4. Visit the short-listed companies to start establishing relationships.
The market research team should now be in a position to hand over the prospect to your internal management team. Senior managers need to be prepared to risk one visit to view the potential manufacturing partner with their own eyes. After the initial visit much of the routine communication can be handled directly by an experienced Asian partner. This can then go right through to the prototype manufacturing stage; there may be a requirement at this point for a visit by experienced quality or technical personnel to give the final OK, this all depends up on the complexity of the products in question and the experience and knowledge of the Hong Kong partner / Chinese manufacturer. The attitude of “can do, want to do� existing in China ensures the time scale to get to this stage is considerably compressed compared with most Western companies.
An experienced partner should normally get you to the point at which a go/no go decision can be made after the third/fourth visit to a potential Chinese company. Top Chinese managers do not waste time. The generally positive attitude ensures that it is rarely necessary to have lengthy visits – though the individual working days can be very long.
It is at this stage that questions of quality systems, adherence to environmental and social norms, ethics and other possibly critical issues should be addressed. As part of the conditions of entry to the World Trade Organisation, China is required (and has agreed) to take into account international standards in all spheres and this includes working practices, employee relations, environmental matters and “marketization� of the economy. Despite the political strictness that has characterized Chinese society, there is an acknowledgement that change will have to be made if China is to become, as desired, a full member of the international business community. There are clear signs that this is happening very rapidly.
5. Make a final selection of Chinese partner(s).
Though many Chinese organizations are now starting to adopt Western standards of disclosure and financial reporting, there is still a long way to go before Western-type due diligence can be undertaken with the same speed and to the same level of detail as that to which we are accustomed here. So however good the deal looks, do not be rushed in final-phase evaluation unless you can assess and manage the possible risk. Hong Kong companies and the Hong Kong financial and legal community are used to this situation and can deal with it best on your behalf.
Protection of intellectual property and product/process patents is a potentially difficult area. Here the role of an Asian (most probably a Hong Kong) partner is crucial. Through the pre-evaluation of potential Chinese manufacturers, the track record of the Chinese company can be examined through the “guanxi� system. Also if one works along with a Hong Kong partner, then that company’s own track record in securing protection of the intellectual property rights of Western companies is open to scrutiny.
How long does this take? There is no simple answer, but there are some best practice principles indicating that the process should take months rather than years nowadays, unless the project in question is particularly large-scale or involves highly sensitive technologies (particularly defence-related). The important thing to bear in mind is that there is no point in hoping to conclude a worthwhile deal on the basis of a single visit, and it is advisable to beware of any Chinese organization that appears keen to do so. This is where the Hong Kong dimension is so important. The right Hong Kong partner knows how to make “guanxi� work, and can get questions answered and interim agreements in place many times faster than most Western operators can by acting independently. This is business-effective as well as cost-effective.
The work of B2B International China
In 2006 B2B established a subsidiary operation (B2B International China) in Beijing. In addition to undertaking market research on China for clients based in the region, the B2B team supports Western companies in (i) seeking an effective route for penetrating the China market and for re-export throughout the region, and (ii) identifying and evaluating opportunities for setting up outsourced operations for product supply out of China.
There are a number of possible mechanisms – (a) export selling, (b) wholly-owned direct investment and (c) alliances. This ‘White Paper’ has been concerned with (b) and (c).
The main reason that the export sales model is often of limited value to Western operations, is that China would normally wish to develop its indigenous manufacturing capabilities unless there is a very significant technological advantage in a product. There is a clear policy of import substitution and technology transfer that figures highly in China’s development plan. So that leads us towards outsourcing opportunities and co-investment. The work of B2B in (and on) China includes research and evaluation of appropriate partners for Western clients. The tools and techniques of business-to-business market research are applied with an appropriate focus, as follows.
* Analysis of the performance and potential of established players that could become outsourced manufacturers either as independent contractors or co-investors.
* Analysis of the value structure of supply chains and the operational characteristics of inward-outward logistics.
* Risk analysis and risk minimisation/management associated with operating in China.
* Evaluation of suitability of product for Chinese and non-Chinese end-users (consumer and business-to-business).
B2B International China can offer direct support in converting market research into relationships and intelligence. This will put you in a position to present to pre-screened companies identified via the market research process. The cost-saving and risk-reduction benefits of this are very significant. China is a potentially expensive market to research if you try to do it without an experienced team that has a good understanding of the business culture and an ability to interpret carefully the statements and claims made by Chinese executives and consumers.
Evaluating the potential for outsourced operations aimed not only at penetrating the China market but also at exporting into other regional and global markets is part of what B2B International has set up its Beijing office to do. The China market is growing quickly in terms of total GDP, and the technological level of much of Chinese industry is rising. This presents two opportunities simultaneously – domestic demand and an increasingly attractive manufacturing base.
Many Western companies are already taking this market seriously. Some are making good money in doing so. Others are struggling and losing time and money. The difference has nothing to do with the China market and little to do with the partnership potential of China’s indigenous industry: it is about carrying out the necessary rigorous market research, analysis and learning.
Daniel Park
March 2007
Copyright © J D Park 2007
About the author
Dr Daniel Park qualified in economics at the University of Glasgow. He has been associated with B2B International Ltd since its foundation, and has acted as adviser and consultant in many of the company’s international projects. Since his first visit to South-East Asia in 1978 he has made over 60 business visits to Hong Kong/China. Between 2004 and 2006 he served as a non-executive director of a major Hong Kong manufacturing company with facilities in China, employing some five thousand people and operating at 6-sigma standards for world markets.
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