Turn Chinese protectionism to your advantage – if you are an SME who is willing to partner.
Last week we started looking at new negotiating agendas for a shakier China. Forging the right relationships and negotiating good partnerships are going to be keys to success for more and more entrants to the China market. Private Chinese firms and local entrepreneurs have been closing the management gap with their Western counterparts and building extensive distribution channels in a tougher Chinese consumer market. Developing far-flung marketing networks may be feasible for global giants, but it is simply too expensive, difficult and time consuming for most SMEs.
Partnering is new China survival skill
Figuring out how to select, build and maintain the right kind of partnership has become an essential management challenge for Western firms with China ambitions. In the past, American firms have tended to opt for sole control of Chinese operations – usually through a WFOE structure , while Europeans have been more comfortable with equity partnerships and tie-ups. American managers are going to have to improve their skills when it comes to building and maintaining profitable China relationships.
Two partnership problems
Western negotiators have soured on the idea of partnerships in China because in the past they have been the express route to stolen technology, counterfeit goods and destructive conflict.
Two common mistakes lay at the heart of most bad partnerships:
1. Passive partner selection. Westerners used to be the prettiest girl at the JV (joint venture) dance. Westerners new to China can be a little girly when it comes to partner selection — they wait to be chosen, either by a potential partner or by a “matchmaker” who may take the form of paid consultant or official agency. This is an ideal environment for predatory IP thieves and counterfeiters whose sole expertise was in buttering up naïve Westerners and telling them exactly what they wanted to hear.
2. The cross-cultural optimist. Some Westerners started their China careers by learning the mantra, “In time we’ll learn to get along”. Americans and Germans were the worst offenders – we just naturally assumed that the Chinese side was eager to learn how to emulate our methods, standards and best practices, and that it was just a matter of time before our Chinese friends started doing things “the right way”.
Both of these blunders could be fatal – leading countless Western SMEs to team up with the wrong partners for the wrong reasons.
The new Perfect Partners Profile
It’s time to re-introduce the idea of the Perfect Partner Profile – a tool we use with clients to help them frame their negotiating strategy. The PPP is a framework that allows you to proactively determine exactly what kind of entity would make an appropriate partner BEFORE you begin negotiating. By deciding what you are looking for in the perfect match — and eliminating potentially dangerous or ineffective candidates before you start sharing valuable information.
Perfect Partner Profile
1. Size. Giant SOEs are too big and powerful. Some unknown trading company operating out of a PO box is too small. You want a company that is big enough to help you execute on your China business plan — but not so big that you have no recourse if they decide to steal your technology, IP, or assets. SOEs and giant national champions with powerful connections can open doors – but they can also slam them shut and lock you out when they have gotten what they want from you.
2. Distribution channels in the right industry. If you plan on selling to the Chinese consumer then one of the top items on your list should be a proven track record in a business you care about. Americans are continually dazzled by the “I’m Chinese so I understand China” line. Building a sales and distribution network in China is just as tough as in the US. You should do your best to find a counter-party that already has a network in place, and waste no time in negotiating for secure access. It probably won’t be cheap — but trying to build your own distribution channels in China has become expensive, difficult — and dangerous (just ask the managers at GSK or Sanofi ).
3. Look at their existing product range. You want to fit into their product range – not become it. Ideally you want to slot in towards the top end of an existing line of products, or possibly replace an old standby that has fallen out of favor. A good example is Danone and their latest JV. In days past, Western brands have entered into some pretty bizarre tie-ups (NY Life – Haier Appliances, I’m looking at you guys) in pursuit of synergy. Nowadays, you need a partner who understands your business and has some brand equity of its own.
4. They should have something to gain. They should need money more than they need your technology, IP or brand. This rules out most SOEs. You want a private company that is feeling the pinch of a more competitive market. Here’s the bad news – you’ll be paying them more than your share. The days of the 2% margin for cheap Chinese labor is over. In the New China, you have to pay for access and the home team advantage. It’s a lot cheaper and easier to just pay up front and keep everyone happy. As long as they feel they are getting the better of you then everything will stay friendly and headline-free.
5. They should have something to lose. Two types of Chinese enterprises don’t fear legal recourse – the ones too powerful to beat, and the ones too weak to lose anything of value. Don’t partner with the government or asset-less scammers. There are plenty of Chinese entities with roots in the community and a reputation they care about who would rather earn a healthy profit than defend their good name in Chinese courts. HINT: The ones that have aspirations of exporting to developed markets are even better.
Partnerships are back in fashion this season in China, but the focus is on smart, win-win tie ups that make sense for both sides. Next time we’ll talk how to develop self-reinforcing deal structures that keep everybody honest.
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