective, you must have current and accurate intelligence on your marketplace.
• Manufacturing efficiencies are there to be had. Explore lean strategies and bring your best practices to China. Even if you are working with third-party vendors, in the right buyer-supplier relationship, you can effectively transfer process knowledge to key partners to help them improve their competitiveness.
• Re-think your supply chain from start to finish. The recent dynamics in global markets have changed the landscape of sourcing costs and moving product around. Look at ways to optimize your supply chain and use it as an offensive weapon. You can exploit the strain your supply chain partners are feeling to develop a more efficient process and a more competitive supply structure. You may find, like the Detroit Three, as our auto companies are now called, that they are open to about any conditions in order to get “bailed out” of their present circumstances.
• Lastly, chaos is the breeding ground for disruptive strategies. Look at going forward or backward in your supply chain in order to add value and enhance control. Consider an aggressive acquisition. There are many cost-effective assets to be had in China if you know how to find and cultivate them. A strategic move here could alter the playing field in your market, both in China and internationally. With the lull in market demand and the difficulties in going IPO, you may find that there are more friendly targets out there among Chinese manufacturers than there have been in the last couple of years when many of these same companies were demanding 20-30 times earnings for a piece of the action.

I hope these insights from the front lines have been helpful and that you will consider some of the actions I suggested. It is interesting to note that when the Chinese use the word for crisis (wei ji), it is a joining together of two words: “danger” and “opportunity.” Let’s not forget the second part of this meaning for crisis as we battle this economic environment. Stay tuned for continued updates from our teams at Technomic Asia and Tompkins Associates.

The concept of global supply chain nodes becomes important when setting up plants in this new workshop of the world. Blue jeans companies, for example, might choose to produce denim in China but manufacture the apparel elsewhere.

Retailers also can form partnerships with local manufacturers to gain an edge in China. Haier, one of China’s largest appliance manufacturers, introduced its products to the United States through Wal-Mart. Today, Wal-Mart imports account for more than 1 percent of China’s gross domestic product.

Despite the potential cost savings, manufacturers must pay close attention to supply chain control if they want to thrive in China. This means manufacturers must buy from reliable vendors and monitor processes closely.

In her previous column, Teagarden wrote about China as a market base. Next month, she’ll discuss China as a research base. You can follow her “China Insider” series of columns here.

Technomic Asia’s Steve Ganster earned his MBA from Thunderbird and has participated in various China seminars at the school over the years.

The article explains that ” ‘relationship’ rules in ‘supplier relationship management’ with Asian sources.” From the article:

“Moving too quickly on sourcing decisions in low-cost countries may prove to be a short-term tactic,” notes Steven Ganster, managing director of Technomic Asia and author of The China Ready Company. “Businesses need a long-term strategy that focuses on relationships for effective sourcing in Asia, and the most successful sourcing companies have placed a premium on developing relationships with their suppliers. These relationships are the backbone of SRM,” he says.

Tompkins conducted a survey of companies that averaged nearly 10 years of experience in sourcing in China and more than 6 years of sourcing in all other Asian countries to gain further insights into trends and current practices in international sourcing and supplier relationship management.

Read more here.

Blanchard’s piece reinforces part of what our own Kent Kedl had to say in his recent podcast about the “new normal” in China: China isn’t simply the cheapest place to find manufacturing labor, but (to paraphrase) it is still one of the best places to establish manufacturing operations.

As a sidebar to Blanchard’s cover story, Technomic Asia’s founder Steven Ganster writes about how Western companies can “China-fy” their manufacturing operations. From the article:

Achieving the right level of China-fication in facility set up, process and equipment is the key to success here. China-fication is transplanting to China what you do well in manufacturing in the West, while exploiting the unique competitive aspects of the Chinese market. China-fication also means you have to do things differently than you do in your home market while not meaningfully compromising the integrity of the end result.

Ganster goes on to remind manufacturers of Technomic Asia’s favorite refrain, to remember the “6 Ds”: due diligence, due diligence, due diligence.

Read the full article on IW’s Web site.

