Editor's note: Negotiating business in China has never been more crucial for N.C. businesses. Grace Whi-Tze Ueng, CEO of Savvy Marketing Group, explains successful strategies and talks to N.C. businesses that have made the leap in this seven-part series. This is the final installment.
James Melton, president and CEO of Grancrete, an advanced materials company based in Morrisville, says his biggest challenge in selling into the Chinese market is the difficulty to forecast accurately. Like many firms of similar size, Grancrete relies on partners as it "can't afford to set up shop" in China yet. Melton's goal has been to align with partners who share the risk to ensure local due diligence to help with forecast accuracy and to plan for capacity.
But in China, forecasting trends is about more than trying to predict consumer preferences or what provinces or market segments will see the fastest growth over the next five years.
Businesses new to the market should track and forecast government polices as well. They need to ask what legal protections will exist in 10 years. And they need to figure out how U.S. policies toward China could affect the Chinese government's decisions.
For example, the U.S. Committee on Foreign Investment recently ruled that Huawei, a Chinese telecom equipment maker, must divest its purchase of a small U.S. technology firm because of the company founder's suspected ties to the Chinese military.
Macroeconomic trends are important as well. The Chinese government intends to allow the yuan to appreciate rapidly to tame inflation. At the end of March 2011, China's foreign-exchange reserves had grown to $3 trillion because of the nation's policy, which forces its central bank to purchase dollars from foreign investors and exporters. The impetus behind the move is China's massive importation of basic commodities, including oil and iron ore, which have had sustained price increases.
A meeting between the State Council and Premier Wen Jiabao indicate that "strengthening the flexibility of the yuan's exchange rate" is a primary goal. Experts believe this could signal a change in policy in which the central government views the exchange rate not only as a method to control exports, but a tool to manage growth and inflation. Paradoxically, an artificially cheap yuan fuels exporters, which increase inflation. The commencement of currency trading in Hong Kong, and other efforts to encourage settling trades with the local currency or even allowing U.S. multinationals to issue yuan denominated bonds illustrate the nation's move away from the dollar. Clearly, these policy shifts can have a huge impact on a foreign company's competitive position.
The unexpected
But as important as it is for new entrants to have a strategy for entering the China market, it is equally important to make contingency plans to deal with unexpected challenges.
Unanticipated obstacles arise quite frequently for foreign companies in China. Companies must be able to adapt quickly to changing conditions. Simply because your company has a superior technology or a proven U.S. business model does not mean success will follow in China. There are companies that failed precisely because they believed these advantages were sufficient.
Best Buy, for instance, believed that its Chinese operations could successfully mimic those in North America. The company failed to realize that margins are slimmer in the Chinese electronics industry. Its "big box business model" was not attractive to Chinese consumers, who thought the product offerings were overpriced. Moreover, Best Buy did not use commissions to give employees the incentive to push particular brands like its local competitors do. After five years in China, the company is closing all of its locations to refocus on a new business model.
By studying the market, preparing for the unexpected, and making a small capital allocation initially, firms can avoid similar missteps. Patience and persistence are the key to success. But success will not happen overnight. Neither the challenges of such an endeavor, nor the realities of the market should be underestimated.
Here is some final advice from companies that have participated in this series:
Thomas Wollman, senior vice president of global laboratories for Durham-based Quintiles: "Do research on the Chinese market, competition, and demand for your product. Determine how much you will have to compete with locals." He considers an investment in China a long-term decision, saying "investing in resources there is an investment in Quintiles' future."
Chris James of Durham-based Cree: "Don't try to do China like a western company. Business in China needs to be done the Chinese way. You can't parachute western ways. Treating China like a subordinate satellite is not going to work. Don't walk around like a western Joe."
James said Cree has always had to answer to the owner ("What can you do for me?") and the engineer ("How does it work?"). "Their questions were meticulous and unbelievable in detail," he said. "Be ready for any questions. The Chinese make you better as they push you hard. They appreciate engineering. I always like my visits. They are challenging in a positive way."
Jim Geikie, vice president of global marketing at Burt's Bees: "Pick a partner that has good local experience. They need real, practical experience. More so than with Japan or Brazil, you must go in with your eyes wide open. Don't compromise to get there quickly. 'Aim, fire, ready' may work in other countries. With China, you must 'ready, aim, fire.' Go through the right steps in China. Between preparedness and speed, be sure to be prepared. Youonly get one chance."
