Insights

Courting China – Very Carefully

Just over a decade ago, businesses became aware of the magnitude of challenges related to doing business in China and other emerging markets. However, for the most part, the customers they would be doing business with were still the “usual suspects.” Thus, the challenge mainly revolved around operations and logistics.

One firm’s experiences suggested a strategy for reaching new global markets relevant to that period. “Some time ago,” the firm recalled, “one of our clients with responsibilities for his firm’s major customers showed us his ‘Nightmare Room.’”

The walls in this scary room were festooned with a series of 11 world maps, one for the present year and one for each of the next 10 years. “Pins showed the locations where major customer support was occurring today and where it was forecast to occur into the future,” the firm described. “From a sparse pin collection concentrated mostly in North America, the sequence evolved to resemble a pincushion.”

We advised that firm to focus on existing customer relationships and identify how collaboration with those customers could facilitate entry into new country markets. We emphasized that the pincushion represented not just a challenge but also an opportunity to deliver increasing value to their customers, helping them to deal with the complexities of new global markets. The advice emphasized CoDestiny strategies through which suppliers could create value for their customers and capture value for their shareholders.

We think this is still quite good advice for firms that serve global customers whose own plans involve continued growth in emerging markets. A senior executive in the customer organization that was the focus of the “Nightmare Room” story recently concurred with our assessment. He noted that his firm now did almost 40 percent of their sales to customers in markets that accounted for less than 5 percent of their volume a decade ago. But he also noted, “In 1999, we should have bought an additional box of pins and just stuck them into random locations in China. It’s now our largest single market, surpassing the United States last year.”

This firm’s experience is not unusual. China continues experiencing extraordinary growth. Each year reveals double-digit increases. Chinese consumers how have an appetite for products they could only dream about a decade ago. This has important implications for most businesses. Executives who underestimated China’s potential in 1999 most likely won’t repeat that mistake in 2011. China resides on everyone’s radar.

But 1999 was “then”; 2011 is “now.” Major changes have occurred. These must be considered when developing 2011 plans to grow in China’s markets. In 1999, customers of interest were global firms who entered China to take advantage of low-cost manufacturing potential. While they sourced and manufactured in China, their markets largely resided in western countries, and the cultures and processes these global firms placed in China were familiar ones transplanted from North America, Japan, and Europe.

Those nightmares were relatively tame. Today, the growth plans of many companies focus on the China market itself, including consumer markets with fast-growing disposable income and business markets that now include Chinese companies gaining position on the roster of global firms. It is no longer enough that the China growth strategy address the needs of western firms operating in China. Now, strategy must respond to the needs of the China market itself. This requires a massive transformation in strategy and thinking.

One thing that businesses will learn as they go through this transformation is that the concept of aCoDestiny relationship soars to new levels in China. We often offer this comparison: In western markets, firms win business on the basis of product, service, and price advantages. To sustain that business, they focus on building a strong customer relationship. But in China, firms will win business on the basis of relationship. Then they’ll focus on the product, service, and price challenges that are on the minds of their customers to sustain that business.

We’ve often been told that this contrast is a good hyperbole to illustrate the importance of relationships in China. Our response is that there is no hyperbole to the comparison. Relationship is a fact of life for businesses operating in China’s markets.

We have identified four lessons that firms must recognize and include if their 2011 growth plans that target China’s markets are to succeed. All require a willingness to embrace new ways of doing business to achieve success in an exciting new market:

  • First, success won’t come quickly. That’s a bit discouraging. Even though growth gallops in China, relationship building in that nation won’t occur overnight. While it takes little time to sign a meaningless joint venture agreement, it takes much longer to build a relationship in China that delivers on sales and profits. Far too many firms have failed to stay the course. If your plans involve new starts in China in 2011, the results will come in later years.
  • Next, recognize that business relationships have a significant personal dimension. One firm we worked with sent a succession of senior executives to China to court a Chinese firm. But there was no significant follow up. The result: the Chinese firm felt its courters were far less than serious, as no one returned for a second visit. Another firm involved in discussions with a Chinese firm completed an acquisition that, from western perspectives, could have been considered a solid asset to the proposed relationship. The Chinese firm considered this a distraction and found the new people in the room totally confusing. To develop relationships in China, continuity and consistency are quite important. Executives involved in developing these relationships must stay the course.
  • Third, China’s economy, while changing rapidly, is inherently local. The supplier or distributor that will be the best partner in Beijing is unlikely to be the one most likely to be successful in Chengdu, and vice versa. Because relationship is everything, the concept of a strong national firm is at most an emerging one, more likely to be a widespread reality in 2021 than 2011. Thus, finding partners is a task that must be implemented on a local basis—and many times over—to reach all of China’s markets. This doesn’t mean that each prospective partner won’t argue for a national, exclusive relationship. They will want that. But they are unlikely to be able to deliver successes beyond the local markets in which they are strongly positioned, in terms of relationships.
  • Finally, western businesses need to be prepared for the other parties that will inevitably be at the table in relationships with Chinese firms. Some years ago, we hosted a Chinese delegation to the United States. During the visit, several days were devoted to meetings with a U.S. firm. These meetings focused on a significant joint venture initiative that seemed to be solid for both firms. On the meeting’s final day, we watched with great pleasure as the discussions moved forward, and saw solid interactions over dinner. Signs seemed totally encouraging. But after dinner, much to our dismay, we heard the senior delegate lament about the waste of time. We asked why he felt that way. He responded, “The mayor didn’t come to dinner.” In China, key government official involvement is prerequisite to anything of consequence being done. Conversely, in the United States, we rarely think of that as relevant. The lesson from this example is one that must be remembered in developing relationships with China. Critical third parties must be included if the relationship is to flourish. Government is the most obvious example, including both national and regional branches. However, in many instances, key third parties can also include universities, design institutes, and similar organizations.

Relationship issues are not the only way in which doing business in China will pose new challenges, but it is one that must be understood and addressed by those firms that see their growth in future years including a significant level of success in China. The opportunity is clearly there, but many firms will be challenged in coming to this realization. Focusing on the realities of CoDestiny relationships in China will be a key step in the process by which that challenge is met.

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

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