As companies are learning that what works at home won’t necessarily work abroad in the Chinese marketplace, they’re finding new ways to cater specifically to the needs and desires of Chinese people — rather than shoe-horning American products into a distinctly non-American set of tastes.

Watch the full segment, about 6 minutes long, here.

With his new documentary for the Discovery Channel, “The People’s Republic of Capitalism,” Ted Koppel shines a light on issues that aren’t much of a revelation for seasoned China watchers. From the producers’ description of the show:

“The American and Chinese economies are irreversibly intertwined. The common complaint that the Chinese are taking jobs away from American workers is in many cases true. China’s cheap and abundant labor attracts manufacturing from all over the world. Still, American economists estimate that the U.S. is as much as $70 billion richer each year because of its relationship with China — something must be going right.”

A number of U.S. companies are enjoying huge success in China. General Motors is the market leader in China and is reaping attractive profits, a stark contrast to its U.S. market position. Profits from their China businesses are having a significant influence on the global financial health of many U.S. companies. In fact, recent research indicates that companies pursuing a dual strategy of participating in China’s local market and exporting from China are achieving substantially higher profits than those firms only doing one form of China business.

The economies of China and the U.S. are, as Koppel reminds us, inextricably intertwined with benefits for both sides. As Koppel’s documentary shows, globalization isn’t the boogeyman some make it out to be. There’s certainly a positive give-and-take between China, the U.S. and, of course, other countries around the world. Those companies proactively exploiting these relationships are going to be the winners going forward.

From the article:

Although foreign companies have had a presence in China since the mid-1980s, China’s reputation as a risky place to do business has not abated. Rather, in some ways, it has increased over time from the regulatory changes in the 1990s through today’s concerns over the quality and safety of Chinese-made products.

Certainly, there are legal and financial tactics that companies use to manage risks in China, and companies should take every precaution to insure that they are on solid ground. There are some broader risk management imperatives, however, that companies should also consider as they establish their China strategies.

Read the full article.

A quick excerpt:

U.S. companies planning to build their success on domestic markets alone will be gone in five years. That’s Jim Tompkins’ opinion, anyway. As president & CEO of Tompkins Associates, he sees an opportunity for U.S. companies to take advantage of the changing demographics among China’s 1.3 billion people.

The article also includes this quote from Steve:

“In 20 years [China's] economy will be as big as the U.S. Automotive will be as big or bigger in less time than that. Warehousing and land costs are going up, as are labor costs, and it will push them to more automation,” [Ganster said.]

Read the full article on MMH.com.

In my previous podcast, I talked about how you can’t succeed by simply being in China — you have to BE GOOD. In today’s follow-up, we share some examples of companies and strategies that ARE GOOD.

In the past podcast, I referenced the famous quote from Woody Allen — “90 percent of life is just showing up” — and posited that this was not the case in China any more. Just showing up is being opportunistic, getting lucky (to a certain extent) and being at the right place at the right time.

While this still can happen in China, it is more likely that the winners here will be those that are not willing to just be here, but are pursuing being GOOD here, thinking and executing strategically. I would encourage you, again, to get your international teams in a room and challenge yourself to assess whether you are being opportunistic or strategic. If you are the former, pat yourselves on the back and thank your lucky stars that, just by showing up, you are still standing and are doing OK. Then roll up your sleeves and get to work on becoming good!

IndustryWeek’s Adrienne Selko reported on the China presentation here. From the IW article:

Companies should develop operations in China that export back to the U.S. as well as sell to customers within China, says Tompkins. “Integrate sourcing from China with product sales in China and make Asia part of your overall global supply chain and customer base,” he adds. This dual strategy also recognizes the growing middle class in China, currently estimated at 100 million. Opportunities for sales and distribution will expand as the middle class continues to grow.

Western companies require “competitive intelligence” in their Asian business strategies in order to be successful, however. “It is a mistake to assume that what works in the U.S. States or Europe will work in China,” says Ganster.

Read the full article here.

Jim Tompkins, CEO of Tompkins Associates, and Steve Ganster, Senior VP with Technomic Asia (a division of Tompkins Associates), addressed China’s changing business climate this morning at the 2008 North American Material Handling Show in Cleveland.

