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Cross the Rubicon

Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

Cross the Rubicon - Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

Now This Is Interesting …

Because a good bit of what we do is for SMEs, one of the issues our clients usually wrestle with is how to cost-effectively sell into China.  They get the top-level strategy, but always harbor deep misgivings about how much really giving themselves over to the idea is going to cost.  This week, as part of an ABC News story on how American companies are selling into the Chinese market, they referenced a business that I am very excited about, a business I believe is going to be very important for clients like ours:  Export Now.  You can see the ABC story below.

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Export Now was founded by Frank Levin, formerly the Undersecretary of International Trade at the Commerce Department and Ambassador to Singapore.  Their model is pretty simple, and I think very impactful to SMEs in the consumer products’ space.  Through a partnership with the Chinese e-commerce site TMall.com, customers of Export Now can get their products put in front of Chinese consumers.  The report makes mention that the web site has been viewed by some 370 million potential Chinese competitors.

Export Now acts as an aggregator of US manufactured products, ships them over to China, coordinates all the logistics behind getting the product into the country and then getting shipped out to the individual customers with order fulfillment by TMall.  TMall also handles on-line marketing of the products in much the same way as would American e-commerce sites.  Obviously, there are fees for these services, but the mechanism parallels what we have seen work in the US and EU.

Not every product is right for this particular model, but the on-line exchange forum this represents is an interesting way of opening the Chinese market up for SMEs eager to find a way to cost effectively sell into the country.  Making the mechanism and transactions more accessible for doing so is a huge step forward, but in no way should this come before up-front due diligence on which products to take to China, and whether

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A New Reason to Be in China – India – Eastern Europe – SouthEast Asia

The Economist recently had a short column out titled “Comparative Advantage:  The Boomerang Effect.”  In it they point out that while some manufacturing is beginning to trickle back to the United States from China and other low cost centers of production, the ultimate impact of this remains unclear.  Those industries that are the most sensitive to labor costs (apparel, textiles, toys, etc.) are either moving in-land within China, or have already relocated to other countries in South East Asia like Vietnam.  As the Economist article points out, much of the interest in Myanmar revolves around it as the next center for low cost production which, given inflationary and labor-supply pressures in Vietnam, could position Myanmar to benefit from a round of manufacturing led FDI.

From a policy point of view, the article makes a damning comment about the much bigger reason why Apple couldn’t make the iPhone/iPad in the United States, even if they were so inclined:  the manufacturing know-how and industrial base simply doesn’t exist in the US like it does in the APAC region.  People are keen to point out all the factors that make China more competitive than the US, especially those that center around their lower costs and currency manipulation; however, missing in these criticisms is an acknowledgement that APAC countries in general (China included, but also Taiwan, South Korea and Japan) benefited as Apple and other electronics’ manufacturers grew up, by having constructed coherent national industrial policies around becoming leaders in these areas.  The know-how is broader, deeper, and more accessible in the APAC region than in the US, a factor the Economist article does well to point out.  For a great take on this, pick up Dan Breznitz’s Innovation and the State.

What the Economist article leaves out, that I think is worth pointing out, is that companies who have been in emerging markets primarily to source, are going to have to transition their strategies into selling to these countries.  This is a challenge that mutli-nationals are most comfortable pursuing; however, vibrant American and European economies need more than just their big companies to be successful at this, SMEs need to figure out how to do this as well.  The days of  being in the APAC region simply to benefit from low cost goods is coming to an end; success now will reside on selling to these economies.

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April – May Emerging Economy e-Newsletter

If you are not already a subscriber, drop a line off to info “at” rubiconstrategygroup “dot” com to be added to our list.  This month’s e-newsletter includes an overview of our work in the Chinese senior care space, as well as an upcoming white paper on IKEA Beijing’s strategy, and our forthcoming West Africa distribution mapping project.  You can also view the e-newsletter here.

