A guide to doing business in China

Burt's Bees saw opportunity, challenges in China

CorrespondentSeptember 25, 2011 

  • Here are a few other ways for your business to enter the Chinese market:

    Test markets: Requires less capital investment so it's not as risky as a full-scale effort to set up shop. Can also provide customer feedback about your product or service, which can improve your business plan before a larger investment is made. Location is important. It is hard to find qualified staff in smaller cities, and expatriates face problems, too.

    Ben Liu, president of Plexigen in Cary, which he founded in 1999, was born in Shandong province and came to the United States in 1985, and joined the faculty of NCSU in 1992. Well before reaching the test market stage, Liu invested "a lot of money" on three different occasions to conduct market research with customers to find out if there was a real opportunity in China. In a couple of instances, what Plexigen thought could be an opportunity turned out not to be. The upfront research ensured that time was not wasted.

    Joint ventures: These allow a company to leverage existing government relationships, market intelligence, hiring experience and manufacturing expertise rather than developing these resources and capabilities internally. There are two types now allowed in China, either a cooperative joint venture or an equity joint venture.

    The joint venture decision is company specific and should be researched carefully because the Chinese government mandates that the Chinese partner own at least 51 percent. Joint ventures are hard to unwind, and while Chinese companies love them, U.S. businesses should think twice.

    Partnerships or alliances through a third party to set up a representative office are additional options.

    Wholly foreign-owned enterprise: This is now the most common way that foreign companies invest in China. This alternative requires you to establish a separate Chinese subsidiary.

    Setting up shop requires a substantial investment before any product is moved because the approval, permit and hiring process may take a year or longer to complete.

    Foreign companies have many legal requirements, including getting approval from the Ministry of Commerce of the People's Republic of China, which will conduct a foreign investment review. They must also register with the State Administration of Industry and Commerce, which will issue a business license.

    About the author

    Grace Whi-Tze Ueng is CEO of Savvy Marketing Group, which works with both startups and new ventures within established companies. A graduate of MIT and Harvard Business School, Ueng has served on the adjunct faculty at Shanghai's Fudan University through a partnership with MIT Sloan School. Locally, she is an adviser to the N.C. Chinese Business Association.

    Bryce Roberts and Michael Sias also contributed to this series.

    Join the conversation on Twitter: #savvychina

  • The N.C. Chinese Business Association kicks off its 2011-12 speakers series with Grace Ueng and Chris James, vice president of strategy and business development at Cree.

    The session is at 6 p.m. Tuesday at the RTP Foundation, 12 Davis Drive in RTP. Details at nc-cba.org

Editor's note: Negotiating business in China has never been more crucial for N.C. businesses. Over the next several weeks, we'll look at successful China strategies and 10 N.C. businesses that have made the leap. This week: Formulating an entry strategy.

After Burt's Bees was bought by Clorox in 2007, its focus turned to international expansion.

It hired a global management consulting firm to assess the Durham company's natural beauty products in 30 countries to determine where to focus its resources.

China soon became the obvious choice.

The country is the No. 3 beauty care market in the world and is expected to soon be No. 1. But while most companies enter China because of the size of the potential market, Burt's Bees was interested because "natural" and "product safety" are priorities for China consumers. In addition, many Chinese make their own products at home and believe in the power of natural ingredients. So Burt's Bees wouldn't have to invest in convincing consumers. It also had the opportunity to create a market in China as lip care there is virtually nonexistent.

"There were lots of reasons to be excited," said Jim Geikie, vice president of global marketing for Burt's Bees.

But before the company could move in, it needed a comprehensive strategy for entering the market and dealing with China's government.

Foreign companies that want to enter China can pursue various methods: test markets, partnerships, joint ventures, alliances or as a wholly foreign-owned enterprise.

Each has its challenges, and each company that tries to enter the China market has its own unique circumstances.

Burt's Bees had to deal with an issue that went straight to one of its core values: animal testing. The company doesn't do it, but the Chinese government requires animal testing on imported products.

The company researched various strategies including acquiring a local brand, making co-packing and distribution alliances and setting up its own shop including manufacturing and running its own stores. Each was quite complicated with different sets of pros and cons.

Executives finally chose a partner with local manufacturing and established go-to market channels and, most importantly, one that shared Burt's Bees core fundamental values.

To make sure they understood the regulatory issue thoroughly, executives talked to 18 agencies at the federal and provincial levels. It took two years to figure it out.

Geikie said working with the Chinese government was "totally important" during the assessment stage. The global consulting firm they engaged had their own government relations arm and Burt's also worked with a local Chinese law firm. When they got contradictory points of view, they kept digging deeper until they heard consistent answers. With China's strict five-year plan, they wanted to make sure they were basing their decision on the right data. They now have additional government relations help from Clorox as well as the partner they ended up choosing, so Geikie is comfortable they have good resources to work with the Chinese government effectively.

At ground level

Other Triangle companies accessed the Chinese market through different routes.

In 2004, Matthew Szulik, past CEO of Red Hat, hired Michael Chen, a native of China with U.S. graduate degrees, to be general manager of Red Hat China. The company decided to build from the ground up and Chen was given the power to develop product and pricing specifically for the Chinese market.

Personal relationships

Cree, a Durham-based LED innovator, has always been a global business, but it took a long time for its business in China to grow. A key factor was the commercial - and then personal - relationship its executives built with a company called COTCO Luminant Devices, and its owner, Paul Lo. The founders of Cree were big on trust, which fit with building " guanxi," critical in Chinese business relationships. Top Cree executives got to know Lo well and in turn learned about China.

In March 2007, Cree acquired COTCO Luminant Device Ltd., one of Lo's holding companies. Owning COTCO gave Cree low-cost manufacturing and access to the important and fast growing solid-state lighting market in China. While the deep science work remains in Research Triangle Park, Cree now has manufacturing and business development functions in China.

Choosing partners

Quintiles, headquartered in Durham and best known for its global management of clinical trials for biopharmaceutical products, has had a presence in China since 1997. In recent years, China has become more of a priority for the company, which employs 20,000 people worldwide. As a result, at the beginning of this year, it sent nearly 100 of its worldwide leaders to Shanghai for a Quintiles Global Leadership Meeting to be exposed first hand to China's healthcare system.

Thomas Wollman, senior vice president of Global Central Laboratories and Cardiac Safety for Quintiles, is responsible for all global lab operations and lab project management. He said in 2003, the company worked through contacts in China to identify 19 potential partners from which they chose their final partner.

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