“The smartest move that material handling and related companies can make is to adopt a dual strategy,” says Tompkins. “Now, it is all about ‘globalization’ instead of ‘China-fication.’” Tompkins advises companies to develop operations in China that export back to the United States as well as sell to customers within China. “Integrate sourcing from China with product sales in China and make Asia part of your overall global supply chain and customer base,” he adds.

This dual strategy also recognizes the growing middle class in China, currently estimated at 100 million. Opportunities for sales and distribution will expand as the middle class continues to grow.

Western companies require “competitive intelligence” in their Asian business strategies in order to be successful, however. “It is a mistake to assume that what works in the United States or Europe will work in China,” says Ganster. “People, thought processes, how technology is viewed, and even the different terrain must be considered when establishing China as part of the global supply chain.”

Ganster also points out that China’s material handling industry has grown aggressively due to continued construction and industrial expansion. “Material handling equipment sales have increased 25-30 percent a year over the last four years,” he notes. “And the opening of China’s logistics market will provide a huge opportunity for suppliers to the warehouse industry.”

On the other hand, the country’s level of technology (including WMS) is still in the embryonic stage, with only about 5 percent of warehouses in China reporting that they have sufficient IT systems. “Many Chinese companies are writing their own WMS programs that are not built to international standards, and this will only add to their difficulties in globalizing,” Ganster says.

It is predicted that China will move from manual labor to automation at a much greater rate in the next five years. Manufacturers there are seeking new ways to increase productivity while cutting costs, which opens up a sure-fire niche for companies in the material handling industry.

Building a dual strategy and understanding how to compete intelligently will provide an edge for logistics, material handling, and systems integration companies to conquer the changing tides in China.

Steve Ganster is featured in a Journal of Commerce article discussing the recent WTO ruling against China. A World Trade Organization panel ruled that by raising its tariffs on imported vehicle components, China violated its obligations to the WTO. From the JoC article:

The Chinese market for imported vehicles and components is booming, and the WTO ruling will have little or no economic impact on that growth, Ganster said. “The impact will be mostly psychological,” he said. In little more than a decade, China has become one of the world’s largest auto markets, and it is a profitable “magnet” of U.S. producers of autos, original equipment and after-market parts. Restrictions on foreign ownership have been relaxed, and many parts suppliers are wholly owned by non-Chinese investors.

You can read the full article on the JoC’s Web site (subscription required).

As China’s over-heated stock markets started to take a bit of a dive early last year, Kent Kedl had a bit of an epiphany: For months, the market had been steadily rising, a China dot-com bubble of sorts in the making. People here were dumping everything into the stock market. Then, on February 27, 2007, Chinese stocks dropped about 9 percent after seeing a record close just the day before. The global reaction was crazy. The U.S. stock market dropped 3.3 percent, its worst close since the days following 9/11. Economic pundits were trying to guess “What does this mean?” and many were predicting a continued slide for all markets.

Journalists and pundits mostly predicted doom and gloom, maybe because it just played better in the press: If it bleeds, it leads, and the bleeding global markets sure led the news those days! However, after a few days, when things cooled down a bit and the foreign press actually started paying attention to the Chinese markets, they started saying, “Wow, we learned something there and we won’t overreact like that again!”

The current situation in China seems a perfect situation to test out this new-found skill in a measured response. While certainly not as explosive as a stock market tumble, the multiple changes happening in the Chinese economy over the past six months might add up to something of seismic importance. In particular, it seems that a number of forces are combining to cause prices to rise in China (both business and retail) and some new regulations are in place that, in some foreigner’s views, make China a less attractive place to do business.

What can we learn from what we are going through? Here are four things, all of which revolve around China’s relatively new role in the global economy:

1) Don’t over-react

The recent changes in China are not a death knell for global business. What is happening here are just the normal growing pains of a developing economy showing signs of budding maturity and the problems that go along with it.

2) Don’t under-react

China IS going to be a growing consuming market and it WILL suck up a lot of raw material and energy resources. And this WILL have an impact on other nations and economies by making these resources more expensive. It is a reality. It is happening. Sitting and complaining about it is NOT going to help. What emergency plans do you have that address potential future scenarios involving a growing China?

