Doing Business In China
Building value for foreign enterprises in Asia
Agenda
1. Selling to China: Commercial Options
The most difficult business issues according to people working in China
2. IP and Relationships
The most difficult business issues according to people not working in China
3. Pitt-falls
Companies struggling to sell in China
a. Case Study I
b. Case Study II
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Selling to China: Commercial Options
Opportunistic / Well Executed Opportunistic
Business Stage
U.S.A.
CHINA
#1 Opportunistic
Agent
American
Company
Distributor
Distributor
Employee
#2 Well Executed Opportunistic
Agent
American
Company
Treating it like you would another region in the US
Market Feedback, Targets, etc.
Distributor 1
Distributor
Distributor 2
Employee
Distributor 3
Market Feedback to
U.S. Company
3
Selling to China: Commercial Options
Opportunistically Invested / Strategically Invested
Business Stage
U.S.A.
CHINA
Agent
American
Company
Distributor
Employee
Employee works through an “incubator”
Most likely still no RMB Invoicing.
DISTRIBUTORS
#3 Opportunistically Invested
1
2
Dedicated
3
Employee(s)
4
on-the-ground
5
n
Market Feedback to
U.S. Company
Your
Business
Established.
Employees
Inventory
RMB Invoicing
1
2
3
4
5
n
Market Feedback to
U.S. Company
Agent
American
Company
DISTRIBUTORS
#4 Strategically Invested
Distributor
Employee
4
Selling to China: Commercial Options
Summary
No Resource in China
Resource in China
High
High
Stage #4
Strategically Invested
Stage #3
Opportunistically Invested
RETURN
and/or
MARKET
SHARE
RISK
Stage #2
Opportunistic Well Executed
Stage #1
Opportunistic
Low
Low
Low
INVESTMENT
5
High
Selling to China: Commercial Options
Issues: Stages 1 & 2
No Resource in China
Resource in China
High
Stage #4
High
Stage #3
RISK
RETURN
Stage #2
Stage #1
Low
Low
INVESTMENT
Low
Second* most cited business issue: Distribution / Channel Management
Industrial Distribution Market
Why???
U.S.A.
Top 10
30%
1. Highly Fragmented
Smallest of top 50 is about $100M
China
Top 10
1%
Largest is about $60M
2. They cannot take much inventory and/or cannot trade in USD
3. Many, many more distribution points
4. If a distribution in the US requires X amount of time training, the Chinese
distribution requires 3x
5. Greater instances of opportunistic behavior: Brand, Pricing, Service
(Studies show a correlation between aggressively managed distribution and growth/profits)
Third most cited business issue (LKS observes) lack of credibility in the feedback channel
impacts adjustments necessary in: Product Development, Service, Brand  Growth
* Per American Chamber of Commerce Survey
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High
Selling to China: Commercial Options
Issues: Stages 3 & 4
No Resource in China
Resource in China
High
Stage #4
High
Stage #3
RISK
RETURN
Stage #2
Stage #1
Low
Low
Low
3 jobs, 28x salary growth
USD Base
Annual Salary
USD Base
Annual Salary
#1 most cited* business issue: Employee Retention
Salary Growth
4 jobs, 14x salary growth
Employee Turnover
Avg. Annual Employee Turnover
Today’s Ceiling
 “Ben there done that” – really expensive
 People looking for development
 Ceiling being noticed – Find the “Builders”
* Per American Chamber of Commerce Survey
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INVESTMENT
High
IP & Relationships
IP Protection (It-is-Not a reason Not-to-Go)
1. China is one of Luis Vuitton’s largest markets for knock-offs and also one of its
largest for real products
2. The baby carriers market consisted only of Baby Bjorn Knock offs which actually
built the brand. It was known, and desired, when the real product arrived
3. Knock offs are not your competitors, they do not win on quality or service
4. But be smart about drawings, etc.
Relationships
1. Relationships matter everywhere
2. As in the U.S. Service, Quality and Value will win out
3. The accessible market is growing
2000
China Industrial Market
20%
Accessible
50%
Non-accessible
80%
Non-accessible
2011
50%
Accessible
Don’t allow Relationships / Culture to be an excuse for losing
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Pitt-falls: Case Study I
Situation
Situation
NYSE listed company selling in China for > 10 years, but yet to achieve scale
Company was growing in the low teens
Distributors were small and few, highly concentrated near Shanghai
Most sales people could not sell enough to cover their costs
Employee turnovers was low, but salesperson turnover high
Objective: Improve Sales
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Pitt-falls: Case Study I
Brand Mapping
Market Perceptions
Brand Perception
User Decision Attributes
Perceived
Brand Leader
Quality
Brand Awareness
Client
Positioning
Co X, Co Y, Co Z
Our client Co A was not strong anywhere
Co X
Had poor quality and delivery perception
Price
Co X, Co B
Delivery
Co X, Co B
After Sales Service
(Negative)
Breadth of Line
Co X, Co C
Co X was mentioned most often and owned
Brand Awareness
Nobody owned after sales service – Negative!
Why are you asking about quality and delivery, you are supposed to fix Sales!
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Pitt-falls: Case Study I
Sales Effectiveness
Sales Function
Success Quoting
on Business
Time at
End Users
25%
Hit
75% Miss
Should be a $50M Business!
