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.
In part two of a three-part Q&A, Ganster sat down with international expert Michael Muth to discuss the differences between the U.S. and China.
Michael Muth: How is sales, marketing and business development different in China?
Steve Ganster: The fundamentals are the same. Itís how you execute thatís different. In consumer products, there are two main channels: the modern trade (which includes department stores, supermarkets and mass merchandisers) and the traditional market (which is still most of the market). This market is unstructured and haphazard. A brand has less value in traditional markets than modern channels.
While your product might be attractive for the modern trade, it might not be for the traditional market where prices are low and consumers donít appreciate your value proposition (at least enough to pay for it).
China has a wide spectrum of income levels from very poor (much of the population) to extremely wealthy (China has the most millionaires in the world). You need to carefully determine where you will design your product and you need to price it appropriately.
In the 1990s when western firms first started to invest substantially in China, many companies misjudged the market. Market volume grew as predicted but pricing levels did not. Consequently, many firms couldnít make any money.
Hereís an example of a customer of ours in the consumer market. They offer mid-end underwear thatís highly functional but not high in fashion. The market in China was dominated by low-end product. One local brand (Three Gun) was representative of this low end. If you were 40 years old, you had a pair of Three Gun in your drawers.
There were also some very high-end brands selling to more wealthy and fashion-oriented consumers. Our client positioned itself in the ďwhite spaceĒ or in the gap between the two extremes. Our research with them revealed an opportunity to create this new market segment. It would appeal to the younger consumer who wanted good quality and value for their money but something more trendy than the old China brands.
MM commentary: Many less-developed countries have the modern and traditional market schism. It existed in Poland when I was there 10 years ago. Many companies use dual-brand strategies in those markets, too. Hereís also where strengths and competitive advantages elsewhere can be weaknesses in China.
MM: How are costs and pricing different in China?
SG: Customers are increasingly asking their suppliers: ďWhatís your China price?Ē Iíve never been in a market as competitive as China. Price is very important and one of the biggest challenges in China.
You are competing with low-cost local suppliers with very different cost structures than a western firm. In the cost comparisons we do between western and local Chinese companies, we see major differences (especially in fixed costs) where the Chinese have distinct advantages in lower overheads. I would say being price competitive may be the No. 1 challenge of western firms in China.
MM commentary: Because accounting practices differ as well, making accurate comparisons are difficult.
MM: Whatís the range of the cost gaps between the U.S. and China?
SG: Itís not unusual to see a local China supplier competing at a cost base of 50 percent to 60 percent of a western firm and supplying product thatís not too dissimilar.
MM commentary: Theyíre drastically lower and that makes it difficult to compete with them.
MM: Whatís the minimum and range a firm needs to invest to enter China?
SG: A company serious about China must be prepared to spend between $150,000 to $250,000 to fully investigate and conduct due diligence before actually investing in any operation in China. Getting outside research and advisory help along with business trips to China can quickly pile up the costs.
Once youíre ready to invest in an operation, the range of investment is wide from several hundred thousand dollars to millions. We try to keep our clientís money out of China as much as possible. If a company is investment averse, there are still creative ways to play.
MM commentary: Itís not cheap to look at China. Still, the opportunity cost might be higher if you donít.
MM: What role does the government play in business in China?
SG: On big deals and infrastructure projects, big government does the business. The new train from Shanghaiís Pudong airport to the city is a very high-end, high-tech system called the Maglev.
Itís an absurd system for the short route into the city (like flying a supersonic jet from Chicago to Dayton). It was an arrangement with the German government. China is now preparing for the Olympics in 2008. This event is generating billions of dollars of business for western companies. GE alone is reportedly doing about $1 billion for the Olympics.
Overall, the Chinese government is explicitly getting out of business and is trying to privatize what was once a state-owned system.
This transition to a market-based economy will take time and local and provincial governments will continue to play a role in business. Unemployment is the big challenge now in China. It is of grave concern to the government due to the potential political and social unrest it can cause. Bringing and keeping jobs in a given locale is often the local governmentís main business focus.
MM commentary: At whatever level, the government is still deeply involved with business and will continue to be so in the foreseeable future. How well it manages the transition to privatization will determine how involved it will be in the future.
MM: Are government-sponsored trade missions a good way to penetrate a market?
SG: While they may not get you sales, they raise the awareness of doing business in China (particularly for smaller companies). They can offer support and resources that an individual company couldnít afford. You also can get access and exposure that might be difficult to get on your own. Theyíre a good tool to get your feet wet in the early stages of your exploration.
There are a lot of good resources to get started with including state trade missions, the Department of Commerce and local country Amchams (American Chambers of Commerce). I certainly would take advantage of them. Theyíre the first step. Theyíre not the last step. Companies like Boeing are a special case where during a trip by President Bush they may pick up some plane orders. The same thing will happen for Airbus when the French president goes to China.
MM commentary: While governments can help, Iím skeptical of trade missions unless theyíre very tightly focused.
MM: How can a company avoid gray-channel imports to and from China?
SG: Itís a much smaller problem than it used to be in the early to mid-1990s. It has dropped 70 percent to 80 percent in activity level. Duties have gone down dramatically while controls have gone up. Itís not as necessary or beneficial to get involved in the gray channels.
The bigger issue today is pirating. They just copy your product. Thereís no need to import it illegally. It takes a multi-pronged defense to stop pirating and counterfeiting and you will never be fully successful. At the government level, we have to keep the pressure on to comply with the WTO. There are strong laws on the books. Itís the enforcement side thatís the problem.
At the company level, you need to pursue a series of measures to protect yourself (such as legal coverage). You also need tactical actions at the plant level. These can include black boxing your key technology, putting holograms on labels, sending a guardian with your technology and spreading the assembly process into distinct cells.
MM commentary: Protecting intellectual property is one of the biggest issues for technology companies. Unless you can afford to lose it, think about taking it there.
MM: Whatís a deep-dive market approach to gathering competitive intelligence?
SG: You need to talk to the key players along the value chain to get a good sense of competition (including a direct assessment of their operations). In China, you have to double check more frequently. Thereís a lot of noise out there that you have to filter. It takes local resources and a well-developed process. We have been doing it in China for almost 20 years and we are still learning every day.
MM commentary: Getting qualified competitive intelligence is tough to do. It requires connected feet on the street, which again is difficult to find.
MM: How can a relationship help a company working in China?
SG: Itís an interesting tool. Itís a way to get a holistic and dynamic view of a Chinese company. China is all about relationships. Building a relationship map on a competitor or potential prospect can reveal a great deal. It tells you the connections and their importance. It tells you who to deal with, where the power is, where opportunities are and with whom to negotiate.
Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at email@example.com.
Click here for Muthís full biography.
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