3) Don’t over or under-react, but DO REACT

Many a fortune cookie tells us, in some form, that in the midst of great chaos one may find great opportunity. Well, now seems a time of – if not GREAT chaos – then of some modicum of chaos in global markets. So how can you react and take advantage of it?

4) Look at all of your options

The lesson here is that companies should certainly consider their growth possibilities in China. It is (and will remain for some time) the most compelling market in the world. However, companies should not look at China at the cost of ignoring other markets. If the changes in China are motivating companies to consider all of their options, then I think this is possibly a good thing and is healthier for everyone involved.

“The past 30 years have been a continuous evolution, and expansion in Asia is the next natural step for us,” says Jim Tompkins, President and CEO of Tompkins. “Technomic Asia has more than two decades of experience in helping clients to enter, expand and optimize their operations in China and throughout Asia, and we are excited to expand our Global Supply Chain Services.”

According to Steve Ganster, Technomic Asia’s Managing Director, there is a definite need for this type of fusion. “By merging with Tompkins, we have the opportunity to combine resources, experience, and knowledge and share the highest level of business strategy and global supply chain expertise with our clients.”

Tompkins’ Global Supply Chain Services help clients define and implement:

• Global business and supply chain strategies, supply chain transformations, and organization development.
• Global supply chain processes that improve efficiency, effectiveness, and business performance.
• Global trade and risk management strategies and processes.

A Global Integrated Business Solutions (GIBS) company, Tompkins is the leading provider of end-to-end business strategy and supply chain consulting services — from supplier’s suppliers to customer’s customers, as well as from planning through transformation and implementation. The company is headquartered in North Carolina with offices throughout North America, Europe and Asia.

Media Contact
E-mail Myra Schwartz or call 919-855-5533.

About Tompkins Associates
Tompkins Associates designs and integrates premier, global end-to-end solutions for companies that embrace supply chain excellence. For more than 30 years, Tompkins has evolved with the marketplace to become the leading provider of global supply chain services, distribution operations consulting, technology implementation, material handling integration, and benchmarking and best practices. The company is headquartered in Raleigh, NC. For more information, visit www.tompkinsinc.com.

Kent offers three key pieces of advice for getting started, including this important piece: Don’t but the tactic for entering the Chinese marketplace before the strategy. As Kent says, “That’s like my saying, ‘Where are you going on vacation?’ and you say, ‘I’m driving a Buick.’ “

For most foreign companies establishing a business in China, the phrase “China market entry” is a one-time process of market assessment, strategy planning and corporate structuring. Once the business license is issued, there is a palpable sense of relief among the management team – “Whew, market entry is done,” they say, maybe hoisting a few congratulatory pints between then, “Now bring in the implementation team to get things going!”

However, those that have been here for awhile understand that “China market entry” is not a one-time thing and that successful companies – i.e. those that are making money here – are continuously revisiting and refreshing their market penetration strategies.

You can read the rest of the article here (PDF).

In today’s China Business Podcast, Kent Kedl discusses the idea of “continuous market entry.” He emphasizes the importance of looking at the Chinese market as if your company had never been here before. Much like the idea of a couple keeping their relationship fresh by not losing touch of the spark they had early on, companies in China must continue to capitalize on new opportunities presented by the constant change in that country.

And of course, capitalizing on opportunities is only part of the game. Companies need to avoid being left behind by this constant change, too. Hide your business plan, get your key sales and marketing staff together, and ask the tough questions about how your product is used — not how you want to sell it. Know that when you stop entering the market for the first time (continuously), it will be your last time.

The first, by Kirby Chien on July 12, discusses China’s regulatory environment in the wake of recent product safety concerns.

The lack of consistent and stable regulations enforced evenly throughout the vast country opens the door for unethical executives looking to cut costs and improve margins.

“There is product substitution, poor manufacturing methods, poor storage and a myriad of other problems that can result,” said Kent Kedl, the Shanghai head of Technomic Asia. Kedl’s company is a consultancy that helps firms such as chemical maker DuPont and Sara Lee to import into and source from China. New Chinese companies pop up literally overnight, trying to take advantage of new opportunities, but often lack proper supervision.

