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Doing Business In China
Building value for foreign enterprises in Asia
Agenda
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1. Selling to China: Commercial Options The most difficult business issues according to people working in China
2. IP and RelationshipsThe most difficult business issues according to people not working in China
3. Pitt-fallsCompanies struggling to sell in China
a. Case Study Ib. Case Study II
Selling to China: Commercial OptionsOpportunistic / Well Executed Opportunistic
3
Business StageU.S.A. CHINA
American Company
Agent
Distributor
Employee
American Company
Agent
Distributor
Employee
Distributor
Distributor 1
Distributor 2
Distributor 3
Market Feedback to U.S. Company
#1 Opportunistic
#2 Well Executed OpportunisticTreating it like you would another region in the US
Market Feedback, Targets, etc.
Selling to China: Commercial OptionsOpportunistically Invested / Strategically Invested
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Business StageU.S.A. CHINA
American Company
Agent
Distributor
Employee
American Company
Agent
Distributor
Employee
Your Business Established. Employees Inventory RMB Invoicing
#3 Opportunistically Invested
#4 Strategically Invested
Market Feedback to U.S. Company
Dedicated Employee(s) on-the-ground
Market Feedback to U.S. Company
Employee works through an “incubator” Most likely still no RMB Invoicing.
Selling to China: Commercial OptionsSummary
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High
Low
RISK
High
Low
RETURN and/or
MARKET SHARE
Low HighINVESTMENT
No Resource in China Resource in China
Stage #3 Opportunistically Invested
Stage #4 Strategically Invested
Stage #2 Opportunistic Well Executed
Stage #1 Opportunistic
Selling to China: Commercial OptionsIssues: Stages 1 & 2
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Second* most cited business issue: Distribution / Channel Management Why???
1. Highly Fragmented
2. They cannot take much inventory and/or cannot trade in USD3. Many, many more distribution points4. If a distribution in the US requires X amount of time training, the Chinese distribution requires 3x5. Greater instances of opportunistic behavior: Brand, Pricing, Service(Studies show a correlation between aggressively managed distribution and growth/profits)
Third most cited business issue (LKS observes) lack of credibility in the feedback channel impacts adjustments necessary in: Product Development, Service, Brand Growth
* Per American Chamber of Commerce Survey
Top 1030%
U.S.A.
Smallest of top 50 is about $100M
Top 101%
China
Largest is about $60M
Industrial Distribution Market
High
Low
RISK
High
Low
RETURN
Low HighINVESTMENT
No Resource in China Resource in China
Stage #3
Stage #2
Stage #1
Stage #4
Selling to China: Commercial OptionsIssues: Stages 3 & 4
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4 jobs, 14x salary growth 3 jobs, 28x salary growth
US
D B
ase
Ann
ual S
alar
y
US
D B
ase
Ann
ual S
alar
y
Avg. Annual Employee Turnover
High
Low
RISK
High
Low
RETURN
Low HighINVESTMENT
No Resource in China Resource in China
Stage #3
Stage #2
Stage #1
Stage #4
#1 most cited* business issue: Employee RetentionSalary Growth
Employee Turnover
Today’s Ceiling “Ben there done that” – really expensive People looking for development Ceiling being noticed – Find the “Builders”
* Per American Chamber of Commerce Survey
IP & Relationships
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IP Protection (It-is-Not a reason Not-to-Go)
1. China is one of Luis Vuitton’s largest markets for knock-offs and also one of its largest for real products
2. The baby carriers market consisted only of Baby Bjorn Knock offs which actually built the brand. It was known, and desired, when the real product arrived
3. Knock offs are not your competitors, they do not win on quality or service
4. But be smart about drawings, etc.
Relationships
1. Relationships matter everywhere
2. As in the U.S. Service, Quality and Value will win out
3. The accessible market is growing
Don’t allow Relationships / Culture to be an excuse for losing
20%Accessible
80%Non-accessible
50%Accessible
50%Non-accessible
2000 2011China Industrial Market
NYSE listed company selling in China for > 10 years, but yet to achieve scale
Company was growing in the low teens
Distributors were small and few, highly concentrated near Shanghai
Most sales people could not sell enough to cover their costs
Employee turnovers was low, but salesperson turnover high
Situation
Objective: Improve SalesObjective: Improve Sales
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Pitt-falls: Case Study ISituation
Our client Co A was not strong anywhere
Had poor quality and delivery perception
Co X was mentioned most often and owned Brand Awareness
Nobody owned after sales service – Negative!
Brand Perception
Use
r D
ecis
ion
Att
ribut
es
Perceived Brand Leader
Client Positioning
Quality Co X, Co Y, Co Z
Brand Awareness Co X
Price Co X, Co B
Delivery Co X, Co B
After Sales Service (Negative)
Breadth of Line Co X, Co C
Perceived Brand Leader
Client Positioning
Quality Co X, Co Y, Co Z
Brand Awareness Co X
Price Co X, Co B
Delivery Co X, Co B
After Sales Service (Negative)
Breadth of Line Co X, Co C
Perceived Brand Leader
Client Positioning
Quality Co X, Co Y, Co Z
Brand Awareness Co X
Price Co X, Co B
Delivery Co X, Co B
After Sales Service (Negative)
Breadth of Line Co X, Co C
Perceived Brand Leader
Client Positioning
Quality Co X, Co Y, Co Z
Brand Awareness Co X
Price Co X, Co B
Delivery Co X, Co B
After Sales Service (Negative)
Breadth of Line Co X, Co C
Why are you asking about quality and delivery, you are supposed to fix Sales!Why are you asking about quality and delivery, you are supposed to fix Sales!
