New Zealand China Trade Association: Strategy

How to Crack China

Sun, 05 Sep 2010 00:00:00 +1200

by Mitch Cosani and Charles Avery.

Switching your sourcing to the world’s third largest economy can save you 30%. But getting in there is no easy matter.

China’s development has been one of the great marvels of the modern age. Its output was regarded as a mere statistical anomaly on the international landscape just a generation ago, but has since ascended to become the world’s third largest economy. Chinese exports dramatically expanded after the country’s admittance to the World Trade Organization in 2001, culminating in China’s current status as the number one exporting nation.

In 2009, roughly USD1.2 trillion of Chinese goods reached consumers at every corner of the globe, with sub-Saharan Africa accounting for USD26.27 billion, the Southern African Development Community region accounting for USD12.9 billion and South Africa USD7.37 billion. If businesses wish to remain competitive, it is no longer possible to ignore China’s export potential. For those involved in sourcing, incorporating China into the supply chain presents numerous opportunities.

But before you call the bank to open a letter of credit, you first need to understand how China sourcing can and should be done. Success depends very much on appreciating a few critical drivers and constraints.

Low wages, good infrastructure

The main reason for China’s prominence as a sourcing destination is low costs. Average cost savings of around 30% (depending on product and industry) can be achieved by shifting procurement to China. At the heart of this is labour costs. Average wages in developed nations such as the US are nearly 30 times those of China. Even other developing nations are unable to compete with China on a labour cost basis. The average wage in Brazil is more than six times that of China, and in Mexico, three times. Other factors that contribute to cost savings include lower product input costs and lower finance costs including access to finance and cost of capital.

China’s infrastructure also affords it a distinct advantage over other developing nations. The country ranks 27 on the World Bank’s Logistical Performance Index, higher than Brazil, Russia and India. Numerous new highways and 78,000 km of railway end in six of the world’s 10 busiest ports. Five hundred airports are available to link Chinese products with their end-users abroad. This network of thoroughfares effectively link China’s low labour costs with the world.

Risks and challenges

How then does a procurement manager access China’s significant potential? The answer lies in appreciating that one size does not fit all and the process is time-consuming and requires effort. Distance (time zones), language and culture are significant constraints, and Chinese specifications and standards – especially when it comes to technical industrial pieces and equipment – are not always easily comparable and require clarification.

When these factors have been accounted for, a comprehensive China strategy can be developed. The pivotal element of this is deciding on the conduit between decision-makers at home and Chinese producers. To manage this crucial task there are three options: to work with a local Chinese agent; to work with an international company with a presence in China; or to dispatch your own employees to China.

Using a local Chinese agent is the cheapest option. Such agents have the potential to be well connected, with the most experienced able to find products for their foreign partners at significantly favourable prices. The major downside to this arrangement is that potential cultural barriers can be a serious hindrance. A common complaint is Chinese counterparts are often less responsive to emails and may be less direct regarding true circumstances. A straightforward 'no' is rare. Thousands of agents exist, making the best ones more difficult to find. Many of these agents may not also have the appropriate import/export registration.

Other routes

An alternative is to use an international firm with a presence in China. These firms typically employ international staff alongside local Chinese to obtain the best of both worlds. A more acute understanding of the buying company’s procurement requests can be obtained through the use of these agents and it may even be possible to find such an agent from the same country of origin in the more cosmopolitan cities of Shanghai and Beijing. These foreign-owned companies are able to obtain import/export rights, and often do. But they tend to charge higher fees for their services and are subject to stricter administrative controls, which may cause further delays or unexpected costs in the procurement process.

Lastly, there is the option of directly dispatching employees to China. This may be the most attractive option for those considering large-scale operations abroad. Expatriate staff will already be aware of the product requirements, eliminating communication problems. This option could be considered if relationships have previously been established with Chinese suppliers as the China-focused strategy matures. But this is a less feasible option for companies still in the early stages of their China strategy. It can be difficult for newcomers to find appropriate suppliers and to successfully manage all steps in the production-to-port process.

Objectives and challenges

Having a representative of the company physically present in China greatly eases the business interaction with suppliers. Business in China is very much centred on relationship building. The ability to associate a face with a voice over the phone or the signature line of an email will foster greater personal commitment from the Chinese supplier. This process involves regular visits and is an important cultural aspect in dealing with Chinese suppliers. Concurrent on-site inspections ensure greater quality control.

As with all long-distance international trade activity, there are many risks and it is critical that companies understand them. An on-site presence allows final inspection of the product to take place at the factory rather than when it arrives at your port. This allows immediate adjustments to be made, saving weeks in shipping time and legal complications that may arise with payment terms. Carrying safety stock is another simple technique in preparing oneself for potential supply chain interruptions. It is also useful to arrange supplemental agreements with separate suppliers so as to avoid an over-reliance on any single supplier.

Once relationships have been established with Chinese suppliers, procurement professionals may be pleasantly surprised by some of the added benefits. Long-time partners in China will frequently share information with international clients, including referrals to other Chinese suppliers in noncompeting industries. Advanced payments often become unnecessary. As stated earlier, Chinese professionals are more responsive to personal affiliations often making it unwise to switch Chinese partners on the basis of marginal price differences. Information sharing, consistent production quality and faster enquiry response times quickly make up for small price discrepancies.

Why choose China?

The potential to obtain significant cost savings because of China’s lower cost base, particularly for labour
You can use the 'China price' to negotiate reduced prices from existing domestic suppliers by gaining greater visibility into the true cost base in low-cost countries
You will avoid the risk of delays or disruptions in material shipments by diversifying your supply base, specifically with critical items

When should China be considered?

