THEN AND NOW: MADE IN CHINA?

To grow in the global marketplace, is your company’s destiny made in China? Chinese consumer markets now possess fast-growing disposable income. Their business sectors are booming. What plans and know-how must you have to grab part of this pie?

About a decade ago, manufacturers started to become aware of the magnitude of the challenges associated with doing business in China and other emerging markets. For the most part, however, the customers with whom they would be doing business were still the “usual suspects” found at home, in their domestic markets, so the challenges dealt mainly around operations and logistics.

Back then, in an article that was published in 1999 [1], one manufacturer’s experiences were used to suggest a strategy for reaching new global markets: “Some time ago, one of our customers with responsibilities for his firm’s primary end users showed us his ‘Nightmare Room’. The walls were covered with a series of eleven world maps, one for the present year and one for each of the next ten years. Pins showed the locations where major customer support was occurring today and where it was forecasted to occur into the future. From a sparse pin collection concentrated mostly in North America, the sequence evolved to resemble a pincushion . . .”

The strategic advice for that manufacturer involved focusing upon their existing customer relationships and identifying how collaboration with those customers could facilitate entry into new country markets. The challenge of the pincushion emphasized an opportunity to deliver increasing value to customers by helping them to deal with the complexities of new global markets. Strategies were adopted through which manufacturers, as suppliers, could create value for their customers and capture value for their shareholders.

This is still quite good advice for manufacturers that serve global customers whose own plans involve continued growth in emerging markets. A senior executive in the company that was the focus of the Nightmare Room story recently concurred with our assessment. He noted that his firm now did almost 40 percent of their sales to customers in markets that accounted for less than 5 percent of their volume a decade ago.

“But,” he noted, “in 1999, we should have bought an additional box of pins and just stuck them into random locations in China. It is now our largest single market, surpassing the U.S. last year.” This manufacturer’s experience is not unusual. China continues its record of extraordinary growth, with every year consistently showing increases at or near the double digit range. The progression of Chinese income distribution has reflected that ongoing growth, and Chinese consumers now have an appetite for products and services that were only dreams a decade earlier.

All of this presents important implications for manufacturers whose 2011 plans include strategic initiatives to achieve growth in China. Those executives who underestimated China’s potential in 1999 are unlikely to do so in 2011. China is now on everyone’s radar scope. But 1999 was ‘then’ and 2011 is ‘now’ . . . major changes must be considered in developing plans to grow in Chinese markets in 2011 as opposed to a decade ago.

Back in 1999, the customers of interest were global multinationals who entered China in order to take advantage of low-cost manufacturing potential. While they sourced and manufactured in China, their markets remained largely in western countries. The cultures and processes that these global firms put into place in China were familiar ones transplanted from North America, Japan, and Europe. Those nightmares were relatively tame.

Today, the growth plans of many manufacturers focus inside the Chinese market itself, on consumer markets that possess fast-growing disposable income and business markets that now include Chinese companies who are themselves gaining position on the roster of global firms. If your strategic planning only addresses the needs of western firms operating in China, your vision is not deep enough to support a full China growth strategy. Going forward, strategic planning must respond to the needs of the Chinese market itself, and this requires a massive transformation in strategy and thinking.

One thing manufacturers will learn as they go through this transformation is how the concept of a relationship soars to new levels in China. In western markets, for example, manufacturers win business on the basis of product, service, and price advantages. Then they focus on building a strong customer relationship in order to sustain that business. In China, manufacturers will win business on the basis of relationship. Then they will focus on the product, service, and price challenges that are on the minds of their customers to sustain that business. Relationship is a fact of life for manufacturers operating in Chinese markets.

For those manufacturers whose 2011 growth plans depend on succeeding in China’s markets, they must recognize several lessons for their plans to yield the desired results.

The first lesson is somewhat discouraging: Success will not come quickly. Even though growth is galloping in China and many firms have had to learn to adapt to “China speed” in product development, relationship building in China does not occur overnight. It takes little time to sign a meaningless joint venture agreement with some Chinese organization. It takes much longer to build a relationship in China that delivers on sales and profits. Far too many firms have failed to stay this course – and they failed to benefit from the China opportunity. If your plans involve new starts in China in 2011, it is wise counsel to communicate and emphasize that the results will come in later years.

Three other lessons for manufacturers including China in their growth plans require a willingness to embrace new ways of doing business as part of the strategy of operating in this exciting new market:

First, recognize that business relationships have a significant personal dimension. One manufacturer sent a succession of increasing senior executives to meetings in China. The reaction of the Chinese firm they were courting was that this manufacturer wasn’t serious, because no one ever returned a second time to China. Another manufacturer involved in discussions with a Chinese firm completed an acquisition that, from western perspectives, could have been considered a solid asset to the proposed relationship. However, the Chinese firm considered this a distraction and found the new people in the room totally confusing. To develop relationships in China, continuity and consistency are quite important.  The executives that are to be involved in developing these relationships must stay the course.

Next, China’s economy, while changing rapidly, is inherently local. The supplier or distributor that will be the best partner in Beijing is unlikely to be the one most likely to be successful in Chengdu, and vice versa. Because relationship is everything, the concept of a strong national firm is at most an emerging one, more likely to be a widespread reality in 2021 than 2011. This means finding partners is a task that must be implemented on a local basis, many times over, in order to reach all of China’s markets. This does not mean that each prospective partner won’t argue for a national, exclusive relationship. They will all want that. But they are unlikely to be able to deliver successes beyond the local markets in which they are strongly positioned in terms of relationships.

Finally, western manufacturers must be prepared for the other parties that will inevitably be at the table in relationships with Chinese firms. Some years ago, a Chinese delegation was hosted to the U.S. During the visit, several days were devoted to meetings with a U.S. firm to focus on a significant joint venture initiative that seemed to be a solid one for both firms.  On the final day of the meeting,  the discussions moved forward with solid interactions over dinner. All the signs seemed to be totally encouraging.

After the dinner, the senior delegate lamented the waste of time that had taken place. When asked why he felt that way, his responded that “the mayor didn’t come to the dinner”. In China, involvement of key government officials is prerequisite to anything of consequence being done. In the U.S., we would only rarely think of that as relevant. However, the lesson from this example is one that must be remembered in developing relationships in China. There are critical third parties that must be included in the relationship if it is to flourish. Government is the most obvious example – both national and regional branches – but in many instances, the key third parties that must be embraced include universities, design institutes, and other such organizations.

Relationship is not the only way in which doing business in China will pose unfamiliar challenges, but it is one that must be understood and addressed by those firms that see their growth in future years including a significant level of success in China. The opportunity clearly exists, but it will challenge many manufacturers to realize it. Focusing on the realities of business relationships in China will be a key step in the process by which that challenge is met.

[1]  George F. Brown, Jr. and Atlee Valentine Pope, “Three C’s of Global Account Management: Customer, Customization, and Competitive Advantage”, Velocity, Third Quarter 1999.