Business Risk Videos

Download this podcast Length 16:50 Download audio file (20091106_kim_woodard_pt3.mp3) OK we are on to Part 3 of our interview with the newest addition to the Technomic Asia team, Kim Woodard.  In this section, we get down into the nitty-gritty of doing deals in China.  Enjoy!

Download this podcast Download audio file (20090629_market_entry.mp3) Nearly 18 months ago, I wrote an article for the British Chamber of Commerce in Guangzhou called “Continuous Market Entry”. A client of ours found that article and called to talk to me about it. It had been awhile since I looked at it so I did a quick review … and not only did I COMPLETELY agree with what I wrote then, I think it is even more important now! Lest you think that my ego has completely run away with me and that I have become my biggest fan (or maybe IN SPITE of that!), let me be clear – what I said then (and will say today) is NOT rocket science. In fact, because this is not rocket science – because it is quite logical and, at its heart, pretty simple – we tend to overlook it in favor of more complicated (and, we think, therefore more valuable) ways of growing our China businesses. So in today’s Podcast, I would like to revisit this issue and explore it a bit deeper. For most foreign companies establishing a business in China, the phrase “China market entry” is a one-time process of market assessment, strategy planning and corporate structuring. Once the business license is issued, there is a palpable sense of relief among the management team – “Whew, market entry is done,” they say, maybe hoisting a few congratulatory pints between then, “Now bring in the implementation team to get things going!” However, those that have been here for awhile understand that “China market entry” is not a one-time thing and that successful companies – i.e. those that are making money here – are continuously revisiting and refreshing their market penetration strategies. In a similar way, a manufacturing theory that originated in Japan called “Kaizen” – roughly translated into English as “continuous improvement” – advocates that quality improvement is not a one-time thing: do it once and you’re done. Rather, quality should be a constant concern for everyone in the manufacturing environment and companies should always be evaluating how they make their products and how they can improve them. We look at what we call “continuous market entry” in the same way: it is an attitude and a process whereby companies approach their on-going China market assessment and strategy planning as if they are facing it for the very first time. This approach is especially important for companies that have been in China for awhile, typically 5-10 years (or even more). Our market strategy consulting firm has been on-the-ground in China since the mid-80s and helped many of these companies on their first market entry. We are now working with many of them to “re-enter” China by taking a fresh look at today’s market conditions and then crafting an appropriate response. Continuous Market Entry: “Re-asking” Questions Going “back to the beginning” is nothing new. Sports professionals talk about maintaining their love for the game by remembering what it was like to play as children on the playground. Therapists recommend couples to find ways to keep their relationship fresh by imagining that they had just met. Buildings are renovated, torn down to the foundation and rebuilt, as if new. For those who have been here for some time, it is difficult to go back to the beginning because we cannot help but look at China through the lens of the lessons we have learned from the past, through our successes and failures. Most of us would not want to return to the naïve attitudes we had when we first came to China: how easy we thought it would be, how smart we thought we were ourselves. No, many foreigners here “walk with a limp” and we would not trade our battle scars for anything. So when I talk about continuous market entry, I am by no means advocating naiveté and downright stupidity (there is already a whole lotta that here among foreign companies entering China!). What I am encouraging us all to return to is the exploration of the many questions we had about the China market and how we could be successful when we first came here. Deep down, we knew that we didn’t know much, and we were hungry for information and any bit of insight that could give us a leg-up in our market entry. It is this non-stop asking of questions that lies at the heart of continuous market entry. There are three categories of questions that I would like to briefly address here: questions about market demand, distribution chains and competitors. Market Demand: Who is my Customer? One of the first questions anyone asks when getting into a new market is, logically, “who will buy my product?” A simple question, no? Well, no…at least not in China! Identifying, with any level of precision, who in China would buy your product and what product features, functions and pricing would satisfy was very difficult in the “old days.” Getting access to potential buyers was difficult: travel was hard, phones didn’t work, we didn’t have the Internet or email. Secondary data, when available, was very thin and was too loaded with political overtones to be very accurate. However, many early foreign entrants showed up with their products and – wonder of wonders – they sold some. Sometimes they sold a lot! Slowly but surely, the foreign companies that survived developed a customer base that kept them in business. The smarter ones moderated their expectations, following a fortune cookie I once read: “Set your goals low and you will always attain them.” But many of these companies became satisfied and somewhat complacent with their success, even moderate success. Slowly, they stopped asking themselves the questions that got them there: Who is my customer? What do they want? What