Whether to source items from China should not be a one-off decision, but should rather be based upon a series of systematic decisions. Some initial questions to ask are:

Is the category large enough to warrant the effort?
Do Chinese suppliers have experience exporting these items?
Is there reason to believe that Chinese suppliers are significantly cheaper than our current/existing suppliers?
Do we want to diversify our risk from relying on local suppliers?

If 'yes' is the answer to any of the above questions, then consider China, but only with a reliable, on-the-ground partner to support you.

Mitch Cosani is manager and Charles Avery is an analyst at supply chain consultancy Bateman Beijing Axi.

This article first appeared on The China Sourcing Blog. CSB is sponsored and administered by THE BEIJING AXIS, a cross-border business bridge to/from China in three principal areas: Strategy, Sourcing and Investment. Aiming to be the leading provider of cross-border China business solutions, THE BEIJING AXIS serves to facilitate, enhance and support an appropriate cultural, political and economic integration of China with the rest of the world.

Source: How to Crack China

Product Development: Partnering with factories in China

Tue, 03 Aug 2010 00:00:00 +1200

Renaud Anjoran from Quality Inspection Blog simplifies the Chinese manufacturing landscape by distinguishing between three types of factories in China and he goes on to offer some sage advice for when dealing with each type.

Most Chinese factories are very good at reproducing a physical sample…and not as good at respecting a blueprint or a set of written specifications.

Importers often waste a lot of time to get to a “perfect sample“, before production has even started. However this step is crucial and should not be rushed:

For new products, a lot of attention is needed to avoid design flaws.
For a new manufacturer making an existing product, the buyer should still ensure that it will be made correctly in mass production.

So, are all Chinese factories inept at helping importers with product development? I don’t think so. One can distinguish three types of Chinese factories, when it comes to design and prototyping.

1. Only good at copying

I guess about 90% of Chinese exporters (whether manufacturers or traders) are in this category. The attitude is “tell us what to do”.

So, how do product developments work? Buyers either bring their own samples, or go to a showroom and make a selection. They might require small changes on the product, or they might only ask for a customized logo/labeling/packing.

If they want to do substantial changes to the product itself, they’d better have a clear idea of what they want and how to do it. The factory will usually provide no guidance, and in the best case they ask a lot of questions.

I remember a morning, two months ago, when I was helping a friend visit a supplier of in-store displays in Shenzhen. They had made a sample based on drawings from my friend, with a couple of mistakes. These mistakes showed clearly that they had not understood the real use of that display. They had simply translated the notes and given the drawings to a technician, without asking any question.

That’s probably what Dan Harris, from the China Law Blog, has in mind when he mentions “the dozens of times [his] firm’s clients have essentially told [him] that they have been shocked at how little help they have received from their Chinese factories on how to manufacture their products.”

To make things even more difficult, sometimes these suppliers accept an order even though they don’t know how to produce it yet. The idea is to find someone else who can do it for a price low enough to leave some profit margin. Needless to say, this is a reason for importers to have a good look at the factory beforehand, and to check production early.

2. Good understanding of drawings, specs, or intended function(s)

After that poor meeting in the morning, my friend and I went to see another supplier of displays. This time the meeting was in a factory building instead of an office. The merchandisers were quick to understand and to explain any point. The technicians could calculate quotations instantly, based on possible changes to bring on the product. The sample they had prepared for us was perfect because they had guessed right in the two or three areas where my friend’s drawings were not clear.

But the key advantage is that they gave us some advice based on what their other customers do, and in a way that was relevant to the intended function of the product.

More and more suppliers have this capability–after all, it only takes a good technician and a smart salesperson. I bet they tend to grow faster that their competitors, simply because it is much easier for them to get orders (regardless of what production will look like). Buyers, but also product managers of the buying organizations, save considerable time and headaches when dealing with such suppliers.

I know several manufacturers of lingerie who pay designer(s) to pump out fresh designs. Sometimes they simply use a new lace or a cute bow that they noticed on the market. Sometimes it is based on a drawing inspired from a big brand’s new collection. They regularly send photos/samples to their good customers, and get new orders this way. But this is risky for importers, who might unknowingly purchase the copy of a competitor’s new style… And have big problems.

So most of the time it starts with a request from a customer. See, for example, how Barnes & Nobles e-reader (the Nook) was developed: “Sources in China are reporting that they assembled a small focused team, and brought the product from a concept sketch into production in about a year. Compare that to Amazon and Sony that took three and four years, respectively.”

So fast, for a company without any experience in electronics? How is it possible? As a commenter wrote: “By the time B&N came along, every ODM shop in Shenzhen had ripped open a Kindle, reverse-engineered the key technologies, and was ready to meet B&N half-way.”

Bottom line: if you want to incorporate technologies that are already used in China, you can probably find a manufacturer that will help you put together a full product that meets your intended function.

3. Capable of proposing new-to-the-world features

A few very large structures have gone beyond basic assembly. They have hundreds of engineers working on new technologies, to complement their customers’ own R&D efforts.

The prime example is Foxconn and its 25,000 patents. HP, Dell, and others probably push them to invest in R&D, in areas that they see as non-strategic for their own success.

Of course, only a few manufacturers (if any) do this in a given industry. And small buyers do not have access to these new features. It will take a long, long time before this type of initiative becomes more widespread.

This article first appeared on Quality Inspection Blog.

Renaud Anjoran helps importers check and improve their product quality in China.

Source: Product Development: Partnering with factories in China

Made in China: From Small Labels to Big Possibilities

Tue, 03 Aug 2010 00:00:00 +1200

Thanks to our good friends at The China Sourcing Blog, this excellent article considers China's prominence as a sourcing destination and offers advice for formulating your "Made in China" strategy.

