What’s old is what’s new in China management. It’s déjà vu all over again for Old Hands with more than 10 years of China-watching experience – but with a couple of twists.
banking crisis and an uncertain business model that left many pundits doubting China Inc.’s long term prospects.
The “China Economic Miracle” has only been accepted as gospel since around 2006 – before then there were plenty of reasons to doubt that the China story was credible. That’s as true for local Chinese commentators as for international observers. The PRC economy looked good in the wake of the 9/11 attack and general weakness of the US economy, but it certainly wasn’t clear sailing for China business. In 3Q2002 the China Story could be summed up as: generally positive, but lots of potential pitfalls. There were significant internal structural problems and China still had to find its place on the international stage. Overseas firms and investors were advised to proceed – but with caution.
For US investors and managers who either missed the China boat the first time round or are looking to make adjustments or expansion to their China operation, the recent slowdown has created new opportunity. Not only are prices moderating, but a stumbling China makes US management practices look good again – for the first time since the Financial Crisis of 2008.
But not everything is the same. Here’s a list of five expat management techniques that worked like gangbusters in 2002 but will spell disaster this time around:
Things that WON’T work this time:
- Seat of the pants management for the first 6 months of your new China operation.China was so new and strange to international managers in 2002 that it was accepted as standard operating procedure – even prudence – to keep your business plan “flexible”. Top managers in China wouldn’t even commit to whether they were there to manufacture or develop the market. It was common for senior strategists and bosses to figure out China as they went along. Overpaid expats who didn’t speak a word of Mandarin swapped hilarious stories about having 24 year old receptionists negotiate their firm’s tax status and operating with the wrong business registration paperwork. Everything was cheap, no one knew what they were doing, and there were few reliable models to follow.Try that now, and you’ll be sent packing before you launch the second iteration of your business plan. Costs have skyrocketed, regulatory requirements are much more stringent, and the competitive environment has gone from toothless to cutthroat. Managers unprepared to hit the ground running will lose their investment, IP and product designs in a matter of months. Have a plan that makes sense BEFORE you start setting up your China business.
- Multiple, morphing business plans. While some companies suffered from a lack of planning, others suffered from too many plans. Many small & medium sized expat-run firms seemed to switch business models every week. Any cool idea they heard at a happy hour went right into a fresh mission statement, and new business plans were about the only thing that got produced. That was fine when China was cheap and there were few regulatory hurdles to jump, but in 2012 you’ll want to do your planning legwork before you start registering and hiring.
- Business plan transplants. If the medium-sized firms where swapping biz plans too often, the big guys weren’t changing theirs enough. Companies used to import their standard operating procedure from the US and Europe over to China like they were delicate pieces of machinery that had to be moved without disturbing their inner workings. Companies like eBay, Best Buy and Dominoes tried maintaining their home-office business procedures in China – and they flamed out. Whether it’s your back office systems, HR procedures or product offering, you have to make adjustments for China.
- Low cost anything. The race to the bottom is over, and you lost. Well, really everyone lost. The old wave of Chinese manufacturing got so good at cutting costs that quality, product safety and a lot of people’s brand equity went out the window. The quality is still questionable, but the prices have gone up. Nowadays, Westerners who focus too much on price of production get their orders filled via sub-subcontractors with workshops out in third & fourth tier villages no one has ever heard of – or will be able to find once the quality problems surface. There are still a lot of great reasons to do business in China, but rock-bottom production costs are probably no longer among them.
- Throwing money at problems (a la expensive expat managers living in compounds). China used to be so cheap – and the rest of the world so dear – that it made sense to pay top dollar/Euro/rmb to smooth out rough patches. Expat packages were the most visible manifestation, but overseas companies used to routinely throw money at problems via international consultants, imported equipment and systems, five-star F&B and entertainment and other high-profile spending that distorted their expense picture and sent the wrong signals to local staff. Modern Chinese operations have to find a middle ground between cut-rate race-to-the-bottom haggling and its-just-a-bag-of-shells squandering. Modern Chinese management is about finding and creating value.
China is shaping up to be a “best of times, worst of times” story – but it’s one that offers overseas managers a few glimmers of hope. The Chinese middle class wants value for its money, SOEs are pushing local privates out of business and the local competition’s existing business models are under fire. Anyone who thought they missed the China boat a decade ago should take a second look – but do some planning before they leap.