else can I provide them? They slid comfortably into defining their China market as “the segment in which I am successful” rather than “all the segments I could possibly address.” In recent years, segmentation of many markets in China has become much more complex and fragmented. Take the automotive market: there used to be only a few kinds of cars to choose from with very few private buyers. There are now well over 100 brands of cars in China with hundreds of models to choose from in a dizzying array of quality, price and performance tiers, all being purchased by private owners. If you are selling into this market now, you better understand, in detail, what your opportunities are in each segment, for each kind of buyer. All foreign companies – and particularly those that have been here awhile – need to understand the details of their market segmentation and to identify, clearly, which segments they should pursue and which they should leave alone. For the latter, this is not easy. A client of ours in consumer products with over 10 years in China is currently going through a ground-up market assessment, looking at the market as if they were not yet here. Our early strategy meetings were full of statements that started with “based on our experience…” or “we know that…”. They have now moved into a stage of asking questions of the market and exploring ways of looking at it that they have never done before. The deep market probes we are doing among customers, distributors and competitors are guided by these questions and we are looking at how our client’s products are used in the market, not how our client sells them. This, in turn, has led to new ways of segmenting (and selling to) the market that is resulting in some real growth. Another client of ours is trying to look at new ways of serving the customers they already have. Because they were so early into the market, they pretty much defined their sector … and while they have certainly found success and happy customers, their strategy has been more focused on “what we have to sell” rather than “what our customer wants to buy.” Now that there is more competitive in the market, our client is going back to their long-time customers and are asking, in effect, “what if we weren’t here … what would you want??” It’s a tricky thing and we are getting some resistance from some divisions in our client from people to have an “if it ain’t broke, don’t fix it” mentality. However, the CEO and senior management, thankfully, have a different view … they see the market changing and know that they will soon face customer demands that they cannot fulfill. They need to get out ahead of those demands now, understand them and plan for them. Distribution: Finding New Routes to Market Not only have veteran foreign companies in China lost touch with their customer segments, but they often miss key distribution routes to those customers. It is logical to think that if my customer is “A” then the way to reach them is “B”. However, as markets have changed and segmented, so have routes to those markets and it is healthy to continuously review one’s distribution strategies. A client of ours brought a product in over 12 years ago and used some Hong Kong distributors to do so. At that time, the Hong Kong distributors knew the market as well as anyone and besides, there simply were not any “local” distributors. In fact, many foreigners at that time did not differentiate between those from Hong Kong and those from the Mainland, naively calling them all “Chinese”. Depending on the industry and channel, there are now many local distributors that are quite mature. They know their markets, they often know technology, and they certainly know how to sell to local buyers. In the case of our client, their Hong Kong distributors are now actually losing deals to local distributors because the local buyers consider those from Hong Kong to be “foreigners” who don’t understand local markets. I am in no way saying that all Hong Kong distributors are a bad idea in China today – but I am saying that what was appropriate several years ago may not be appropriate today. Companies pursuing continuous market entry are re-mapping distribution channels at the same time they are re-segmenting their markets, all the while trying not to be biased by the distribution channels they worked so hard to establish already. It is not an easy thing to do, but they are critically analyzing the “reach” of their present distribution and are assessing whether or not it is as broad or deep as is required. We have done many projects over the past year to objectively map just how far a foreign company’s distribution is reaching. In all cases, we found that penetration was not as great as the distributor was telling our client nor was it often even in the right channel. These discoveries didn’t necessarily lead to our clients replacing distribution; rather, they were able to add partners to get into areas they had no access to. Only an attitude of continuous market entry led them to such conclusions. Competition: New Players in New Segments When many of the “old-timers” came into China, they were some of the first foreign companies entering the market and their ability to differentiate themselves was relatively easy. Price and quality differences were very apparent: the quality and price of the foreign product was very high and the Chinese competitive products were, if they existed at all, typically low price and low quality. It was often easy for foreign companies to charge a premium of several hundred percent because a certain portion of the market was looking for quality and was willing to pay for it. If a foreign company was bringing a product or a technology to the market that had never been seen before, they found buyers (often other foreign companies) willing to pay anything for it. Ask them who their competition was, they would say “no one”…and they were