The words 'Made in China' can be found everywhere, from the labels on basic necessities such as clothing to the portable music players and cellular phones which exemplify modern life’s conveniences. It is the work of international procurement professionals who have brought these products from the manufacturing floors of China to households worldwide. China’s emergence as the world’s largest exporter in 2009 is further evidence of the immensity of this nation’s sourcing potential. But before calling the bank to open a letter of credit, it is best to first understand sourcing from China and how to engage with this unique business environment.

The reason for China’s position as the foremost sourcing destination is of course, low costs. On average, 30% cost savings can be expected for products procured from China in comparison with the home country. Everything from machinery to articles of steel to furniture can be obtained cheaply. At the heart of this are labour costs. Average wages in developed nations such as the United States are nearly 30 times those of China. Even other developing nations are unable to compete with China on a cost basis, as the average wage in Brazil is over six times that of China, and in Mexico, three times.

Second and often overlooked is China’s infrastructure which gives it a distinct advantage over other developing nations. China ranks 27th on the World Bank’s Logistical Performance Index—higher than the other BRIC nations. Numerous, newly constructed, multiple lane highways and 78,000 kilometres of railway end in six of the world’s ten busiest ports along China’s coastline. By air, 500 airports are available to link Chinese products with their end-users abroad. This network of thoroughfares effectively link China’s low labour costs with the world.

The question then becomes how does the world—or more specifically, the procurement manager—access China’s potential. This process begins at home with an effective strategy, the pivotal element of which involves deciding on the point of contact with Chinese suppliers, the conduit between decision makers at home with Chinese producers. To manage this crucial task there are three options: to work with a local Chinese agent, to work with an international company with a presence in China or to dispatch employees to China for on-site operations.

Using a local Chinese agent is the cheapest option. Such agents have the potential to be well connected within various industries. The most experienced Chinese agents are likely to find the most suitable products for their foreign partners at the most favourable prices. The downside is that this approach is open to cultural misunderstandings and difficulties. A common complaint is that Chinese counterparts are often less responsive to emails, and even when responsive may be less direct regarding actual circumstances; a straightforward “no” is rare. Thousands of Chinese agents exist, making the best ones more arduous to find. Furthermore, many of these agents may not have the appropriate import/export registration.

An alternative to this is to use an international firm with a presence in China. These firms typically employ international staff members alongside local Chinese to obtain “the best of both worlds”. A more acute understanding of the home office’s procurement requests can be obtained through the use of these agents; it may even be possible to find such an agent from the same country of origin in the more cosmopolitan cities of Shanghai and Beijing. These foreign-owned companies are able to obtain import/export rights, and often do. On the downside, international agents tend to charge higher fees for their services and are subject to more strict administrative controls which may cause delays or unexpected costs in the procurement process.

There is also the option to forego the use of third parties by directly dispatching employees to China. This may be the most attractive option for those considering large scale operations abroad. Expatriated staff members will already be aware of the product requirements and time frames, thus eliminating any communication problems. This option may also be considered if relationships have previously been established with Chinese suppliers as the China-focused strategy matures. It is a less feasible option for those still in the early stages of their China strategy as it is difficult for newcomers to China to find appropriate suppliers and to manage all steps in the production-to-port process.

Although there are options for establishing a point of contact in China, having a representative of the home company physically present in the country greatly eases the business process with suppliers. Business in China is centered on relationship-building. Having a face to associate with the voice over the phone or the signature line of an email will foster a more personal commitment from the Chinese supplier. This process entails regular visits, if even from an agent, and is an important cultural aspect in dealing with Chinese producers. Concurrent on-site inspections further work to ensure greater quality control.

Through effective communication the China low-cost advantage can be transformed into profit and customer savings. The question is just HOW this will be done, because China sourcing is all about having a strategy that works for you.

Source: Made in China: From Small Labels to Big Possibilities

My logo is bigger than your logo! The culture of Chinese consumerism.

Tue, 03 Aug 2010 00:00:00 +1200

In this article, Rand Han from Littleredbook takes us on an irreverant journey into the heart of Chinese consumerism and explores the driving forces behind China’s voracious appetite for luxury goods. Take note niche, high-end New Zealand manufacturers.

One billion material girls…for the single man, both a blessing and a curse.

China consumes 25% of the world’s luxury goods; this surpasses every country, even the US. When considering its per capita income of USD 2000 (I’m rounding up here), and the fact that luxury goods are no cheaper in China then elsewhere (not counting counterfeits of course) it’s culturally interesting to probe the reasons why Chinese spend such a large percentage of their income on luxury. Is it a status thing? Is it an appreciation of “the finer things”?

Well its actually a mixture of both, but the recipe in China calls for a different ratio of ingredients compared to the West. Also, cultural factors and Chinese history play a major role in the motivations of today’s consumers. The World Luxury Association predicts China’s demand for products will increase from 86 billion to 136 billion by 2010… crazy right? I’ll attempt to show the logic behind this statistic (wish me luck).

My logo is bigger than your logo!

Yes the #1 reason why Chinese buy luxury goods is to show off. Profound isn’t it? Well, it does get marginally more profound; showing off is a bit different in China than from the West.

A role model for us all.

China considers luxury brands to be symbol’s of status; while thats true in most places, it’s super-true in China. Due to stiff competition among, oh a billion or so peers, Chinese tend to use luxury goods as a territorial warning; i.e. "I’m successful, I can afford to surround myself with all this glittering **** so back the **** off!"

Well maybe they don’t say it like that, but you can feel the implication. Statistically, 64% of Chinese equate luxury brands with success, while a small 1% feel luxury brands have superficial connotations; so we tend to see a lot of “social statements” being made using luxury products, while in the West, a more understated approach is desired.

