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January 17, 2006 

 Q&A: Steven Ganster of Technomic Asia on Approaching Chinese Expansion 1/17/2006
The mission of Going Global, which appears on ePrairie on most Tuesdays, is to educate and inform Midwest technology companies on what local technology companies are doing internationally so other firms can learn from the successes of like-minded peers.

CHICAGO Ė Steve Ganster is managing director of Technomic Asia. He has 27 years of experience in international market strategy consulting primarily in Asia. He has assisted 150 multi-national firms in their assessment of opportunities in Asia and their resultant business strategy development.

From bases in Singapore and Shanghai, he has worked in China and has supervised Technomicís office in Shanghai for 10 years. His expertise is focused on helping western companies develop growth initiatives to profitably enter or expand in China either through organic strategies or acquisitions.

He is the author of the recently published book ďThe China-Ready CompanyĒ. Prior to joining Technomic in 1978, he worked for Sullair Corporation in international marketing and sales. Ganster has an M.B.A. from the Garvin School of International Management (Thunderbird) in Arizona.

In part one of a three-part Q&A, Ganster sat down with international expert Michael Muth to discuss how to approach the opportunity of expanding your business to China.

Michael Muth: How is the Asia/China growth cycle different than any other growth cycle?
Steve Ganster: Itís probably not fundamentally different from other emerging markets. The pace of its evolution, however, is more accelerated than many other countries (like Japan or Korea) due to developments in technology and communication as well as a strong and aggressive government plan.

Their focus on both foreign and local investment is significant as they are catching up in trying to be a global player. The pace of development and change in China is almost unprecedented today. The government is clearly orchestrating the development of the country. Beijing controls the five-year development plan, the infrastructure development, the level of openness, compliance with the WTO and the level of development of the economy.

Still, Beijingís tentacles canít reach that far and the central government isnít in complete control of activity at the provincial and local levels. Local provinces are competing with each other for investment and jobs. They exert quite a bit of independence from the central government (even going against directives from Beijing). In their own way, they are also pressing the countryís pace of development.

MM commentary: Growth rates of 8 percent to 9 percent for a country the size of China is incredible.

MM: How should small- to medium-sized companies approach China?
SG: Thatís a big question. The simple answer is very, very carefully. We use the term ďsix DsĒ when talking about approaching China (i.e. due diligence, due diligence, due diligence). For SMEs as compared to larger multi-nationals, the risk is typically higher, their resources are less and their international experience isnít as deep or sophisticated. Any move to China can have a profound impact on their business.

MM commentary: While there are great opportunities in approaching China, the pitfalls are just as deep.

MM: How can you fully qualify and do due diligence on partners in China?
SG: First, you have to commit to spend the time and money to do it right. Many SMEs take a do-it-yourself approach or conduct any investigation on the cheap. It takes travel (which is expensive) and time in China. This means time out of the office running your core business. The CEO and/or owner must often be involved along with other key managers.

Because these resources are precious, small companies will sometimes try to shortcut the process. This can be disastrous. For instance, they may make a deal with the first company that approaches them instead of stepping back and taking a more systematic view of their alternatives. It can be complex and time-consuming. Fundamentally, you do due diligence the same way as in other countries.

Because Chinese company structures and financials are not very transparent, you need to turn over enough rocks to get to the truth. It takes more digging than in developed markets. You need to do primary research as there is minimal quality secondary information available. We encourage our clients to go there and kick the tires to see it for themselves. They must have conviction to go to China. Itís tough to have it without seeing the opportunity.

MM commentary: This is one of the toughest obstacles in China. You pretty much have to go local and finding someone you can trust can be very difficult.

MM: What are the typical strengths and weaknesses you find for companies entering China?
SG: These are the fundamental questions to ask yourself when looking at entering China: ďWhat do I bring to the market? What do I have that they need? Whatís my value proposition?Ē Today, many Chinese companies have grown up and have developed across all functional areas.

One of our clients in the building materials area had considered an acquisition of a Chinese firm in the mid-1990s. At the time, this Chinese company was relatively weak in technology and other capabilities (though they were one of the bigger ones locally). Our client backed out of the deal but then came back to the table just a couple years ago. By then, this Chinese company had grown into a 500-pound gorilla and didnít need our client as much as before. As a result, the cost of the deal was much higher and our clientís bargaining power had declined.

Today, western firms typically bring advantages in technology, brand or manufacturing process over their Chinese counterparts. In some cases, the Chinese still need capital, but much less so than five to 10 years ago. What western companies often lack is low-cost production, local connections and access to markets. The most common mix today is western company technology and brand power with Chinese low-cost production.

MM commentary: There are no single company strengths or weaknesses in going to China. Itís changing so fast that they are quite fluid.

MM: What are typical competitive advantages that lead to success in China?
SG: Western companies have technology, intellectual property, brand and capital. Access to customers in the West is also a strong proposition for those wishing to source in China. The key for western companies coming to China is to identify a market space where they can successfully apply these competencies and still make money.

When you segment many companies in more detail, you may find only a small portion of customers willing to buy your product at the price you want or need. China is a very, very competitive market and low price is often the most important buying criteria. A western companyís product Ė while superior in performance and features Ė may be priced out of most of the market.

MM commentary: Competitive advantages in other foreign markets might not hold in China.

MM: How is working with partners in China different from working with partners elsewhere?
SG: Local companies often donít have the business knowledge and experience to deal well with western companies and their systems. A Chinese partner may have different ways of doing business than you and may use tactics that are questionable or even illegal in the West.

One example is what we call ďblack salesĒ where a company sells a product to a customer but doesnít give them a receipt. The Chinese use a tax system where you add 17 percent tax to your invoice. In a black sale, no tax is added so the customer gets a lower price. The selling company doesnít report the income and avoids the tax.

In working with local partners, you need to understand their way of doing business and establish clear ground rules on what is acceptable and what isnít. We tend to be more profit-oriented. The Chinese are more volume- and share-oriented. We look at ROI while they may look at revenue volume. We think fewer employees is a sign of productivity. They may see more employees as a sign of success.

Many of these companies may still be owned by the government. The demarcation between government and business is murky because theyíve been the same thing for so long. There are still a lot of governments involved in business. A lot of local officials donít earn a lot of salary but have a lot of influence, which can make them wealthy. Itís a very different business paradigm and U.S. companies need to take the time to really understand their partners.

MM commentary: Itís still all about who you can trust. Finding partners you can trust is compounded by many more factors in China than most countries.

Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at mike@intlalliances.com.
Click here for Muthís full biography.

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Q&A: George Deeb, CEO of iExplore in Chicago, on Competitive Distinction (11/15/2005)
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