China Business Blog and Podcast

Steve Ganster, managing partner of Technomic Asia is a frequent speaker around the world contributing to the discussion about business strategies for China. Yesterday, he presented to a Chamber of Commerce event in Memphis, a city accustomed to international business being the headquarters for FedEX and witnessing rapid growth in exports to China.

Ganster’s comments about how businesses can “China-fy”, a termed coined by Ganster, centered on the importance of long term engagement with the country, its economy and culture. The Memphis Commercial Appeal article reported others on the panel and the audience agreed with the tenets of Ganster’s concept. Ganster has seen many strategies come and go in his nearly three decades analyzing China’s economic and political journey.

Ganster shares his perspectives about developing sound business strategies for the China market in the book The China Ready Company. The book’s co-author Kent Kedl provides ongoing commentary on the China Business Podcast.

Kent Kedl, general manager of Technomic Asia was quoted in USA Today an article entitled “U.S. companies turn to China, other Asian nations, for growth”. The story focused on the only region of the global for growth being Asia, many companies are looking to how they can get in on that trend line.

Kent is a frequent contributor to articles and reporters’ background research. Kent can be heard on the China Business Podcast.

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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.

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

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

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

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

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

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

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

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

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

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

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

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

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

Technomic Asia Conducts Research for AmCham Shanghai Report

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

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

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

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

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

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

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

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

A recent article in Forbes Survey Finds China Key to Global Profitability reports on a recent survey by the American Chamber of Commerce in Shanghai. The article highlights how China was once a global source of low cost manufacturing is now becoming a source of new growth.

Kent Kedl was quoted in this article and work with the Chamber on this survey. There will be more analysis of this survey on this blog in the coming days. We’ll also have a podcasts on the topic. What are your thoughts, is China a necessary component for a company to grow globally?

Long Running Podcast Appeals to CEOs and Executive Expanding to Asia

December 1, 2009 – Minneapolis, MN – Stitcher Radio, the popular audio streaming service that eliminates the task of downloading podcasts, has added the China Business Podcast to its show lineup. This mobile application allows you to stream podcasts to your phone or iPod Touch device without having to sync it through your computer.

“We are getting comments from listeners who are increasingly using their smart phones to access the podcast,” said Kent Kedl China Business Podcast host, and Managing Partner of Technomic Asia. “Since Stitcher is available on the iPhone, many Blackberry models, the Palm Pre, and as Stitcher announced will soon be on the Android mobile platform, being added to Stitcher will be extremely helpful for CEOs and other international executives,” Kedl added. Streaming the audio, instead of downloading makes listening to the China Business Podcast as simple as hitting play.

Kedl’s more than 20 years in China, his wit, and interviews with noted business leaders make the China Business Podcast a fast paced, informative, and entertaining program. Kedl is a regular resource for journalist covering China business issues and China strategies.

Technomic Asia is an international consultancy helping companies from around the world develop strategies for entering the China market or sourcing materials from Asia. Kedl has seen increased interest in the podcast, now in its fourth year of production, because of the global economic situation, greater appeal in the China merger and acquisition market, and a high demand for understanding the China health care market which is going through a health care reform. Recent episodes over the last two months have focused on China M & A , health care, and China’s efforts to stimulate the global economy. Technomic Asia will celebrate its 25th anniversary in China in 2010.

The China Business Podcast also has a blog associated with the program and can be found at The China Business Podcast is recommended by highly regarded blogs such as the China Law Blog. In December, the China Business Podcast will feature episodes on recapping 2009 and predictions for China events that will impact business in 2010.

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

Shanghai – August 21, 2009 – Technomic Asia CEO, Steve Ganster, announced today that Dr. Kim Woodard will join the company as of September 1, 2009 and will help lead the company’s Asian M & A practice, focusing on developing a comprehensive deal execution capability. Technomic Asia is a wholly-owned subsidiary of Tompkins International, a leading business and supply chain consultancy, and has been assisting companies from around the world on their China and Asian business strategies.

“Kim’s extensive track record and on-the-ground experience in China and other Asian markets will significantly enhance our ability to serve our clients who are trying to profitably build their Asian businesses through acquisition”, stated Steve Ganster. “For the past decade, we’ve had a strong M&A strategy practice to find and cultivate deals; however, now we are seeing a growing demand to extend that practice to assist in executing deals. Kim will lead the development of these capabilities.”