There is a great deal of function without emotion in play here; one could say that the average Chinese hasn’t had enough time to emotionally bond with a luxury brand (just when you thought coke’d out models were universally adored), so interchangeability between brands is common (like coke’d out models I assume). (Source: TNS, Luxury Brands and Middle Class Chinese, Online survey, Nov.2006)

Evolution of materialism

As Chinese become more familiar with luxury brands as a part of their lives, we see a gradual evolution from pure materialism, to emotional bonding with a particular brand (cynically: focused materialism). This is seen pretty much only in Shanghai where the effect of American imperialism is most obviously felt; products bought include watches and furniture by men, and jewelry and purses by women. Makes sense except for the men + furniture combo… that’s a head scratcher.

Men vs. women; who’s the bigger spender in China?

Surprisingly, men, 25-40 years old, come out ahead in terms of annual spend (compared to the West this group would be 40-70). This aligns with recent Chinese history and it’s 20+ year flirtation with capitalism. Among the richest men in China, 3 out of 5 are in their 30s, and the average age of the richest men is about 47 (vs. 60 in Europe).

So what do these sugar daddies buy? Well as the label entails, quite a few things for their wives and mistresses. In fact, luxury consumption among second wives and mistresses (which rank lower then 2nd wives) is highly competitive; brands transform themselves into symbols of power and desire, and as an exchange for time spent.

So do women win this category after all? Not quite; as stated above, the territorial aspect of luxury status motivates Chinese men to purchase the bulk of status-lifting glitter and glam; from new cars, new clothes, and the accessories that go with.

Bribes Gifts.

“Gift” giving is a big part of consumption as well; In China, 50% of luxury consumption is due to gifts from companies to clients. That’s 50% of the present USD 86 billion spent per year. This is largely due to guanxi, the Chinese word for “you scratch my back, I’ll give you USD 43 billion in gifts”; the reciprocal nature of guanxi helps smooth the way for new client wins, recommendations, raises, promotions, and generally, personal gain. Luxury brands are no dummies; realizing this trend many have established Corporate Gift programs for both local and locally-based foreign companies.

Geographical differences, categorical stereotypes.

China’s a big place, and attitudes differ region to region. In the northeast we see the BIG LOGO and outstanding (read: gaudy) decorations reign supreme. In the South, consumers tend to be a bit more conservative and pay attention to detail.

Central areas, like Chengdu, do not earn a high income compared to the rest, but consume similar to Americans, buying luxury items that are beyond their means. In cosmopolitan Shanghai, BIG LOGO and blingbling are slowly being phased out and understatement is becoming more fashionable.

Challenges for brands entering China.

This brief introduction into China’s consumer culture begs the question “So now what?.” In a follow up blog entry, I’ll go over many of the challenges brand’s face when entering the market; and a general approach to solving potential problems.

This article first appeared on Littleredbook, a blog dedicated to to giving visitors deeper look into China advertising, marketing, communications and culture.

Rand Han is Strategy Director at Bloodyamazing Co., Ltd. (est. 2006), is a full service Shanghai-based advertising and marketing communications agency.

Source: My logo is bigger than your logo! The culture of Chinese consumerism.

SMEs in China: Much Opportunity But Little Room For Error

Tue, 03 Aug 2010 00:00:00 +1200

Dan Harris and Simon Malinowski from the acclaimed China Law Blog share some insight into the common pitfalls SMEs face when doing business in China.

SMEs going into China simply cannot afford big mistakes. Generally, they have to get things right the first time.

It is with that in mind that Technomic Asia's Business Podcast has just started a new series of podcasts on Small- and Medium-sized Enterprises ("SMEs") in China. Their first podcast (Kent Kedl interviewing Steve Crandall), entitled, "Small- and Mid-sized Challenges in China: An interview with Steve Crandall," focuses primarily on market opportunities available to SMEs in China and how not to get burned.

• China is a unique opportunity for SMEs. Crandall notes that growth for SMEs in the first 6-18 months of their existence is usually slow in already well developed Western countries. On the other hand, China’s rapid development and growth leaves a lot of open market space foreign SMEs to maneuver and grow.

If you’re going to do China, know China

China is not an entire market onto itself. For example, the social, cultural, and linguistic differences between, say, Guangzhou and Beijing could not be more apparent. Consequently, viewing China as an entire market is a mistake; it is more appropriate to look at it as a number of unique markets under a larger umbrella. The regional diversity, coupled with a good degree of autonomy between the provinces necessitates knowing your target markets.

Though China's regional diversity complicates entry, it also magnifies the market gaps that allow for growth.

If you’re going to do China, do it right.

Included in all of that regional diversity is the somewhat autonomous functioning of the regional government entities. In order to smoothly enter one of these markets, developing knowledge of and strong ties with the regional government is almost a necessity.

Successful entry into China requires serious due diligence and a comprehensive game plan. The risks are serious and significant for SMEs, and a failure to adequately prepare for them can be disastrous. Kedl and Crandall both point to IP protection and employment as potential minefields.

Multinationals have a wealth of resources available to the, including the ability to withstand failed experiments. SMEs do not have this luxury and Crandall notes “they have to get it right the first time.

