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):
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.
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.
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.