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Finding Bandwith

Over the last two days I have had a number of meetings with various state officials who are active in trade development for Washington State.  With the broad array of industries at their disposal and the very rich vein of manufacturing and technology expertise across the area, they are in a unique position to see patterns in how the local and global economies are changing.  In particular for a state as reliant on exports as Washington (fifth in the country for 2011), they see the unique role international sales and marketing plays in the growth strategies for the industries and companies they serve.  What struck me in our conversations was that no matter which industry was the purpose for our meeting – agriculture, composites, pharma or medical devices – the same issue came up when we started talking about developing an international sales strategy:  bandwidth.

Obviously the smaller the company, the more bandwidth overall is a problem.  But even in mid-sized companies, finding the time to develop a strategy for selling into, or finding partners within emerging economies can be so great that it never makes it onto the organization’s list of priorities.  Similarly, few companies have staff members who are willing to be dropped off in an emerging economy with little in the way of guidance (how about telling your product manager to “go figure out how to sell into India” – having been on the receiving end of that sort of conversation myself a time or two, I can appreciate how that goes over!).  Even more problematic for staff members is being tasked to do this with little in the way of local support.  It takes a unique individual who is willing to get off a plane in Accra with no one waiting for him.  Developing an international sales strategy for emerging economies is something almost every company knows it needs to do, but the problem of bandwidth continues to prevent them from pursuing it.

This is obviously building to a bit of shameless self-promotion, but the larger point is this:  never before have American companies been more in need of crafting strategies to get their products and services into emerging economies than now.  While the American economy appears to be righting itself, the compelling high growth economies are those outside our borders, and it is only by carving out the time, energy and capital to build strategies for working within these countries that we can hope to have a healthy and vibrant domestic economy.  It was encouraging to hear from so many well-placed people within the state that the need for these services is greater than ever.  For SMEs, the challenge is finding the time and selecting someone like Rubicon to take the lead in the early-stage missionary work that is always the most ambiguous and poorly defined stage in the process for becoming a proficient export company with a solid international sales strategy.  Hey, I said this was going to end up being a shameless self-promotion, so I’ll wrap up by pointing you to our contact page!  Hope to hear from you soon …

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You’ve Got It all Wrong … Stop Sourcing, Start Selling

The world is clearly at a major inflection point:  whether you subscribe to Niall Ferguson’s view that power is inevitably shifting from the developed West to the emerging East (and China specifically), or take a more contrarian view (that China is going to implode aka Gordon Chang), both camps agree that the forces shaping globalization are undergoing momentous changes.  Specifically, globalization is coming under assault in the developed West as economic recessions drag on and it becomes politically advantageous to blame China as the cause.  Added to this tension is awareness within China that the massive growth it has enjoyed over the last twenty years has led to many pockets of inefficiency and excess capacity that will ultimately have to be dealt with by policy makers.

Companies operating in China are nervous about how governments on both sides of the Pacific are going to respond to these stresses.  Over-reactions are certainly possible and, given the nature of what passes for political thinking in the United States today, growing more probable as each election cycle moves forward.  Against the backdrop of these large strategic questions is a more basic one:  will MNEs who initially went into China to take advantage of low priced labor continue to invest in the country as wages (and most other inputs) go up in cost?  The answer to this question is, absent political responses that make it impossible, “yes”.  Yes, companies are going to continue investing in China even though the country is getting more expensive to operate in; however, they are going to increasingly shift resources away from exports to products manufactured for the domestic market.

Focused on the question of whether FDI will increase or decrease in China, the Economist Intelligence Unit (EIU) put out a new report called “Serve the People:  The New Landscape of Foreign Investment Into China.”  The report makes the point that while China is getting more expensive, this does not mean companies are going to move away from China as a key growth market.  As the report states, “Contrary to those that suggest rising wages in China will encourage multinationals to base their operations elsewhere, we argue that rapidly growing levels of personal disposable income will encourage foreign investors to try to tap into rising domestic demand.”

The report makes note of two trends:  FDI more focused on service than manufacturing and companies are moving inland both because it is less expensive, but also because that is where the fastest growing untapped domestic market is.  Proof of the latter is, as the report states, “… the municipality of Chongqing, in western China, was in 2007 ranked 22nd of China’s 31 provinces in terms of overall FDI.  However, in 2011 it attracted and estimated US$10.8bn in inward investment, more than the national capital, Beijing.”  This echoes analysis done, as the EIU report shows, by the US-China Business Council who “estimates that more than 70% of sales for US companies in China were to the domestic market, with only around 8% exported back to the US in 2000-08.”