Common mistakes

I have seen too many SMEs lose big due to one mistake not to vehemently agree with this podcast. The most common "lights out" mistakes I have seen have been the following:

Purchasing product from China without a finely tailored OEM Agreement. The American company gets a massive shipment of bad product from its Chinese supplier and it has no real recourse against the Chinese company and insufficient resources to both secure new product and pay off its disgruntled customers.
Failing to properly register key trademarks in China. If you do not register "your" trademarks in China, someone else will. And then right when your largest shipment is a bout to leave China, you will get a call from the company that registered "your" trademark. They will be calling to let you know that unless you pay them a massive licensing fee, your shipment will never leave China.
Thinking that because you have gotten away with functioning illegally in China for years (or because you know someone else who has) that you will never get caught. Absolutely not true. My firm has been contacted by a firm that was in China for twelve years before it was unceremoniously shut down for not being properly registered. We were also contacted by a company who was allowed by the local government to operate a business for nine years against all zoning regulations, but then shut down one month after a new administration took over.
Failing to have a written (Chinese language) employment agreement with all employees and failing to have an employee manual (again, in Chinese) explicitly setting out the grounds for termination. Though I have yet to see a company have to close down for these mistakes, I have seen many instances where companies subjected themselves to expensive and protracted (and always losing) litigation for these mistakes.

I could go on and on.

This article first appeared on China Law Blog.

China Law Blog is published by Harris & Moure, is an international law firm with offices in China and "have been involved in China long before China became the hot topic".

Source: SMEs in China: Much Opportunity But Little Room For Error

China Joint Ventures: Legal Due Diligence

Tue, 29 Jun 2010 00:00:00 +1200

Part Two of the China-Briefing.com “Joint Ventures as a Strategic Investment” series.

Legal due diligence is a complex and contentious issue when it comes to joint ventures in China. Many investors seem to regard it as a waste of time and money; they’ve developed a relationship with an existing supplier, feel the guy can be trusted and see no need for delving deep into the Chinese company’s position. Yet it is as this stage that the foreign party can be most vulnerable.

By Chris Devonshire-Ellis and Richard Hoffmann

One of the issues about foreign investment in China is that the business, as partially foreign owned, is “upgraded” in status by the Chinese authorities in terms of attracting a higher level of official scrutiny. Operational, administrative and legal issues that the Chinese company may have been able to get away with are less likely to be unpunished or tolerated as soon as a foreign investor steps in.

Legal due diligence prior to investing in a joint venture in China is therefore a prerequisite not just to find if there are any skeletons lurking, but also to determine where the current managerial operations are in the existing company and what needs to be changed to bring it into compliance both with an increased amount of interest from the Chinese authorities but also with the international standards the foreign investor must adhere too. Accordingly, legal due diligence both provides peace of mind over the actual situation, can raise any areas of concern, and also provides a blueprint for what needs to be done to upgrade the potential businesses future integrity.

In this article we explore some of the issues that often crop up in legal due diligence areas:

Business licensing

Is the Chinese companies’ current scope of business compatible with the intentions for the joint venture? Are all the required operational licenses in place? Are they transferable to the joint venture? These are all issues that need to be clarified, and the mechanism for these licensing rights carried out to transfer them where necessary to the JV. It is also useful for the investor to note expiry dates on these, and ensure that renewals are carried out in time. The same is true of the Chinese company. Business licenses in China have to be renewed. If his license to operate expires in 12 months and you are committing upfront finance for a 20-year joint venture, you need to assess the risk factor of his own licensing renewal situation. It is also wise to check that the name of the legally responsible person on the Chinese business license is the same as the person you are dealing with, and if not, determine why.

Corporate structure

It is also sensible to check that all the facilities you believe are being transferred to the JV are in fact all within the same Chinese business. They may not be. If you set up a JV and then find you’ve omitted to realize the finishing function is actually carried out by a workshop belonging to a separate company, you can be in for a world of hurt. Check that all facilities you require are part of the agreement and that they are all included. If not, it is possible to bring more than one Chinese company into a JV to correct this, or at least to be able to negotiate supplier contracts from a position of pre determined strength.

Land use rights

There are two types of land use rights in China, Granted and Allocated. Granted rights mean you own the land, while allocated mean you have the right to use it. Granted rights sell at a premium. Chinese businessmen will often include the land use rights valuation as their contribution to the JV equity. You need to ensure that he really does have these rights, that the pricing is correct and that the rights operational term is intact. These issues can be cross-checked independently at the local land bureau; all Chinese towns and cities have one. Difficulties however can occur under certain circumstances; subsidiaries of state-owned enterprises in China may not have a land use rights certificate for verification, they will need to obtain one from their parent. Also, fairly common in rural areas are when the rights are held by a “village collective.” The head of the collective needs to sign his approval over the transfer of rights. A very common fraud in China is to “sell” allocated land use rights to the JV, but inflate their equity position by using the costs of granted rights as their contribution. This is a means to get the foreign investor to inject more cash. Attention to detail needs to be paid in this area if an expensive mistake is to be avoided.

Pollution

It may also be wise to have core samples taken if the ground has been used for industrial purposes. Labs exist in Hong Kong now to process these. Regrettably, most industrial land in China is polluted, however the concept of polluter pays is still in its infancy in China. It makes sense to find out the extent of damage in the ground, then use any untoward findings as either a means to negotiate a lower land value, or at least reach agreement over whose liability clearing it up will be. Local governments are starting to assess pollution damage, and if your JV is sitting on such land you may have to pay to have it cleaned up.

Access and utility rights

Not all land is directly accessible to major roads, and other relevant connections. In this case, access rights need to be obtained to ensure the JV property is easily accessible. In terms of utilities, especially electricity and water, these need to be identified and specific usage meters arranged exclusively for the JV. Otherwise overcharging is likely.

IP

You need to ensure that all IP you may have been using in a supplier relationship is still under your ownership. Suppliers have been known to ‘helpfully’ register your own brand in China, and then omit to give it back. If you’ve been using your supplier also to help get you established, these types of issues need to be checked. IP agreements and technology transfer we will cover in a later article.

Valuations

Valuations of equipment and buildings can be notoriously erratic in China, not least because there may be a relationship between the valuer and the owner. It can be a tough negotiating position over which valuer to use. If you wish to insist on an independent valuer who is not known to the Chinese partner, you will usually be expected to pay the costs. However, this is usually worthwhile. Professional valuers such as American Appraisal or the major Real Estate firms in China will have a valuations department, and will usually be accurate, fair and use internationally accepted standards in carrying out work. Using them is to your advantage.

