- What’s the Scope of your China deal? Not ‘how much do you want to be in China?’, but rather, “how much China do you want to be in?”
The scope of the China business is something many Americans don’t think about until it’s too late. Scope refers to how big your involvement in China is – how broad and how intense. The main question you need to answer is – just how much am I willing to invest in my China deal in terms of money, time, and organizational bandwidth? Knowing how much money to invest is relatively clear-cut, but quantifying the staff, time, energy and sanity you will expend seeing your China business through to completion can be much more difficult.
Some Chinese counter-parties are quite entrepreneurial while others are extremely passive. Neither one is necessarily problematic – as long as you are treating the scope of your business as one of the variables. State Owned Enterprises tend to be pretty passive about expanding the scope of business relationships – which is too bad, because they often control all of the assets, approvals and connections that you most care about. On the other end of the spectrum is the Chinese entrepreneur who has lots of ideas but relatively little in the way of assets. These guys will start talking about getting married before their laptops have powered up. In between is a vast array of potential counter-parties who have varying degrees of resources at their disposal – and demands of you.
HINT: The scope of your China business is something you should negotiate clearly and vigorously – INSIDE your organization. The scope of your business will determine many of your decisions, and it’s important that everyone on your negotiating team is on the same page. Your CFO may assume that you are planning a modest office with a couple of clerks while your HR manager has a mental image of hundreds of employees in Shanghai’s newest office tower.
Americans tend to start their China planning with a very limited scope in mind – and plans to incrementally increase their involvement if and where the situation warrants. It’s a great impulse. Try to stick to it.
The problem is that Americans in China sometimes don’t have the experience or judgment to know when they are wading in too far too fast – or missing the action by mincing around in the surf. If you aren’t careful in negotiations, you could end up over-allocating your organization’s most important asset – your time. But over-extending yourself isn’t the only danger. You can also end up in a relationship with a Chinese counter-party who has different expectations and assumptions about the scope of the deal you are doing together.
If you don’t pay attention, you can easily be dragged in to a very heavy commitment that you can’t possibly spend enough time on. That gives your Chinese counter-party de facto control over your China business.
One of the worst mistakes Americans make is to assume that their China operation can operate on some kind of auto-pilot system. If you don’t put in regular face time (at least twice a year for all relevant people) you will be a distant, toothless shadow that has to be managed but not obeyed. Don’t over-reach, and don’t allow yourself to get dragged in to ongoing obligations that can last for years. During the negotiation, your counter-party may be charming and trustworthy but that can change later when your money is already invested and now he has to pay you. Many Americans have found out the hard way that if their Chinese connection doesn’t pick up the phone, then they have virtually no contacts or channels of communication with the Chinese organization at all.
Inappropriate scoping can also be a problem. Some Americans never take the trouble to find back-up sources and suppliers, so they develop a strategic reliance on a single Chinese counter-party. They make their counter-party a ‘key-supplier’ or ‘key-partner’ by default, but the Chinese party may not have any interest in creating a more secure or strategic relationship. This is common when Americans are dealing with English-speaking functionaries at a local Chinese company (particularly a State-run one) and don’t develop a relationship with the key decision-makers. American negotiators have been surprised to find that their years of orders haven’t won them any “guanxi” with the government appointed managers of their main suppliers.
The opposite case is also common – where an American business considers its involvement limited to the purchase of commodity products, but the Chinese side is looking for a much more significant relationship. The danger here is that the Chinese side may not have size, power or stability to support the ambitions of the American side.
Determining the optimal scope of your China business
Once you’ve finished the financial analysis of the China deal, look at the scope of your new business. What we’re most concerned with is the total cost to you and your key people in terms of time, energy and organizational resources.
1. How much time are you budgeting to research and prepare for your China deal or transaction?
2. Who on your team will be the China specialist? (It’s ok if it is you – as long as you are aware of it.)
3. How many team hours are you willing to invest in the China deal? (To get the deal – and to maintain it until execution is complete.)
4. How much are you getting out of it? (Short term cash or long term market expansion are all ok – as long as you have some way to measure and monitor.)
Remember – you should be analyzing the scope of the deal from the time that negotiations start until the business is concluded. Think of it as the Total Cost of Ownership of your China business.
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