basically right. A client of ours was in this situation. The capital equipment they brought into China was brand new in the market; there was nothing like it here. Our client considered it “world class” quality – and indeed, they lead most of the rest of the global market in this product category. Their immediate market entry was very successful. There was a small part of the market that would pay any price and our client was always pushing their manufacturing capacity to supply their customers. However, as the market matured, two things happened: first, more buyers came online who began to see the use of this particular product and thought it would be helpful. However, these buyers were not rich foreign companies but were often privatizing local companies who were looking for “China quality”, not “World Class quality”. Secondly, more competitors – many of them local Chinese companies – rose up to supply these segments with that “China quality” equipment, leaving our client in its own “World Class” bubble. Recently, our client has been looking at the China market with a fresh perspective and is realizing that the market has not grown beyond them, but has grown up below them. They still have sales in the premium segment of the market, but the sweet spot of the market has shifted to the middle range and competition there is quite fierce. Our client has been going back to find out how their competition is serving this market and how our client can begin to compete. We have had to work together to eliminate the phrase “we have never done it that way before” and still have some distance to go; however, waking up to a market rife with strong competition has changed the way our client is looking at the market and planning their future strategies. Our client no longer claims they have no competition in China! Another client of ours in consumer products is looking at the challenges facing them in China in today’s very unique retail market. For the non-retail jockeys in my listening audience, the retail challenge in China today, in a nutshell, is the tension between what is called “traditional trade” and “modern trade”. Traditional trade are the mom pop shops, local retailers serving a particular neighborhood … think the corner hardware store or the neighborhood grocery store… small, familiar and convenient. Their product stocking practices are hit or miss, their pricing is not too aggressive and their quality is sometimes suspect, but their customer service is fantastic. They have been serving the same neighborhoods, sometimes for generations. Modern trade, on the other hand, are the “super stores” and “hypermarkets” … think Home Depot in the U.S. (or B Q in Europe) and Wal-Mart. These are the stores that go to market based on their huge selection, their good quality and their low prices. They are not always convenient to get to, but they are a “destination” … you go there, fill up your car (or bike basket) and go home happy. China is going through a massive transition from traditional to modern trade … where people are going from shopping at the corner grocery store to making a trip to Wal-Mart or Carrefour. While the VOLUME of total retail sales is in the traditional channels, the GROWTH is in the modern ones. And consumer goods suppliers must manage the tension that exists in serving both of them. Our client is struggling with this … and so we are in the process of doing a benchmarking program to look at how some of their competitors are handling some of these problems and then looking at how these challenges are addressed by peer companies – companies working the retail space but not in the product space of our client. We are seeing some VERY interesting results so far. The biggest benefit is that it kind of levels the playing field. We all tend to complain that what we are facing is unique (and many try to get their bosses to see that, given the uniqueness of the situation, they are doing pretty good!). However, when you look at how your competitors are facing the very same problems you are, you take away these excuses. You benchmark your current performance against theirs and you see where you really stand. You also can sift through a lot of approaches to the same market – some of them are good and some of them are not (and some of them are downright illegal!). But you are not creating strategy in a vacuum here … you are looking at the market realities and are honestly assessing yourself against them. Conclusion In conclusion, I certainly do not want to give the impression that a continuous market entry perspective is easy nor is it a cure-all for what presently ails stagnant foreign companies in China. However, for many of us who have been in China awhile, we are victims of our own success, even if success is defined as “still standing.” We have found that returning to the fundamental questions about customers, distribution chains and competition really does begin to help break us out of old ways of thinking. For those newly arrived in China, I would like to encourage you to start now your process of continuous market entry. For the moment, hide your business plan and the feasibility study you used to get your business license. Get your key sales and marketing staff in a room and ask each other the tough questions about customers, routes-to-market and competition and press yourselves to answer them (or at least establish a plan to come up with the answers to them). If China has taught us one thing in the past decade, it is that this country and its markets will not stop changing, growing and adjusting to global conditions. The successful foreign company in China will adopt a similar attitude knowing that when they stop entering the market for the first time, it will be their last time. Thanks again for listening. And remember our motto: “In China, everything is possible but nothing is easy.” We’ll see you next time on the China Business Podcast.

