COMPETING IN CHINA: China: Are You Ready?

October 1, 2004
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While it's true that many companies have blown it in China, it's also true that many others have done well. Separating the winners from the losers is the goal of this article.

It doesn't matter how fast you are, you can't outrun the inevitable. The only question is, how will you react when it arrives?

That was the question being pondered by an executive I met recently who works for an American specialty materials company. His market is seeing intense price pressure at the lower end brought on primarily by low-cost Chinese imports. A little research told him that, in recent years, both the Chinese government and foreign competitors had stepped up investment in this market segment in China. He figured the price pressure would continue - given the increased investment - and he also thought it likely that the Chinese competition would eventually creep up the quality scale toward the more value-added end of the market.

He was probably right, but what could he do about it? File anti-dumping charges in the United States? Source product in China, import it and slap the company's brand name on it? Do nothing, except run the business better so he can withstand whatever competitive threat comes his way?

This manager was considering all these options and more, and unless there is something about your business that makes it unlike most other businesses in the world, the day will come when you will have to consider the same options. Quite possibly, that day is already here.

I'm not sure what that company will do (they are still evaluating options), and I am not sure what your company will do. What I do know is this-there is no one-size-fits-all solution. The best course of action depends on your market, your company, your people and your resources.

Taking the Plunge?

I started doing business in the Far East more than dozen years ago. I've managed operations for major U.S. corporations there, and now, as a consultant, I primarily help American companies get involved in China via export, import or investment. You might think that given my occupation I would be an unabashed promoter of overseas investment, and that my attitude would be, "If you're not in China in the next three years, you're going to miss it." Think again.

I've seen too many companies blow it. I've seen too many companies rush in with high hopes and fat wallets and then stagger out with their hopes dashed and their wallets emptied. The fact is, if you don't understand the business environment and the cultural differences, and if you can't commit the management resources, then your chances of success in a place like China are roughly equivalent to winning the Powerball Lottery. (Keep in mind, buying a lottery ticket is easier, cheaper and more fun.)

Then again, I'm not one of those people who thinks China is impossible. Over the last 20 years, China's economy has been one of the world's great success stories, with an annual growth rate of 8% or better and exports going from almost zero to over $200 billion a year. Given China's recent ascent into the World Trade Organization and the regulatory changes within China that will result, it seems a good bet that the country's economy will continue to grow and develop well into the future. More importantly, that growth can mean profits for your company, as it has for many other American companies in China.

Yes, it's true that many companies have blown it in China. But make no mistake about it: many others have done well. As a friend of mine who has spent many years as a manager in the Beijing office of one of the Big 5 accounting firms recently said to me, "If you're in China and you're not making money now, it's your fault." His point was that opportunity definitely exists for those who can recognize it and manage it.

Test the Waters

What separates the winners from the losers? Answering that question will be the main goal of this column. In each column, we will deal with some aspect of doing business internationally, with primary focus on China and the Far East. We will spotlight issues that can have a substantial and practical impact on your ability to succeed in that part of the world. In general, we'll be looking at the same issues you will be considering as you make your decisions, primarily those relating to the market, the business environment and the culture. Examples include the following.

  • Market size. Given regional variations, technical disparities, differences in tastes and standards, and financial factors, how do you accurately assess the size of the local market?
  • Market freedom. Developing countries like China are still developing primarily because, in the past, they did not have free-market economies. How do you assess a market's degree of freedom, and how does it impact the way you do business?
  • Dealing with the government. Less freedom in the market means more government in the market. Since the government's presence is going to be greater, you'd better figure out how to deal with them.
  • Competition. Don't assume the local competitive factors are the same as back home. Quality, service, delivery, reliability and price might not be given the same relative consideration as in the U.S.
  • Guanxi (Relationships). It's the most frequently discussed factor relative to doing business in China-the importance of relationships. But are relationships overemphasized, and how do they really work over there?
  • Leadership. Traditional Chinese concepts of leadership differ vastly with those of modern America-not only in government, but in business as well. When it comes time to hire managers, you'll want to know what to look for and what to avoid.
  • Corruption. It's not a pleasant subject, but it's a fact of life-developing countries are notoriously corrupt, and China is no exception. You will have to deal with it, externally and internally, so you'd better give it some thought.
  • Organization. Terms like flat organizational structures, empowerment, teams and the like may be commonplace in America, but you can't assume all people from all cultures understand these ideas. You will want to know what factors to consider as you develop your management system and organizational structure.
  • Profit-orientation and basic business skills. Believe it or not, concepts such as capitalism, business, efficiency and quality are not innate in all people. It might be a partner, supplier, customer or employee, but chances are, in a place like China, you will deal with people who don't exactly share your view of how business works. You will want to be prepared.

Rest assured, either because you have to protect your market or because you've decided it's time to pursue new opportunities, one day you will find yourself considering the same options as that executive I met. I know you'll be ready. I hope the lessons I share with you in ASI will help you be prepared.

Daniel R. Joseph is Managing Director, International Operations, of ESS (http://www.theessco.com ), an organization that specializes in solving complex business challenges with innovative engineered systems and solutions. He is the author of Wen and the Art of Doing Business in China, a humorous and instructive book about his experience managing businesses in China. Prior to his current role at ESS, Joseph held positions in finance (on Wall Street and in Taiwan) and in manufacturing management (in the United States, Taiwan and China). He holds degrees in international economics and mechanical engineering, and speaks Mandarin Chinese. He can be reached at (724) 941-9669 or via e-mail at djoseph@theessco.com .

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