Insights

50 Ways to Win in China

In 1975, Paul Simon released the song 50 Ways to Leave Your Lover, which, despite the promise of the title, offered only five such possibilities within the lyrics. We consider this to be a solid example of literary license (rather than outright deception) and will therefore follow his practice in this article and offer five suggestions about how to succeed in Chinese markets. While only five in number, these suggestions are ones we believe to be critical to success in the world’s fastest growing and most rapidly changing market.

Perhaps Simon’s decision to limit his list to five reflected the fact that rhymes involving the names Jack, Stan, Roy, Gus, and Lee are relatively easy to come by. We will also follow his lead in this regard, and present our recommendations in the style of Simon’s hit song. But we should note that the listener to Paul Simon’s song could actually leave his or her lover by using any one of Simon’s options. To succeed in China, it will be necessary for firms to follow all of the five recommendations we present below.

China’s dynamic and challenging market is one in which it would be much easier to write an article titled Fifty Ways to Fail in China, but our belief is that the five recommendations in this article can help firms that want to succeed in China to do so.

Enjoy the pack, Jack.
Anyone who has been doing business in China already recognizes the fact that transactions aren’t the “one to one” variety common in most western markets. In China, the reality is “one to a pack”, with the “pack” reflecting the various organizations involved in business decisions in that country. The most common additional participants in the “pack” are still governmental organizations, both national and regional. Most China-savvy practitioners know that it makes good sense to get to know the mayor and key party officials. In instance after instance, we’ve seen what would be considered a pure business decision in the west influenced by the potential impact on local employment or some other metric important to the mayor or other government officials.

The roster of the participants among the “pack” goes far beyond government, however. Universities, design institutes, and trade associations are among other important examples. And, like government, while the descriptor of the organization is the same as in western markets, the roles played by these organizations are very different. In previous time, for example, Chinese trade associations often actually ran their industry. That defined their roles far differently from their western counterparts. As an example, the China Valve Industry Association cited its roles as inclusive of product purchasing, investigating “internationally famous valve companies”, participating in the technical verification of foreign valves, and helping project investors to choose valves. It is hard to imagine, for example, a US trade association taking on the role of recommending one of its members over the others.

An extreme example of the “pack” was recently provided by a client working in the commercial vehicles market:

“We were involved in negotiations with a Chinese firm that we felt would be a good partner for one of our product lines. The relationship was envisioned as a key element of our strategy to enter one of China’s key regional markets, and our efforts to build this relationship had, we thought, covered all the key bases. We knew the government agencies involved, and had made sure our business case emphasized the positive benefits for the region in which this firm was located. It was our expectation that we’d close a good contract on the visit last month.

“When we got to the meeting, along with the expected participants, there was a surprise. Our prospective partner had brought to the meeting executives from a firm that for all practical purposes was a Chinese equivalent of our own firm. The only reason we weren’t competing was geography and history – neither firm had previously ventured into the other’s markets. The signal we got from our prospective partner was that this firm was ‘an important and trusted member of the local business community,’ one that our prospective partner felt could ‘be an important element of a future relationship’.

“The normal reaction we would have had would have been ‘No #&$% way’. That certainly would have been the reaction in the US or our other major markets. But we recognized, just in time, that we were in China and that familiar rules don’t apply. So we are now in the process of rethinking the business model so as to include this firm in the relationship.”

As this example illustrates, the “pack” can include quite a number of diverse participants. Be prepared for not only numbers, but also surprises as to which organizations and firms become relevant to your business transactions in China. It’s helpful to go into negotiations from the perspective that nothing would surprise you and to be creative in your ability to craft a solution that creates a win for your organization and the members of the “pack”.

You are the man, Stan.
In China, the personal dimension of business relationships exceeds that of most other markets. One experienced executive responsible for his company’s strategic accounts described his typical message to his team as follows:

“You are our company’s point person with your assigned accounts, but it’s about the company, not about you. You need to make sure your customer sees that the relationship is with the company, not with you. You can think of yourself as the conductor of the orchestra, but always remember that it’s the orchestra that makes the music.”

His advice is correct for most market settings. Our research into strategic relationships clearly shows that company-wide competencies in implementation and innovation are the foundations for long-term successes[1]. An individual’s relationship skills can help his company move from a traditional supplier relationship to a stronger position, but that alone typically is not enough. It takes company-wide efforts to sustain higher-level relationships.

The same executive went on to describe his company’s experiences in China:

“We went into China and were quite successful as a firm. We benefitted from the incredible rate of spending on infrastructure there, to be sure, but our sales outpaced the market. A significant part of our sales involved two major customers, and we quickly elevated them to strategic account status and assigned one of the key ex-pats on our China team to manage these relationships. It was great making quarterly presentations about our successes in China, which were moving the needle for our company.