Download this podcast Download audio file (20090503_regulators.mp3) China’s rapid development in the past 15 years can leave one feeling a bit dizzy.  My first time in Shanghai in the late 80s – in town for an escape from the small central China city where I was living and teaching – was heady enough.  There were only 10 taxis in the entire city and you had to get around on diesel fume-belching busses or by foot (and it was a battle between the aerobic benefits of walking and the heart-stopping inhalation of diesel exhaust).  Now its tough to step in the street here and avoid getting hit by a cab (unless, of course, it is raining or you are late to a meeting or you have two heavy boxes you are trying to schlep to a client … and then there are NO taxis to be found in the entire city.  Go figure). So when China seems like its returning to the bad old days, it is a bit shocking, particularly when this return is signaled by increased regulation from the Party.  There have been a series of steps over the past year that, in hindsight, are heading in a direction that could be of concern to everyone who does business in China, local and foreigner alike.  Late last year we saw the government put extra restrictions on Carlyle, the financial investor, as they sought to buy out XCMG, one of China’s leading heavy equipment manufacturers.  Carlyle eventually let the deal die because the limitations were so onerous.  At the time, everyone clucked about “protectionist policies” but eventually chalked it up to China wanting to guard an industry that could figure into national defense (ala the U.S. blocking the Chinese oil giant CNOOC from investing in a U.S. offshore oil company a couple of years ago). The next big restriction was for visas for foreign visitors wanting to enter China just before the Olympics last year.  Thousands of businesses were impacted by this and many Olympic events were sparsely attended because people just could not get here.  Again, apologists for China cited so-called “legitimate” reasons for this … in this case there were serious security concerns.  The reality was that China was playing a game of CYA – “Cover Your Anterior-region” – and was willing to go overboard on restrictions in order to insure that nothing happened while the spotlight was shining so brightly on them.  Sure, it bothered me too but I guess I understand erring on the side of caution – my own country’s Transportation Safety Administration recently busted my daughter on a routine check at an airport … she was relieved of a fingernail clipper, ostensibly because she might use it to hijack the airplane to Cuba (where she would need said clipper because you simply cannot buy them there).  In the immortal words of Fleetwood Mac: “Oh well.” But then this year, things have been getting even more tight, it seems.  We started the silly season off with Coke being denied their acquisition of the large Chinese juice manufacturer, Huiyuan.  The government was oddly silent on the specific reasons for the denial.  There were some mumblings of avoiding “monopolistic” practices which, in a way, was legitimate as the merger would create a beverage company that would rule in two key categories: sodas and juices.  But many legitimately pointed out that China’s industries are ripe for consolidation and that, following pretty much any other economy as its developed, there are, as time goes on, going to be fewer but larger players in the market.  There is speculation – no none of it published, as far as I have seen – that the government is pushing Huiyuan to themselves become more acquisitive … to go out and start buying up smaller beverage companies to grow larger themselves, in effect creating a competitor to Coke.  Typical of China, the old adage is flipped on its head: “if you can’t join them, beat them.” Just this last week, two things have happened to make me even more concerned.  The first was the release last Friday of the new Postal Law in China which everyone in the logistics and delivery sector has been anticipating like Christmas morning at the Bill and Melinda Gates household.  However, much to the chagrin of foreign delivery companies like FedEx, UPS and DHL, the law bans foreign companies from participating in domestic express delivery, citing the original 1986 Postal Law that limits domestic delivery of regular mail to the government-owned China Post. 1986?  In China in 1986 it took an entire day to mail a letter!  We had to, literally, make our own envelopes, painstakingly cutting out a template from paper and then using paste thoughtfully provided by the post office to glue them together.  Then you had to let them dry before stuffing them with your letter.  You ended up with glue all over, trying to cram a sticky mess in a drop box with fingers webbed like Aquaman.  And if you wanted to send a parcel in China, fuggitaboutit!  You had to purchase white cloth and make your own bag in which to put your items.  Seriously, I am not making this up.  Around the post office were stores selling fabric, needles and thread and you had to form your own sweatshop on the steps outside the post office to assemble your package for mailing.  I had flashbacks to 7th grade home-economics class, nearly failing for improper needle threading and insufficient stitch tightness.  Who knew that I was actually learning life skills that would come in handy some day?? Anyway, I digress …  This new and unimproved interpretation of the Postal Law is going to be a serious setback to the entire postal system in China.  Plainly speaking, the foreign delivery companies have, for the most part, cracked the code in express delivery in their home markets.  