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China: Anything is Possible, Everything is Difficult
by Lou Longo
When it comes to China, there’s a saying that “Anything is possible; everything is difficult.” I’ve found that most people buy into the first part of that statement and ignore the second. Very often, companies try to do too much, too quickly, pursuing far too many ventures and spreading themselves too thin. The result? They don’t succeed at any of them.
By and large, companies have been far less successful and made significantly less money in China than they could have or should have, due to the way they’ve gone about doing business there. American businesses can’t expect to go to China and operate as a traditional American company; it’s just not feasible. Because it’s not business as usual — it’s business in a foreign country with its own language, currency, and logistics. There’s so much more to consider than the untapped opportunity there.
Let’s begin with payment terms. In China, net 60 would be typical, and it’s not unusual for the terms to exceed net 100. If your models consider payment terms that are net 45, then you’re going to have a significant cash flow problem. Second are quality issues. In the United States, if a quality issue arises, the customer simply won’t pay for that shipment; in China, they still expect immediate payment for the flawed product and will send quality goods later on.
Holidays are another consideration. Whereas the United States celebrates Labor Day, the labor celebration in China lasts an entire week. In addition, the period of time around the Chinese New Year represents the largest temporary migration of people, when workers in China and around the world travel home to be with their families. My point? Don’t think about shipping and business operations on a Western schedule, or you’re going to have major problems.
Next, China’s energy infrastructure is tenuous; unlike the United States, energy sources are consistently unreliable in certain parts of China, and power outages are common, as areas of the country have simply grown more quickly than the power infrastructure can handle. In addition, it’s not uncommon for the local government to declare non-production (work stoppage) days if dignitaries are coming to the area in order to clean up the air before their arrival.
It’s important to understand that there are “multiple Chinas” within its various regions and provinces, each having its own strengths and weaknesses in regard to doing business. For an American business to be profitable in China, these differences must be assessed; many businesses think they can tap into the Chinese market and open one office in one location that can cover sales and distribution throughout the entire country. This simply isn’t the case. The country is so large that, depending upon where you locate your business, you’ll have lengthy supply chains even within the country, never mind internationally. Plus, although the road system continues to improve, a lot of product still travels by water. It’s important to consider all of this when planning a China strategy.
And then there’s the product itself. Companies must focus on core competencies to be successful in China. For example, when it wasn’t economically viable for Coca-Cola to distribute its product via bottles and cans, the company moved to a fountain service approach and enjoyed considerable success. It’s important to look at product distribution and be willing to amend that process, if necessary.
In many industries, being a global provider is critical to a company’s longevity. China needs to be part of one’s strategic understanding so that data-driven decisions can be made whether a company should be in China or not. Indeed, there is significant opportunity in China and other low-cost regions, but only for companies that focus on their core competencies and are willing to make an investment of time to understand the complexities of the region they’re entering into. Remember some of your most important investment assets for a successful China strategy are soft costs, meaning staff skills and systems that you may not have today. And it is true when it comes to China that virtually anything is possible when a thoughtful, pragmatic strategy is applied. But don’t overlook the second part of the statement, “everything is difficult,” because I’m here to tell you, that’s no exaggeration.
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