“Then we hit our first speed bump, for a reason we had never anticipated. We replaced the ex-pat who had been working with the two strategic accounts with another individual. This was part of our normal rotation, with the first individual’s career path bringing him back to the US to assume a group leadership position and the second one transferred to China to gain some global market experience. The person we transferred was a highly-ranked professional, on a fast track, so we were confident he would be a more-than-adequate replacement.

“But what we heard was exactly the opposite. One of the major customers said they were insulted that we would make such a change, particularly without consulting them in advance. It was clear that they believed they had a say, a major say, in our personnel decisions. The second customer wasn’t as explicit, but we saw that their orders started to decline and learned that they were now splitting orders between our firm and one of our competitors. This was clearly fall-out from the personnel actions we had taken.”

This experience is far from uncommon. The personal element to business relationships cannot be underestimated in China. “It’s a long-term job, Bob.” It takes a considerable adjustment in the human resource policies of most companies to avoid disruptions such as those experienced by the firm whose executive was quoted above. Selection of individuals and management of eventual changes requires a new emphasis and level of skill.

Learn to deploy, Roy.
The concept of “China speed” is among the most challenging of concepts to communicate. One of the strongest messages we have provided about what it takes to succeed in China is that firms must change their processes to move at China speed or face a serious competitive disadvantage.

Perhaps this concept can be best understood in the context of China’s amazing pace of economic development. The country’s economy has grown at a double digit pace for twenty years, with the country’s income about eight times higher than it was just two decades ago. As a result, literally hundreds of millions of consumers have had the opportunity to buy their first cell phone, their first DVD player, their first color television, their first car, and their first condominium in a period of less than two decades. The number of passenger vehicles in China went from about four million in 2000 to more than sixty million in 2010.

While only about 10 percent of China’s population had an income over $10,000 in 2000, 60 percent exceed that level today. And these more prosperous consumers are impatient, eager to enjoy the higher standards of living that have become possible to them. As a result, speed matters and the firms that aren’t able to meet consumer demand are going to fall by the wayside.

There are still other characteristics of China’s market that reinforce the importance of speed. Markets are not only growing rapidly, but are very fluid, with tastes shifting quickly and the annual new entrants into each income strata are so numerous as to create a new market on their own, with no history or prior purchase patterns. New technologies or fashions can thus see explosive overnight sales gains. The firms that supply products have very little in the way of brand loyalty, given the absence of history, so a new entrant, from China or abroad, can quickly gain market share with the right product and sales campaign.

And processes in China are different as well. The ready availability of labor at costs that are still low by global standards allows China’s firms to do things differently than is the case in other markets. Research and development processes, for example, often reflect China’s ability to swarm a task with labor, even if the required labor involves skills like engineering. And many Chinese firms continue to bring products to market with minimal beta testing, knowing that they can swarm performance problems with service labor[2].

An executive from a major automotive parts supplier provided the following description of what his firm learned:

“China moves so fast that it required a totally new set of internal management systems. Our reporting relationships had to be streamlined. It just took too long to get anything approved. The same was true of spending approval systems. By the time we had approval, it was typically too late. And our approach to product design was a nightmare. We would be two generations behind before we had launch approval.

“Our CEO from the US saw it firsthand. He visited our largest US OEM customer at their office in China and was told that to win the business with their joint venture in China, we would need to deliver off-tool samples of components in a quarter the time that is standard in the rest of the world. We were at risk of losing our most loyal global customer. We can’t afford that and they can’t chance missing the market due to their suppliers not matching the requirements of doing business in China. In short, the market is simply too volatile and competitive for the type of planning, both by OEMs and suppliers, that we are accustomed to.”

For the foreseeable future, none of these factors will change much, even as China’s economy continues to grow. “Get used to speed, Reed.” The firms that will be best prepared for success in China will rethink their processes and systems to take time out if they are going to be competitive in this market.

Stay on the bus, Gus.
In an earlier part of this article, we emphasized the personal nature of relationships in China, requiring that firms implement personnel policies that reflect the importance given to relationships by the Chinese organizations with which they are doing business. Stability is a key success factor in China. This need goes far beyond ensuring stability with Chinese customer organizations.

One reason for the criticality of stability is the fact that contracts are not reliably enforceable, so relationship is the way that interests are protected. “The rules” are often unwritten in China and are frequently unpredictable in application, so the importance of a strong relationship extends to officials as well as to customers. If a firm changes its players, the odds are good that the Chinese will think that contracts and rules are open to change as well.

