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Trade Tensions

Last Man Standing Part 3: POV Counts.

POV counts. Chinese have opinions too.

In US China negotiation, POV changes everything.
POV changes everything in negotiation

Some westerners are pushing back against the idea that we are facing the risk of rising trade barriers or a breakdown in orderly trade regimes. Their logic is that, “The US has a lot of levers, and we can assert our rights without necessarily sparking a trade war that the Trump Administration doesn’t want.” Not wrong, but it makes the dangerous assumption that trade relations are going to be something Washington stays in control of.

Trade frictions almost always take on a life of their own due to a single inconvenient point: Both sides in a dispute get an opinion. If you don’t know the other guy’s point of view (POV) then you have absolutely no control over the final result.

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Last Man Standing: China as Global Leader

Takeaway: As the US rapidly disqualifies itself from global leadership, China will find itself shoved into a role it doesn’t want it and isn’t ready for. We will almost certainly see a more China-centric world. Here’s what it may look like.  

What a difference a week makes. In my last article I spoke about 3 big issues China would face if it tried to step into the position of global leader.   In just a matter of days, however, the new US administration not only allowed it to happen, but seemed to be have been actively

Chuang Tzu and the Turtle
      Chuang Tzu tried to warn you

pushing the PRC into that role.

China went from the scrappy challenger who looked like a long-shot for the title to the last man standing in a remarkably short period of time. They’ve emerged as the odds on favorite by default.  The US has taken itself out of the global leadership game.  Europe looks fragmented and weak — and may very well end up following the US into isolationism. Russia is a military force. China is the last man standing and leads by default.

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Is China ready for the global BIG Time?

Before China can step up to global leadership it needs to address 3 BIG challenges:  Branding, Innovation, and Globalization.  It’s just not there yet.

The Trump inauguration and British exit from the EU may very well usher in a new era of isolationism. Every 10 years or so, pundits like to ask if it is China’s turn to step up to take center stage in global politics.   Even China’s foreign ministry has said it will reluctantly step up – if it was necessary. The truth, however is that whatever the external situation might be, China simply has a set of BIG problems that will contain China to a regional power for the time being.

China map - doing business in a regional power
Still Regional, after all of these years

 Branding

 Innovation

Globalization

Branding:

Still all Party. Chinese corporate branding tends to be very vague (at least by international standards) or very “talking head” (think Alibaba’s Jack Ma or Wanda’s Wang Lianjin). It’s very hard to separate the image of China brands from the CCP itself, and that’s a problem that isn’t going away. Global brands like Apple, Disney, Mercedes, and L’Oreal have their own identity – so they can manage their international image at will. You have your own view about Google or BMW. You can make it personal. China Inc. simply doesn’t work as a consumer brand, and even the few Chinese privates with global heft don’t have much identity apart from their owners or the Party.   (For a detailed examination of Chinese branding download BrandZ’s Chinese Global Brand Builders )

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Is It Still Worth it to do Business in China?  Conclusion

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.

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Is it Still Worth it to do Business in China?   Part 4: Different Earnings Models, Different Bureaucratic Challenges

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

10 China Negotiating Mistakes - Buy the eBook on Kindle
Learn from the expensive mistakes of expats who have come before you.

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.

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China and EU Resolve Wine Dumping Charges — Just as Xi Jinping Winds Up EuroTrip

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 Learn to negotiate in China with China Sooveslightly 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

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In China – The Media is the (Financial) Message

Bloomberg and NY Times have become the China Business Headline

We Westerners all love our freedom of speech and an independent, unfettered 4th estate — but Sign up for the ChinaSolved newsletterthe visa situation for western reporters from the New York Times and Bloomberg still waiting for residency visas to remain in China  has much deeper implications for international managers.  Beijing and the CCP view press freedom as a matter of privacy and sovereignty.  US Vice President Joe Biden  recently registered the Western view that a free press is vital to a healthy economy and society.  But this goes far beyond a clash of cultures.  This time, it’s commercial.

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3rd Plenum Wish List – and Won’t List

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 Sign up for the ChinaSolved newsletterforeign 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.

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USCBC 2013 China Business Survey – The Verdict is “Tempered Optimism”

International managers must learn to deal with a more mature, independent Chinese economy – and that won’t be easy.

USCBC 2013 China Business Environment Survey Results:
Tempered Optimism Continues Amid Moderating
Growth, Rising Costs, and Persistent Market Barriers

Sign up for the ChinaSolved newsletterThe 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.

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5 Shades of Gray – Managing Graft Levels in your China Business

How far is too far when it comes to graft and corruption in China?

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Last week’s post on MNC bribery scandals in China sparked a bit of indignation and claims that “red envelops” were the only way to do business in China. Several members of the China Solved LinkedIn group challenged me to provide alternatives to paying bribes.

5 Shades of Gray

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

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