Pretty much anywhere in Europe or North America, if I want something delivered by 10 a.m. tomorrow morning, its going to get there.  I might have to take out a second mortgage on my house to do it, but dang-it, its going to get done!  Now, I don’t for a minute think that any express delivery company would be able to quickly transplant their system in China … China is too big and too complex to do that simply.  But the China postal system could certainly use some external influence and best practices … mailing a letter by regular post is a hit-or-miss thing these days.  The Chinese authorities cited security reasons for keeping the foreigners out … I guess news of the express-delivered anthrax a couple of years ago in the U.S. freaked some people out here.  But seriously, can the Chinese postal system do any better??  I guess in one way they can – with such a dismal delivery rate for their mail the insidious package can’t do any damage if it never reaches the intended receiver.  Let’s hear it for incompetence! The last indicator that something’s up is the rumor – at this point unsubstantiated – that China is going to once again be very restrictive in issuing visas this summer and into the fall.  This year marks two very important anniversaries in China: the 20 years this June since the Tiananmen Square movement and 60 years this October since the founding of the People’s Republic.  Like with the Olympics last year, China wants to keep out anyone who might make a placard and march on the streets, shouting their support of any one of a number of banned issues.  Hong Kong’s South China Morning Post published a story last Thursday saying that Beijing has said that all “F” business visas issued after April 15th will expire on September 15th.  An F visa is for short-term stays of less than 6 months.  The paper quoted several China visa agents who said that applications for F visas beyond September 15th would be put on hold until there were more clarifications from the government (who, like any government, avoids clarity like the plague).  Again, there have been no confirmed announcements of this, just newspaper articles … so let’s not wig out until we have to. But shy of wigging out, I think there is some indication for concern here. There is DEFINITELY a protectionist wind blowing in China and with it could come a storm that could hit us all.  There are two sides of this coin here: First, remember that Chinese regulations are often published but never – or are selectively – enforced (on a side note, the converse is also true … China has been known to enforce rules for which they do not allow the publishing of the official law … I have heard stories of people being prosecuted for breaking a law and were refused the request to actually read the law on the basis that the law was a state secret).  What this means is that there are varying levels of sensitivity in China – if you are a big company and are doing big things in China, the light shines more brightly on you and you have to take more care to cover your bases.  All the big Fortune 500 companies working in China spend squillions of dollars each year in lobbying efforts in Beijing and in the various localities in which they do business.  This is just good business practice (hey, they even do it in Washington!). But for many companies, they work hard at doing a series of smaller things in order to stay below that radar and to not attract attention.  In any M&A deal we do in China, one of the biggest commercial due diligence questions to probe is how the regulating authorities will treat the new entity once it has foreign ownership.  Chinese companies can get away with things that foreign companies cannot, simply because they are foreign companies (and, contrary to popular practice, having local staff often does not protect you … the spotlight is just brighter on you when you are a foreign company).  So the lesson here is to explore all the possible regulatory implications of what you are doing in China … not just the laws on the books but to talk to all the authorities who touch your business to get their read on what might actually be enforced.  Your business leaders here – your general managers and CEOs – should be spending a large amount of their time schmoozing with the authorities here.  If they are not, you are exposed. The second thing to remember is, simply, that China is different – it is a one-Party system and that Party is primarily concerned with maintaining their singular hold on power. On a global scale, it is not the riskiest place to do business – that honor is held with dictatorial grip by some southeast and African nations.  But it is comparatively riskier than doing business in the West.  Walk the streets of Shanghai and you can often forget that – the signs for Western products and services make it seem like New York with a really big Chinatown.  But its not.  China is different from other markets. And, truthfully speaking, I often forget this.  Therefore, I have made myself a May Day resolution (my New Years resolutions having drowned in the Ocean of Poor Self Discipline long ago) – I resolve to be more observant of some of the macro-regulatory moves here and to not be so flip and dismissive of them when they do happen.  I firmly believe that China is moving towards more openness … my last quarter century hanging around here is proof of that.  However, these changes progress at glacial speed with short-term freezes and retreats in the midst of forward movement.  Whether what we have been seeing recently is such a momentary freeze or the tip of a larger iceberg remains to be seen.

