Big Western brands in China pay the price for failing to adapt to local market conditions. It’s a form of cultural blindness they would find unthinkable when operating in their home territories. As a result, they lose out to companies with senior management teams that understand what customers want and how to extract the best from employees.
Adequate thought has to be given to skills, training and leadership if foreign entrants are to keep pace with indigenous competitors that are moving quickly and at scale. Criticaleye spoke to executives that either work in China or conduct regular business there to explore what companies are doing to be successful:
1) Know What’s Expected as a Leader
The word ‘hierarchy’ crops up a lot when discussing effective leadership. Chris Riquier, CEO of Asia Pacific for market research company TNS, comments: “A leader in China needs to recognise they are in charge and be seen as such by the team on the ground. They need to gain respect, have extremely strong listening skills and be very perceptive, with a high level of emotional intelligence.
“You’ve got to have experience and an understanding of Chinese culture so you’re able to read a room and interpret what is communicated to you.”
There are nuances to take into account. Roger Steel, President of New Markets and Business Development in Asia for Sun Life Financial, says: “You need to listen to the way things work and have an incredible amount of humility in the face of innovation because China is innovating so fast.
“For example, in my industry of insurance, it’s almost a bit scary how good they are at creating new distribution channels.”
Ultimately, organisations require people that are at ease with the way business is done. Andrew Minton, Executive Director at Criticaleye, states: “As stakeholder bases become more diverse, you need to really understand your customers, employees, suppliers and the regulatory environment.
“It’s clear that the make-up of executive teams must reflect this diversity, otherwise they will struggle to navigate the different market conditions and will not perform at the highest point. This can’t be overstated for a market as varied as China.”
2) Map Your Talent Strategy
Opinions about how to attract and retain people vary by sector. Barrie Goodridge, former Chairman and CEO of Edipresse Media for Asia, says: “Generally, getting quality talent in China is not easy…The growth they’ve had in the last 15 years has outstripped their ability to produce enough talent.
“My experience is it’s quite difficult to find internationally orientated people over the age of 45, and the younger people, if they speak English and have international experience, know their value. With our office in China, we had a very high turnover of people.”
It’s not helped by the fact that the cachet and lure of working for a Western brand isn’t what it used to be. Roger says: “If you’re super talented in China, you want to work for one of the big Chinese companies because they’re growing fast, they’re innovative and very dynamic.
“It’s increasingly difficult for Western companies to attract top talent, unless they have a very strong market proposition.”
Chris says: “At the senior level it can be difficult, but at the mid-level the economy is maturing and, to a degree, you’re starting to see more people with 10, 15, 20 years of experience. If you’ve got the right remuneration structures, it shouldn’t be a difficult proposition.”
According to some commentators, events that have occurred in China over the last 40 to 50 years, from the Cultural Revolution and the one-child policy to its re-emergence as a superpower, mean there are marked differences between the generations. This puts additional emphasis on gauging the mindset, motivations and values of employees.
Jingru Liu, Director of China Advisory Services for professional services firm BDO, refers to how “one of the largest Chinese IT companies trains its middle management staff, who were born in the 1980s, on how they’re going to manage people born in the 1990s.”
3) Don’t Rush into a Joint Venture
There are industries where a joint venture (JV) is mandatory. For other companies, a partnership won’t be legally necessary but it may seem a simpler way to combine resources, share knowledge and improve chances of gaining market share.
Ann Coughlan, Managing Director of Bupa Asia, comments: “China has multiple layers of rules and regulations, plus distinct cultural characteristics and consumer preferences. For some companies, particularly those without previous experience of doing business in China, JVs or partnerships can add a lot of value, insight and knowledge that you would not necessarily have as a foreign investor setting up on your own for the first time.”
Like any JV, it’s a case of remembering the basics:
• Conduct extensive due diligence
• Be clear about expectations and financial rewards
• Use advisors and make sure there is a break clause
• Adopt a hands-on approach
George Yip, Criticaleye Thought Leader and Professor of Management and Co-Director for the Centre on China Innovation at China Europe International Business School (CEIBS), says: “When strategic objectives are aligned it’s a win-win for the two of you. You have to be as sure as you can that the JV partner isn’t someone who is likely to turn into a competitor in the future – that is one of the biggest things to worry about.”
4) Results Take Time
New entrants to China can be dazzled by headline growth rates. However, supply chains, logistics, market compatibility, the cost of labour and knowing how to build relationships all require significant research and effort. It’s also easy to underestimate the impact politics has on the way business is done and decisions are made.
In this context, good risk management is another essential. The issue of intellectual property rights and piracy remains problematic, notably for businesses operating in industries designated as high-priorities for China’s economic development. If a JV / partnership is struck with a private or public company, it’s wise to adopt a cautious approach to commercially sensitive information.
On a positive note, there is a crackdown on corruption and it’s also acknowledged that China’s Government is more internationally focused than the previous leadership. This is creating greater openness in terms of how trade is approached, helping companies from an export and investment point of view, and there are hopes this will improve with China taking Chairmanship of the G20 Summit in 2016.
5) Study Where Your Company Fits
As the e-commerce giant Alibaba showed with the marketing magic of ‘Singles Day’, whereby an estimated $9 billion was spent in 24-hours last November, it seems plenty of Chinese consumers have cash to burn.
That said, such stories shouldn’t lull businesses into thinking it’s an easy market to crack. Jingru of BDO says: “China is not one market – it’s larger than Europe and it’s diversified. If a foreign player wants to enter China for anything consumer related, they would have to research by region to find the right market segment.”
Roger warns: “You do not want to go into China with ambitions to run a national business. Your first entry ought to be in one or two selected cities. Get to know the places before you seek to expand.”
When examining where to start trading, businesses are frequently advised to note China’s system of ranking cities into five tiers (one being the most advanced). But for Chris at TNS, there is a danger that focusing too much on this grading system could result in poor decision-making.
He explains: “China usually gets segmented by marketers and commentators as having its cities separated by tiers, all reflecting different levels of development, economic status and various other things. It’s an oversimplification – for a company entering the market, which is a small part of the overall Chinese economy, there may be little difference between a tier three and tier one city, in terms of category.”
It will depend strictly on what service or product a company is looking to trade. “They need to really come and do their own landscaping with the category they’re operating in, to understand the consumer and market opportunity,” he adds. “They can’t just rely on a consultant’s point of view.”
I hope to see you soon.