The last week has seen some really interesting analysis about the future of US-China trade. Yesterday evening’s State of the Union added an additional dimension to this as well. The conversation in the United States about China seems to be consolidating around three points: first, can American manufacturing get back any of the jobs we have lost either as a consequence of rising costs in China or, as last night’s SOTU suggested, through quasi-protectionist measures? Second, what does America need to be doing in order to convince a company like Apple to build its products in the United States instead of China? Third, how do American companies become more competent at selling into China?
We’ll unpack each of these three points over the course of subsequent posts. For today, the last question is where to get started. For years, I have been of the opinion that what has motivated both large and small companies to move into China has been a combination of three factors: low costs, a stable country, and access to China’s domestic market. As much as critics of China want to point to China’s inexpensive labor as the “only” reason US manufacturers have located there, the reality is that China hasn’t been the cheapest country to manufacture in for years. I remember hearing a presentation by Dan Rosen in early 2000 that showed how much higher China’s labor prices were in relation to other countries in Southeast Asia. Count me in the camp of people who agree that China is going to continue to be the world’s factory for a long time (absent political recriminations by the US, something that remains a possibility).
Dan’s point, and one I agree with, is that there have been other reasons that drove the massive trade relationship between the two countries and that meant China would remain the preferred destination for investment and manufacturing over other emerging economies. More specifically, for large MNEs with a slightly longer time horizon, the opportunity to ultimately sell into China has been as – if not more – important than any of the others. As Michael Zakkour at Technomic Asia put it in a recent blog, one of the reasons access to China remains a critical component to an organization’s strategy is, as he put it,
“China for China – As more and more Western companies turn their focus to China as a market, they are shifting their in-country manufacturing and sourcing to creating products for China, as well as export. We expect that this will have a positive effect on China’s overall manufacturing out put in the next five years.”
The trend Michael is writing about is one of the most important reasons why an open China that is amenable to foreign investment and foreign competition is critical. It is also one of the clearest areas where the tactical capabilities of MNEs versus SMEs are not the same. My experience has been that for many SMEs who were on the fence about whether to go to China or not, one of the intangibles that ultimately pushed them over the edge in favor of expanding into China was the opportunity over the long-term to sell into the country. However, doing so effectively remains a major challenge for US and European SMEs. Many CEOs of these companies believe they are not as successful as their MNE counterparts largely because they do not have the resources. I disagree. I think what MNEs may have is a willingness to do some up-front due diligence and planning that many SMEs avoid, whether because they think it will be too expensive, or they feel it is something only they can do for themselves. Consequently, with a myriad of other pressing issues, it never gets done.
I recall last year on a flight to Shanghai sitting with an older gentleman who was on, as he put, a “raise the flag” trip to one of his manufacturing companies that had a facility in China. Frustrated at his inability to sell into the country, he echoed what I have heard other SMEs say: he went to China initially to take advantage of lower manufacturing costs, but his real motive was to be able to sell into the country’s growing industrial market. After several years of trying to do this, he was close to giving up. His company had initially been successful selling to his North American customers who moved to China, but even in this channel he was facing stiff competition from Chinese competitors who were getting more sophisticated. Overall, selling into the Chinese market remained a mystery to him.
As we talked, a couple of points came to mind that are relevant for SMEs who want to, as Michael puts it, be in “China for China.” First, just being in China isn’t enough. That sounds simple, but in an environment like China where being in the “right place at the right time” has been good enough for many companies with operations in China to drive top-line growth, local presence is only a part of the equation. The second point follows the first: being local means starting with a blank white board over how you plan to design for, market to, and sell through the Chinese market. Being this open-minded is challenging because we all want to believe that part of our success in China is going to parallel what we have done that works in other export markets. While this is true in some small part, the bigger point is that you are going to have to localize for the China market in ways you have never had to for other export markets, even those where you might feel you are successful. Third, the informal networks – relational and actual distribution channels – are highly fragmented, discontinuous, and non-linear. Consequently, selling into China requires an ability to be very fluid and flexible about how you go to market. I’ve written about this before, but in China a SME should be thinking about a city-strategy before a regional-strategy, and a regional-strategy before a nation-wide strategy. Being hyper-local may not be exciting, but it’s necessary to getting your China strategy properly positioned in the long term. National distribution policies are – as pharma is discovering – impractical and unlikely to be successful. Fourth, if you are not successful, you are going to have to find a way to narrow down why your Chinese competition is winning sales you are not. The easy answer to this is going to be “cost”, and that might well be true. But what you need to find out is whether the other features you offered – both tangible aspects of your product and intangible elements of your service or brand – are being properly communicated and understood by the Chinese customer.
Too many SMEs who want to sell into China focus on the “doing” before they get the sort of market-intelligence work completed which is necessary to properly understand what their Chinese customers want and how they view the American value proposition. It is an easy conceptual mistake to make, and fortunately, an easy one to fix.