biz china 101

BIZCHINA 101:

Myths and Realities

Xiaolin Lu

[email protected]

Copyright @ 2011 Morning Forest, LLC! 1

MYTH 1: The Market

Opinion 1: China is a huge and fast growing market and everybody could make money.

Opinion 2: It is a copycat market, you won’t have a sustainable business as everybody copies/steals.

Realities:

1. It is a big market, but people consume differently or for different purposes. What looks like a market in the US may not be a one in China, and vise versa. Therefore you need to look into what the consumption model is.

Example: fast-food industry in the US is for the convenience at lower-cost. If you go down that route in China, you would be dead competing with low-cost local players. BUT, if you go to the “packaging” of the fast-food and sell it at higher price like MacDonald, it becomes a family luxury in China - the consumption model changed.

2. It is a big market but there is not necessarily a go-to-market strategy in every market segment, especially for foreign investors.

Example: content distribution over cable TV is a huge market in the US, but has not been so in China. The pipe is controlled by segmented local governments, consumers get used to free-TV social-services, and foreign companies cannot have more than 50% control over the assets. Therefore there is no go-to-market strategy for anyone - the market practically does not exist.

3. It is a big market but not necessarily located (physically) inside China.

Example: 70% of European luxury-good sale is to Asian tourists, and half of them is to China tourists. This means that 35% of European luxury-good revenue is from China that is not physically inside China.

4. There is not a single big market, but many ones that ride on each other.

Example: real estate boom drove home improvement, and therefore the consumer electronics - the more fancy they are, the more people want to buy: all for the social-face-value - a China/Asia-particular consumption model.


5. Copycats are wonderful!

Example: There are millions of knock-off Louis Vuitton, Gucci, etc in China, mostly consumed by teenagers and US tourists. However, grown ups only buy the real things - for their social status. Those copycats ironically helped the luxury-brands. Only Microsoft and Adobe-like are stupid enough to generate revenue in China from suing or threatening to sue each company and individual.

MYTH 2: Regulations and Back-Doors

Opinion 1: Regulations are not friendly to foreign companies and therefore you cannot do this and that.

Opinion 2: You could manipulate the policy or get special treatment through back-doors.

Realities:

1. In this economy-driven world, even the communist country leaves rooms in its regulation to allow economic growth. A very common used practice for foreign investors is the so-called Hybrid approach, in which a foreign company collaborate with a pure China company legally operating a business that by-regulation should not be allowed (to a foreign company).

Example: All those famous NASDAQ “Chinese” companies operate that way: An US or Cayman company creates a wholly owned subsidiary in China, and the founders’ relatives or just company employees set up a pure China company that hold the regulatory-approved license to operate in industries that only Chinese citizens are allowed. The subsidiary “licenses” its brand and domain name to the Chinese company for all its revenue, and the holding company gets all the profits transferred freely from the subsidiary.

2. No decision could be made and guaranteed by one individual official, and the biggest interest of an official (any official in the world) is his/her political status and wellbeing. DO NOT even think that you are smarter than everybody that you could manipulate the policy or get a special treatment.

Example: News Corp is the one that has been very aggressively trying to influence China government to enter the media industry. They last try was a secret “purchasing” of a cable channel in the remote area (through the backdoor mechanism). Whistleblower disclosed it and News Corp was out.


MYTH 3: Your Way, My Way

Opinion 1: We use this mechanism allover the world, and it should work in China. or this is the system that makes us profitable, China does not have it, so we cannot operate in China.

Opinion 2: We need to use 100% local practice.

Realities:

Each local market has its own mechanism that makes a business float. The best mechanism is the combination of the one proven elsewhere and the one proven locally. Use each of them independently will doom to fail for any foreign company.

Example 1: US TV Shopping Business Model = a 24 hours national channel (to be profitable) + credit card and express mail systems.

QVC’s claim: China does not have those, so it won’t work.

Truth: regulation does not allow a foreign channel directly land in China national TV system, but all the provincial cable companies would love to carry it on its digital tier which is allowed. ToDo = create an ordering system that synchronizes across multiple cable systems.

FedEx and Amex are not popular in China, but there are millions of low-cost and reliable express-mail services in China and the destination-verification payment system (using China credit cards or bank cards) is more trusted by consumers than anything else.

Example 2: Walmart is a low-cost retailer in the US and if it used the same mechanism in the US or used a pure China one (many low-cost retailers cutting each others’ throats), it would be dead by now. Instead, it follows its own quality assurance principle and leverages that to meet China’s growing concerns of merchandise quality. It only uses the Sam’s Club (prestige in China consumers’ mind), and establish itself as a high-quality prestige retailer. By doing so, it sells more and at even higher price than its competitors - making quality and price parts of the products.


MYTH 4: Human Resource

Opinion 1: High quality education, huge talent pool, widely available labor force.

Opinion 2: We need to parachute somebody who is Chinese to operate China business

Realities:

1. China education system only covers a small portion of the population, and focuses more on teaching skills than teaching capabilities to learn.

2. Family-authority is far more powerful than individual-will. Single-child-family worsen the situation, and China “baby-boomer” further spoiled the next generation (“protect” from the “hardship” they went through).

3. The mean-society-value is “easy-life + fast-rich”.

4. Having a Chinese face and speaking the language does not mean he/she understands China.

For those families that can afford the education, the youngsters are typically spoiled, always rely on family’s direction and support, and closely follow the mean-society-value. As a result, China has coders, no system engineers; has salespersons, no marketing experts; has project managers, no product managers...

Hints: Hire fresh-graduates, train them in a system. When hiring, focus on characters, learning capabilities and most important, willing to learn, less on experiences.

Don’t trust consultants and bankers around China with your money.


MYTH 5: Long-Term vs Short-Term

Opinion: China is a good market for vendors to get fast-profit, not feasible for strategic investors who are interested in building long-term sustainable business.

Realities:

This is definitely true, but there is always another side of the story.

Example: China agriculture industry was one of the first got commercialized. Some strategic investors have been patiently establishing their presences in China by building agriculture-bases in China’s most valuable agriculture territories for 30+ years. Now, everybody see the results - they control the entire food-supply market.

With a 5,000 years history, everything goes with its own pace.

The Final MYTH: A Thesis

China is an attractive market with its population: large potential consumption-base and labor-force. The key to entry is an in-depth understanding of the culture and society, and flexibility to adapt and recreate.

(1) Market is a perception and waiting to be defined by discovering a consumption model. So is the go-to-market strategy.

(2)Leverage the regulation, don’t manipulate it.

(3)Innovate by marrying home-based practice with China local special.

(4)Similar to the Market, human-resource is not a free-gift, it is also waiting to be defined and created.

(5) Be patient and look beyond the 5,000 years history.

Attached is an article about China Cable TV industry, which reflects some of the points above.
