Intercedent Q4 2014 Insight

John Gruetzner of Intercedent’s Address to Canadian Senior Business Delegation that accompanied Prime Minister Stephen Harper to APEC on November 8th 2014, China World Summit Hotel, Beijing

When speaking about “Doing Business in China” there is too much to say as well as too much one dare not say.

Having been engaged with China since 1982, there are two points that framework the discussion of this topic.

The first is that we are only at the start of a process that will continue to bring massive material, political and human progress to the people of China.  China’s current president, Xi Jinping, calls this continuing evolution “the China Dream”. 

It is easy to dismiss President Xi’s dream as just a political slogan.   There is, however, a basic but powerful truth in the notion of the China Dream.  For the first time since the Taiping Rebellion in 1860, there is now the potential for people born after the sixties in China to live from cradle to grave without war, famine and chaos. This stability permits everyone the opportunity to dream about the potential of their own lives. It is still a different dream than Martin Luther King’s but due to the progress made over the last 35 years since Deng Xiaoping had the political courage to start the Open Door there is increasing potential to dream.

The second is that moving forward Canada’s commercial success in China will be driven by the same basic factors of product offering, quality, price and service that drive business in Canada. To capture the full potential in China, a company needs to offer the same level of sales and post-sales support in this market through a similar scope of engagement with customers.

I am also going to answer one of China’s great mysteries-Why do we have to drink Moutai or what we call locally “jet fuel” at a banquet?

Canada’s commercial and political engagement with China will not only shape Canada’s sustainability and prosperity but also that of the planet.

Also the China part of this speech is not as important as the Doing Business part because ultimately it will be our acumen as business people and entrepreneurs rather than China hands that underpin our success here.

There are three parts tot this address on Doing Business. What actions are required by a company to do business in China? What actions are required by industry and government in off-shore to be able to compete in China? Thirdly, what expectations should we the business community put on both governments to create the best framework for cross-border commerce?

(The written version of the original remarks that is posted here only addresses the first question and second question.)  

Since 1988, my firm Intercedent has been in the business of designing and implementing business development strategies for our clients particularly in China.  This makes me reluctant to speak about the China market in broad terms bearing in mind that a key part of our philosophy is that every company requires its own unique path to profitability.

There are, however, still some common actions that improve one’s chances.

1.  Define Success:  The Board, management and owners must have a shared, and also very clear short and medium term definitions of success, and what human and capital resources are available to achieve this success;

 

2.  Language:  Invest the time to identify and train an interpreter and a technical translator with the academic and industry background that understands your technology or service proposition.  If you cannot convey what you offer, the buyer will not know what you mean. Do not hire someone who happens to be bilingual unless they also have proven commercial skills

 

3.  Business Case:  Articulate better what the business case is for buying from you. What are the benefits of working with you as they pertain to cost savings, improvement of services, safety etc. Same as back home. Case studies, case studies, case studies and more case studies.

 

4.  Overcome the Challenges:  The market requires a company’s management to be creative in terms of the different types of marketing tactics and value added business partnerships they implement.  Reflect on one of my favorite quotes by Lawrence Anthony, a South African conservationist, who recently passed away:

 

“I have never understood the saying “To think outside the box.” Why would anyone sit inside of a box and then think outside of it. Rather just get out of the box.”

 

5.  Death of the Joint Venture:  Of equal importance is to be flexible and creative in terms of the legal structure and the types of partnerships developed here.  One urban myth that should be challenged each time it is raised as a solution is whether or not the joint-venture is the best way to approach China.

 

6.  Too small to fail:  Another mistake that companies make is to have a China strategy that is too big to be successful. “To small to fail” is what we advise for the first few years. Learn from the US Marines who apply the maxim “Improvise, Adapt and Overcome” as a critical first step to get on a China beach profitably. 

 

7.  Triage the market:  Focus first on either one of the seven major geographic areas or a select few customers and also explore developing opportunities in Taiwan and Hong Kong that might be smaller but faster to penetrate.  Do not rely on what might be labelled “the “one name card theory”.  This market requires research before you ready, aim and fire.

 

8.  Stay the Course:  A key mistake that is made at the senior management and Board level is to be hot and cold on the market based on one of three macro factors: negative newspaper headlines, GDP growth and a return to strong growth in the US economy. To understand this is easier in the world of Google News.  If you read the coverage outside of Canada that gets put in newspapers offshore you quickly develop a very negative view of doing business in Canada and the Canadian economy.  

 

9.  GDP:  Due to the impact it has on commodity prices, there is a worldwide obsession with the percentage of GDP growth rates in China.  What would be more telling would be to focus on improvements in the GDP per capita or actually recognize that using the baseline of close to US$ 10 billion that 5% growth today creates a larger economic pie than the total Chinese economy represented when Team Canada first showed up with Prime Minister Jean Chretien in 1994.  5% GDP growth, as you know from Ms. Ling Ying’s presentation is way below the government’s current target of 7 to 8%.

