Is it worth the effort and investment for foreign firms to do business in China? The answer depends on who you are and what you want from the market – and that’s a problem.
I spent a month in China trying to answer the question, “is it still worthwhile for Westerners to try doing business in China?” The international business press has been focusing on Beijing’s prosecution of the infamous Anti-Monopoly Law and use of national security claims to restrict foreign firms’ access to China’s burgeoning middle-class markets. Overseas readers of the WSJ and Forbes could easily get the impression that foreign brands are being chased out of China on a tide of xenophobic resentment and anti-foreign fervor – but it’s simply not the reality on the ground.
The Chinese bureaucracy is much more tolerant of overseas companies that spend than of overseas companies that earn in China. That means integrated MNCs must adjust their business models – and their approach to regulators – when they are selling.
Western negotiators in China are finally coming to accept
that no matter what the deal on the table may be, their most significant counterparty is the Chinese government bureaucracy. The Chinese government has a much different attitude towards international businesses coming to China to buy or manufacture as opposed to those coming to China to sell and market. International managers are still coming to grips with this dichotomy, and it is causing problems and costing money.
Ask not what China can do for you – ask what China wants from you.
China mixes trade and politics in Europe – and underscores the futility of building win-win relationships.
The SCMP (among others) ran the headline: China, Europe reach deal to end Beijing’s anti-dumping probe of European wine just as Xi Jingping is winding up his European tour. This was a slightly less dramatic headline than “China takes firm stand against Russian land grab” which we are unlikely to see, or “Chinese economy shows new signs of weakness” – which are seeing far too much of.
If you have trouble remembering just what the China -EU Wine Dumping case was all about, think back to May and June of 2013 when the EU threatened to discuss hitting China with trade sanctions about Chinese dumping of solar panels, and China retaliated by claiming the EU was using unfair trade tactics to sell wine to China. Here’s the piece ChinaSolved ran on the subject last year: Living to Fight Another Day? China vs. EU is Bruising Loss
No news will be the best news for international managers in China
Even optimistic predictions about the upcoming 3rd Plenum are pretty downbeat for the foreign business community – which has not been enjoying Xi JinPing’s administration as much as they had hoped. Headlines about scandals, corruption charges and villifications by the official press have been bad news for individual MNCs like Starbucks and GlaxoSmithKline. Worse news lurks beneath the surface in a series of trends that have the potential to tip the financial balance against a China investment. Regulatory mechanisms that are unfair and worse – unpredictable, visa policy that is restrictive and cumbersome, inflation, hyper-competition and HR bottlenecks are the biggest complaints.
The US China Business Council has published its annual “China Business Environment Survey” results, and it is a mixed bag for international managers in China. The Council keeps using the phrase “tempered optimism”- but that seems to be a euphemism for “new reality that Westerners must deal with.”
The Council puts on a brave face and mines the data for bits of good news, but the upshot is that the problems facing international managers in China are A) daunting and B) not going away any time soon.
Borrowing a page from a wildly popular best seller, ChinaSolved offers up 5 Shades of Gray – a very sexy guide to MNC corporate governance in China.
The Missionary Position. Straight and narrow. Follow the rules, do your own paperwork, wait on long lines, and pick non-sensitive service industries. Avoid the spotlight. This is the slow and infuriating route to growth, and it will always look like the locals and savvy expats are eating your lunch. For the multitude of start-ups, entrepreneurs and boot-strappers who can’t afford to pay bribes, this has always been the path of choice.
Make them say your name.Build end-user support through advertising, branding or promotion using traditional pull marketing techniques. Focus on branding and name recognition. Use bribes and pay-offs as needed to secure permits, approvals and to clear set-up bottlenecks, but not for regular marketing. The downfall of the Euro drug and formula makers was that they relied on a complex, permanent structure of pay-offs that left an indelible trail For small businesses, building a positive reputation in China has never been easy – and with more and more high quality locals scrambling for mindshare and shelf space, it’s getting even tougher. Focus on niche markets and specialized products or services. Successful models include Apple and Android.
Flog it yourself. Sell your goods directly to consumers by building your own distribution channels. Some western brands have been successful in building their own retail infrastructure. IKEA. GM. And super-luxe brands like Hermes have used this model successfully. While this is another option that seems like it’s only for the giant MNCs – smaller, nimbler actors can make this work in the 3rd and 4th tier cities. Building your own distribution channels in China is extremely difficult and cumbersome – but it gives foreign brands greater control over their sales and marketing.
Find your sugar-daddy. Partner with the influential and connected — and pay dearly for it. Find distributors and partners who already have channels and pay them for access. A lot. Years of bribery and relationship-building should be priced in to the deal terms, so be prepared to spend. The bad news is that this usually means working with an SOE. The worse news is that they may not want to work with you. If you are in sensitive industry like education, media or transport, there probably isn’t any other option. NYU and Disney followed this path with great success.
Who’s a dirty boy?Pay bribes and take your chances. This used to be the smart money, but it is looking increasingly dumb. Your Chinese consultant and head of marketing has been pushing this forever. Maybe it’s time to push back.
The Writing on the Wall
Anti-graft campaign against foreigners has been tremendously successful for Xi and the Beijing bureaucracy – you will see more and more of it in the future. The first wave of prosecutions has focused on European companies with the muscle to dominate markets – to the detriment of local Chinese consumers. Look for autos, F&B, premium liquor and maybe even hotels to start getting more unwanted attention.
Taiwan and China welcome foreign negotiators the same way – but say goodbye differently.
I was recently asked by a member of the ChinaSolved Linkedin group if there was difference between the way Chinese and Taiwanese negotiators behaved. It’s a great question that comes up often, but seems particularly appropriate now.
The bottom line is that negotiations with Taiwanese and Chinese counter-parties start out the same, but end up in different places. Westerners can be successful in both cases – but have to understand how negotiators from Taiwan and mainland China think about VALUE.
Is it a witch-hunt if the people implicated were really practicing witchcraft?
It’s getting hard to keep up with the growing list of Western and MNC firms implicated in Beijing’s anti-corruption campaign. Drug companies have been the prime suspect, but baby formula and luxury autos have also been implicated.
Western observers are sensitive to any indication that the business environment is shifting against foreigners in China – and we have good reasons to be watchful. But if the companies in question are actually guilty of bribery and market manipulation then claims of a xenophobic witch-hunt are completely baseless
Western managers who delegated the “guanxi” or relationship-building function need to audit their China operation.
Ever since I published the eBook – Guanxi for the Busy American – I’ve been on the receiving end of an endless stream of jaded Old Hand derision and criticism. It usually takes the form of a fast-paced 2-Step. First they declare that they are tired of hearing the overworked and
misused phrase, “guanxi” and they don’t bother with it anymore. The next step is to delegate the entire relationship-building process to a trusted Chinese associate or agent. (A typical response to any mention of the g-word: “I don’t bother with guanxi nonsense since it isn’t really necessary and never helps westerners anyway. Instead I have, over the years, built up a strong relationship with my Chinese partner/lawyer/director/wife/classmate.”)