STR - AFP/GETTY
A worker stokes a giant burning cauldron June 25 at a steel mill in Hefei, in eastern China's Anhui province.
When David Mohler, chief technology officer at Charlotte-based Duke Energy, started looking into clean energy relationships in China, he studied a dozen books about Chinese leadership, and he began working with a tutor to learn Chinese. The lessons are already helping his pronunciation of the names of new friends in China.
But learning the language, as difficult as it is to master, may be the least arduous challenge awaiting U.S. executives who want to do business in China.
The Chinese business world demands a repertoire of skills beyond and often conflicting with Western business practices. U.S. executives are learning that a successful presence in China entails more than a local sales team. They need a comprehensive understanding of the local industry, competitors, customers, business culture, and the trajectory of the market and government policy.
Cultural differences, public relations issues and conflicting regulations are some of the major stumbling blocks foreign firms encounter.
But the rewards are great for those who are successful. China surpassed Japan as the world's second-largest economy in 2010, and its rapid economic growth, large population and urbanization have created unprecedented opportunities.
N.C. companies long ago realized they couldn't ignore the Chinese marketplace if they wanted to thrive. Red Hat, for example, said in June that its sales will reach $3 billion in five years - with the fastest pace coming from China.
"International markets have become more appealing due to the U.S. crisis," said James Melton, president and CEO of Grancrete, an advanced materials company based in Morrisville. "China offers the most growth even with the recent slowdown. We can't ignore China as it offers projects 10 to 100 times larger than anything in the U.S. This results in expansion in both our North Carolina facilities as well as our needing to build capacity in China."
Hurdles to jump
But China is not a panacea for slower growth in developed markets like the United States. Vague regulations and selective enforcement are barriers to foreign investment. And U.S. companies often underestimate the complexity of the Chinese market.
Chinese companies are no longer relegated merely to low-cost manufacturing. While these companies secured a toehold by manufacturing components at the lowest cost, they have used strategic acquisitions, licensing and partnerships to gain additional technical and management expertise. This has allowed Chinese businesses to integrate vertically to the point where they can produce entire products in several industries, such as the automotive and aircraft industries. For example, in the first nine months of 2010 the Chinese manufactured only 1.6 million automobiles; by 2020, the nation aims to export 25 million annually.
While Western companies have been preoccupied with the recession, Chinese firms have increased productivity and consolidated. They are now using excess capital for larger foreign acquisitions.
Furthermore, several industries remain dominated by government-owned companies that often lack transparency. Top executives at these companies may even be former members of the Chinese Communist Party. It is critical never to underestimate the significant local advantages afforded to state-supported businesses.
Therefore, U.S. businesses need to analyze how to seize opportunities and confront the inevitable challenges they'll face once they enter China. U.S. companies also must be nimble or risk falling behind because China does not buy older technologies; it buys the technologies that will be used in the coming decade.
Getting advice
For all these reasons, a majority of companies entering China hire outside experts when formulating their market strategies to provide market research and counsel on strategy.
When Burt's Bees in Durham made global expansion a priority, it hired a leading global management consultancy to help. When China arose as a top opportunity, it engaged the consultancy's China office to work closely with it on a range of issues from finding a partner to legal issues.
Firms focused on consumer preferences should partner with local Chinese firms to better understand the distinct markets within China, which can vary widely from region to region because of local tastes, traditions and economic dynamics.
When an N.C. business succeeds in China, the benefits come back to the state, executives say.
"If our electric car maker partner BYD manufactures here, they could build a plant here and create jobs," Mohler said. "We aren't shipping jobs to China. A lot of Chinese investment is coming here. Seventy percent of the jobs/value go wherever the asset goes."
He added one last observation, based perhaps on his China studies: "China and Chinese people are not what we in the West think. We have a vision of the 1960s and the Cultural Revolution. Now China is a hugely dynamic country. Deng Xiao Ping made huge changes and introduced a market economy with great leaders. His philosophy was to 'cross the river by feeling the stones.' "
Originally this meant to move ahead with economic reforms slowly and pragmatically. More recently, it has come to exemplify capitalism and taking entrepreneurial risk. If you are not certain in trying something new, just make it across the river by feeling the stones.
NEXT WEEK: Strategies for entering China's market
