Wanna be in China?

The Chinese market has undergone enormous transformation since I first arrived in 1989. At that time, some 80% of the population lived on the countryside with only 20% in the cities. This ratio has changed to 40% living in the cities today. The Megapolises of the Yangtze River Delta Megapolis (Shanghai-Hangzhou-Nanjing-Ningbo-Suzhou) now consists of 97 million people and the Pearl River Delta (Hong Kong-Guangzhou-Shenzhen-Zhuhai-Macau) of another 50 million people. The urbanisation continues and is expected to be at 60% in 2020 meaning another 200 million people settling in urban areas in the next ten years.

These new city-dwellers will have needs for products and services that are not too different from people in the developed countries and this is where the large attraction with being present on the Chinese market lies.

So much for the attraction. Successfully establishing oneself in China requires knowledge and insight on how to overcome the multitude of hurdles also.

First, the government is (rightly) very protective of its core industries such as telecommunications, banking, insurance, automotive, etc.  Companies that want to enter these regulated markets will have to put up with minority shareholding and a large number of restrictions on how they can operate. Large efforts could be required in lobbying for national standard acceptance that benefit or incorporate technologies.

Companies in sectors less regulated are on the paper mostly equal to their local competitors but will face challenges in being equally cost effective. My personal experience is that most foreign corporations wish to adhere to all regulations (and are also more closely monitored and targeted than local companies for adherence).  Apart from possibly higher general personnel overhead, this would be the main reason for a disadvantaged cost picture.

Secondly, it may also be that the product or service the foreign company want to sell is not fit for the market. Their different technology is simply not suited for the Chinese market. A good market study and business plan is required. If the product or service is not suitable, then either create the demand (could be very costly) adapt to the local needs (through R&D) or stay out.

Third and most important, Chinese companies and their executives are much quicker and more flexible than their foreign counterparts in adjusting to the market needs. They are often fearless in testing and launching new products and services. If not successful, they either discontinue or adjust and improve. Foreign companies, used to the slower pace in their home-markets are less equipped at doing so.

In short, a China executive will need to be able and willing to be quick, bold and not too linear in his or her approach.

During my time in China, I have witnessed a move from pure manufacturing to subsequent local sourcing for exports. Later, the global manufacturers setup their networks and sold some of their product locally while exporting others. What seems to come into prominence is a further move into having their China organisation as a part of their overall value chain.

Take for example the American company A. O. Smith who produces water heaters. They are now the second biggest supplier on the Chinese market. I don’t have direct insight to what their success factors have been but from the outside, they have an established R&D team in China that develops products that suit this market, they produce most of their product in China and they have been able to setup a strong installation (quite particular to the Chinese market) and after sales service organisation.

Not only are they established in China, they now also export their finished products to other parts of Asia and the world.  Their China organisation, fully owned, is now a part of the company’s overall value chain.

Certainly, A. O. Smith is well placed to meet the demands of the 200 million people that will need products and services such as theirs in the next ten years and could effectively mean that A. O. Smith China will lead the company’s global turnover in the next ten years.

7 comments to Wanna be in China?

  • Hey! Can we get a picture of a water heater in here or something?

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  • Chad Lewis

    The growth and demographics are amazing. I know that in Europe, U.S. and Japan the growing aging population is having a profound financial and social impact on these countries. What can you tell me about the aging population of China?

  • David Petersson

    Hi Chad,

    Glad to see you read my blog. I don’t know much about the aging population in China but I would think it is a little different from the Western society in that older people are living and being taken care of by their children and other family.

    Although perhaps an alien thought now, surely there will be a need for retirement homes and elderly care centers in the future to care for (well-off) older people who’s family is no longer around or unable/unwilling to look after them.

    This could be an interesting blog topic but would need some research first.

    David

  • hihihi! I really like your post on Wanna be in China? | Insights on managing businesses in China 在中国管理企业见解. My name is ho chi minh city, can we exchange links?

  • Kevin Yang

    at Chad Lewis

    Chinese population is aging fast. The peak will be about 15 to 20 years later when now 50 some years grow old. It is becoming a problem fast as social mobility ( due to work ) and desire for a new life style ( to live separately from parents ) have childrens live away from parents. As a result, welfare houses are in a huge demand across the country.

    Just like anything in China, everyone realizes the opportunities, but too expensive to make an early market entry.

    Hope that helped a bit. You can email me at kevinxyang@gmail.com for more information. I’d be happy to clarify them.

  • Barbara Menard

    In terms of management style, how do the Americans and British differ from the Chinese? Is it dificult for them to manage Chinese workers in terms of culture?

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