The quotes that follow, from distributors of commercial and industrial large equipment, are representative of the vast majority of interviewees who said that stable relationships are the most important factor in their successful business transactions:

• “The market in Chongqing is not standardized. Regarding projects, it doesn’t matter if the quality is good. The relationship is more important.”

• “Sales are made through good relationships that have been built over time.”

• “A big percentage of business is dealing with loyal customers or introduced through ongoing relationships.”

• “I worked for the China Ministry of Construction before, so I have many friends there. Relationship accounts for 80 percent in bidding.”

• “Strong and stable relationships are the most important factor in doing business in China, including with private companies. When a government department hints at using a certain product, the customer listens. Brand and service are also important, but relationship is first.”

• “Relationship is very important to doing business in China. Nearly all foreign companies are concerned about that and realize that you can’t win business when your competitors are doing their best to build relationships while you are doing nothing.”

“Don’t pass the baton, Ron.” Success in China requires building many key relationships and sustaining them, presenting a picture of stability to all of the organizations that make or influence decisions along the customer chain. Without stability in key relationships in China, success stories will be few and far between.

The city is key, Lee.
Despite the incredible growth that China’s economy has experienced, it is a very diverse country market, far more like the European market of several decades ago than the US market. The eastern part of China, including Beijing/Tianjin, the Shanghai area, and Guangdong Providence, is by far the most developed region, with the highest incomes and the greatest concentration of global firms in operation. Incomes and the business mix vary widely across the rest of China, with rapid changes taking place due to government incentives and even a western migration spurred by increasing costs in the coastal regions.

But it is not only economic geography that makes it important to focus upon the unique characteristics of regional markets in China. One executive provided the following case history:

“Our firm provides some key products used in major construction projects, like large office buildings, condominiums, and various infrastructure projects from airports to stadiums. We had done very well in Beijing, spurred in part by the boom associated with the Olympics. From a standing start, we were very proud of the inroads we had made in China in just a short period of time. Our business plan was to expand into other city markets and continue the fast growth of the last several years.

“Were we in for a surprise. In the first new market that we targeted, we learned quickly that our technology hadn’t been accepted by the design institutes located there. This hadn’t been an issue in Beijing – in retrospect, we learned that one of our competitors from Germany had done the spade work many years earlier to gain acceptance prior to our arrival in China, so we had smooth sailing. But that wasn’t the case in other markets. In this particular market, customers are still cautious until they see design institutes embracing our technology, and we’re going into our second year of the situation. No one seems to have any urgency on the design institute side, probably because there are local companies serving the market with a different technology. We think ours is superior, but it would threaten the incumbents, and we have no relationships to draw upon.

“A second difference we’ve seen as we tried to move west was that the projects of interest to us are all basically run by government agencies. In Beijing, it seemed much closer to the traditional mix of private companies managing the projects, albeit with government clearly in the mix, often as owners. Here the customer is government, and doing business with them is a far cry from anything we experienced in Beijing.

“A third difference is in the standards. In Beijing, probably because of the Olympics, every project had to be a showpiece. Even in the US, we rarely saw such attention to every detail along dimensions that ranged from environmental performance to state-of-the-art technology. In the other markets we’re targeting, while there are standards, price is far more important and some of the credentials we had been citing from our experiences in Beijing fall on totally deaf ears.

“So while things are still going strong for us in Beijing, we are some number of years away from being able to claim successes elsewhere in China. My yearend report back to headquarters started with the statement that ‘the rest of China is a whole different world’.”

This company’s experiences are far from unique. Widespread differences exist across China’s cities and regions, starting with rules and regulations, competitors, customers, and extending along almost every dimension that is relevant to business success. Plans for short-term successes in new regions typically result in disappointment; the better strategy is to assume the need for a reasonable start-up period during which relationships can be developed and the local rules of the road can be learned.

Conclusion
China’s markets offer some of the best opportunities for growth in the world, but achieving success there remains a challenge. The five key recommendations developed in this article can raise the probabilities of success and shorten to some extent the time required for success. Plan to create a “win” for the pack of participants in business transactions and decisions; remember the personal component of business relationships in China; make the changes in your processes and systems that are necessary to operate at China speed; create stability within your organization; and recognize the inherently distinct nature of China’s regional markets.

We close with one final recommendation, again drawing upon Paul Simon: Never forget that China is Still Crazy After All These Years. It isn’t just the rapid rate of growth, but the incredible pace of change that is occurring in that market. Be ready for it, and enjoy the ride.

Authors: George F. Brown, Jr. and David G. Hartman

All Rights Reserved | © 2017 Blue Canyon Partners, Inc.