Background checks

Under some circumstances it would be prudent to know exactly who your partners are. There may be political and legal ramifications if you are not fully aware of their background. This can be difficult to find out in China, as there is no public records office. However some diligent, low key questioning may reveal details. If not, or if you suspect potential issues, there are low-key investigations agencies in China that are able to provide a dossier on identities, backgrounds, and any legal problems pending or previous.

Professional advice

These are just some of many legal due diligence issues that need to be addressed; they vary depending upon each specific case. A good professional firm will be able to discuss all the issues with you, assess what needs to be checked through, and allocate dedicated on the ground staff to look into and report back. We do not recommend using any firm that subcontracts such work, as if they are not in control of, or managing the process directly, the margin for error is significantly increased. We recommend only using firms with a proven track record and with applicable resources and offices in China.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and lived in China for 21 years. He has over 17 years of experience in establishing JV’s in China. He is now based in Mumbai.

Richard Hoffmann is a senior associate of Dezan Shira & Associates and has seven years experience of foreign direct investment in China. Richard also writes for the Legal Ease column on the Beijing Review, China’s only English national news magazine. He is based in Beijing.

Source: China Joint Ventures: Legal Due Diligence

China Joint Ventures as Strategic Investment

Mon, 24 May 2010 00:00:00 +1200

The debate over joint ventures has been going on since China opened up to the West. For some companies, JVs are a cheap way of entering the China market, others see a useful potential in the partner’s production facilities and workforce. While there is a measure of truth in all arguments, the sensible application of due diligence and an understanding of what a Chinese partner brings to a JV are paramount. In partnership with China-Briefing.com, China Now presents a series of articles examining these issues to determine how joint ventures in China can be strategic investments.

Part One: Why the Need for a Chinese Partner?

By Chris Devonshire-Ellis and Richard Hoffmann

There has been much discussion on the best way to enter the China market but perhaps under reduced financial constraints. A joint venture partner is often considered because it is less expensive than building from scratch.

In fact, this debate has been doing the rounds ever since China became a major beneficiary of foreign direct investment. Another school of thought dictates that under no circumstances should a joint venture in China be considered: Chinese laws are said to favor the Chinese partner; there are issues of corruption and the Chinese side is difficult to manage in terms of adherence to international standards of accounting and transparency.

While there is a measure of truth in all arguments both pro and con as regards JVs, a sensible application of due diligence and an understanding of what a Chinese partner can bring to a JV are paramount. In this series of articles we examine these issues, developed from over seventeen years experience of our firm establishing joint ventures in China.

Why the need for a Chinese partner?

In our experience, the occasionally perceived adage that is it less expensive to set up in China with a partner than going it alone isn’t really true. It certainly should not be used as the primary reason to have a Chinese partner. In fact, so much so, that we would advice setting that in stone. If you intend to go into a JV purely as a cost-cutting measure, you shouldn’t be considering one.

Restricted industry access

Certain industry sectors demand a Chinese partner. In this case, the regulatory position gives the foreign investor no choice. Certain sectors vary in terms of how this manifests itself, however if the law says a partner is required, then there is no maneuverability on the subject. In which case, the immediate concerns move on to management and equity structures, and due diligence. We shall address these points later.

Existing facilities and workforce

If the potential partner’s premises, workforce and production capabilities are a match for your product, then you have potential for examining the situation further. However, added to these should be an examination of the supply chain, both in terms of suppliers, and in terms of delivering to the point of sale. Are these intact and part of the agreement? Also important is the marketing aspect. A product that is new to China may take an additional length of time to sell to the market.

This needs to be properly factored into the business negotiations and agreed. We recall one JV which failed because the initial product volume was too low and the marketing resources required too high for the Chinese partner, which made other, related products, to maintain interest and devote time to brand development and marketing.

Although the Chinese partner could have delivered and was certainly capable of doing so, the product failed because they were not prepared to invest in its marketing development. The foreign investor lost a lot of time, effort and money. So a JV is not just about the Chinese partners capabilities. He also has to be similarly motivated and sufficiently financed to want to push the product.

Regional market capabilities

Tastes, consumer behavior, brands and even language vary considerably across China. Reaching out to consumers in Central China may well require a different set of market evaluations than consumers in Shanghai. A JV partner can be a useful asset in a new regional market to allow you to develop your brand, sales and market penetration. In fact, if your business is looking long term at developing a national structure throughout China, then a strategy of starting each location as a JV makes sense.

Use the local partner’s knowledge to build up each regional location, then gradually buy out each local partner. The result is a fully owned, national business. If you’re in this league, then examining the potential of a JV as a stepping stone to your ultimate goal is a sound and well proven concept in China.

Existing brand awareness

There are new opportunities in China for selling to the domestic market. In which case, if you have a product that can piggy-back on an existing, respected Chinese brand, you save the trouble of having to build a market on your own. The Chinese have for years been selling auto components to international auto brands. There’s no reason why you can’t do the same in reverse in your industry.

Supply chain

This is a major component and highly valuable to gain access to the Chinese market. Without it, selling to the China market requires an extra layer of business relationships and expense. If your potential China partner possesses a proven supply chain then this may well prove to be a primary driver. It is a major asset. However, when evaluating a partner, access to the supply chain, and the conducting of due diligence on it is a prerequisite. From our perspective we identify the China supply chain as the key element as to why you would want to have a JV partner.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and lived in China for 21 years. He has over 17 years of experience in establishing JVs in China. He is now based in Mumbai.

