If you are doing business in China and you are not reading Andrew Hupert’s Diligence China Blog [no longer exists], you are making a mistake. Plain and simple. Andrew Hupert is one of the best versed and straightest talking China business writers in the blogosphere and his China focused business blog is essential reading. He just did a post on an issue I had been wanting to post on for weeks:  a recent influx of what I call conservative United States companies seeking to go into China. His post is called, “China Business: The Learning Curve has just gotten much Flatter.”

I had a conversation on this topic a few weeks ago with Jeremy Gordon of China Business Services and the China Business Blog. During our conversation, we discussed how we were both seeing increasing in business from old-line companies (mostly American in my case and mostly British in Jeremy’s case) looking to manufacture or sell in China. We talked about how these companies had previously taken a wait and see position towards China, but were now ready to move in. As Jeremy put it (this is a very rough quote on my part), “five years ago, China was on everyone’s mind. Two years ago, China was on everyone’s agenda. Six months ago, China was placed on everyone’s desk.” There is a certainty about China now that was not there even one year ago. Immediately after I got off the phone with Jeremy, I started a post on this topic, but abandoned it after realizing I had nothing more to say than what I have said in this one paragraph.

Thankfully, Mr. Hupert just wrote the blog post I should have written. Hupert sees the same “shift” of which Jeremy and I (and countless other China service providers) were discussing:

China business has just shifted again. It’s a little hard to tell because it was subtle, but the last few weeks have seen some powerful trends confirmed. US companies’ 06 China operations threw off 50% more profits than in the first half of 05. Starbucks is buying back their JVs and running their China stores independently. Wal-mart has unveiled plans to become the #1 foreign retailer in China.

US corporations, who have largely been waiting on the sidelines during the Great China Opening, are finally ready to start moving into this market.

Hupert then goes beyond merely seeing the trend to explaining it.  He sees the following as driving the trend (my comments are in italics):

  1. International MNCs [multinational companies] have officially learned how to do business in China. “China is still hard and unpredictable, but now it’s possible. Expensive, bureaucratic, and slow” but that’s what legal departments are for. There are enough roads and wires and regulations in place for the US giants to execute their large-scale, integrated plans. The Americans are coming.” He is absolutely right.  There are still risks, of course, but they can be calculated.

  2. Chinese bureaucrats have officially learned how to do business with the World. “They have a good idea about what is possible, what is not possible, and what works. Again, he is absolutely right.  Just by way of example, we are now able to fairly accurately predict the minimum capital requirements for various businesses seeking to form in the Shanghai area and in various other China locales.  There is actually pretty good consistency there.

  3. Private Chinese and ex-pat’s have learned where the opportunities in China really lie. “While not always successful, they are a lot more savvy and sophisticated about how to attack the China market. They know that if they go with the flow, they will find tremendous opportunities. But anyone who bucks the trends or looks to get rich quick will get destroyed by the big forces in this environment.” This does seem to be the case, though we are still seeing many Americans seeking to do business in China without enough of a real plan.

Hupert then sets forth the two basic rules of China’s opening to business that all must “take to heart: 1) China’s policy of economic opening is essentially a conservative attempt to safeguard the long-term security of the Party. 2) China’s intent was always to interact with the West as little as possible while securing maximum possible gain in terms of technology, knowledge, process and intellectual property.

He then goes on to say that an accommodation has now been reached between the Chinese government and foreign business: Westerners get access to the China market so long as they act to support the bureaucracy.  The Chinese get to hold on to manufacturing, but are to “back-off [from] the notion of Chinese consumer branding.” For the most part, Chinese brands have not taken hold either inside or outside China  and the “lion’s share of the Chinese domestic economy will be engaged in OEM [original equipment manufacture] manufacture for western companies or servicing international brands.”

I agree with Hupert regarding Beijing’s goals in opening its economy and I also agree that Beijing, at least to a certain extent, will continue favoring foreign companies over domestic ones because it sees big money in the hands of its own people as a potential threat to its own power.

Hupert then discusses how American companies (rightfully so) do not like to partner; they like going it alone. China has been “a scary and unfamiliar place,” but that all changed last month when Starbucks bought out its Beijing joint venture (JV) partner and Wal-Mart made clear its plans to go full bore into China.  Hupert sees much “more US style business entry into China, with US based companies establishing a toe-hold in Shanghai or Beijing and then rolling-out new locations as part of a systematized, scheduled plan.” Hupert sees “new energy in M&A and buy-out activity as US firms look to collect assets, brands and marketing territory.”