“Last year they were planting soy beans, and this year they are doing chemical processing,” said Kedl. “They can get loans and backing quickly but don’t have the proper level of expertise and sophistication,” he said.

And the most recent Reuters article discusses Mattel’s recall of 1.5 million Chinese-made toys worldwide because their paint may contain too much lead.

The recall comes amid heightened concern worldwide about the safety of China’s exports. Many of the previous problem products have involved smaller manufacturers, but now a major company in a sensitive sector has been hit.

“Nobody wants to face that PR nightmare,” said Kent Kedl, the Shanghai head of Technomic Asia, which advises companies sourcing out of China. “But the reality is that things slip through the cracks. And the cracks are a little bit bigger here in China.”

Read the full news story from Reuters.

The Shanghai American Chamber conducted its annual China Trends conference in Shanghai earlier this month, aiming to update the business community on key trends in China’s economic, regulatory, political and business areas that will affect the operations of American and other foreign businesses in China.

Steven Ganster, managing director of China strategy consulting firm Technomic Asia and co-author (with Kent Kedl, the regular host of this podcast) of the business strategy book “The China Ready Company,” kicked off the event by outlining some key trends that will affect company strategy and business case development in China.

In today’s podcast, Ganster references his slides from that presentation. Those slides are available to view or download at www.technomicasia.com/AmChamShanghai2007.pdf.

“The pace of change in China is so rapid that we view business years in China like ‘dog years,’ ” Ganster said. “One year in China’s economy is like seven years in the West in terms of change.”

In his opening presentation, Ganster covered:
– Determining a company’s addressable market – “where you can make money”
– Changes in competitive structure in China
– Developments in strategy alternatives, including acquisition
– Movement to strategic sourcing

In addition to Ganster, presentations were made by other premier China advisors and practitioners such as AC Nielsen, ChinaVest, Baker & McKenzie, Mercer Consulting, the deputy director of Shanghai World Expo, and a panelist of award winning journalists from the Wall Street Journal and the BBC.

“The need to develop a sound and dynamic business case has never been greater,” Ganster said. “China’s markets are slowly maturing and becoming increasingly competitive. If your value proposition is not accurately aligned with your market target, you just can’t make money.”

Ganster also spoke about the emergence of acquisition as a strategy to accelerate growth.

“The early to mid ’90s was the era of the 50-50 joint venture,” Ganster said. “After many failed ventures and a loosening in foreign ownership restrictions, companies quickly shifted to wholly-owned investment strategies. But limitations in this approach are leading to acquisition as a way to achieve the best of both strategies.”

Kent Kedl, executive director of Technomic Asia, a St. Paul-based market strategy consultancy, expresses the same idea a bit more colorfully. “I gave a speech a while ago about how everybody thought that, ‘Well, that ship has sailed — anybody who was going to come to China has already come to China,’ ” he says. “The title of the speech was ‘Late to the Party but Better Dressed.’ Honestly, things are just beginning to mature here.”

The article also features Kent’s advice on “the top five things you need to think about before launching your company’s China strategy.” Read the full story for more info on China strategy.

This is second of two parts of my presentation from a recent event hosted by the Minnesota Trade Office. The first part, which you can find here, covers an introduction to China strategy and a discussion of the first step –- analyzing your “China readiness.”

As we continue today with “The Six Steps to Building a China Strategy,” we start with Step 2: finding your addressable market. In China, as with any other market, focus is a key to success. Step 3 involves doing competitive intelligence, identifying your competition. Always keep in mind that your markets and competitors at home are not the same markets competitors you’ll find in China.

Step 4 is to identify where you will fit in the value chain. Your China strategy will be determined by where in the value chain you will play. In Step 5 we look at which assets to localize. There are a broad range of options for how deeply a company can participate in China. The key lesson is, don’t do more than you have to! A company’s participation mode is determined by best “match” of external requirements, internal resources and a risk profile. How “local” do you need to be? Identify the key assets you will need on the ground in China.

Step 6 covers entry structure: Build it or buy it? Based on what assets you will need to localize, you can begin thinking about how to localize them, either by building them yourself or “buy” them by partnering. These decisions determine your “build it” strategy or form the selection criteria to find appropriate China partners.

