Cracking China

For all those management teams who have made a success of expanding into China, it’s fair to say there are legions more who have been left perplexed, frustrated and significantly out of pocket after attempting to gain a foothold in the world’s second largest economy.

Clive Ansell, Group Managing Director of Technology for the education specialist Tribal Group, warns that you should “expect entrepreneurialism, both in its good and bad features, at every turn”. For Graeme Hossie, the CEO of London Mining, it’s vital to “understand that China business practice is different to the West in so many ways: don’t assume anything is ‘mutually understood’ unless you have discussed the detail”.

Still, the scale of growth means that when looking at international expansion it’s a country that proves hard to resist. Nicholas Emmerson, a Partner at international law firm Eversheds, says: “China is the second biggest economy in the world and the Beijing area alone has a GDP equivalent to that of the UAE. It can currently be summed up in two words: mass urbanisation. It’s on a scale we’ve not seen before with massive migration from the countryside to the cities.”

Notwithstanding concerns about the country’s slowing economic growth (8.9 per cent for the fourth quarter), the appetite for inward and outward investment remains uniquely ambitious for the current climate. Graeme says: “It is a very good and opportune time to get involved and establish a relevant business presence and relationships. China is growing in all aspects, including a huge and very capitalist/entrepreneurial private sector as well as state-owned enterprises looking for growth and partnering opportunities.”

Quality matters

As with any move to expand internationally, the two common denominators for success are to find the right local partners who know the market and to have some of your best people on the ground to ensure expectations and reality are aligned. Peter Blezard, former CEO of Plant Impact plc, says: “Choose the right partners with good contacts and deep experience of the business field. You need to remember that China is a vast country with great cultural diversity between regions. Just like the US, you are more likely to require regional/local partners than a single national partner.”

Clive says: “Invest in relationships and the long  term when dealing with senior people. You also need clarity and good commercial arrangements and specificity when dealing with mid-level people.”

Again, it’s dangerous to assume anything. “Work on a win-win basis,” states Graeme. “It is important that all parties fairly benefit from the relationship and it is seen as value creation rather than a zero sum game – approach the venture/relationship as a marriage and treat it as a long-term investment that can grow in many years. Be very clear about the big picture of what you are doing and why it makes sense for both parties – keep this in mind throughout.”

The complexity around legislation and red-tape is as well documented as the need to spend time on building relationships. “You’ll need to have a good grasp of how to deal with each level of bureaucracy if your business is to truly flourish,” says Sharon Shi, Head of China (EMEA) at Eversheds“There’s central government, the provincial level, five municipal cities with certain powers of autonomy and further levels of local government, each with different authorities that may issue their own rules.”

Sadly, it’s still true that a lot of businesses fail as they become caught up in the excitement and frenzy to enter the market at all costs. Chris Merry, who in the mid-nineties was Managing Partner of PricewaterhouseCoopers’ (then Coopers and Lybrand) office in Shanghai, says: “There is a lot of information, expertise and sensible people to talk to now, both here and on the ground in China, so take some time to get briefed.”

See the difference

There will almost certainly be frustrations around intellectual property rights, hiring and retaining talent and the differences between the first, second and third tier cities. “Some foreign companies have discovered the cultural variations early enough and adapted their product or services accordingly,” says Sharon.

This is fundamental for Pankaj Ghemawat, a Criticaleye Thought Leader and Professor of Strategic Management at IESE Business School. “The first point is that you have to go beyond looking at market size or just the number of Chinese. Many people seem to be interested in this market based on the idea that there are lots of Chinese and that’s not exactly a proprietary insight.

“The important thing is to start going beyond market size and to recognise the numerous differences that exist between China and where you’re coming from. Then you have to try and figure out whether the market is of interest and, if so, what are the best ways of pursuing that.”

It’s in these niches, whereby a company can tweak its offering to meet the specific needs of a local market, that real traction can be gained. “I do think there is often a disconnect between people on the ground in China and the folks who work at HQ,” adds Pankaj, who notes corporate management may need to get smarter when listening to the insights of their country managers, rather than rigidly abiding to a global strategy (food and restaurant chain Yum! is a great example of a company getting it right).

Not so long ago China embarked on its 12th ‘Five-Year Plan’, which details the avenues where foreign companies and investors can capitalise on this grand push for growth. Graeme says: “The local market is growing exponentially in multiple sectors. It is ripe for proven business concepts and models and products from abroad. The entrepreneurial opportunities are very substantial.”

It may be a market that’s not going to work for every company, but for those that can detect an opening the basic rules are planning, preparation and putting in the groundwork to meet the people who can open doors and also save you from expensive and potentially disastrous dead ends.

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

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