He sees development in China’s second tier cities exploding as US companies radiate out from Shanghai. US investors will scour for under-utilized assets and inefficient competitors ripe for consolidation. They will take the brand and customer lists, shut the factory, and centralize production and operations in an efficient, high-volume facility. Hupert concedes all this has been going on for years, but on a much smaller scale than he anticipates going forward.

Hupert sees a difference in how American and European companies approach developing markets:

The new competition in China will be between the market-dominating US brands and the market-building Europeans. Europeans tend to get in early and try to slowly change the rules of the game in their favor. Americans like to wait until the regulatory and physical infrastructure is on the ground, and then move in force. There is still time for some Chinese private brands to emerge, but companies like Wal-mart and Best-Buy tend to be category-killers that discourage new competitors from entering the market.

I do not know enough about European companies to concur in Mr. Hupert’s comparison, but his description of American companies perfectly coincides with what I see with my firm’s mostly American clients.

China is becoming less exotic and more doable for American business.

  • Jonathan

    Even if the above will infact happen, one has to keep in mind that this is indeed China and read the rest of the articles on this site…
    “One or Two” MNCs here is fine, but if it gets too easy, it’s going to threat China’s businesses too much. Just as regulation change in Shanghai every two days it can change in regard to these MNCs as well.
    What motivates a big part of the government here is passing foreign knowledge to locals. See JVs with gov. entities. If MNCs will make this useless, i.e. even if locals get the knowledge they still wont be able to compete with the MNCs, then…

  • Jonathan

    Just to add some buzz words. The reason China is going on so fast is due to this new “great leap” which is supposed to pass the current world economies etc. See the new Internet Infustructure. It IS NOT so USA MNCs can TAKE OVER China. The more I think about it the more I’m sure this will not happen.

  • davesgonechina

    I’ve started reading Mr. Hupert’s blog, and I find it fascinating. But I feel like there’s a disconnect here – when he says China, he seems to basically refer to Shanghai and the SEZs. That’s at most half of China. I don’t disagree with what he says, but it sounds like he’s describing what’s happening in one country, the dynamic East, while ignoring what’s happening in the Other China (everyone else). Yes, there will be radiating out, but there are limits. Migrants, western province underdevelopment and a growing gini inequality will have political consequences in the future. I’d like to see Mr. Hupert or others who are far better versed in China’s business community address these concerns.

  • Jonathan —
    Thanks for checking in. I completely agree with you that it will not happen. I say this for two very strong reasons. One, China will never allow it to happen. And two, equally importantly, there will be Chinese companies (some of them created by those who worked at the MNCs and some not) that will learn how to compete globally (some from the MNCs and some otherwise) and they will compete with the MNCs. In other words, it is ridiculous to think foreign MNCs can dominate in every industry.

  • davesgonechina —
    You are absolutely right. I had not even thought of that, but now that you mention it, I realize that is completely true. I don’t even think Hupert would dispute it, as I know he spends nearly all of his time in Shanghai. But, at the same time, Shanghai (and by Shanghai, I mean greater Shanghai) really is the center of China business for foreigners. I cannot tell you how many times we have suggested other Chinese cities to our clients (for instance, we are big fans of Qingdao, Yantai, Xiamen, and Dalian because we have strong contacts there, think the governments are good, like the cities themselves, and think they make sense from a costing and logistics perspective) and our clients seem to nod along and then go to Shanghai. In the end, American companies want to be where there are plenty of other American companies (and I would guess this is equally true of just about every other country). I think this explains the “Shanghai-ness” of the business blogosphere.
    From a legal prospective it is certainly true. When I write about how Chinese courts are improving, I usually (and probably should always) note that I am talking about places like Shanghai, Beijing, and even Qingdao, but essentially completely ignoring places like Anhui province. The reality though is that foreign businesses for the most part completely ignore places like Anhui province as well. But, I believe that is changing and that change will accelerate. For instance, we are seeing strong interest in Sichuan Province and in Chongqing (technically no longer a part of Sichuan Province) in the last few months where there was nearly no previous interest.
    Again, though, I think you make a great point and I am going to start leaning on the other business bloggers out there (and redouble our efforts here at CLB) to cover the other areas more.