To contact Dezan Shira & Associates’ business advisory services division for JV advice and other corporate establishment issues email info@dezshira.com

Source: China Joint Ventures as Strategic Investment

STRATEGY: Telling stronger export stories

Fri, 19 Mar 2010 00:00:00 +1300

Communicating your message and selling your product/service in a foreign market like China is about more than simply marketing, it’s a matter of clever strategy.

Chris Wilson, Director of All Told, recently addressed an audience at the Wellington City Council’s Shanghai Expo Workshop. His message is clear and refreshing: New Zealand exporters need to start telling stronger stories. Take it away Chris.

There is a saying that the difference between humans and animals is that humans tell stories.

In export circles at the moment the phrase “telling your story” is being used a lot. But there may not be the same level of understanding amongst exporters about what good storytelling involves.

New Zealand exporters hail from a wide variety of industries. I would like to leave you with some suggestions that will give you an edge over your competitors from other countries. Ideally, what you want is to have other people telling your story.

First, a little bit about myself. I was the founding editor of bright magazine, published by New Zealand Trade and Enterprise for exporters for six years. And late last year, I established a new consultancy, All Told, with six Wellington associates to help exporters tell stronger stories.

We are currently working with one of our clients, Pipfruit New Zealand, and on a series of humorous videos for their new website to market New Zealand apples to consumers overseas.

Next, I want to talk about how Kiwi exporters are perceived in China, what good storytelling leads to and how to tell stronger stories.

How Kiwis are perceived

So how are Kiwis perceived in China? And I must now give a ‘censor’s warning’: some of the following content may offend sensitive readers!

Both NZTE and the Asia New Zealand Foundation have carried out research on New Zealanders’ reputation in China. Based on interviews with Chinese business people in Shanghai, NZTE found that Kiwi exporters rank high in human values compared with other exporters. We have a reputation for openness, honesty and directness which is valued.

But we’re not seen as strong long-term business partners. We’re regarded as lacking in business acumen and not being proactive enough. Our relaxed attitude seems half-hearted compared with the attitude of exporters from other countries.

Here’s a quote from one of the Shanghai business people:

“I like to cooperate with those who have a real interest in China, have long-term and detailed business plans and goals, and come to China to understand and interpret us and our consumers more. I don’t like those who do not have many thoughts put into the Chinese market.”

And here’s another quote:

“New Zealanders seldom make a sound in the international market. They have no passion to introduce themselves to others.”

The Asia New Zealand research found similar perceptions to NZTE’s. We rank highly in ‘being trustworthy’ and ‘keeping our promises’. But the research found we need to more strongly demonstrate ‘better connections’ and we’re not ranked highly in ‘offering a unique product or service’. This latter point is particularly important when telling your stories, as New Zealand exporters often lead with their product or service offering, which could put you on the back-foot to begin with.

Two weeks ago I asked Jeff Shepherd, NZTE’s trade commissioner in Shanghai, how New Zealanders can get beyond these perceptions. He said you need to demonstrate a real passion for trading in China and you need to respond very quickly to any requests for further information.

What good storytelling leads to

Turning to my second subject, what does good storytelling lead to – why put any effort in? If you have a good product or service priced for the market, surely that will be enough? A Kiwi exporter to China said to me a few weeks ago, “My product stands on its own merits”.

Compare this with a quote from the Better by Design conference in Auckland a few years ago by a professor of design who had studied the transformation of Finland’s economy. He said:

“The world market is saturated with similar products. You have a second to win a customer, based on the values perceived by the user.”

How does Icebreaker manage to keep growing when you can buy another merino wool top for half the price? It’s all because of the story they have woven into it. They have built up such a powerful emotional and rational attachment to their brand that their loyal customers – including myself – won’t think twice about paying a premium to buy part of that story. So you need a good story – not just to break into a market – but to also hold your place there for years to come.

How you create a good story

This leads to how do you create a good story? First, all good stories have a similar plot or pattern that will be recognised in most countries you export to. For example, the Maori creation legend Rangi and Papa that will be a focus of the New Zealand Pavilion is one of only three types of creation legend in the whole world. So many cultures going through that pavilion are going to recognise the pattern of that legend – it’s going to resonate with them.

Similarly, the number of other types of story in the world has been chronicled by the writer Christopher Booker, after 34 years of reading, as numbering just seven. One of these – rags to riches – is the pattern of the Michael Hill Jeweller story. It begins when he was working in his uncle’s jewellery store and his house burnt down. He was left virtually penniless at the age of 40 but set out on his journey with fearless resolve. He tells you the ups and downs of that journey in different export markets – he maintains the dramatic tension – just as you find in another rags to riches story, Aladdin and the Enchanted Lamp.

So many of the Kiwi export stories I’ve read are only fragments of a true story, with all the tension taken out. They are really just a snapshot of products or services. Certainly in a short meeting you won’t have time to tell a full story but on your website why not tell it? It’s not as if you haven’t had any dramas – how many of you have had a vital container delayed in customs, or an important customer ask you to do something at the drop of a hat? These are the elements of drama and people remember them.

The marketing strategist David Meerman Scott goes so far as to say in his latest book not to talk about your products and services again. Instead, he says to focus on a distinct group of potential customers and how you can solve problems for them. Because he says people are not really interested in your products and services but they are very interested in how you can solve their problems.

If you only have a two-minute pitching opportunity where you can just present a slice of your story, recount a situation which illustrates how you solved a problem for another customer.

Several years ago, I interviewed Neil Flett – a New Zealander who heads the pitching consultancy Rogen International and who helped Sydney win the bid for the 2000 Olympics. He said then:

“The tragedy would be if a wonderfully innovative New Zealand company goes overseas to sell something that is superb but fails due to a lack of pitching skill.”

