Heading to China isn’t right for every company–and even if it is for yours, it won’t be easy. Here are three things to remember.
It’s the most populous nation on Earth, potentially its biggest market, America’s chief creditor, and the maker of most of our goods. It’s like the Mount Everest of business, a new pinnacle to be conquered "because it is there."
Expanding into China presents a huge temptation for businesses large and small, and has led to heartache for some that gave in to that temptation. At one time or other you’ve probably wondered: Is my business ready for China?
That was the question facing Panjiva, the B2B online marketplace whose name is a play on the Earth’s ancient single continent. The answer was yes. "We made the decision to open an office in China at the end of 2010," says Josh Green, the company’s founder. "We had an office up and running by the end of 2011, and today we have 18 people there, a third of our company’s head count."
It’s an investment that’s paid off. "From nothing at the end of 2011, we’ve grown sales so that in the fourth quarter of 2012, 30 percent of new sales came from our China office," Green says.
Nevertheless, he says, expanding into China isn’t right for every company. And even if it is right for yours, it won’t be as easy as you think. To make it work, you’ll need what he calls "The 3 Ps":
What’s your purpose in expanding into China? "Because it’s there" really isn’t good enough. For Panjiva, purpose was a no-brainer: The company’s mission is to connect buyers and sellers, and many of those sellers are in China.
But, Green warns, "Purpose flows both ways. There needs to be a rationale for why your company wants to go to China, but also a rationale for why customers in China will want to buy from you. There needs to be a reason why you’d have a shot at successfully competing in China because it is a very competitive marketplace."
"A new company in a new geography needs one person to be the driving force behind it," Green says. This is especially true in China. "You need a person with very specific skills who can lead the charge, and finding that person either inside or outside your organization can be a challenge."
The ideal liaison has Chinese language skills, Green says. It should be someone who can navigate any legal and regulatory challenges that might arise, and someone who can be an ambassador for your company and its culture, and also help convey some of the Chinese culture back to your company. "There’s no question that you’re going to be looking for someone with a skill set that’s really difficult to find. That process will take time," Green says.
In Panjiva’s case, the right person is Bob Gates, who comes from Texas, and reputedly speaks Mandarin with a Texan accent, and who had experience setting up a company in China prior to Panjiva. Though Green was certain from their first encounter that Gates would be a great representative for his company in China, it took many months before Gates was persuaded to sign on.
"Everything in the world of start-ups takes longer than you would like," Green says. "That is never more true than when opening in a new geography, China in particular."
Have the patience to work through the legal issues, the patience to hire the right local staff to carry your company’s message forward and especially the patience to listen to the local market. "No matter what you think you’re going to be selling, chances are high that you’re wrong in some respect. The market will teach you what it’s interested in, and it will differ in subtle or maybe big ways from what you expected. Have the patience to experiment, and experiment again."
It’s well worth the extra effort, he adds. "I can tell you that when I hop off the plane in Shanghai and walk into the Panjiva office and see a team of incredibly talented people working hard to build their piece of a global business–it’s a very rewarding feeling."
China is booming! That’s the story you seem to see everywhere you look. Indeed, this year, China has emerged as the world’s second largest economy with an average annual economic growth of 10% over the past 30 years. Seeing numbers like these can make foreign companies salivate at the chance to tap into China’s growing market. However, Chinese business culture is unlike it is anywhere else in the world and to thrive in this market, foreign companies need to have an understanding of the major practical challenges they will have to face if they want to succeed here.
With over a decade of assisting foreign companies, especially small and medium size enterprises (SMEs), market and sell their products, technologies, and services in China, US-Pacific Rim International, Inc. (USPRI) has come to understand what the major problems are for these kinds of companies when operating or growing their businesses here. Below we offer what we consider the five biggest practical challenges for foreign SMEs in this market and how to address them.
1) Red Tape
In China, many administrative and bureaucratic tasks that have been simplified in the West can still be quite time-consuming. Everything from opening a bank account, to registering your company, to gaining product approval, can drag on for months. The lack of a strong rule of law and an inconsistent application of regulations means that such processes are not always designed for your company’s convenience.
In addition, many procedures that would be handled electronically in the West require reams of paperwork which need to be filled in and stamped by hand. The time required to complete these efforts can be unexpectedly lengthy. We know of many foreign companies that hire 1-2 full-time staffers in China, hoping they will lead their marketing and sales efforts, only to find that their employees spend more than half of their time completing administrative tasks.
