This is another excerpt from my new, as yet unfinished book ‘The Dragon Flies’ or ‘How Not to Lose your Shirt in China.’
This is the single most important business-advice mantra for successfully doing business in China because ignoring this precept almost guarantees failure. The importance of this advice simply cannot be under-estimated and it comes up over and over again in discussions with companies in China.
The market is led by pull not push – and you have to be there to understand what pulls the market.
You can’t win and hold ground if you don’t put boots on the ground.
The bombers can disrupt but the infantry secures.
Ask yourself why Japan, an old enemy of China, is so successful as an investor and business operator in China. Although China and Japan have strong economic and diplomatic ties today, the Chinese people still have considerable residual ill feeling toward Japan as a result of the Second Sino-Japanese War, which took place seventy years ago.
Despite this, almost visceral ill disposition to Japan, the Japanese have one of the highest rates of Foreign Direct Investment (FDI) in China and are generally successful in their enterprises. Why should this be so?
Some assume that it is because the Japanese are Asian and therefore understand the “Asian mind game,” but this assumption does not hold true. The rules for doing business and the way of thinking in Japan are completely diﬀerent from those that prevail in China. If the Japanese can overcome the negative feelings surrounding a history of mutual hostility to successfully invest and do business in the Chinese market, what prevents Westerners from doing the same, when we enjoy a high regard in the eyes of most Chinese?
The answer is actually quite simple: The Japanese are masters at learning how to do business in other countries and getting the better of their opponents, even while playing the opponent’s own game. Japanese companies spend enormous amounts of money on intangibles such as research, information and forming connections before they even enter negotiations.
Generally, a Japanese businessperson will spend some months (or years) in preparation before even contacting a likely partner. The money spent in the initial stages would stagger some Western individuals, who want to see an immediate return on every cent invested. Whether it is better to spend the money up front and see your business succeed or hang on to your cash, only to lose it in an unsuccessful venture, is entirely up to you.
Sun Zi’s Art of War opens with a statement concerning the importance of knowing oneself and one’s enemy. Sun Zi (perhaps better known in the West as Sun Tzu) says that knowing yourself will ensure victory perhaps ﬁfty per cent of the time, according to the rules of probability. To ensure victory in every battle, however, he says that you must know your enemy as well as you know yourself.
To know your Chinese “enemy” as well as you know yourself requires both close study and close scrutiny. I recommend that you read as many books about China by as many diﬀerent authors as you can—and that you spend as much time as you have available on the ground in China, simply learning, before entering into deals.
If resources do not allow you to spend much time in China, you must be prepared to buy this knowledge, either by employing China experts on your staﬀ or by securing the services of a recognized consultant or achiever in the marketplace. Both of these options are expensive, but unless you can do your own research in China, there is simply no other way to enter the Chinese market successfully.
If you ﬂy into China clutching a “great deal” and stay for two days, a week or even two weeks, do not begin to think you will learn even one iota about China. If you are going to stand any chance at all in the Chinese business environment, plan on spending some months in the country laying the necessary groundwork. Spending several months in China before doing business is, in my view, absolutely essential. It is during this apparently unproductive time that your future business is made.
Over the years I have counselled literally hundreds of companies, and the successful ones all share the same factor: They have boots on the ground. The person with boots on the ground is the one whose job it is to answer the 150 questions that have to be answered before stepping into the deal.
Likewise, you cannot build a guanxi network without spending the requisite time on the ground needed to build it.
There are a number of ways that the principle of Boots on the Ground can be established.
Firstly, there a couple of overarching questions that have to be answered:
- Why am I coming to China?
- Is China the best possible use of my resources?
- Can I afford a number of years’ expenses – up to 5 years and possibly 10 years – to get established and reach a point of profitability and stability.
Why am I coming to China?
The answer to this first question is usually met with the same response: China is a huge market and if I can just get my product into the market and sell it to such a large market then I shall be successful beyond my wildest dreams.
But probably not.
There are so many factors that mitigate against your product reaching domination in the China market.
First and foremost is a misunderstanding of the size of the Chinese market. China has one of the most unequal distributions of wealth in the world – currently in China the top 1% own around 70% of the wealth. The Gini Coefficient in China, which is a widely used measure of inequality is a staggering 0.474 – the World Bank considers a coefficient above 0.40 to represent severe income inequality.
The above figure can be compared with the US where the top 1% own 42% of the wealth – and the US is considered the most capitalist country in the world.
What this figure translates into is that there are huge gaps in urban/rural incomes, regional and provincial differences and between educated and non-educated sectors of the population.
There is also the factor of the per capita consumption figures to consider – not only is there an income gap but there is a very marked gap (falling roughly into the above categories) in what percentage of a family’s income is spent rather than saved.
Rural families save an enormous percentage of income compared with urban families for example.
The population figures can only be assessed when looking at where a company’s product fits into the income graph, the table of consumption and the number of people likely to buy the company’s particular product range.
