I recently wrote a piece for Forbes.com on doing business in China. Below is a slightly longer version of the piece that includes a few extra cases studies and data points that couldn’t be included in the Forbes piece due to space constraints. I hope you find it interesting.
China’s political and economic reforms in the last 30 years have transformed its society to a degree that took a century to unfold in the US and Europe. China is now the largest market in the world for Bentley’s and Bordeaux wines. The country has close to 1 billion mobile phone users. The number of English speakers in China totals more than the entire population of the United States; and recently, the math test scores of school children in Shanghai trumped those of their peers in New York, Tokyo and London.
During all of this continuous change in China, one constant has been the growing attention China has received from global companies, all on the hunt for more efficient supply chains, new customers and continued growth.
But even as China has become an increasingly important part of more companies’ current performance and long-term strategy, there is still a lack of understanding at many global headquarters about the unique trends, obstacles and opportunities in China which can have a huge impact on how a company fares in the Middle Kingdom.
Mistakes are being made… right now. The question is: How many is your company currently making?
1. You have a Government Relations Department in China. But you don’t have a real relationship with the Chinese Government.
Companies need to take practical steps to monitor and influence specific government policies and regulations in any market where they operate. However, the Chinese government’s reach and influence on business goes far beyond just rule-making.
China’s economy is a state capitalist system where the government, as well as the Chinese Communist Party, have huge influence over business operations, access to capital and the marketplace itself. In addition, Chinese state-owned enterprises (SOE), ranging from China National Tobacco Company to China Mobile to Hainan Air, in total comprise one-third of the entire Chinese economy, often with monopoly-like advantages. Most China observers agree that President Xi Jinping has sent clear signals of his intention to effect real reforms in many parts of the Chinese government and economy. However, President Xi has been noticeably less clear and not definitive about any plans to reform SOEs.
CEO’s of Chinese SOE’s have Ministerial status in the Chinese government; and there is a completely accepted practice of company executives rotating into senior posts in the government agencies that regulate their industries, and vice versa. So one day, your competitor could become your regulator. Therefore, establishing an active, ever-growing web of government relationships that extends beyond your official regulators is critical to manage risks, as well as identify opportunities.
And sometimes, foreign companies in China need to create completely new networks among policy makers and influencers.
Companies always want to “shape the debate” in a policy or regulatory setting relevant to their business. However in China, companies sometimes need to actually “create the debate”. A large financial services company wanted to enter the Chinese market specifically with its person-to-person payment products. However, there was no regulatory framework for this type of product.
The financial services company went to the Chinese Academy of Social Science, one of the largest think-tanks in China. The company worked with CASS to create a conversation about the role of personal payments in China’s economy , including – importantly – the positive economic and social contributions such payments can make. This involved engaging and convening policy makers, academics , social organizations and other relevant businesses (including competitors) all of whom brought a wide variety of expertise and perspectives, some aligned with the company, some not. But constructing that conversation from the ground up was a crucial building block for creating awareness, building understanding, establishing rules, and incubating a market
All of this would be the same sort of exercise a company would undertake in Washington or Brussels to influence the government. However, CASS is unlike Committee for American Progress or the Heritage Foundation, each of which have clear ideological bents, but are also independent organizations. CASS is officially connected to the State Council of the People’s Republic of China, a government body chaired by the Premier of China and includes the heads of each governmental department and agency.
Therefore, the company’s partner in its campaign to influence the government was in fact an arm of the government itself – a reminder that In China, your government relations strategy is very often your business strategy.
2. You are not training your Chinese colleague enough
When an economy grows at 7 – 10% per year, every single organization within that economy also expands at a rapid pace. Growth is partly addressed by hiring new talent. However, as organizations grow rapidly, existing employees also get broader responsibilities sooner in their careers. Put another way, a sales manager in Shanghai will become a sales director in three years. While in San Francisco that same career trajectory would take seven years.
This accelerated advancement within individual organizations reverberates across the broader Chinese labor market. Turnover rates in China are very high, as are salary and title expectations. And often times, newly promoted employees haven’t had the same years of experience to effectively execute their new responsibilities. What’s an employer to do? Annual double-digit percent raises are not sustainable, and unchecked title inflation creates a confusing mess.
