Australian Firms Starting to Win in China – What are the Key Factors?
Business disasters always get lots of publicity, but we've found some quiet achievers in China and reveal some of their keys to success
The squeaky wheel always gets the most oil – and business disasters in China inevitably get all the press. Since the well publicized failures in the late 1990s by big names like Fosters, there has been a stubborn suspicion that Australian companies ultimately find the China market just too difficult to break into. Tales of success seem harder to come by; there seem to be a lot more stories about business failure in China. But a recent analysis of how 25 Australian firms operate in China should help restore the balance and some optimism. Notwithstanding the very real challenges and problems of doing business in China, the report finds that Australian firms are starting to get it right in China. And what’s more important, these firms reveal some of the factors central to their success (or the occasional lack of it).
Titled “Engaging China – The realities for Australian business”, the report was prepared by the Australian Business Foundation. Based on case studies and interviews with 25 firms working in the China market, the report emphasizes there is no single model (or factor) for business success in China. At first glance the report lists concepts that will be familiar to anyone with even a rudimentary knowledge of China; the importance of relationships (guanxi) and having the right business partner being two. The evidence in the report affirms these concepts are meaningful, and not just worn out clichés from the innumerable range of “how to” books about doing business in China. By using case studies and interviews the report presents practical and often fresh perspectives on doing business in China. The 25 firms surveyed comes from a good cross section of business, ranging from financial operations such as the ANZ Banking Group, to mainly SMEs involved in engineering, electronics and software, education, food and professional services. It may not be an exhaustive canvassing of Australian business in China but its findings and especially interviews and case studies make interesting and worthwhile reading.
Some Key Factors
Culture and Relationships – It’s Essential to Get Them Right in China
The report finds culture (in particular relationships, or guanxi), “saturates all aspects of business engagement” in China. The report argues relationships are so critical to business success that they deserve to be considered on the boardroom table, rather than shunted down to lower levels of the operation. The Australian companies interviewed generally say that effective relationships are a precursor - if not a prerequisite - to deals in China. Getting – and keeping these relationships - requires effort, time and commitment. Yet because the concepts of culture or guanxi are inherently intangible and hard to quantify in standard business language, many firms are unwilling to allocate the investment in time, money and effort they require. The ABF report concludes “at the heart of Chinese culture is the importance of relationships.” What this means in practice varies enormously. One manager talks about travelling around China by train so that he could visit his key contacts in person and work on those relationships face to face. Even when this idea is understood, not everyone is prepared to invest the time and effort needed for this. Unsurprisingly the report reveals that senior executives in Australia often struggle to allocate the time and resources required.
Talent and Skills – The Challenge of Getting and Keeping the Right People
If getting the culture “right” is vital, then it logically follows that having people with the skills and experience to work in the Chinese cultural context is also vital. Managers interviewed for the ABF report confirm that employing good Chinese national staff is essential. The report concludes recruiting skilled local managers is “indispensable”. One of the larger Australian firms candidly admitted they made the initial mistake of taking high level Australian staff, dropping them into China and expecting them to operate well, despite having little or no country experience or language skills. The one common complaint from Australian firms profiled in the report is how hard it can be to find, recruit and retain good quality Chinese managers – because of the intense competition for their services.
Intellectual Property Rights (IPR)
The ABF report pulls no punches and confirms you can expect piracy and blatant copying of your product in China. One firm reveals in the report that rip off copies of its products were being marketed back in Australia within months of them being first sold in China The experience of Australian firms (especially smaller ones) is that patents, lawyers and expensive lawsuits usually won’t help. Instead several firms argue that the most effective response is to stay continually ahead of the market and relentlessly innovate and change. Other firms worked on built in design or operational features that would at least slow down the counterfeiters.