To be successful in China, your company will also need a full-time administrative team in place which can handle all of your company’s paperwork in China. This support will free up time for your sales staff to focus exclusively on promoting your company’s products, without having to spend time getting approvals from offices all over town.
Cultural misunderstandings arising from miscommunication are one of the biggest challenges which foreign companies face in China. Although there are an increasing number of Chinese people highly proficient in English, it is uncommon to find someone who understands the subtleties of the language and possesses a strong enough understanding of both Chinese and western culture to navigate delicate business negotiations.
USPRI has witnessed numerous instances where heads of foreign companies make a trip to China, have several productive meetings, and return home with strong business prospects. While communication between the foreign and Chinese companies goes smoothly at first, things start to break down as business issues get more complex and the Chinese side has difficulty explaining to the foreign company business practices that are unique to China in a way that is understandable to a western audience.
What started as a promising prospect for both sides often breaks down due to misunderstandings. To avoid such problems, it is important to have an international team in place which can bridge Chinese and western cultural differences.
3) Human Resources
Year in and year out, western companies in China rate human resources as among the biggest challenges of doing business here. While western employees tend to delegate responsibility and have flexible lines of authority, Chinese workers are accustomed to a more hierarchical structure in which each person has a clearly defined role. Such differences can often lead to tensions between western managers who are used to employees who take their own initiative, and Chinese staff who have been trained from a young age to always follow instructions from the top.
It will be important for your company to have a clear set of procedures regarding incentives for outstanding work and punitive measures for substandard performance. In addition, regardless of the size of the company, you should divide employees into small teams which each have a clear leader who oversees the group and reports directly to his or her superior. To best motivate your Chinese employees, it will be necessary to closely monitor their work while also encouraging them to be creative and take risks.
4) Business Culture
You’re not in Kansas anymore. To succeed in China, your company must realize that it cannot take the same business model, which may have served you well in your own country, and simply apply it to the Chinese market. You will need to be flexible and adjust to a country that practices business according to “Chinese characteristics” deeply related to is traditions. Due to these differences, many business practices in China do not always conform to commonly accepted international standards.
Without a presence and close supervision in China, it will be difficult for your company to ensure its best interests are being advanced by its agents and employees. To adjust to these cultural differences, it is important to be humble and to learn from the new culture you are dealing with so you can have the cultural sophistication to grasp the complexities of this market.
5) Relationships (Guanxi)
One Chinese word you will hear constantly while doing business in China is guanxi. Translated into English, the word means, roughly, relationship. The importance of building strong relationships in business is not a novel concept for western businesses. However, in China, guanxi plays a far more important role than it does in the West. While in the other parts of the world, you may be able broker a deal just through formal business meetings; in China it is necessary to spend time getting to know your Chinese counterparts outside the boardroom during tea sessions and dinner banquets.
In order to develop such relationships, it is important to have the patience to build them. Due to the necessary time commitment, deals may take three to five times longer to complete in China than they do in the West. For your company to succeed in China it is important to spend time cultivating relationships with counterpart businesses, government agencies, and trade organizations.
Anthony Goh is president and Matthew Sullivan serves as the firm’s director of business development and communications of US-Pacific Rim International, Inc.
Well its preety obvious isnt it????
China is quickly transforming into a mass consumer market. Some say it is even going to overtake the USA. When is another question, but what we sure know is that it will. It has never been a better time to expand than now…
Whether you have been in business for a long time or not, just ask this question to any “elder” business person you know, When is the best time to enter a market??? He will always tell you, when it is growing.
And China is growing now.!!!
The European as well as American markets are mature markets. They have already passed their “growing cycle” and willfor the next years, unless something dramatic happens in innovation, remain in a steady
Whether you are in a service or product related industry, now is the time to enter china.
If it is in a product industry, you got to realise and realise NOW, that the chinese market is changing from a developed to a consumer market. And it is turning fast. It is normal human nature that if suddenly you have more money to spend, then you want to spend it in the best. And what is the best??? Something made in Europe or the USA. That is the mentality in the chinese new middle and upper class.
Many say that the chinese economy is overheating. So what??? Take your place now, and when it slows down, it will slow down from a 8- 9% growth to a 4%. Even then, a 4% growth in a billion people country, is a lot!!!
If you are in a service industry, it is even better. Since the economy has been growing at such a fast pace, it is only logical to note that the qualty of the service type industries cannot possibly have grown at such a level of standard that we have in the west.
