The business dimension – how to get started
The typical response to a perceived opportunity in China goes something like this. In addition to the market potential you believe that outsourced manufacture is worth a look. So you go out to China on a trade mission; attend an exhibition subsidised by the government in one of the major cities. During the exhibition you exchange dozens of business cards with executives of Chinese companies and provide details for supply quotations to the companies that you believe are a good fit based on what you seen and heard at the exhibition. You return to your home base and in due course examine the quotations you receive. In most cases you will then make a cost-based decision and ask for a sample or trial batch of products. When you receive the sample or prototype products; they are as good as anything you could produce yourself; and you cannot believe they can do for the price (in some cases they probably cannot, and they may not actually have made the samples themselves).
The situation now is that you are hooked. You do a deal and start to run down part of your own supply facilities and ramp up your Chinese operation. You feel you can now compete with a cost-down approach. You are now working on the assumption that the good experience you have on the trial batch will translate to the full production volume. It is at this stage most companies fall into the trap of not understanding the culture or having the necessary experience to handle the communication with the Chinese supplier if things start to deteriorate. If you now start to experience (very common) quality or service issues as the volume ramps up, the costs you hoped to save will be of little use if you cannot meet the needs and demands of your customers. You must also never forget the need – even with commoditized products – for product evolution and be confident that your chosen partner is capable of achieving this with you.
Unfortunately, as in many cases, you find that there is a major problem as you have run down your home-based supply sources (internal or external). Moreover, your personal relationships (“guanxi�) that are so important in doing business the Chinese way are not yet established, and the problem is happening over six thousand miles away.
There is a better alternative. It starts with careful market research, applying contemporary tools and techniques to appraisal of markets, products, suppliers and customers.
If you look closely at companies that have had successful experience in operating in China, you see two related things that almost all of them have in common; (i) they partner with an Asian (particularly a Hong Kong) company that already knows China and/or (ii) they learn how to partner directly with the best Chinese operations in creating a business for the long term.
Perhaps surprisingly, the big issues in getting started in outsourcing in/from China are not related to product and process, but to the cultural, legal and operating dimensions. It is here that delays and unanticipated costs and problems are found. Let’s look at each of these in turn.
Concerning cultural issues, China is first and foremost an ancient civilization and its business and social culture (“the way things are done around hereâ€?) is based on a very different history and system of customs, behaviour and values. The main cause of the difference can be characterised as a collectivist rather than an individualist set of norms. The importance of consensus is paramount and this can lead to what Westerners can mistakenly view as indecision and bureaucracy. Seniority tends to be based on age and length of service: that is why top managers – and even CEOs – of quite substantial Western companies have to get personally involved in the early stages of negotiations. To entrust this to a high-flying young middle manager just would not work- especially in these important early stages. Part of this is the issue of “faceâ€?. This can be characterized as the avoidance of any embarrassment in interpersonal dealings that would result in loss of “faceâ€? if your Chinese counterpart were to appear inferior in rank, professional standing or knowledge. “In-your-faceâ€? toughness, a confrontational negotiating style and “shooting from the hipâ€? simply make you look immature in Chinese eyes. The fundamental – and critical – issue here is to develop relationships at a very personal level. It is the personal dimension that determines whether you will move on to discuss product and process and ultimately conclude a deal.
The legal dimension is an area in which careful advice and preparation are needed. There is little in Chinese law that relates to Western concepts. This stems partly from the points made earlier concerning personal relationships, and “guanxi� (the hard-to-translate Chinese word for “connectedness�) is key to getting anything off the ground.
The main point in relationships is that Chinese at all levels are only just beginning to absorb Western legal concepts and management practices, and the extent of absorption varies across industrial sectors. However the rate of learning and change is impressive, especially in the main coastal cities such as Shanghai and Shenzen, (a city just over the border from Hong Kong) and in the special economic zones.
In operational terms the Chinese respect hierarchy – and this in no way contradicts the previous point made about the collectivist dimension in society generally. Decisions are made at the most senior relevant level, whereas in the West we have become accustomed to ever-increasing levels of delegation. Teamworking is a long-established Chinese concept, but it includes the view that there is a team leader who has seniority, decision-making responsibility and accountability. This combines so much of modern management thinking with a very old-fashioned management structure. Leadership and authority are not resented: indeed these are basic requirements of effective executive behaviour in China. Many Western executives, now damaged by managerial political correctness and unaccustomed to a “directiveâ€? style, often find this a difficult dimension of the transition to the Chinese business and organisational culture.
Part 3 of 4 will be published on Tuesday 3rd April.
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on Friday, March 30th, 2007 at 9:27 am and is filed under Industrial Research, International Market Research, Market Assesment, Market Research, Market Research China, White Papers.
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