Proper preparation and planning, the saying goes, prevents poor performance.
Australian experts urge say the old maxim applies to China and urge business to do the basics well before considering any venture there.
“Business sometimes thinks that if they can sell a pair of socks to everyone in China, they will sell billions,” says Christopher Wright, a Senior Trade Commissioner at Austrade. “They get fixated by the big numbers and get distracted from the things needed to do the deal.” Wright therefore advises that businesses contemplating a Chinese venture do the basics, starting with a chat to someone who has gone there before.
“Talk to as many people as possible who you know are already doing business in China to help you get your bearings,” he advises. And if you cannot find someone at home to talk to, ask an Australian who’s already in China. “Especially in the big Chinese cities it’s not hard to find Australian companies.” Those conversations, he says, will be informative, but won’t reveal secrets that make the Chinese market easier. “My view is when you map out your deal, you have to map it out the way you would anywhere and make sure it makes sense. The strategy would be familiar to any MBA student anywhere for any market entrance.” Cameron MacMillan, Executive Director of International Business at accounting and advisory network BDO also advises careful preparation before entering China.
“I don’t think it is any different to any other market,” MacMillan says. “An exporter needs to take their time and do lots of research: businesses get a bit blinded by the opportunity and don’t cross the T’s or dot the I’s. Sometimes we do more research to go into another state than we do to go into China.”
MacMillan and Wright both advise that while it is important to find key advisors in China, it is risky to work with a single person or ‘fixer’.
“Sometimes we meet someone, they paint a picture of the possibilities in China and we fall into them as a sole source of information. You can end up in a position that takes a lot of backing out of,” MacMillan says.
Wright agrees with MacMillan, and advises businesses to be sceptical. “People will make claims,” he says. “They will say they know the right people and can fix things for you. Those claims are hard to establish, but frequently you will be disappointed. So be sceptical and always keep your wits about you.
“Tactically, you will need assistance along the way: you’ll need a lawyer, an accountant, someone linking you to people in China’s bureaucracy or establishing contacts with buyers.
You will build a web of relationships that smooth your entry. But the problem with building a strategy on a fixer is they can evaporate.” Another tip for those approaching China is not to expect overnight success.
“If you are an exporting business, the ones that go well are cautious and have a short to longterm plan,” says John Shim, a Partner at PwC and the leader of its Korean and Chinese desk. “Have an expectation of impact in 18 to 24 months. Anything faster is an unrealistic expectation and the ones that are desperate for growth will be disappointed.” “The China opportunity is not going to go away, so do your due diligence.” Austrade’s Wright concurs.
“Be very conservative in your expectations,” Wright says. “I think a lot of people get excited by the hype. Lower your revenue forecasts.
Increase your cost and time estimates. Run a conservative plan. If it works on that basis, you are half way there.”
Where to start
Another consideration for those entering China is where, physically, to start.
PwC’s Shim suggests that Hong Kong may offer a comfortable base, but may not be the best place to locate your Chinese venture.
“Those who start in Hong Kong do it for lifestyle reasons,” he says. “China is a massive challenge. Hong Kong is a good gateway, but a compromise.” The island city is, however, a good place to see trends in Chinese consumption.
“If you want to see the power of the consumer in China, you can see it in Hong Kong with queues outside branded stores,” he says.
Austrade’s Wright advises considering both first and second-tier Chinese cities.
“Shanghai is a massive market of 20 million people, but everyone is here. If you go a couple of hours out of Shanghai, the cities are not as big and the population may not have the spending power … or the competitors. You can go in and build from there.” A smaller city may also bring the advantage of lower costs. “Labour costs are increasing in the east of China and the rise is slowly moving to the west,” Shim says.
That shift, he says, can be used to your advantage, because if you use China for manufacturing, it is far safer to use more than one supplier.
“One thing those who use China as a supply base do badly is depend on one supplier,” he says. “That is a bad business practice, because manufacturers are realising Australia is a small nation and they can cut your supply overnight.
Quality is also an issue: as soon as it drops, it will take another three or four months to find another supplier. So you need two or three suppliers in different parts of China.”
Wave the flag
Another risk-reducing tactic is to work with the Australian government when you enter China, according to BDO’s MacMillan.
“I cannot over-rate the importance of having Australian or State government support,” he says. “Government agencies can help you do the research on the right people and they are very good people to have leaning over your shoulder when you are about to sign a contract. No-one in China has heard of your business, but everyone has heard of the Australian government. When the Government are there at the signing of a contract, people are more hesitant to leave you empty-handed. The Chinese have great regard for government and I believe Australian government involvement increases the rate of success.” PwC’s Shim believes exposure to China also increases success.
“The thing I would say to all Australian small businesses is go to China in the next 12 months.
Have your next holiday in China: it’s time to have the experience.”