  • Jonathan

    A bit off topic, but if you’re around Shanghai you dont even need to go “so far” as qingdao. Hanghzou and Xiaoshan both have fantastic State Level dev. Zones with great infustructure and services. Foreign companies would find out that that it’s in fact far easier to get things done in these zones than in Shanghai’s zones. Xiaoshan has now a sort of an international airport, and a usable port at Hangzhou. However, I would not go for any of these for a non manufacturing, rep office etc. At this point, it’s not only the companies but the clients who feel more comfortable at Shanghai. Ok rumbling out.

  • Jonathan —
    I agree there are plenty of areas near Shanghai that might make good sense for manufacturing. I also agree that Shanghai has become the de facto center for everything other than manufacturing. I also see Shanghai (as opposed to virtually everywhere else in China) tightening up the requirements for foreign entry, mostly in terms of raising capital requirements.

  • Mr. Li —
    You are right about the Shanghai/coastal syndrome, but the reality is that does constitute nearly everything for foreign businesses. You are also right to defend Chinese brands as there are definitely some strong Chinese brands within China. At the same time, however, how many of those brands would people buy over an American, European, or Japanese brand if the product were priced the same?

  • davesgonechina is right on on “Another China.” I would call it the Shanghai Syndrome: observers using Shanghai/Beijing and costal cities as sample to extrapolate the entire China.
    In the article: ” Chinese brands haven’t really taken hold over the last 30 years, inside China or the export markets, and we’ll probably start hearing less and less about them.”
    This is simply not true. Top 10 Chinese fashion brands actually have small operation in Shanghai or Beijing. They see those area are bias toward foreign brands but their boutiques are everywhere once outside of those major coastal cities. These companies are rarely covered by the Western media but one can’t miss them watching CCTV commercial. They hired Pierce Brosnan and Jet Li with tens of millions in USD, buy up commercial TV spots in CCTV and focus mostly their brands outside of the costal region. And they are getting more aggressive toward the coming of Olympic. There are example in cell phone as well. MEN (Moto, Ericssion and Nokia) laughed at the like to Ningbo Bird and others for their attempt into the cell market two years before Bird took #1 spot in cell phone sales. Surprises do come from country side in China.
    I am not saying these brands will successful in the future. Just to point out a common problem in China observations.

  • Well, the cell phone is an interesting case study, the phone from Bird, Lenovo or Amoi are not cheaper then the similar products from MEN (Moto, Ericsson and Nokia). The brands power are actually comparable in secondary cities. Samsung has high price strategy at work in Asia and often been seen as best brand. They only offer high end models and would discontinue a product before discounting it. Japanese phones? What Japanese phones? 😉 Panasonic, NEC and others are minor players in the market. Cell phone offers an interesting case study for war of foreign and Chinese brands in Chinese market.
    One other industry I have seen is the man’s suit (I did some work closely with several top Chinese brands). They operate thousands boutiques across secondary cities. The average price for their suit is about USD$400. Not quite Armani but I don’t think many heard of Armani outside of Shanghai or Beijing. And I don’t see Armani and the like being able to open thousands of boutique across China. By the way, the best selling item in Armani’s Shanghai Bund flagship store is their chocolate. Don’t be surprised when people say “Armani, nice chocolate.” 😉
    LCD/Plasma TV sales in 2006/2007 will offer another interesting case study for your questions here. Japanese brands: Panasonic, Sony, Sharp and Toshiba have adapted a new price scheme against Skywork, Changhong, TCL and others. Instead of traditionally pricing 100% over their Chinese competitors, the Japanese flat TV has adapted only 15% over the Chinese ones. We should be able to see how this works by mid-2007 after the big Chinese New Year shopping season.
    By the way, I think the brands competition has to take into account of the complexity of their supply chain. The more complex the supply chain, the more likely Chinese brands will have a chance. Cell phones and flat TVs have long and complex supply chains. Few brands own their own technologies and the technologies are spread across the complex OEM/ODM and components vendors. The same supply chain serves Japanese and Chinese brands equally so quality won’t be an competitive advantage. It will come down to the understanding of overall Chinese market instead of Shanghai market alone.
    The joke on the cell phone is the fake diamond face plate introduced by some of the Chinese cell phone vendors. MEN actually has public statement saying pretty much “we won’t be caught dead with that kind of phone!” The diamond phone turn out to be a hot seller.

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