How To Manage A Successful Business In China

Johan Björkstén, Anders Hägglund

• Publisher: WSPC
• Year: 2010
• Print ISBN: 9789814287821
• eBook ISBN: 9789814338561
• Topic: Biological Sciences
• Subtopic: Science General
• Index: Biological Sciences

This unique book discusses how to manage an organization in China. It is based on the invaluable practical experience of entrepreneur Johan Björkstén, who successfully built a local consulting business with over 100 employees, and Anders Hägglund, a seasoned manager who set up high-growth and highly profitable operations in China for a major industrial multinational. The book provides widely applicable advice based on experiences from different industries, including but not limited to those of the authors.

Most books about business in China belong to one of two categories: autobiographical “success stories” or academic treatises. Managing in China goes beyond these genres to provide highly relevant, practical advice and checklists, as well as concrete and illustrative examples from the authors' own experience. Managing in China succinctly explains how historical, cultural and social factors influence today's Chinese business environment, and how managers should take this into account in day-to-day operations.

The book focuses on managing in a rapid-growth environment, but also provides advice on how to ensure sustainable operations and profitability in mature industries or a temporary downturn.

Contents:

• Introduction: Why We Wrote This Book
• Chinese Business Climate
• Differences and Similarities
• Key Concepts of Chinese Business Culture
• The Language Challenge
• Qualities of the Right Expatriate Manager
• Company Setup
• A Winning Local Team
• The Right Corporate Culture
• Right Business Focus
• Support Your Frontline Sales Organization
• Marketing to China
• Successful Execution Demands Top Management Attention

Readership: Academics, students, general readers interested in China studies, China's economy, business and management and entrepreneurship.

Chapter 1

Chinese Business Climate

1.1. Land of Golden Opportunity or Corporate Quagmire?

Are foreign companies successful in China? Over the two decades or so that foreign businesses have again been involved in the Chinese market in a major way, opinions have differed. There is the pessimistic camp, according to which foreigners have forever chased the potential of China without ever realizing any profits. In his book, The China Dream, Joe Studwell traces these aspirations over hundreds of years, starting with the 17th century efforts of Jesuit monks such as Matteo Ricci to convert “a single market of 150 million souls” to Christianity, and continuing with the railway investment bonanza of the late 19th century and Carl Crow's 1937 classic Four hundred million customers, to finally provide a series of case studies of failed investments in the 1990s and early 2000s. According to Studwell, the China investment frenzy is based on hype based on a misunderstanding of the fundamentals underpinning the Chinese economic reality, as well as underestimation of the difficulties and obstacles involved in doing business in the country.

Doing business in China is not as easy as the headquarters of multinational corporations think. The potential is there, but business cannot live off potential alone. As the world's largest recipient of foreign direct investment (FDI), China has certainly been host to an increasing number of multinational companies who have, in some cases, floundered and lost money for years, and in other cases simply given up on the market after losses accumulated to unacceptable levels.

There is, however, also a more optimistic point of view. If by “success” we mean “profitable growth”, that is, “showing long-term, steady growth while maintaining a profit level acceptable to the owners”, most companies actually seem to be doing reasonably well in China; some have even been spectacularly successful. Well-known multinational corporations such as ABB, BASF, Coca-Cola, GE, IKEA, Nestle, P&G, Siemens, SONY, and Volkswagen can, to date, all be counted as resounding success stories in China. They have been accompanied by tens of thousands of lesser-known enterprises who are showing every sign of having made the right investment decisions. Surveys on the local business climate carried out by the Chambers of Commerce of various countries also seem to indicate that member companies tend to show higher and higher profits as they become more familiar with the local market.

1.2. From Manufacturing Base to Competitive Market

It is important to differentiate between the—usually successful and profitable—companies who use China as a manufacturing base, and the companies who have tried to break into the local marketplace by selling their goods or services there. Local manufacturing seems to be relatively straightforward; local marketing and distribution have been the toughest nuts to crack. But as the market grows, matures and becomes more relatively important on a global scale, and as Chinese companies start entering the world markets, more and more multinationals need to do exactly that: compete with these new entrants on their home turf. This is the macroscopic situation we deal within this book.

1.3. More Demanding Head Offices

It is true that some companies have suffered large losses on the local Chinese market. But as international head offices have become more knowledgeable about China, they have also become more demanding of their local organizations. A few years ago, multinationals would accept loss-making subsidiaries because it was seen as “investing in the market”. Today, most companies demand profitability of their China operations and tend to regard China as “just another market”.