It would be almost impossible to adequately assess the market potential by sitting at home in the foreign country reading tables and graphs prepared by other people, so at the very least, before committing to a market entry into China there has to be an intelligence gathering period, which should involve someone being in the country and doing on-ground research.
This is where the Japanese excel – as mentioned elsewhere, a Japanese company will send at least 2 people to live in China for a year or so, before any decision is made to start business there.
The brief they carry with them is to answer the 150+ essential questions that need to be answered to be able to make a prudent and cogent decision whether or not to enter the market.
The questions that have to be answered cover every aspect of a market analysis, but in much more depth than most western companies would usually analyse.
Simply identifying what is the true size of the market for your product and where it fits into the market – by income level, by geographical location, by price, by acceptability, by China centric Unique Selling Proposition – is essential before launching the product.
To do this analysis requires time and money and the question: ‘Should I come to China?’ can only be answered through this analysis and before taking the step of expending the resources required for this, you should be very clear on the reasons for entering the market.
Is China the best possible use of my resources?
China is a really hard market to conquer and do well in.
There are as many factors mitigating against foreign companies’ success in China as there are factors on the plus side.
I counsel any company coming to China to be aware that there are other markets in the world that are easier to enter than China and knowing in advance what some of these are and assessing the call on company resources against deploying those resources in other markets is essential before starting out.
I am not trying to talk anyone out of coming to China – I am trying to blow away any idea that it might be easy and to understand some of the things that will inevitably crop up during the establishment of the business in China.
I am talking in general terms here, because there are a number of ways that you can do business in China and not all of them are as hard as others. But in particular, in the hardest business is setting up a company in China (Wholly Owned Foreign Entity – WOFE) to manufacture goods or provide services for the Chinese market itself.
Other business types are:
- Establish a Wholly Owned Foreign Entity – WOFE – to manufacture goods or provide services for the China market itself.
- You manufacture in your home country and import directly into China and sell either directly or via distributors into the China market.
- You manufacture in your own factory in China for your home or international markets.
- You provide good or services for other foreign owner entities in China.
- You contract manufacture for home and international markets using established Chinese businesses.
- You form a Joint Venture with a Chinese entity to sell into the Chinese market.
- You set up some combination of the above options.
The 10 Most Damaging Problems that you are likely to face in China:
- Competition not just from the existing Chinese companies but from pretty much every global competitor in your market – all of whom are trying to conquer the market.
- Lack of a well-developed local network which can ensure consideration of the bid or proposal – Chinese buyers rarely buy from unknown entities and having a strong local network in place creates credibility with buyers.
- Choosing the wrong partner.
- Success breeds attention and attention can bring two negative results – increased competition from local companies – including unauthorised use of IP, and creation of new government standards that favour the local companies. In addition, the Chinese companies will be working from a much lower cost base and will likely be able to reduce the price of the particular item, even if the quality is not necessarily the same.
- Lack of understanding of the local market and inappropriate advertising and brand creation strategies used by the foreign company.
- Pricing not meeting the market expectations or the market segment being marketed to.
- Supply chain not established properly leading to impression of poor service.
- Lack of ability to manage local staff in a China appropriate way.
- General naivety about how China operates and the differences in mores in doing business.
- Overoptimistic belief in one’s abilities – sometimes bordering on arrogance.
A well laid out plan for China, before making the decision to enter the market, would give careful and well-founded consideration of the nature of the above problems and other particular problems associated with your individual market.
These problems are going to be encountered either individually or in a combination of one form or another and therefore, at the very least, having an assessment of the risk and a likely answer to these problems, with the cost implications involved, is necessary before deciding if China is right for you.
Other markets, that operate on similar rules and standards to the home market, can usually be opened without the same depth of analysis required that is required in China.
While these points might seem negative, and it may seem like it is all too hard, there are solutions to all of these problems.
For example, in the great beer wars of the 90’s there were clear winners, who managed to navigate these types of problems and are successful and profitable some 15-20 years down the line, because their strategies fitted into the China business paradigm. It is also no coincidence that the top 10 western beer brands in China all followed a similar strategy – which, incidentally was, find a major beer manufacturer, build them a brand new factory, license the beer manufacture to the local company and its attendant distribution network, and jointly pay for the marketing.
The companies that failed to follow this strategy all failed – some of them spectacularly, losing hundreds of millions of dollars – usually by believing they could own the entire supply chain themselves.
Part of the strategy before deciding to come to China, therefore is to, get some limited boots on the ground and answer the questions that need to be answered before committing to the battle
Can I afford a number of years’ expenses? Can I afford up to 5 years and possibly 10 years to get established and reach a point of profitability and stability.
Once the first two questions are answered affirmatively – why am I coming and is there is a better use of resources elsewhere – the next question is to work out if there are sufficient resources in the war chest to commit to the time it is likely to take to be successful in China.