When starting a business, give it lots of "TLC" and a healthy dash of "CYA" -- Cover Your Assets.

Mike and Eddie have no fear promoting their skydiving company but are chicken when it comes to choosing the right printer for their business. Inkjet or laser?

All too often in today?s business world the concept of risk, both calculated and spontaneous is often overlooked as the strongest common denominator amongst successful businesses. Now this does not mean that you have to go out and bet everything you have on your idea in order to be successful, in fact, many successful individuals have made their wealth by minimizing risk in various business and financial dealings. The idea here is to be conscious of what type of risk you need to take, in order to receive the reward you are looking for. A good example of high risk takers in business are first time entrepreneurs. When starting a business for your first time it is very natural to have great drive and ambition which pushes you to take great risks. At this stage in development most entrepreneurs have not been burnt or hurt by past business dealings, so they are very eager to try all sorts of new things. This level of risk can be tremendously advantageous to entrepreneurs. This stage offers entrepreneurs the ability to grow very quickly with proper planning and execution of operations through calculated and spontaneous decisions. At later stages in business growth and development it is easy to become more risk adverse as you have a greater grasp on the operation and the pitfalls that can occur. Another example of risk vs. reward you can find in the stock market. When you make the decision that you are going to get into the stock market there are really only two ways to approach it, one being a conservative approach with long term goals in mind, the second being a more aggressive approach where you are looking for a short term play. On one hand you might think that you should buy 10 of the top blue chips stock in the country. It isn?t very risky because you are almost certain you will get a good return from them over the next 10 years or so, but it will produce a nice return in ten years. On the other hand you might decide that you absolutely love this new Hydrogen Fuel Company and what they are doing. You decide that the world is moving towards hydrogen cars and you decided to invest all your money in this company. Now this would be very risky based solely on the fact that you have no established trading history for this company and the hydrogen market is yet to evolve. However, this return could offer you ten times what the blue chips will provide, and this stock potentially could pay it back in 4 years. The concept here is to understand the risk that you are taking, and what the potential downfall will be, as well as the reward. When deciding to go into your own business, you really need to think about the two ideas we just spoke about. Most business owners come out of the gates very ?gung-Ho? and want to tackle the world and make their mark as quickly as possible. This type of attitude and motivation is what has driven some of the greatest entrepreneurs of our time and it has become and model for American success. I urge all new business owners to take risks when they first start out, you should always calculate the risk in the beginning stages, but you can?t be afraid to take steps that you don?t feel 100% comfortable with. At the same time 80% of all small businesses do not make it past their first year of operation, so this should be a very clear sign that risks do not always end with the reward you expected and new business owners should take note of this percentage. When running a business and trying to grow your operation, the stock market example is best used to explain your risks vs. reward. When you have established your business and you are looking to expand, think of it has having a lump of money that you are getting ready to invest in stocks. You can either put all the money that you have made working from the ground up into one very lucrative but potential high paying stock, or you can diversify your money into safer stocks with lower returns. As an established business owner you need to find a happy medium between diversifying your business assets and placing them all in one basket. When trying to grow an existing business, it always takes a jolt or kick -start to stir up clouds of excitement about the business. This kick-start can come in the form of a big publicity stunt or major expansion of the business. It can also come from a calculated advertising campaign and targeted business meetings with new clientele. Making the decision as to how risk adverse you should be can be a very tough choice. However, if you understand the risk and reward associated with each side of the situation you will be better equipped to deal with the end result. Business Strategy, Business Risk, Analyzing Business Risk, Business Podcasts, Growing your business, entrepreneur If you are looking to start, grow or expand your business, please contact the associates at The Motivated Entrepreneur, www.MotivatedEntrepreneur.com