Remember, when the ball is rolling, you don’t want it to stop. Yes there are many couriers, logistic companies, restaurants, schools, hospitals,etc, but how many of them are up to western standards????
And imagine if you were to take your stand now???? Not only can you differentiate yourself and target that new rich consumer that is emerging, but when the market starts to slow down in the coming years, who do you think will stand out???? Since a service is an experince that you have had, as long as the experience you have given to the local chinese consumer ( who has never imagined the western standard of service), is as good as in the west, you are assured a good market share for the future.
So, what are you waiting for???? Do it, and do it NOW, don’t wait till you cant afford it, or till its too late.
About the author:
The author is a China Business Expert, entrepreneur and self made businessman. He has been dealing with China for over 10 years now, both for his own import & wholesale business as well as for some of his customers where he acts as an intermediary and consultant in the supplyside purchasing cycle.
The potential expansion across China underlines the ambition of Tesco to grow its online business around the world.
The company is the largest online food retailer in the world and already has an internet business in most of the 14 countries where it has stores.
In the next few months it will launch online businesses in Bangkok, Turkey, and Shanghai, where Tesco also has stores. Tesco will officially launch its online food business in Bangkok, Thailand, next month and start taking online food orders in Shanghai in June or July.
The company believes that launching in a major city is the most prudent way to begin an online business, but it has aspirations to expand across Thailand and China
Alliance Boots plans to double its Chinese operations within two years, after revenues fell for first time since merger
Alliance Boots plans to double its Chinese operations within two years, becoming a nationwide operator in the country, as the company’s revenues fell for the first time since Boots Group and Alliance UniChem merged in 2006.
The company, which recently sold a stake of its business to US pharmacy giant Walgreens, said it already has operations in 17 Chinese provinces and wants to expand to all 34. Bosses also have an eye on an expansion into South America for the first time.
The decision comes as the company said revenues were down 2.6% to £22.4bn, with underlying profit after tax up 12.7% to £805m.
In the UK, under the Boots brand where it has 2,000 stores, sales were £6.55bn, down 2.9%, as the high street continued to suffer.
The chief executive of health and beauty, Alec Gourlay, explained: "Footfall is down across the whole UK by around 3% and we mirror that."
He said the fall in sales was also due to some best selling medicines, especially high cholesterol-reducing drug Lipitor, losing their exclusivity patents.
Profits were boosted by an increase in margins, with haircare and "indulgent bathing products" doing particularly well.
The No 7 anti-ageing products have also been successful since being introduced in Walgreens’ Hollywood store, bosses said.
And while UK products are finding their way across the Atlantic, Alliance Boots chairman Steffano Pessina was clear the cigarettes sold in Walgreens would not appear on shelves in Boots.
He said: "It would be absolutely inconceivable to sell cigarettes in our European stores."
The company’s tax bill has also increased to £114m, up £31m, including a £64m UK corporation tax bill.
China’s current transportation development plans call for huge numbers of new airports, but building them looks to be untenable, both economically and environmentally.
The Twelfth Five-Year Plan’s goal of building 82 new airports by 2015 will increase China’s airport network by nearly 50 per cent. The majority of these airports will fly shuttles for passengers located in remote cities of China to hubs that connect to other major destinations. But as Chinese airlines are forced to cut prices to compete with the rapidly growing high-speed railway network, the answer is not more airports, but better-developed transportation networks.
With more than three-quarters of China’s existing airports already running a deficit, the focus on airport construction is misguided. The high-speed railway construction boom since 2002 has intensified pressure on existing airports. After the opening of the Beijing–Guangzhou line in December 2012, China’s 9,000 kilometre rail network is now the world’s longest. China’s goal is to extend the high-speed railway network to 16,000 kilometres by 2020.
Existing airports already struggle to compete; some coastal cities now even request government officials fly rather than travel by train for business trips in order to boost local airport use. Opening even more airports will only make the problem worse.
The Civil Aviation Administration of China (CAAC) is the government body that oversees the expansion of China’s airport network. It argues that China needs to expand its airport network to catch up with the United States and other economies, comparing China’s 180 airports to the 700 in Brazil and 19,000 in the United States.
But the CAAC is looking at the wrong numbers. For example, it compares the number of commercial airports in China to the number of flight facilities in other countries, a broad category that includes helipads in the United States. While Brazil may have more than 700 airports, only 28 served over one million passengers in 2011 — China had 53. In fact, the number of China’s large airports is much closer to that of the United States. In 2012, only 62 US airports handled more than two million passengers boarding annually. In 2011 (the last year for which data are available), 43 Chinese airports reached the same level.
