Succeeding in China Tom Behrens-Sorensen Navisino (Beijing) Advisors Ltd.
Muligheder og udfordringer 24 millioner SMVer i EU 13% af EU27 SMVer eksporterer uden for det indre marked Kun 250.000 SMVer eksporterer til Kina Kilde: EU SME Centre 11/7/2012 præsentation 2
Advice: Access to Markets what are the key issues? The Chinese market is dominated by local and regional brands How to expand production facilities in so big area with quicker customer services and lower transportation costs? How to build up an efficient distribution network? How to secure the raw material supply? 3
Advice: Access to Markets key success factors Understand the large diversity of the Chinese market through detailed analysis of target customers Put much expenditure in mixed advertising method on promotion and change the customers concept and thoughts Localize: Hire sales representatives and set up sales offices province by province throughout the whole nation Present your plans to the government to make sure they understand your plans and the foundation for a win-win situation 4
Advice: Sourcing from China what are the key issues? Procurement in China is much different than in European countries Often, what a European company views as important does not match the intentions of the Chinese supplier partner Attractiveness depends on advantages based on: structure, factors of production, and government Hidden costs abound, know how to calculate Total Cost of Ownership (TCO) 5
Advice: Sourcing from China key success factors? The attractiveness of a sourcing region depends on many factors, such as production factor advantages, structural advantages and government policies Sourcing in China will be greatly facilitated through: Much greater face-to-face contact and shared engineering talent Having a local procurement department Total Cost of Ownership (TCO) is a convenient tool for cost reduction and decision making Supplier on-site visits and supplier development is paramount to achieve low TCO Achieve win-win through cooperation around quality issues 6
Advice: Redefining Investment Strategies what are the key issues? In China or with China? China is becoming too important to not be considered both as market and as a partner Certain industries are heavily regulated, which restricts the stake you are able to take JV partners may have different objectives than the foreign company Foreign companies are looking for ways to align their own objectives with the Chinese interests and it is not always easy to maintain the balance 7
Advice: Redefining Investment Strategies key success factors Timing is everything, cash have been driving the negotiations for either partnerships or acquisitions, but know-how and technology are becoming increasingly important. Be creative in finding solutions for what will seem impossible up front, even if these solutions are not perfect Build a relationship, either by yourself or with a good partner, with government (local and central) to be able to get the message across that you would like to achieve win-win situation Persistence and the use of the right resources are critical to deliver this message 8
Advice: M&A in China what are the key issues? Is acquiring a Chinese company the best way to enter the Chinese market? Industries may be regulated and the acquisition and negotiation process may take longer than Europe Managing and resolving issues identified during due diligence; particularly understanding the hidden risks and liabilities connected with the acquisitions could be difficult. Decide which structure to choose, asset vs. share deal Retaining management of an acquired company when most of the western incentive models (e.g. options) are not working Cultural differences make a successful integration more challenging than in a western situation Constantly changing tax and legal framework for M&A transactions, reactive instead of pro-active 9
Advice: M&A in China key success factors Have clear directions on strategic objectives for the acquisitions and setting precise and measurable targets Use a strong local leadership and local M&A team Share the vision / strategy with the seller to make clear what the directions of the company will be post acquisition Understand Chinese negotiation mentality 10
Advice: Innovation what are the key issues? China is currently not capturing innovation value but is the workshop of the world: Research-based product innovation need to improve in response to policy measures, and/or, via implementation of foreign R&D centers in China. Promotion of indigenous innovation by the government - Can this lead to a shift from copying towards a source of innovation? Great pressure to reduce royalty payments to foreign IP owners, as well as great pressure to supplant foreign IP standards with local standards. Common innovation-related problems for foreign players in China: Protecting IP rights - battling infringers Avoiding regulatory attacks driven by success Innovatively adapting business models and processes for China - protecting trade and business process secrets 11
Advice: Innovation key success factors Foreign companies in China should participate in local Chinese initiatives for innovation Confidence in the foreign-domestic partnership - share technologies and latest developments with strategic partners Location decision for R&D center needs to be based on what the market has to offer in terms of expertise Not setting up R&D center in China will not prevent patent infringement See Chinese competition as a benefit to international competitive landscape 12
Advice: Fraud & Corruption what are the key issues? Corruption and IP infringements are damaging a company s reputation both in and outside China According to statistics the western companies in China are more involved in fraud cases than domestic companies, the main reason for that are: Foreign companies are going to the authorities to report fraud; Press coverage: It is more interesting to out a foreign company in the news than a local company Counterfeit products are harming the Made in China brand and China s image and China products need to regain the trust 13
Advice: Fraud & Corruption key success factors Set-up a company internal anti-bribery policy Apply a zero tolerance policy An effective anti-fraud policy is reliant on the following three fundamental requirements: Effective controls A culture that supports control efforts The correct tone at the top Prevention is better than cure (and a lot cheaper!) 14
Advice: HR what are the key issues? Leadership shortage especially in China: Difficulties in recruiting experienced high level management local talents; Rising cost in management; Competition from domestic companies Labor market situation in China: High career expectations by the few bilingual experienced managers; Unwillingness to relocate to other cities expect hot hubs; There are culture gaps between East and West Factors affecting employee satisfaction (e.g. leadership style) High employee turnover 15
Advice: HR key success factors MNCs need to think globally and act locally Develop a Chinese business model instead of using the existing European model MNCs should place more emphasis on soft skills Focus on performance management 16
Advice: What does this mean for you? Is this market a priority for your company? Are you sending your best people to run and expand here? Local strategy China will remain for the years to come a market that MNCs cannot afford to ignore China is an emerging force (innovation, M&A) that should not be underestimated Strategies toward China should evolve from inbound investment to partnering with China (sourcing, licensing, franchising) 17
Advice: What does this mean for you? Detailed preparation and adaptation to local conditions are key to executing successful strategies Compliance with tax and customs rules will remain a challenge Development of MNCs in China may be hindered by increased competition of domestic companies and a shortage of talent 18
China: Culture Deal First vs. Relationship first Informal vs. Formal Fluid time vs. Rigid Time Expressive vs. Reserved Leadership Style: Democratic, flat organization Hierarchy is for convenience Consultative Consensus building, slow decision process Team, we focus Participation and contribution expected 19
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