New distributors
signed in last 18 months
75% End Users
3
Generally a Mature Market characteristic
Passive distribution management
New or
Current
Distributors
25%
Why can’t sales increase reach?
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Pitt-falls: Case Study I
The Fundamentals
Perception vs Reality
Delivery
Warranty %
5
VOC
1 week
4.5
Complaint w/ abuse
Complaint w/o abuse
4
Co X
3 days
3.5
3
2.5
2 weeks (China)
%
Co A
Co A
2
1.5
5 weeks (Imports)
1
0.5
0
Jan
Feb
Mar
Apr
May
Sales training, incentives and structure will not solve this problem!
12
Jun
Pitt-falls: Case Study I
Summary
Summary
Leadership: Someone with credibility in the home country
Poor sales is usually a symptom of something other than a poor sales team /
structure / incentive
We see a lot of industries where “Service” is still an open attribute
Don’t be distracted by FCPA, Sales Pressure, Retention Issues: Don’t forget the
Fundamentals!
Don’t let an export driven factory forget to measure domestic performance
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Pitt-falls: Case Study II
Situation
Situation
Selling in China for > 10 years, but was not satisfied with sales performance
Sales people focused on finding and signing new distributors
Sales were 30% “Standards,” 70% “Specials” <The opposite of the rest of the world>
Their share of “Specials” was <0.1% in China
Objective: Improve Sales…Again
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Pitt-falls: Case Study II
Product / Competitor Concentration
Market Situation
Specials vs Standards
Competitor Concentration
This client is good at Specials
Specials
10%
Others
Standards
75% 90%
Miss
Specials: Fastest Growing Segment
Major
Global
Players
40%
60%
Global Majors had the Majority of the Market
Specials are ignored by the
biggest companies
Specials sales require time at
end users identifying and
solving problems
Distributors prefer to sell
standards
Like every other country, the client was focused on Standards
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Pitt-falls: Case Study II
Distribution Model
Distribution Situation
Standards: “Catalog” Sales
Sales team was recruited from the global major competitors
that had already been established in China
Distribution network was set up just as in the US or as the
other major competitors had done in China
Nobody in the China organization understood how to build a
network, or sales plan, focused on Specials
Specials: End User Pull Model
Distribution model and salesperson DNA
need to fit your positioning
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Pitt-falls: Case Study II
Summary
Summary
If late to the market, you may grow faster, and more profitably
focusing on your niche items
If you build the organization around a “niche,”
the “bulk” will eventually come – if you want it to!
Be open to positioning your brand differently in China
Don’t necessarily recruit from the same industry,
recruit from the same business model
Moving production etc. can ameliorate some of the delivery and cost issues,
but not always
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Shenyang
Overview
Capital of Liaoning Province and established as a major heavy
industrial base
5th largest city in China
Large companies in the city include: Brilliance China Auto,
Shenyang Aircraft Corporation, Neusoft Group (the biggest software
company in China), BMW, Toshiba Elevators, General Electric,
Michelin (Tires), Coca-Cola, BASF
Typical industries in the city include: Automotive, Aerospace, Software
Quick Facts:
Area: 13,308 km2
GDP: 501.7 B RMB (81 B USD)
Imports: 3.78 B USD
Population: 7.86 million
GDP Growth: 14.1%
Exports: 4.08 B USD
Many businessmen have said that the business environment can be challenging and more
bureaucratic than East China. This is related to the higher proportion of state-owned enterprises
than elsewhere in the country, and the relative lack of experience in international business
practices. However, Shenyang is in the process of reforming its 280 SOEs
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Doing Business in China
Summary
Know your strategy
Is this opportunistic or strategic?
What is your positioning?
Don’t be overwhelmed by culture, FCPA, bureaucracy etc. and remember the fundamentals
are the same anywhere.
Be flexible when building your positioning
Your brand positioning or even product use may be different than in the US.
(KFC - menu, MD – dating, Go-Thru, Gas Pumps, Micrometers)
Include the China team
If you are not going to listen to their feedback, don’t hire them
Relationships
They matter everywhere – build them – don’t use them as an excuse
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Lancaster Consulting
Management Team
ALEX CLAYPOOL / Managing Director
Alex has started-up, turned around and grown businesses in the US, China, Japan, Singapore
and Belgium for US Fortune 500 corporations (Danaher Corporation, The Stanley Works) and
US private equity firm portfolio companies.
Alex attended Rikkyo University (Tokyo), the London School of Economics, has a BA from
Washington & Lee University and an MBA from the University of Michigan. He is an advisory
board member of XnI Consultancy Services Pvt. Ltd. a consulting firm in Delhi, India, and is
an active member of the American Chamber of Commerce and Australian Chamber of
Commerce in Shanghai. He has lived eleven of the last thirteen years in Asia and Europe, and
currently resides with his wife and two sons in Shanghai.
aclaypool@lancasterholdings.com
LI XIAO / General Manager
Li Xiao has led the establishment of over fifteen foreign businesses in China and has thirteen
years of experience working for US, European and Indian multinationals. Prior to joining
Lancaster, Li was responsible for the establishment of manufacturing operations and
management of commercial operations for WIPRO Hydraulics China.
Li has a BA from East China University of Science and Technology and a diploma from the
Swedish Institute Management Program with a focus on Corporate Social Responsibility. Li
currently resides with his wife and daughter in Shanghai.
xil@lancasterholdings.com
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