“With economic recovery already happening in China and clear signs of a bottoming out in the West, we anticipate strong activity in M & A in China as early as the 4th quarter this year,” said Kent Kedl, Technomic Asia’s Shanghai based General Manager. “Many deals have been done in China – but doing the right deal in the right way is a huge challenge. Kim’s proven success in executing deals will enable us to provide a complete package to our clients.”

Dr. Woodard has twenty years of business experience in China, primarily in investment planning and strategy. He lives and works in Shanghai and Beijing, where he led Javelin Investments, a boutique advisory firm focused on M&A. He has served as a Vice Chairman and a Member of the Board of Governors of the American Chamber of Commerce in Beijing. Kim was previously Chairman and General Manager, AMP China Investment Company, part of the world’s leading producer of electronic and electrical interconnection products, where he was also responsible for strategic planning, project development, and government relations in China. He previously worked, also in China, for John Deere and for A.T. Kearney. Dr. Woodard holds a Ph.D from Stanford University in international relations. He is fluent in Mandarin Chinese and first traveled to China in 1971 at the invitation of the late Premier Zhou En-lai.

You can find more details on the China M & A markets on the China Business Blog and our China M&A presentation on SlideShare

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

Albert Maruggi, for Technomic Asia
651-695-0174 – office
612-325-8126 – cell
amaruggi@providentpartners.net

Steve Ganster Keynotes Deal Cultivation at China M & A Conference

Shanghai, China, June 21, 2009 – Steve Ganster, Executive Director of Technomic Asia, will highlight the opportunities and challenges of mergers and acquisitions in China at the GIC sixth annual Mergers and Acquisitions Summit held in Shanghai on June 25. Ganster says China’s business is good for M&A activity, however it is still a maturing market that requires a much different approach from what many US companies expect as they consider expansion through acquiring a stake in China companies.

“US companies need to modify their approach in making acquisitions in China putting a great deal more emphasis on cultivating relationships with target companies. Acquisitions are in an embryonic state in China, and the rules of the game are not well established. Much more energy needs to be spent in the discovery stage, getting to know the stakeholders and what they want from a deal. Local Chinese management often goes into the discussions not fully understanding what they want,” says Ganster.

“In the US, the emphasis is placed on financial statements in a relatively transparent process. In China, relationship is the key filter through which the deal must successfully pass.” Ganster added.

China’s companies are searching for natural resources and big name brands to beef up their portfolio or supply chain in anticipation of increasing growth. Since 2007, outbound investment has grown from $26.5 billion to $52.2 billion in 2008, according to Reuters.

One example of this activity is the recent intended acquisition by Sichuan Tengzhong Heavy Industrial Machinery, a private machinery maker, to purchase the Hummer brand from bankrupt General Motors.

The Mergers and Acquisition Summit will be held at the Crown Plaza Century Park, Shanghai June 25 and 26.

Editors & Bloggers Note: A soundbite from Steve Ganster is available with a description of the bite below.
Soundbite with Steve Ganster on China Mergers and Acquisitions
IN: After I’ve identified…
OUT: Can’t do that successfully in China
Length: :38

A full interview with Steve Ganster on the Merger and Acquisition topic is available on the China Business Podcast

About Technomic Asia

Technomic Asia (www.technomicasia.com), a division of Tompkins Associates, is a business strategy and supply chain consultancy with more than 25 years of experience helping clients plan and execute Asian growth and operational strategies. Technomic Asia assists companies in entering the Asian market or in expanding their business by providing critical market insight, an understanding of business potential, and assistance in designing the optimum strategy for success.

Media Contact: Albert Maruggi amaruggi@providentpartners.net
612-325-8126

The global mood today is similar to that of being in a huge storm. It’s that time just after the wind has died down, the thunder is muted off in the distance, and the sun’s rays are streaking through the breaking clouds. Big trees are lying in the road, debris is in front yards, but the danger has passed and the first clear views of what to do next are becoming clear to see. That is where we are now in assessing the opportunities for US companies in China.

This is an excellent article by Steve Minter, Editor-In-Chief of Industry Week, as he examines some of the turnaround planning being done by companies in China. My colleague Steve Ganster, who has provided business recession recovery advice over three decades in China is interviewed for this article.