Two distinct and legitimate fears that international companies have about China are loss of intellectual property and corruption. 

The legal framework and regulations for IPR protection in China exist there but compliance is still an issue. There are legal, technical and also commercial strategies that can be deployed to mitigate the risk. 

The most important one is to aggressively commit to sell and service the market. Most customers including many customers prefer the comfort of buying a product from the inventor, designer or largest supplier that have a track record of quality and performance. 

An analogy that helps explains this to clients is to recall the young girl selling lemonade in the HSBC television commercial. Her business is founded on the premise that she is the only one on the block.  If Orangina, Minute Maid or Fanta was available it is hard to imagine how she could easily survive.  Thirst is a legitimate problem and whoever shows up first to service this need will win market share.

Corruption is illegal in most OECD countries who share legislation similar to Canada’s Influencing Foreign Officials Act.  Stopping it is a main priority of all governments especially the government of Xi Jinping. It is our moral obligation and in our commercial interest to make sure we are part of the process that breaks this cycle. This will require a break in the culture of asking and taking. It is always been my view that offering a bribe is a sure sign that your basic product or service offering in the market is either too expensive or badly delivered or not what the market requires.

The biggest challenge here is to be able to do business with good margins. The origin of this problem is that of course the subsidy associated with the socialist market economy and one the basic rules found in Economics 101.

China has the potential to dominate world markets simply because it simply enjoys in many sectors very low production costs due to the massive savings obtained through historically unprecedented economies of scale derived from the large amount of production capacity that the domestic economy generates.  This is an important factor to consider.  It means we have to be faster to market, more innovative, expand our venture capital channels in Canada and build markets globally.

Finally, we drink Moutai because it provides a forum or vehicle to break down walls and seek consensus. The reason being that is the best way to be successful is to understand that both parties need to make money and both parties feel they need to win.  Do not get mad get what you want by spending the time and money to develop the right approach and your company and Canada will prosper here. 

Now we focus on what must be done outside of China to be successful here.

Does the China market now warrant a unique national sector focused and/or company level strategy and product development plan for companies that have or will focus on China?

Off-shore governments  industrial policy  as it pertains to development planning by sector must factor in the needs and demands that China as the second largest economy create in terms of new opportunities. It is not where the market has been but where it is going that distinguishes a great commercial nation and its private sector companies.

China has benefitted, albeit with economic costs, from having a clearly defined industrial policy that is reconstituted in what we know as the “Five Year Plan.”   This plan historically has allocated government grants and loans to develop champions with in a sector, new sectors of industry and regional or municipal clusters of expertise. 

The time allocated today does not permit the luxury of conducting SWOT analysis on the importance of each sector and its potential for international participation.  Detailed research coupled with careful thought, planning and analysis at the government level in partnership with private sector corporations is the best arenas for this detailed work.  Many of the opportunities that will exist are being driven by changes to China’s government policy, the social needs of its people and also a reorientation of consumer interest and public policy after over three decades of frantic but regular GDP growth nationally and per capita.  For consideration are:

•      China is committed to the formation of a national carbon emissions market in 2016. This creates massive opportunities to sell any technology that improves energy efficiency or captures carbon;

 

•      China is about to address what will be the largest undertaking worldwide to remediate soil estimated to be US$ 100 billion dollars;

 

•      That China has over 600 million cell phone makers may not be as relevant to Canada as China’s commitment to clean up its lakes and rivers and improve its rural and municipal waste and water systems;

 

•      China must and will move over time to reduce or remove all non-biodegradable food packaging from its industrial process. 

 

•      China has long term investment needs and stable long term investment generated by capital raised by the National Social Security Fund and its life insurance industry;

 

•      The next generation of Chinese tourists will be seeking eco-tourism opportunities that Canada can exploit and also address its needs to create jobs for the First Nations of Canada;

 

•      Exchange fluctuations in Canada, US and China as the world economy recovers and the implications of the last 6 years of monetary policy are felt will require forex risk management;

 

•      Intercedent’s model, indicate US minimum wage and Chinese labour rates will reach parity in some sectors within 3 to 5 years.

 

Foreign companies to continue to be a significant player here as part of their own internal business plan need to identify and work at home to create the partnerships with industry counterparts, government and capital markets to maximize the benefits that an industrial strategy provide

We can still rely on the virtues of the market economy but also to remain competitive we must be more proactive in developing market driven solutions.

When we find ourselves a competing against Chinese corporate and government’s fiscal capacity within China and off-shore one of the first revelations is that the process is more regulated but also better organized to assist Chinese companies dominate domestic and international markets.   China sees government as the referee but also it’s leading companies’ international banker.

When competing against this dynamic combination then international companies need to have a good game plan but also respect that the best solution is to respect and utilize that in some instances partnership with their own governments at home can at least create a new referee or ideally at least a better chance to win within China.

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