1.4. A Welcoming Business Climate…

Multinational companies are, overall, also manifestly welcome in China. In neighboring Korea and Japan, foreign companies have been met with more ambiguous feelings. Overall, the Chinese acceptance of foreigners and things foreign has been high, almost to the point of being overbearingly welcoming from time to time. When one of us mentioned the fact that “I feel very welcome in China” to a Chinese colleague, her reply was “that is only natural; we learn in school to like foreigners”. Multinational companies have in many cases received substantially preferential treatment compared to Chinese private and even state-owned enterprises, to the extent that Chinese enterprises started investing in holding companies abroad in order to come back as “foreigners” to invest in China, taking advantage of the tax breaks, importation policies and VAT refunds that “real” foreign companies enjoy. These benefits have been particularly pronounced in the so-called special economic zones. Here, foreign companies usually get easy access to policy makers who can help solve administrative problems. The zones are established as a way to provide easy access to resources, workers, and policies.

1.5.…Or the Heavy Hand of the State?

The more pessimistic crowd would regard these successes as isolated areas in a difficult macro environment of low development, ambiguous laws, arbitrary restrictions, and control. In China, they would emphasize, you will often compete against government agencies that belong to the state bureaucracy issuing regulations for your industry. The field is hopelessly slanted in favor of Chinese state-owned enterprises and “market” conditions are determined by ham-handed bureaucrats in love with grandiose policies bordering on the megalomaniac.

In his book, One Billion Customers, Jim McGregor describes his own fight, as head of Dow Jones's business operations in China, with the vested interests of the Xinhua news agency. By bureaucratic fiat, Xinhua simply issued regulations that outlawed its international competitors from the Chinese market. The same thing has happened in other industries; a hugely successful foreign entrepreneur in language education one day received a letter signed by the main Chinese language universities stating that the Ministry of Education had “decided to shut him down for unfair competition” and asking him to abide by this decision. In the end, however, both McGregor and our entrepreneur friend succeeded in deflecting such attacks and their businesses continued to thrive in China.

1.6. The Wild East

We once heard Frédéric Cho, an “old China hand” with some 20 years of experience from the Chinese market working for major financial institutions like Banque Indosuez, talk to a delegation of visiting European parliamentarians. “Which are the main obstacles to success on the Chinese market?” they asked. “How can we ensure that companies become profitable in China?” As Frédéric rattled off one suggestion after the other, the politicians looked more and more confused. “Excuse me”, one of them interrupted, “but it sounds like you are blaming the companies themselves, rather than Chinese policy, for most failures in China”. “That is correct”, replied Frédéric. “Most companies fail in China through their own incompetence. When a company has problems, it is perfectly natural for the managers responsible to blame China for their own failures. But when you look at the specifics of each case, you quickly see that management failed to understand the market, chose the wrong partners or simply underestimated the challenges of doing business in China, all of which could have been avoided had the company done its homework correctly”.

Jöerg Wuttke, Chief Representative for German chemicals giant BASF and himself an old China hand with long local experience, notes that “everybody blames China, but when you analyze failed ventures, you usually find that the mistakes were their own. The perception is so different from the mature markets like the US, where European companies usually admit that the errors are of our own making”. The myth of the “difficult Chinese market” is also influenced by media reports and books claiming that many, even most, multinationals are losing money in the country. Wuttke continues: “People complain about unfair competition. But most multinationals do make money. China is a profitable place to do business—with 10% market growth, it is actually pretty hard to fail here”.

Depending on one's mindset and experience, it is possible to take either a very optimistic or a pessimistic view of the Chinese market. We have known and talked with international business people of each persuasion. The general consensus tends to be that, sure, there may be great opportunities, but there are also innumerable pitfalls for the unwary.

This is why we often compare China, “The Wild East”, to the Wild West of Hollywood renown: the opportunities are endless on this new frontier, but the businessman without his wits about him may end up losing everything. By this we do not mean to say that Chinese businesspeople are less trustworthy or more corrupt than businessmen elsewhere or that the Chinese business environment is hopelessly stacked against the foreigner—just that China is such a large, complex, and dynamic marketplace that you need to be even more vigilant and astute than on more mature markets. To do business, you will still need to develop fruitful relationships with partners and employees whom you are prepared to trust.

1.7. What You as a Manager can Influence

Whether or not China is “difficult” is beside the focus of this book. Complaining about “unfair competition” is, in our opinion, simply irrelevant for the individual manager; it is difficult for the individual to do anything about. A businessman has to do his best to succeed by adapting to the situation he is facing—or opt out of the market, as the case may be.

In China, we can often influence our own situation to an unusually high degree. We are facing a blank slate without legacies. It is not unusual for foreign entrants to be able to “define the market”, just as is the case for new industries in the West. Just as dotcoms such Amazon defined the online retail market, and a brand like Listerine once created, or at least made relevant, the concept of chronic halitosis, so Häagen-Dasz ice cream has defined its very own premium segment in China. Häagen-Dasz is sold at higher prices in China than in the US and Europe, despite the much lower average income levels in China. Häagen-Dasz ice cream parlors have become the venue of choice for middle-class Chinese to hold a romantic rendezvous.