It takes time to be successful in China. While there are examples of companies getting it right, and getting it massively right first time, these are the exceptions and not generally the rule.
It tends to be a hard slog in China – one step at a time. There is so much complexity in the market that it takes time to work out just how to grow organically.
There are a number of ways to get boots on the ground:
- Open a small office with a small number of local staff
- Employ a marketing company with a proven track record in the market selling in the general industry type as your product/service.
- Employ a couple of graduates and send them to China with the brief to answer the questions required – good choices would be a Chinese student graduate and a home country graduate. You need both points of view reflected
There is a myth that setting up an office in China is expensive and out of the reach of most small or medium sized businesses. But this is exactly that – a myth.
When an army invades another country they usually establish a beachhead. And that beachhead is simply a small chunk of ground that they use to stabilize the troops and then use the secure ground to expand the territory.
Renting and running an office in China is not expensive if the cloth is cut to suit the budget.
Getting 50 to 100 sq. metres of basic office space and employing 2-4 local staff will cost around 4-8,000 USD a month, depending on the location, but it can be substantially less than this if you are prepared to work in outer suburbs or work in lesser quality office space. If you do not have clients coming to visit you then you can work from less salubrious accommodation (or from home) and meet clients either at their office or in a hotel lobby or meeting room.
A year’s costs, factoring in travel expenses, should be between $50,000 and $100,000 USD.
Getting this beachhead established is a sure-fire way to learn the things that you have to learn to make your company successful – if you borrow and copy the Chinese way you will see that it is very rare for a Chinese entrepreneur to go all out at the beginning – small steps after small steps until you are strong enough to not only survive but to start prospering.
Getting a local marketing company on-board can seriously shorten your time to profitability. Locals understand locals. Locals have networks with locals.
Using a marketing company as opposed to a JV partner means you are not wedded in despair to a partner if things don’t work out.
A business partnership in China is just like a marriage, except it is way more difficult to divorce your business partner than a wife – particularly in China where divorces can be obtained in a day. Dissolution of a business partnership is not an easy process and if you have any hair left, or any hair that is left is not white from traumatic stress you will be lucky.
Local marketing companies are like sales organisations and come in every stripe and flavor – if your product has not yet been proven in the marketplace then a great place to do a proof of concept is social media i.e. WeChat or on the TMall (www.tmall.com) or Jing Dong (www.jd.com) platforms.
I would strongly advise that either you employ someone from a marketing company with proven experience in these platforms or engage a local company that specialize in these platforms.
They don’t operate like western platforms – the advertising is different; the sales triggers are different and the look and feel is different.
If you want to do a simple proof of concept, then find someone with a WeChat reach of around 100,000 and pay them to advertise to their reach. I deliberately chose a lower reach figure for the proof of concept because if you need to tweak the message then not ruining a large pool of prospective buyers make a lot more sense.
WeChat is the second most popular social media platform in the world and it dominate the entire population in China with around 1.1 billion registered accounts and 820 million regular (more than once a month) users.
Those are big numbers, but what is more surprising is just how addicted the populace is to the WeChat world – sit in a coffee bar for 10 minutes and see how many people are sitting drinking coffee staring into space – you’ll be lucky to see one – everyone is checking their WeChat messages – it is a gorilla in the zoo of social media and it’s an incredibly powerful platform to get a marketing message out into.
It also fits into the cost-effective battle-plan for seeing if what you have is worth selling in China – it offers a mechanism to get the product analysed in the university of cash-register market research – if you get a positive response from a test market proof of concept then it is likely that you will be able to leverage what you learn into a viable product or service.
Graduates are another cost-effective way to get the knowledge you need to be successful in the market – you can make it a fun learning experience for a couple of young aspiring ascendants on the corporate ladder.
Learn Chinese, eat great food, meet interesting people and get paid into the bargain.
Since a beachhead has a military connotation play by military rules: get the right intelligence, analyse the battlefield, find out about the enemy troops and make battle plans – because once you start it is a battle. The fact is that China has a huge population and everyone is trying to follow Deng Xiao Pings aphorism – ‘to get rich is glorious’ and you will find that if you have a successful product and carve out a successful niche then you are going to find a million competitors in a very short space of time.
The Chinese market is a live and crackling with energy and enthusiasm – and with people who are prepared to work inordinately hard to establish themselves. Personally, I am amazed at the hours we get phone calls from clients/suppliers/partners – the calls go to midnight and all weekend – there is no concept of a rest – if the business is there then it is a race – a 100-meter race at full speed – and the other side is totally focused on winning the race. Therefore, you need to be ready for the battle once you have established your beachhead and figured out that you have a workable idea.
If you are interested in a pre-release copy of ‘The Dragon Flies’ – How Not To Lose Your Shirt In China’ follow the blog and you will be sent a pre-release opportunity to get the book at indecently reasonable rates.
And if you have any favorite subject you would like covered in the book send me an email:
gavin.crombie at idfglobal.com – you might even get a reply.