In addition, Beijing, the largest Chinese air hub, boards almost twice as many passengers as Atlanta, the largest US hub. China’s airport network therefore comes close to equalling that of the United States in terms of major airport hubs. And it is important to understand the broader context: the US passenger railway network is undeveloped compared to China’s extensive railway network, which also includes a growing number of high-speed lines.
The Chinese authorities should take note of the financial struggles smaller US airports currently face. Beyond the 62 major airport hubs mentioned above, many US airports have been running increasing deficits since 2002. The overall level of debt reached almost US$800 million in 2012. There is no sign of recovery for these smaller airports and this is a dilemma that China can avoid.
If there is little profit to be made from the construction of new airports, why is China in such a rush to build them? It is partly due to the fact that while railway expansion is coordinated at the national level by China’s Ministry of Railways, it is local government that pushes for airport construction. Airport expansion often also fits neatly into local government officials’ desires to maintain their political profile through investing in projects to stimulate short-term local economic growth. The cycle of political promotions makes it possible for officials to claim credit for airport construction but not be accountable for paying back the debt afterwards.
Airport construction is not only a bad economic investment — it also has adverse impacts as China struggles to reduce carbon emissions and pollution. High-speed rail, the main competition to air travel, emits less carbon dioxide per passenger. Requiring electricity rather than kerosene, high-speed rail travel can also help China decrease dependency on foreign oil and the associated susceptibility to price fluctuations and supply disruptions.
High-speed rail is already edging out regional flights and airports, with Shanghai starting to offer combined flight and rail tickets for onward travel to nearby cities. If other major cities follow suit, regional small airports will be further marginalised.
This sort of integration between air and ground transportation is actually an efficient way for China to expand its transportation networks while reducing carbon emissions. Air travel between China’s main hubs continues to remain profitable for the airports and operators. More high-speed rail links between provincial capitals would maximise China’s transportation structure while minimising unnecessary flights with low passenger flow. Most importantly, it would reduce the carbon footprint of medium-range inter-city transportation.
What China needs is not more airports but smarter integration of its different transportation networks.
Tips on how to grasp the nuances of operating your supply chain, warehousing and distribution operations within China.
It is an exciting time to be working in the supply chain industry in China. The logistics sector lies in the cross-section of all the growth and changes taking place across the country. The infrastructure is being developed alongside international businesses seeking to manufacture their products, source suppliers or even to begin tapping into the end markets and selling products to consumers.
When well-established businesses seek to expand into China, it is important for them to understand the dynamics of supply chain, warehousing and distribution decisions in this new territory, rather than expect the same rules to apply, or their brand name and reputation to carry over from other parts of the globe. In order to best service international clients in China, my background provides me with the perspective of understanding both local and U.S. customs.
I am a Chinese native and I earned my MBA in the United States, at Michigan State University. I have also worked for a number of other global companies, and all of these experiences allow me to relate to large foreign companies seeking to do business in China, understanding their business practices and priorities, and helping their team achieve success.
Over the years Ive worked with many logistics services in China that include class-A forwarding, customs clearance, ocean and air booking, international trading and duty, trade finance, Foreign Trade Zones, and non-bonded inventory and warehouse management all of which allow us to help shippers establish their supply chains in China.
The volume of business is smaller in China than in the U.S. or Europe, but is rapidly growing. The supply chain process is very dynamic, and we have to be flexible enough to cope with all possible changes. Contingency plans have to be thoroughly developed with all possible scenarios.
Problem-solving skills are key to driving excellent customer service. Some customers are new to this, bringing with them stocks that sold well in their home countries. We work with them on the inventory analysis to promote the aged stocks, and stock the right products for the local markets.
With the increasing popularity of online shopping site like Taobao and 360buy, people are starting to realize that logistics can be a core business and are a competitive advantage for companies. The competition is becoming fiercer, and we will see a trend of consolidation.
Multinational companies who are already well-established in China would like to leverage their scale and work with just a few providers. They also like to have visibility into and transparency over the supply chain. Creative solutions, carrier management expertise and localized systems will be areas that can help bring supply chain management to the next level.
While there are challenges to doing business in China, things can be done very quickly when the right relationships are cultivated, while proactively adapting to changing laws and regulations. Logistics providers can offer various services and sound local market advice and experience.
There are several key things to think about when establishing your strategy for China and below are a few starters to grasping some of the nuances of operating your supply chain, warehousing and distribution operations within one of the worlds fastest-growing economies with a population of over 1.3 billion.