Ogilvy and Mather, a respected advertising agency with a me-too offering in PR and integrated marketing services in other countries, has made itself into the market leader in most of its areas of activity in China. The secret? By being an early mover, and taking a long-term approach to building its organization, the firm has successfully leveraged its advertising brand into other areas of activity and gained respectability in a wide range of businesses.

Which are the factors you can influence, and which ones must you learn to live with? What can you learn from the mistakes and triumphs of those who have gone before you? How much can and should you adapt to local conditions? How much can you compromise your business idea and corporate core values in order to adjust to China? If it is possible at least for some companies in a wide range of businesses to “succeed” in China, can we then try to find some of the factors that have made them successful? And what can we learn from their less fortunate peers, who in China found only failed ambitions and missed opportunities?

Some of the factors where success is directly dependent on one's own actions, or which one can at least prepare for in an adequate way, are:

• Understanding of the market: culture, market research, choice of partners, due diligence, analysis of market barriers.
• Legal structure and geographic localization of business.
• Quality and motivation of management and of employees.
• Execution and follow-up.
• Realistic expectations and a sustainable mandate from head office.
• Consistency and endurance of policies.
• Marketing and brand building.

Of course, external factors will also influence success. There are political, social, and macroeconomic questions such as investment policies, benefits, and legal investment framework to consider. There are also internal corporate questions such as product offerings, management issues and China's overall role in global production strategies. We will focus on those issues that are in the direct sphere of influence of a local manager.

Chapter 2

Differences and Similarities

“I have been to countries where they drive on the right hand of the road and I have been to countries where they drive on the left—but this is the first time I’ve ever experienced a place where people drive on both sides”, a business acquaintance visiting Shanghai in the 1990s once quipped to Johan. Although the situation on the streets of the largest Chinese cities is more orderly these days, we would still suggest that riding with a local cabbie is the ideal crash course in Chinese business for the newly arrived foreign executive. Your taxi driver's freethinking interpretation of traffic regulations closely mimics the way Chinese businesspeople have learned to maneuver a heavily regulated, contradictory and chaotic local business environment.

After half an hour on the road, you will have come to fully appreciate the commonly heard saying among expatriate businessmen: “In China, everything is difficult but nothing is impossible”.

2.1. Sources of Some Differences from Other Markets

China will likely be different from other countries where an international manager has worked. Some of the characteristics that determine these differences are:

• Size: China is a very large country; cultural and economic differences between regions are often wide. In addition, lack of logistics solutions and internal trade barriers make some markets difficult to access.
• Market development: China is not yet a fully developed market economy and systems and institutions can be lacking or immature. Aspects of the planned economy continue to influence some industries.
• Cultural factors: Chinese people relate to each other, and to the environment, in ways that are subtly different from Westerners. Only by understanding such differences can you successfully negotiate with Chinese business partners and manage local coworkers. China also has a long tradition of education and self-betterment; this influences how Chinese colleagues view employment opportunities and long-term careers.
• Low trust: During the planned economy era, when there was not a lot of competition in the market, both consumers and corporate customers could do little if they were cheated and left with the short end of the stick. There is still a “trust deficit”, where customers are afraid of being cheated. This has sometimes worked to the advantage of multinational companies, which were often automatically held to higher standards than local companies. This situation is changing, as more and more Chinese companies have grown large and mature enough to care about their reputation in the market. Even so, building trust is important in China: Besides being as wary as a local business person on your own part, you also need to build a strong brand that communicates trustworthiness. And it is not only customers who are suspicious—building trust with employees takes time as well.

All of these factors, taken together, mean that things do not always happen as quickly and easily as one would hope. Endurance, patience, and carefully considered long-term objectives are key.

2.2. Some “China” Factors with Global Relevance

There are also aspects of the Chinese market that can be said to be equally valid in other countries or business segments. In our opinion, China has much in common with other markets, and Chinese employees are often motivated by the same factors as their colleagues in the US or Europe are.

Some especially salient “China factors” that we believe will become more relevant world-wide as a result of globalization are:

• Rapid change: During the last decades, China has embarked on a breakneck journey to break out of poverty and backwardness. But the most striking changes are not the improvements in material conditi...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Acknowledgements
• Preface
• Introduction: Why We Wrote This Book
• Chapter 1 - Chinese Business Climate
• Chapter 2 - Differences and Similarities
• Chapter 3 - Key Concepts of Chinese Business Culture
• Chapter 4 - The Language Challenge
• Chapter 5 - Qualities of the Right Expatriate Manager
• Chapter 6 - Company Setup
• Chapter 7 - A Winning Local Team
• Chapter 8 - The Right Corporate Culture
• Chapter 9 - Right Business Focus
• Chapter 10 - Support Your Frontline Sales Organization
• Chapter 11 - Marketing to China
• Chapter 12 - Successful Execution Demands Top Management Attention
• Chapter 13 - Dealing with Head Office