Just like their peers around the world, Chinese employees want regular advancement and reward in their jobs. Multi-national employers in the China, face tough competition from Chinese state-owned enterprises in the war for talent. SOEs promise high salaries, often low stress working conditions (having monopoly-like market advantages helps) and a political approach to advancement and promotions where personal connections may trump merit or talent.
But besides raises and promotions, Chinese professionals are also hungry for personal and professional development opportunities. The Kelly Global Workforce Index reports that one third more Chinese employees are actively seeking further education and training opportunities than their peers in the US. And this is where multi-nationals have some unique advantages.
A global pharmaceutical company set up a State Department-like “China Desk” in its global HQ to provide its C-suite with direct insights from the strategically important market . A regular rotation of Chinese colleagues spend 3 – 6 months “on the desk” and along the way, pick up invaluable lessons for their own professional development.
Most domestic Chinese companies, state-owned or private, in China are very seldom an incubator for innovation or a source of learning for their employees (Xiaomei, Haier and Huawei being notable exceptions to this rule). For employees with a hunger to learn and grow, multi-nationals can provide a regular diet of both formal and on-the-job training, as well as opportunities to transfer around a company’s network to learn from colleagues around the world, while simultaneously providing these colleagues with insight into the Middle Kingdom’s billion-plus customers.
3. You will not manage a crisis in China from China
Crises are fact of life for any company in any market where they operate. However, like the vast size and rapid growth of its economy… because of the massive scale of social media engagement… and given some of the country’s huge social and environmental challenges … crises in China invariably move quicker, take more unexpected turns, and often cause wider collateral damage than in other parts of the world.
However, many foreign companies and brands don’t actually manage a crisis in China, from China. Real authority is often not given to the team on-the-ground in China. Decisions all happen at Worldwide HQ, meaning there are large gaps in on-the-ground information and insight; and at a more practical level, the “crisis clock” for responding to media and communicating quickly to employees and business partners, ends up being calibrated to WWHQ’s “regular business hours”. Conversely, at times, the China team is not forth-coming with the complete facts in real time out of concern for how they will be judged. The net result is that, in addition to impeding swift and smart action during a crisis, once the crisis has subsided, a longer-term trust chasm forms between the China team and HQ.
A multi-national oil company recently experienced a relatively modest oil spill off the Eastern coast of China. The company acted quickly and any environmental impact was quickly remediated. However, the company was slow to alert government regulators and were quickly accused of hiding something. Government regulators loudly denounced the company and the company’s State-owned joint-venture partner was absolutely silent.
The situation mushroomed publically into a classic case of the alleged cover-up outweighing the “crime”, itself and it required the global CEO to visit China to make an apology. Unfortunately, the final version of the CEO’s actual apology was channeled through the legal office back at HQ and when translated into Chinese, the CEO’s words did not actually apologize but obfuscated, thereby further aggravating business partners, local communities, regulators and even employees in China.
Crisis management in China cannot be phoned-in. If your local team doesn’t have the skills and capabilities, then parachute someone in from HQ. But ensure they stay until the crisis is truly resolved and that they operate with their Chinese & HQ colleagues as one team.
Also, as a crisis winds down in terms of public attention, applying local sensibilities and sensitivities to public statements and proclamations is hugely important. In many cases, the public rhetoric involved in a resolution to the crisis may diverge significantly from more private agreements with regulators and business partners – and this may be just fine. For example, if your company’s crisis is related to one of the key issues the Chinese government is grappling with, such as food safety or environmental remediation, prepare for loud public castigation and criticism which “makes an example” of your company’s bad conduct. But this public castigation could be coupled with more private appeals for assistance in terms of technical assistance to help the government, and even other Chinese companies, take practical steps to improve standards, practices and performance around a particular issue.
In China, sometimes achieving the Western notion of a “win-win” requires someone playing the public role of “losing”. And it’s a safe bet that the government will not play that role.
4. Your Corporate Brand in China is not Social Enough
Foreign companies are held to different and usually higher standards than domestic peers in terms of business conduct, quality standards and social responsibility; and expectations shift constantly based on social trends, government priorities or current crises.
