China is the modern-day headquarters of hope and heartbreak for ambitious foreign entrepreneurs. Australian owned and run companies have been in the front seat of the rollercoaster since Deng Xiaoping opened the world’s most populous nation to free market reforms in the 1980s. Last issue, in the first instalment of this four part series, Paul Waide looked past the hype to the nuts and bolts of setting up a successful business in China. In this second instalment, he recounts the many Australian stories of success and failure and suggests some crucial lessons for those contemplating a commercial foray into the Orient.
On my first day at Alcatel’s Asia Pacific headquarters in Shanghai, I was taken aback by the Australian presence. With 7,000 or so employees in Shanghai, I was surprised to find the French telecommunications equipment maker not only had an Australian president, but that the head of human resources, finance, and sales and marketing were all Australians. A week later at an American Chamber of Commerce dinner, Hewlett Packard’s China head introduced himself as the head of the American Chamber’s IT Chapter, but with a smile and a distinctly Australian drawl. When I founded my own company in China, I was surprised to find the ranks of entrepreneurs filled with Australians.
In China, Australians are everywhere: lawyers, consultants, accountants, technical specialists, managers, and, of course, entrepreneurs have all been attracted to the booming economy.
If China’s economy keeps growing at its current rate it will be half the size of Japan’s economy by the end of 2006, according to Goldman Sachs’ Asia vice-chairman Kenneth Courtis. While Australian corporate icons are present in China, it is small and medium sized company operators that seem to provide the best insights on success and failure.
THE CHEQUE IS IN THE MAIL
Australian companies can use a multitude of vehicles to enter China – the representative office, joint-venture, licensor-licensee relationships – but the most fraught with risk is the wholly owned foreign enterprise (WOFE). All modes of business hold some risk. However, joint-ventures or representative offices do not require businesses to put much on the line by way of registered capital. Depending on the industry, WOFEs require anywhere from 250,000 Yuan (A$42,000) to 10 million Yuan (A$1.68 million) in the company’s Chinese bank account before legal operations can begin.
One Australian who opted for the WOFE is Melbourne native Kirk Jobsz. In 1999, Jobsz founded Mailman in Shanghai, a media company (yes a media company) that hits an audience of 10 million every month. Mailman’s portfolio of services includes postKard advertising, SMS services, movies and other out-of-home advertising. Mailman’s postKards can be found in nearly every fashionable Shanghai and Beijing cafe, targeting the affluent expatriate community and local cafe crowd with glossy postcards touting global consumer brands like Nike, Nokia and BMW.
Guanxi, one of Mailman’s SMS services, gives English language foreigners the chance to get around Shanghai. The wandering foreigner simply SMSs his intended destination to 85880 and Guanxi sends back the address in English, giving the traveller an option to request the destination’s Chinese name to show to taxi drivers or helpful pedestrians.
The company’s design arm, REDdot design, operates as a separate unit but ensures a consistent look and feel for all of Mailman’s products. The company also has a logistics arm (Mailman logistiKs) that uses bar code technology to track media impact and distribution.
Despite facing a lot of China-centric problems, one of Jobsz’s biggest challenges is one that most small businesses face. "Getting the right people who will stay and not job hop for a few dollars and a new title on a business card is difficult. HR is tough for smaller companies, especially as the big multinationals have the funds to snap up the good people," says Jobsz.
Jobsz’s other lesson to pass on to aspiring China entrepreneurs is, "Don’t believe a ‘win-win’ is a win." Contra-deals are popular in the Chinese media and, given that much of the industry is still State-controlled, when disputes arise it is tough to take the Government to task.
MANUFACTURING OUTSOURCING
Because of the labour cost differential, China remains extremely attractive for manufacturers. The outsourcing trend appears to be accelerating and spreading to more knowledge-intensive industries, as China’s move to treble the intake of tertiary institutions back in 1999 begins to churn out engineers and computer scientists. Most Australian manufacturers have to at least consider outsourcing parts of production to China.
Sydney-based Westray Engineering forges precision equipment. The company knew it could cut costs and focus on more interesting work by outsourcing some production to China. "In considering entering the Chinese market the most important thing was to determine our market entry process," says Westray chairman Wendy Simpson. "No matter what your product or situation, firstly you must understand the Chinese market and how things are done in China. How do you select the right partner to help you understand the China market? Well they must understand both the market conditions and your business. There are any number of generalists around but we realised very quickly that we needed someone who had a good understanding of our product and the key players in our industry in China. With this information we are not travelling around China in an ad hoc way, but making targeted calls to specific cities. China is a big place. You can waste a lot of time if you are not seeing the right people."
Simpson says when sourcing from China, companies need to know that their reputation is on the line. To ensure components sourced in China meet quality standards, she suggests a factory visit. "Meet not only the factory owner and the sales people who are managing your account. Meet the factory supervisor, look at their office, look at their paperwork. If they have an efficient work flow process, job card, delivery tags, then you know they are likely to be quality suppliers. If things are all over the place and there is little documentation, then there is a good chance that things will go wrong."