It can be difficult for a SME to know what to make of this changing landscape.  To the extent larger companies are struggling to make the transition from being in China for low priced goods to the development of a meaningful and profitable domestic market for their goods, the challenge is even more acute for smaller businesses.  Now is the time to get very serious about developing a strategy for selling into the Chinese market versus simply sourcing from it.  This is easier said than done; however, if you wait to develop a plan for selling into China until sourcing from the country has ran its course for your business, by the time you are ready the market will likely have moved on.  If domestic competitors pick up the slack for you during the interim it will be difficult, if not impossible, to displace them.  Yes, your reasons for being in China are changing.  But, the much bigger and more impactful opportunity for your business has always been selling to, versus sourcing from, the Chinese market.  As the EIU report makes clear, now is the time to get busy developing a way to develop the domestic Chinese market for your company.

 

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A Change of Focus

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.

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Wal-Mart’s China Experience & Your Business

The December issue of the Atlantic magazine has a very good article by Orville Schell titled “How Wal-Mart Conquered China … and Vice Versa”.  It is one of the more balanced pieces I’ve read in some time about Wal-Mart in general, and the company’s efforts to promote sustainability in China specifically, in some time.  Most people are familiar with the relationship between China and Wal-Mart.  As Schell writes, “Although Wal-Mart’s $7.5 billion in Chinese sales receipts account for only 2 percent of the company’s annual revenues, its sales in China have risen substantially over the past decade … Equally important, if not more so, some 20,000 Chinese suppliers, or ‘partners,’ reportedly provide Wal-Mart with about 70 percent of the nearly $420 billion worth of goods that it sells globally each year”

 

The article goes into great lengths talking about what Wal-Mart is doing to encourage sustainability and environmental stewardship with its Chinese suppliers, both for reasons born of its own domestic North American market as well as those it is already encountering in its growing Chinese market.  The recent snafu over Wal-Mart’s sale of non-organic pork under organic labels hit a sore spot both with the Chinese government as well as the burgeoning middle class Chinese consumer.  North American consumers might approach Wal-Mart with caution as to the quality expectations they have when purchasing from the massive retailer, but Chinese consumers approach Wal-Mart with in many ways much, much higher expectations.  In the United States, Wal-Mart is a necessary retailer; in China it is an aspirational retailer.

 

While reading Schell’s article it struck me how Wal-Mart is setting in motion not just an increased consciousness about sustainability and environmental impact in the Chinese market, they are also acting as a major stimulator of forward thinking from their Chinese vendors for the Chinese market.  Through Wal-Mart’s elevation of questions about how your factory is run, what is your major product’s life cycle, how can you best address the environmental impact or perception of quality from the Chinese consumer, Wal-Mart is acting as a force to elevate the perspective of Chinese entrepreneurs and businessmen who previously only needed to meet price and delivery terms in order to be a successful Wal-Mart vendor.  Now that Wal-Mart expects more, they are going to be a major force in setting in motion the sort of forward thinking Chinese business desperately needs.

 

All of this is very, very good, yet I would suggest that for North American and European SMEs, the process Wal-Mart has set in motion is also dangerous for your business on at least two fronts.  First, Wal-Mart is going to force your Chinese competitors to think in more sophisticated ways and ultimately, this new knowledge is going to filter into other parts of the Chinese companies you face every day.  With this new knowledge, they are going to get more savvy about marketing, product design and consumer research.  Walmart is going to be a very direct protagonist facilitating these companies to develop new skills and build new areas of expertise.  Some of these benefits will accrue only to the Chinese market, but others will hold the potential to impact export markets like those in North America as well.

