chinaAdapted from: Corporate Board Member Magazine of Jan/Feb 2006
“A Director’s Guide to China” by John Curran
http://www.boardmember.com/issues/archive.pl?article_id=12407
What’s the first thing I should know about doing business in China?
The first thing that John Curran wants us to know about business in China is that it is not simple. Of course, I ask myself, when and where is it simple to successfully manage a business? If it were easy for me, I’d be grossly rich and on a boat in the Mediterranean eating sushi. But Curran’s comment really points to the fact that the Chinese market is more complicated than it needs to be. With China’s unique method of market socialism, working with any one of Chinese six thousand governmental zones is a complicated task because the laws on running a capitalist business in a socialist atmosphere are both inscrutable and varied. Add in corruption, the remorseless theft of intellectual property, backwards banking, and 200 distinct languages, and you have a real challenge.
There go my dreams of a yacht and sushi.
What is the Chinese market like?
The rumors are true. You can make and sell your products in China. Previously, businessmen made products and shipped them out of China to a place where people actually had money. But with all the money that is entering into China, many Chinese are starting to spend it. For example, there are more than 160 million cell-phone users in China and over 100 million Chinese on the Internet—the second largest Internet community in the world. And the annual premiums in the insurance market are expected to exceed 120 billion dollars by 2008.
The answer is: the Chinese middle class is growing incredibly rapidly and with their ascension, the Chinese market holds vast potential. Maybe, with a little work, I can afford the sushi—if not the yacht.
How big is the gap in the cost of labor?
Twenty dollars an hour, on average. The average hourly compensation for unskilled workers in the U.S. is $21.86 whereas in China it is 80 cents an hour. That’s a massive gap. A forty-hour workweek in America costs over 800 dollars. In China the cost is 32 dollars—about the cost of one-and-a-half hours’ time in America.
However, some are worried that this advantage will vanish as Chinese wages continue to rise. However, even though China’s wages are rising, American wages are rising as well. So no matter the rise in cost of labor in China, it will be extremely difficult for China’s average wage to increase so much that it catches up to that of America any time in the near future. Manufacturers can rely on the cheap labor of China for a good while longer.
How do I adapt my foreign products to China?
Curran uses an example from P&G Greater China operations. P&G realized that they could not just dilute their products to sell to the poorer Chinese countryside. Instead, they has their R&D departments come up with entirely new, but still relatively high quality products, to sell to the majority of the Chinese. They still sell their original products in the coastal cities where money is plentiful, but their strategy of producing different products for different income levels in China has worked: they are the Chinese market leaders in hair care, facial moisturizers, personal cleansing, baby care, and feminine care.
The key is P&G understood that most of China is still on the sustenance level and so they created products for China’s large low-income market.
In other words, it is ok to sell beautiful fake pearls when people cannot afford and do not expect real ones.
How hard is it to find a reliable partner in China?
It is truly difficult, and for two reasons. First, the Chinese educational system emphasizes rote memorization, which cuts down on creativity. It is rare to find a manager who can and will come up with original ideas. Secondly, many Chinese managers and distributors are more concerned about making money than about keeping a good relationship with their foreign partners. If they can turn a greater profit by reverse-engineering your product and selling it cheaper, they likely will.
How do you fill the gap in leadership and increase trust? One suggestion is to move what you can’t do well in China outside of China—like finance operations. A way to develop trust with your Chinese partners is to treat them like family, to invite them to dinner and build a guan xi or relationship that goes beyond business—but is still an integral part of business. Its hard to understate how much of China’s business goes beyond the board room.
Just how bad is the theft of intellectual property and what can I do about it?
It’s bad enough that you shouldn’t your technology to China unless the manufacturing you are doing in China doesn’t involve trade secrets or, if it involves important technology, make it technology that evolves so fast that once someone has reverse-engineered the it, the technology is already out of date.
Though new rules have been implemented, they are not very well enforced yet. What can you do? Follow the above advice and defend your intellectual property like your first-born child. Expect someone to kidnap your brainchildren and prepare for it. This is blanket advice meant for large companies, though, and may not apply to your specific situation. For example, smaller companies with smaller markets may get by with patents and good guan xi.