In China, understanding and managing relationships is fundamental to supporting a successful business. Everything flows from an opportunity within a relationship.

More on these topics at www.chinareadycompany.com. Also, be sure to enter the drawing for an iPod nano by filling out our survey.

Today’s podcast is from a presentation I gave recently at an event for the Minnesota Trade Office, its 2007 China Practicum. I spoke at the first China Practicum, too, ten years ago. As you might have guessed, things have changed a bit since then.

In this seminar, I laid out the basic principles to guide China strategy development, especially helping business leaders analyze their organizational preparedness to do business in or with China.

Western businesses face many challenges in China, and understanding and balancing risks and opportunities is critical. A solid China strategy is built on a deep understanding of the market conditions in which you will work and the range of responses you can have to those conditions.

In this presentation, we cover the six steps to establishing a solid, effective China strategy. Step one is to identify your “China readiness.” China is a high-risk place to do business, and companies must be sure they are ready to face the inevitable challenges. China readiness is measured in two key dimensions: motivations to go to China and the level of organizational preparedness to go to China.

Today’s podcast is part one of my presentation, which covers an introduction to China strategy and this important first step, evaluation China readiness. In a few days, I’ll post part two, which covers the remaining five steps to developing an effective China strategy.

For more on China readiness, check out www.chinareadycompany.com.

The only way to cross a river with no bridges, that’s full of stones and has a rapid current, is with a good strategy. A former premier of China once said that you cross a rocky river by feeling for stones. Feeling for those stones and crossing the river is the business strategy. You must look ahead and identify those strategic stones in your China “river crossing.” Strategy leads structure.

What are the risks and rewards of crossing over? Remember that 1.3 billion people is a large population but not necessarily a large market. There are two ways into the market: Either you buy it or you build it. Having a clear vision of where you are going in the market will save you from dismantling what you have built. A clear vision will sustain you.

Relationships are the essence of Chinese culture. Historically — and in the present day — the majority of conversations take place face to face, not over telephone. You will need to meet people at least once — and often more than once — to gain their trust. Favors come from relationships and history.

Three steps for International investors:

• Carefully determine a solid set of motivations for your China journey
• Suspend decisions on the structure of your business until you determine what your strategy should be
• Validate your plan with deep due diligence before you begin

And always remember “the 6 Ds”: due diligence, due diligence, due diligence.

Identifying your strategic stones in the China-business River is just the beginning of this journey. You’ll need expertise and flexibility to adapt: Some of these stones will prove secure, but others will be quite slippery. When you find your footing, that’s when we start to read about your successful strategies in the China Business News.

Interview with Geoff Holdsworth, managing director, Asia Pacific for WD-40: Part 2

Kent Kedl of Technomic Asia brings you part 2 of his interview with Geoff. Geoff and Kent discuss finding and hiring the right people for your China operation and how to train them.

Geoff says hiring is not all that different than in other markets: Ask around with trusted partners and see who they might know and recommend. Training is a different issue, though – more complicated because national and corporate cultures are much harder to translate than language.

Geoff stresses the importance of visiting China and really getting to know the market. Walk the backstreets, he says, and dig beneath the surface. And when asked to offer one word to describe life in China, Geoff says: enlightening.

Kent Kedl interviews Geoff Holdsworth, managing director, Asia Pacific for WD-40. This is part 1 of a two-part interview. We’ll post part about a week or two from now. Geoff talks about the beginnings of the WD-40 brand and distribution in China, how they entered the market, and how they “leaked in” for some time before formally entering the China market.

Geoff and Kent discuss changes in the Chinese marketplace, including the areas of strength for WD-40, including the Guangdong province and the coastal areas. They also discuss product distribution, relationships with distributors, and how, if at all, the WD-40 brand is positioned differently in China.

Geoff also says that one of WD-40′s biggest problems in China is counterfeiting. People buy a product they think is original WD-40 and come back asking, “Why doesn’t this work?”

Part two of this interview, which we’ll post soon, includes more from Geoff Holdsworth, including discussion about finding and hiring good people and how to train them.