I would like to leave you with this perception. It is a quote from a US wine importer, Martin Gold, who I interviewed in 2003. He was importing wine from 300 wineries from around the world, including Palliser Estate. I interviewed him in New York, where he said about New Zealand:

“The people are dynamic and exciting, the country is beautiful and the product is wonderful. I fell in love with all of it. You have a great story to tell.”

[NZCTA: What are we waiting for?]

Source: STRATEGY: Telling stronger export stories

STRATEGY: What is the hardest part of doing business in China?

Thu, 18 Feb 2010 00:00:00 +1300

Andrew Hupert of China Solved ran a pair of surveys on Linkedin and has shared the results with us.

One survey appeared on a set of Linkedin business groups with NO specific geographic orientation and asked, “What is the most difficult aspect of doing business?”

Andrew broke down the deal process into 5 phases:

1) Finding appropriate counter-parties

2) Clarifying deal terms

3) Finalizing the deal – signing the contract

4) Executing the agreement / doing the actual business

5) Post-deal compliance, Quality Control

He then ran another survey with the same answer choices, but which phrased the question slightly differently – and targeted China-oriented business groups. This time the question was: “What is the most difficult aspect of doing business IN CHINA?”

Results from the first (general) question were:

Results from the second, China-specific question were:

Andrew provides the following commentary and analysis:

Outside of China, a little over 50% of the respondents said that the biggest challenges occurred pre-deal, with only 23% reporting that their main difficulties occurred once the contract was finalized. In China, however, almost half of respondents said that their problems started AFTER they thought an agreement was reached.

One can draw two conclusions from this data:

1. Chinese businessmen deceive, cheat, mislead, or otherwise fail to honor their word.

2. Westerners in China are choosing inappropriate counter-parties, aren’t doing proper due diligence or are cutting WAY too many corners early in the negotiating process.

Which conclusion is valid? Let’s take a look:

Is choice 1 correct?

Considered politically incorrect and borderline racist in the west, answer 1 is not without validity. But rather than accuse your dear author of racism for vilifying the entire Chinese Nation with charges of dishonesty, better you re-examine your own puritanical notions about the universality of honesty as a virtue. You may be the one guilty of a subtle yet pervasive form of racism – one that is far more damaging and dangerous to you than to your Chinese counter-party. You may come from a society that holds Judeo-Christian notions of an objective, immutable Truth and considers honesty to be a simple matter of black and white, good and evil – but not everyone in the world necessarily shares your opinion. Chinese history is peopled with strong, moral and SUCCESSFUL leaders who instructed their students about the virtue and efficacy of deception. Sun Tze, in the classic “Art of War” is the most famous Chinese leader to advice followers on the most effective ways to employ deception. Years later, Mao Ze Tong’s “On Guerilla Warfare” described how deception and surprise could neutralize an enemy possessing superior technology and firepower. Even Deng Xiaoping’s “White Cat, Black Cat” lecture effectively argues that managers need to adapt a fluid, pragmatic approach to be successful.

Win-Win negotiation is hardly standard operating procedure in the West and it certainly never really caught on in China. Astute Chinese dealmakers would be ashamed at leaving money on the table or failing to maximize their benefit in a transaction. If the Western counter party is satisfied with the outcome of a deal then the Chinese side has clearly not worked hard enough. Let the Westerners wave signed contracts around all day long – there are always new opportunities and new counter-parties coming down the road.

Or is Choice 2 the true explanation?

Westerners just aren’t doing enough due diligence and are rushing into deals with the wrong counter-parties and a poorly considered deal structure. Actually, I think that this may be the problem much of the time. International lawyers are constantly warning Western clients that suing in Chinese courts is an expensive, time-consuming and ultimately unsatisfying endeavor (www.ChinaLawBlog.com – assorted) – yet novice deal-makers still seem to think that an aggressive legal strategy will remedy any unfavorable deal outcome.

There are several major factors leading Westerners to accept less stringent deal structures (or unreliable counter-parties) in China than they would back home.

A) It’s so hard to get to the negotiating stage with ANY Chinese counter-party that no one wants to let go of the first guy who seems to fit the bill for fear of never finding another one. China is indeed a difficult environment to do your first few deals – and between jet-lag, culture gap and language problems, senior Western managers have been known to suffer from some pretty serious lapses in judgment. Tired, confused and frustrated, otherwise savvy Westerners tend to hear what they want to hear – and believe promises that they would ordinarily suspect.

B) The politically correct types are so afraid of making the Chinese side “lose face” or are so anxious to “build guanxi” that they don’t drive a hard enough bargain — or don’t ask for the right things. Are you in town to buy & sell – or are you here to make friends and build your network? It’s very hard to maximize your profits and ‘build guanxi’ at the same time. Many Westerners have left money on the bargaining table – or worse, signed deals that don’t provide adequate safeguards or quality controls – in the name of ‘building a long term relationship’. Well – once that Western businessman has to explain to his boss or board of directors why he’s just squandered the firm’s money he tends to be less excited about his new relationship in China.

C) Not knowing how to structure a proper China deal. When money changes hands the power balance shifts. That’s when smiles disappear — and phone calls don’t get returned. If your China deal involves up-front payments or transfers of assets and IP, then you are putting yourself in a very dangerous situation. Pay attention to the way you have structured your deal so that your Chinese counter-party doesn’t have to choose between common sense and honesty. Trust is wonderful. Verification is better.

Experienced deal-makers – Chinese and Westerner alike – know to budget time and bandwidth to post-deal negotiation in China. No matter how much time you spend hammering out the deal terms and contracts, you should still expect to conduct your second REAL negotiation after you thought the deal was already done.

Source: STRATEGY: What is the hardest part of doing business in China?