One easily avoided mistake that companies moving into China make repeatedly is to lock into long-term agreements before both parties are comfortable. Another is assuming that your Chinese sourcing partner can facilitate the delivery of goods from Chinese ports to Australian ports or those of customers anywhere in the world. Manufacturers tend to be good at manufacturing, not logistics. Despite booming export trade, the freight companies that act as gate keepers to many of China’s ports are not the world’s most efficient. Make sure your company understands how long things will take to get from the manufacturers and, equally important, how much. If your company is manufacturing finished goods for immediate shipment, keep in mind that the US and EU have some strict trade quotas in place when it comes to China.
On a more personal level, Simpson says, "The person who account manages you is usually also one of the best English speakers. Try to get them on Skype so you can talk easily and often. Don’t wait for the Chinese to call you. Often they are not very pro-active. Silence usually means they are stuck, but it is up to you to take the initiative to check why things have slowed down."
THE 3 TRAPS…
Jim Curtis is not an Australian, but the man only half jokingly dubbed, "Ambassador for the Commonwealth of Maryland," has sat through hundreds of official dinners and advises companies from the state of Maryland in the US on their China operations. In 2005, Jim set up two China-based businesses: a garment factory in the Yangtze delta and the Robert H. Smith School of Business Executive MBA in China.
Jim’s 3 traps to avoid when doing business in China
- 1. Never underestimate.
Don’t assume that the reason why things aren’t going as expected is because your Chinese partner doesn’t understand what you want. More often than not they know entirely what you want, but are simply playing out the negotiations to move them to their favour. So, be firm and patient.
- 2. Never pay the first price – ever.
It’s been said before, and it’ll be said again – but it needs to be repeated over and over, because it’s too easy to fall back into a familiar (Western) pattern of paying what is asked. The Chinese themselves will never accept the first price, ever. Therefore, when they give an offer, they are expecting a negotiation, and have calculated that into their price.
- 3. Avoid the quick fix.
You will have to deal with problems and circumstances in China that you will not want to face, many of which would not even exist in your home country. This is where you must persevere and is where the game is one or lost. The devil is in the details, and there are many of them waiting to get you here if you don’t dot every "i" and cross every "t".
Other things to note:
When someone likes you, you will know. When someone doesn’t like you, they may still seem to like you. Time will tell.
Take indirect signals very seriously. If someone doesn’t return a call, or is difficult to reach, it’s most likely because they don’t want to talk to you.
When someone in China doesn’t like something, they will not say that they don’t like it. "Ok", is bad.
Chinese women are mostly romantics. Gifts and warm gestures go a long way. Watch Chinese television for an hour and you’ll know. (Shanghainese business women seem to be the exception to this rule).
LESSONS FROM THE BIG END OF TOWN
Australian corporate icons, including Fosters, Macquarie Bank, BHP, Qantas, and lately the Commonwealth Bank and ANZ Bank, have all pushed into China. The Commonwealth Bank (CBA) and ANZ Bank, with the Asian financial crisis fresh in their minds, have adopted an invest and learn approach in China. CBA has invested in Hangzhou City Bank, while ANZ is putting up $160 million for a 20 percent stake in Tianjin City Bank. These investments are not as aggressive as those made by Bank of America, Royal Bank of Scotland and Merrill Lynch, which have taken billion dollar plus stakes in some of China’s "big four" state banks. The Australian banks’ investments in city banks mean that they know who the key stakeholders are – unlike the big banks, where a province head of the Bank of China might abscond with hundreds of millions of dollars while management back at headquarters in Beijing assures investors that everything is fine.
Macquarie is another bank that is quietly building its business in China. The bank now has about 15 staff on the mainland, doing some advisory work but primarily looking after their real estate investments. Macquarie bought a Shanghai office building for $98 million in 2005 and plans to invest $600 million from its Global Real Estate Fund in China this year. The bank has been slow to hire Chinese staff but has recently brought on its first batch of Chinese graduates. Being able to pay top dollar for the best graduates will no doubt help set Macquarie up for future business in China, but competition for the top graduates is tough. Most of the North American bulge bracket banks, private equity firms and consultants have set up shop in China and are competing for the same graduates from China’s elite universities. Australian companies doing business in China should not be discouraged by this war for talent. There might be a shortage of bankers and consultants but engineers, computer scientists and other technical specialists abound.
The lesson Australia’s biggest companies appear to have learned is that planting the flag does not get you very far. By carefully studying the business environment, building a local network and growing business organically, Australian companies succeed. Wading in and buying the market with advertising or expensive marketing efforts has limited impact in the short-term and in the long-term can even hurt credibility when results are not forthcoming.
In the next instalment of this series (issue #15 – Apr/May), Paul Waide delves into the world of venture capital in China.
Paul Waide is the founding editor and a director of Shanghai-based publication, Pacific Epoch. Waide is currently freelancing out of Melbourne while he tries to recover from imbibing four years of rampant Chinese growth.