Criticism or calls-to-action directed at foreign companies most often reflect (and refract) current social ills or issues for which, the “fixes” are highly complex and require action and accountability by multiple private and public sector players. For example, concerns about food safety in China are epic and cut across all geographies and socio-economic strata.
In 2011, some Wal-mart executives were arrested – and jailed – over mislabeling non-organic products as organic. Fast forward just a couple years and Wal-mart is working with the Chinese food safety authorities to train food processing companies on health & safety standards.
Foreign company executives in China can bemoan double-standards. But it won’t change things, and public expressions of frustration will not help in relations with the Chinese government, nor will it be useful for employee morale. Instead, a corporate brand can engage.
Find areas to collaborate with the Chinese government on some of its most vexing social challenges. Use social media not just to market products, but engage employees and local communities on issues that matter to their lives. Bring practical skills and best practices to your supply chain partners, the government, and yes, maybe even your competitors.
Being an engaged corporate citizen in China is not a nice-to-do, but a must-do
5. You treat “the China market” like it’s a single market… in a single country
Historically, both domestically and abroad, the China market has been defined by the trends, sentiments and economics of its largest cities, Beijing, Shanghai and Guangzhou. These “Tier One” cities were often the exclusive focus of any international company entering the market.
However, lower tier cities are not only significant economies and markets in their own right, they often pose quite distinct opportunities and obstacles for businesses and brands, and they represent the economic engine room of China’s growth for the next many decades.
In 2012, Beijing’s greater metropolitan economy grew by 8.1%. Tianjin, a metro region of 15 million people, and a mere 32 minutes away from Beijing via high speed rail, saw its GDP grow by 13.8% in the same year.
Beyond different economic fundamentals, the lives of customers in different Chinese cities vary to a far greater degree than local differences between New York and Philadelphia or even Milan and Hamburg.
For many products, such as mobile phones, computers and refrigerators, consumers in lower-tier cities are making these purchases for their first time in their life. And influence on purchasing can also be dramatically different. A recent study by Ogilvy found that the influence of children on family purchasing is almost three times greater in higher Tier cities.
Therefore, whether it be related to R&D, product development, gathering customer insights, management systems, or even logistics, a global company would be loath to have a one-size-fits approach to China, or to even treat the market itself as an equivalent geographic and economic unit as Australia with a total population of 23 million.
Also, your best opportunity to engage Chinese consumers may not even be in China. Chinese tourists now make more international trips than travelers from any other country, and this will remain the case for the next generation.
How many sales people at your marquee retail locations on Fifth Avenue or Champs de Lysee speak Mandarin? Does the breakfast buffet in your hotel include a congee station next to the omelet bar? Can your customers pay with UnionPay, the Bank of China-owned debit and credit payment system used by most Chinese households, which accounted for 21% of total global card purchases in 2012, while American Express tallied just 8% of global transactions.
Beyond just providing cultural and convenience niceties, many brands have explicit outside-China strategies to reach Chinese customers.
Over the last decade, luxury brands like Cartier, Louis Vuitton and Chanel experienced eye-popping year-on-year growth in China and responded with commensurate new store openings and other investments into the China market.
However, in the last 12 – 18 months, luxury brands are closing stores in China and sales figures in the market are trending downwards. Has Chinese society had an existential about-face on the value of a $10,000 watch? Not in the least. Due to multiple factors such as high import tariffs, as well as a recent government campaign about unchecked luxury consumption, Chinese consumers have continued to feed their voracious appetite for luxury goods, but they now make one-third of these purchases outside of China, be it Paris, Monaco and Geneva.
And this trend is not limited to luxury goods. China is still the single largest domestic car market in the world. However, as China imports millions of cars, it is also exporting close to 1 million college students every year. Hence, as Business Week recently reported, car dealers in East Lansing Michigan and Bloomington, Indiana are hiring Mandarin speakers in their show rooms and claim that 10 – 15 % of their total sales are going to Chinese students studying in the US.
Global companies should not just thinking about “entering” the China market, but also “welcoming” the China market.