Embrace Cultural Differences
The Chinese work culture is more personal than in the U.S. In the U.S., cultural norms often dictate a work-life separation. However, in China, work and personal lives are blended together.
Chinese people want to understand you as a person. For example, we have a very open culture with our employees. We have many team-building exercises that bring us together and this provides us with an opportunity to learn more about our colleagues and to serve our customers more effectively.
Chinese people also typically want you to spend quality time with them to find out what is going on in their lives, as well as take the time to train and teach them. We even use Sina Weibo, which is the Chinese version of Twitter, in order to keep up with each other digitally. The micro-blogging site is very popular in China.
These approaches work well since employees tend to be young, and more talent management is required to offset the talent shortages in the logistics and supply chain industry.
This personal nature also applies to doing business with carriers, customers, vendors and even potentially your own employees once youve established business roots in China.
Sometimes it takes longer to do business in China because of this getting-to-know-you phase. Yes, it can test the patience of non-Chinese but this is a key cultural difference worth remembering. Not understanding and respecting this cultural difference can be perceived as being insulting, overly aggressive, and result in lost business and relationships.
Understanding Just-In-Time and Data Integrity
China is a rapidly developing marketplace. Entire new cities, roads and infrastructure are constantly under construction. So, just-in-time (JIT) takes on a slightly different meaning. We often have to educate customers on these challenges.
When we contract with local shippers to transport their goods and services via trucks that are much smaller than in the U.S. or elsewhere, we understand roads in some areas are not as well developed and travel time increases. A traffic delay caused by an accident in the U.S. can divert your drivers for a few hours. In China, a major road disruption can translate to delays that are days in length.
GPS capabilities are also not as robust, and obtaining updates on shipment progress is still more manual in nature. Thankfully, cell phone signals are very strong throughout the country, as the number of mobile devices greatly exceed landline phones.
Working properly and in compliance with Chinese customs is critical and demands good planning and data management practices. Proper documentation is critical, as is complying with the HS Code (Harmonized System Code, for China, is a 10-digit code of which the first six digits are international nomenclature). When a U.S. company begins importing and exporting in China, accurate quantity counts are part of the firms reputation, lest you want to be suspected of smuggling.
If you list the incorrect number of items too often, customs officials will not hesitate to inspect and detain your shipments for an extended period of time. Future shipments may be flagged and detained needlessly due to poor reputation. As a result, your company and its customers may miss out on valuable sales and opportunities, thereby losing ground before much can be gained.
In order to obtain accurate updates, truck drivers must be contacted directly. Culturally, Chinese truck drivers do not always convey accurate data when contacted, sometimes stating theyre 30 minutes from reaching their destination, when in actuality they are a few hours away. Contacting them directly helps to provide visibility to customers. Logistics providers do safety background checks on drivers, providing upfront and ongoing training.
Also, the Chinese truck carrier market is more fragmented and not as mature as it is in the U.S., similar to Chinas transportation infrastructure, which brings with it challenges as well. There are no major truck carriers that work across the nation, but rather medium- or small-sized businesses and entrepreneurs who are good at certain lanes or region.
At Penske, we spend more time upfront to do the due diligence with these carriers, including customer service mentality, management culture, employee turnovers, financial and industry expertise. We view them as our business partner, develop and grow them, especially in customer service and quality communication.
With VAT reform and fuel cost increases, we help them absorb part of the costs, to ensure they can continue to grow while we work with them to optimize routes and improve efficiency in the overall process.
Working with these entrepreneurs also provides us with challenges that they could be short-term driven and can discontinue services abruptly and with little warning. Regular communication and review with these carriers is key.
Logistics costs are a higher amount of Chinas gross domestic product than in the U.S. I estimate it to be at 20 percent, over double of U.S. GDP costs. Logistics costs are getting better in China, as more professional services across the board are being developed, the work force is maturing by the day, and the environment is becoming more pro-business.
There is a strong need for integrated solutions to drive optimization and consolidation, with many of the supply chain managers focused on unit cost reduction, with frequent bidding and changing suppliers.
Companies are now starting to do a better job of examining the supply chain as a whole, and moving away from seeing logistics as an isolated part of the business. Logistics management is being viewed less in terms of warehouse and freight cost, and more as a way to forecast and plan, and maintain order management, packaging and consolidation across different regions.
With more logistics professionals on the customer side, it will help drive the trend of sustainable improvement, by working together as one team.