 

Second, the conversation Wal-Mart is having with its Chinese vendors represents one of the most pivotal and impactful exchanges taking place between the Chinese consumer (as represented by what Wal-Mart is gleaning every day from what its Chinese customers want, value and are willing to pay for), and your Chinese competition.  If you let Wal-Mart have this conversation just with your domestic Chinese competitor, then you aren’t benefiting from your existing supplier relationship with Wal-Mart.  If you want to get a place at the table talking to, and benefiting from, the growing Chinese middle class, you have to find a way to get your Chinese strategy somehow into the conversation with Wal-Mart in China.  The more you can localize your Wal-Mart China strategy, the more you stand a chance to be seen as not only a forward thinking SME serving Wal-Mart’s North American needs, but their Chinese needs as well.  Not doing so could well mean not benefiting from one of the most important conversations taking place with the Chinese consumer yet.

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Think You’re Struggling?

Then spend a little time in the SME sector in China, or for that matter, most Chinese manufacturing businesses.  Today I visited a factory owner who I’ve been working with for several years.  A Taiwanese who has homes in Taiwan and Guangzhou, this second generation businessman is facing an incredibly difficult future.  The tone in this part of the Chinese economy has definitely changed over the past five years, from a spirit of “can-do” at almost any request to an attitude of reticence, reluctance and refusals today.

 

Here’s why:  this factory owner, one of the many SMEs Beijing no longer needs to make a priority, has had his factory get closed down by the government (the building, not the business).  Not because they don’t want him making any more of what he’s involved in manufacturing, but instead because they have decided that the factory complex he’s been operating in for the past several years now should be an electronics mall.  So, the government has appropriated the land and will be demolishing all the factories in the area starting January 1st.  Even before this, the rent on his factory had tripled in the last five years.  Ouch.

 

In addition, his labor rates have gone up – according to his back of the napkin estimates today over lunch in Shenzhen – over 50% in the last 5 years.  He commented that even if he could afford to pay them, he couldn’t find workers that were willing to work in the sort of manual labor jobs he has to offer.  Labor rates have increased about 10% over the last 18 months alone.  Coupled to the appreciating RMB and food costs (he, like many factory owners in China supplies dorms and food as part of his workers’ compensation), he faces an incredibly uncertain future.

 

Over the short term, he is planning to move production to Ningbo, where he has a business partner who has cheap land and an available factory where he can relocate his operation to; however, the combination of a tripling in his rent, 50% wage increases, the RMB appreciation, and the inflationary pressures on his food purchases, he is becoming additionally uncertain his business can compete much longer.  His friends are talking about opening up factories in Vietnam or Indonesia, but thus far, he has resisted doing this.

 

What does all this mean to American companies?  Most obviously, China is transitioning out of being a low-cost manufacturing center much faster than we might expect.  The country has long been more expensive than other countries in the region like Indonesia and the Philippines, but other factors (the vibrant domestic Chinese economy, infrastructure and logistics advantages, rule of law, etc.) have given China the edge.  As China’s costs continue to grow, smart companies in the field of logistics and infrastructure will begin helping to further build the conduits of commerce in countries like Vietnam, Indonesia, the Philippines and Thailand in order to facilitate low cost industries migrating out of China.

 

More on this in a later post, but the predominant reason countries like Vietnam have struggled to become the next great Asian success story is the lack of infrastructure and logistics, which if resolved, could transition Vietnam into a source of growth opportunities.  While it might be too early for your manufacturing company to invest in Vietnam or Indonesia, if you are a logistics or infrastructure company, you are in an ideal position to benefit as the Chinese low-cost story fades and other countries become attractive as sources of low cost manufacturing labor.

 

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Just how bad of shape are China’s SMEs in?

I have spent most of this week in Wenzhou at a variety of the SMEs who are being impacted by the city’s loan crisis.  Wenzhou plays host to the country’s thousands of manufacturers of sunglasses, cigarette lighters and cheap leather goods (shoes, purses, wallets, etc.).  SMEs are critical to China’s overall economic performance, and have a particular legacy in how China transitioned from the collectivist model of the country’s economy to its hybridized capitalist/socialist model of today.  My column at today’s Asia Times talks about what is happening on the ground and what it suggests about the future.

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