Market Perceptions
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Pitt-falls: Case Study IBrand Mapping
Success Quoting on Business
75% Miss
25%
Hit
Should be a $50M Business!
New distributors signed in last 18 months
3Passive distribution management
Time at End Users
New or Current
Distributors 75% End Users
25%
Generally a Mature Market characteristic
Why can’t sales increase reach?Why can’t sales increase reach?
Sales Function
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Pitt-falls: Case Study ISales Effectiveness
Co A 5 weeks (Imports)
Delivery
VOC 1 week
Co X 3 days
Co A 2 weeks (China)
Warranty %
0
0.5
1
1.5
2
2.5
3
3.5
4
Jan Feb Mar Apr May Jun
%
Complaint w/ abuse
Complaint w/o abuse
4.5
5
Sales training, incentives and structure will not solve this problem!Sales training, incentives and structure will not solve this problem!
Perception vs Reality
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Pitt-falls: Case Study IThe Fundamentals
Leadership: Someone with credibility in the home country
Poor sales is usually a symptom of something other than a poor sales team / structure / incentive
We see a lot of industries where “Service” is still an open attribute
Don’t be distracted by FCPA, Sales Pressure, Retention Issues: Don’t forget the Fundamentals!
Don’t let an export driven factory forget to measure domestic performance
Summary
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Pitt-falls: Case Study ISummary
Selling in China for > 10 years, but was not satisfied with sales performance
Sales people focused on finding and signing new distributors
Sales were 30% “Standards,” 70% “Specials” <The opposite of the rest of the world>
Their share of “Specials” was <0.1% in China
Situation
Objective: Improve Sales…AgainObjective: Improve Sales…Again
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Pitt-falls: Case Study IISituation
Like every other country, the client was focused on StandardsLike every other country, the client was focused on Standards
Market Situation
Specials vs Standards
75% Miss
Specials: Fastest Growing Segment
Competitor Concentration
Global Majors had the Majority of the Market
Specials
10%
Standards
90%
Others
40%Major Global Players
60%
This client is good at Specials
Specials are ignored by the biggest companies
Specials sales require time at end users identifying and solving problems
Distributors prefer to sell standards
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Pitt-falls: Case Study IIProduct / Competitor Concentration
Specials: End User Pull Model
Standards: “Catalog” Sales
Sales team was recruited from the global major competitors that had already been established in China
Distribution network was set up just as in the US or as the other major competitors had done in China
Nobody in the China organization understood how to build a network, or sales plan, focused on Specials
Distribution Situation
Distribution model and salesperson DNA need to fit your positioning
Distribution model and salesperson DNA need to fit your positioning
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Pitt-falls: Case Study IIDistribution Model
If late to the market, you may grow faster, and more profitably focusing on your niche items
If you build the organization around a “niche,” the “bulk” will eventually come – if you want it to!
Be open to positioning your brand differently in China
Don’t necessarily recruit from the same industry, recruit from the same business model
Moving production etc. can ameliorate some of the delivery and cost issues, but not always
Summary
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Pitt-falls: Case Study IISummary
Capital of Liaoning Province and established as a major heavy industrial base
5th largest city in China
Large companies in the city include: Brilliance China Auto, Shenyang Aircraft Corporation, Neusoft Group (the biggest software company in China), BMW, Toshiba Elevators, General Electric, Michelin (Tires), Coca-Cola, BASF
Typical industries in the city include: Automotive, Aerospace, Software
Quick Facts: Area: 13,308 km2 Population: 7.86 millionGDP: 501.7 B RMB (81 B USD) GDP Growth: 14.1%Imports: 3.78 B USD Exports: 4.08 B USD
Many businessmen have said that the business environment can be challenging and more bureaucratic than East China. This is related to the higher proportion of state-owned enterprises than elsewhere in the country, and the relative lack of experience in international business practices. However, Shenyang is in the process of reforming its 280 SOEs
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ShenyangOverview
Doing Business in China Summary
Know your strategyIs this opportunistic or strategic?
What is your positioning?Don’t be overwhelmed by culture, FCPA, bureaucracy etc. and remember the fundamentals
are the same anywhere.
Be flexible when building your positioningYour brand positioning or even product use may be different than in the US.
(KFC - menu, MD – dating, Go-Thru, Gas Pumps, Micrometers)
Include the China teamIf you are not going to listen to their feedback, don’t hire them
RelationshipsThey matter everywhere – build them – don’t use them as an excuse
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Lancaster Consulting Management Team
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ALEX CLAYPOOL / Managing DirectorAlex has started-up, turned around and grown businesses in the US, China, Japan, Singapore and Belgium for US Fortune 500 corporations (Danaher Corporation, The Stanley Works) and US private equity firm portfolio companies.
Alex attended Rikkyo University (Tokyo), the London School of Economics, has a BA from Washington & Lee University and an MBA from the University of Michigan. He is an advisory board member of XnI Consultancy Services Pvt. Ltd. a consulting firm in Delhi, India, and is an active member of the American Chamber of Commerce and Australian Chamber of Commerce in Shanghai. He has lived eleven of the last thirteen years in Asia and Europe, and currently resides with his wife and two sons in [email protected]
LI XIAO / General ManagerLi Xiao has led the establishment of over fifteen foreign businesses in China and has thirteen years of experience working for US, European and Indian multinationals. Prior to joining Lancaster, Li was responsible for the establishment of manufacturing operations and management of commercial operations for WIPRO Hydraulics China.
Li has a BA from East China University of Science and Technology and a diploma from the Swedish Institute Management Program with a focus on Corporate Social Responsibility. Li currently resides with his wife and daughter in Shanghai. [email protected]