Having the Right Local Partner
There was a time that foreign firms could not operate in China without a joint venture or other local partnership. Some of these shotgun marriages worked out – but many did not. Since China’s accession to the WTO and opening of its economy, the compulsory need for a local partner is much less. In many sectors Australian firms can operate on their own as Wholly Owned Foreign Enterprises. And the report talks to at least one experienced China consultant who endorses this as the best way to operate. Yet many of the case studies reveal that having a reliable and effective partner remains a critical part of successful business strategy. But how do you recognize the right partner? Like everything else there is no easy formula, but the case studies reveal interesting insights into the benefits as well as pitfalls of the selection process.
Other Important Factors
The ABF report finds that government remains a ubiquitous element of the business landscape in China – central, provincial and local. China has changed in many ways – but government remains a central part of doing business (for better and for worse). Manufacturers in the report noted that quality can be a stumbling block, as many Chinese partners or suppliers are traditionally focused more on volume and cost. Shortcuts in quality are seen as acceptable if they achieve cost reductions. Insights into managing this dilemma are just one aspect of the useful case studies included in the report.
Communication raises its head again as a significant issue impacting performance in China –getting the language right, but also the language of nuance – being tuned in to that indirect style of communication is not easy and requires expert assistance in the form of interpreting and translation and reading between the lines.
Focus, find a niche, and continually adapt are mission critical factors
All too often newcomers to the China market will see it as one vast, undifferentiated market of 1.3 potential customers. But it is vital to understand the enormous diversity and complexity of China’s regions, government levels, and the different stages of economic development across the country. This is especially important for small and medium sized companies who don’t have the resources to tackle a market the size of China. The message in the ABF reports is to focus. Identifying and working on a targeted segment or niche, is essential. It might be a single city, or a specific customer group or a larger geographic region – but develop a business focus. Andrew McGregor, the former CEO of ANZ China notes it would be a mistake to develop a business plan for one city – say Beijing – then apply it to Shanghai, Chongqing or Guangzhou and expect it to be successful
It is also essential to accept and deal with a constantly changing and dynamic market place, one that often does not follow the same rules as mature, industrialized economies. The ABF report concludes that the most successful firms in China display qualities of flexibility, agility, adaptability and an “exceptional ability to learn” in the China market. The pace of change can be staggering – take banking: “China’s banking system has gone from where Australia was in the 1960s to where it is today in just a very short time – about 3-5 years.” Jock McGregor (Former CEO ANZ China)
China is changing so fast and so quickly opportunities can simply be missed or just not even seen. Long time China watchers will remember predictions during the late 1980s that western style fast food would never appeal to Chinese families, and later that Chinese consumers would never embrace large scale supermarket shopping. The proliferation of giant international supermarket chains like Wal-Mart and Carrefour, and every known brand of western fast food across China have made such predictions look very foolish in hindsight.
In a report on the China market, the Boston Consulting Group warned that this explosive and often unpredictable rate of change in local tastes and preferences can rapidly change the marketplace; “Armed with superior insight into consumer behaviour, a relatively small player could leap frog the competition and usurp a market leader’s position with remarkable speed.”
The explosion in consumer wealth (at least along the eastern seaboard of China) has made Chinese consumer tastes look very much like anywhere else in the world – home furnishings, mobile phones and electronic accessories, international travel, cars, branded luxury goods, and so on. The appearance of uniformity can be deceptive. There are major income gaps between city and country – even within the same city. Even very large inland cities can have much lower income levels and very different demands and requirements than their coastal cousins. In the ABF report BigWorld, an Australian computer gaming software firm with an international reputation, discovered its gaming product was too sophisticated for the computer platforms available in lower tier cities in China – and it had to work with its partner to modify the product accordingly.
Successful players also recognize the need to adapt and refine products and services to local tastes and preferences. Although the western fast food outlets are easily recognizable as those you would find in Australia or the USA, they have subtle adaptations to local preferences, including different packaging and food products.
The case studies in the ABF report include numerous examples of how traditional and cultural preferences can influence the business process. One telling example is the Australian exporter of premium priced live lobsters to China, who found his customers started complaining when the live lobsters delivered were not the deep red colour they preferred. The firm quickly realized that the colour red (an auspicious colour) was preferred in every step of the business process in China – from packaging to the lobsters themselves.
References
Engaging China-The Realities for Australian Business
