Insights and Opinions

Targeting China - Notes from a New China Hand

China's the new frontier for U.S. companies.  There's nothing like a sprawling, goldmine market with a Wild West feel to get Yankee adrenalin pumping. 

Our company, OnGreen, entered China in 2010.  We are a Los Angeles-based online-offline network connecting cleantech innovation with investors and partners.  Our own series A capital came from China, and our investors encouraged us to expand here.  With 325 clean technology companies and $US2.5B in funding opportunities on our online marketplace, we felt we were ready to head West and stake our claim.

Since arriving in China, we've made mistakes but also progress.  Drawing from both, here are our top five tips for Newbies in China.

Don't Skimp on Research

China is not only huge (1.4 billion population with a GDP second only to the U.S.), it is also complex.  Regions vary wildly in terms of demographics and development.  Industries run the gamut from state of ruin to state of the art.  And yet many companies dive into the country with no more preparation than they'd put into a new U.S. market.  Typical is the firm that hires a single consultancy – or a single consultant (“our China guy”) – that promises national perspective and unbeatable guanxi (insider contacts).  Such consultants usually end up providing a deep but limited perspective and setting up a couple of meeting tours.

Our recommendations

- Go to China early and often.  Everyone who'll touch China should visit at least once.  We've led two China Roadshows, introducing more than 20 U.S. cleantech firms to over 250 potential partners and investors, and our mantra is that this should be the first of at least ten trips for senior executives.  “If you don't go, you don't know.”

- Get free advice.   Interview multiple research firms, including Chinese ones, and use your request for proposal process to elicit as wide a range of facts and opinions as possible.

- Look beyond the numbers.  Good business statistics are notoriously hard to come by, and even reliable ones tell only part of the story, as this is a market of relationships more than numbers.  The best reports should read more like a Who's Who than a spreadsheet.

Staff for the Long Haul

More than 50% of the foreign companies we talk to say they're unsatisfied with their staff in China.  While wages are still relatively low, turnover is high.  Stories abound of workers hopping jobs for tiny jumps in pay or simply deciding not to return to work in the big city after going home for the holidays.  But equally numerous are complaints from Chinese who've worked at Western companies and found them narrow-minded, short-sighted and tone-deaf to the realities of this market. 

Our recommendations

- East over West.   It's easy to say look for in-country leaders who know Western business practices but Eastern culture, but those leaders are rare and expensive.  If you have to choose, err on the side of China experience.  A common thread in many China flops is that companies hired country managers with black belts in U.S.-style professional management but yellow belts in hand-to-hand local-market combat.  In fact, their time in the West often came at the expense of the experience or business contacts that would make them more successful here.  And their very compatibility with the home culture often made it harder for U.S. bosses to get a clear picture of how they were failing.

- Employee Handbook meets Little Red Book.  It's tempting to treat Chinese employees completely differently than U.S. employees.  To be sure, the cultures and regulations are different.    But the most successful companies bring their best practices and adapt them as well as possible to local circumstances.  In particular, we've seen that Chinese employees respond well to the same career development policies that have become more common in the U.S. Personal goal-setting, regular evaluations, performance-based pay and clear promotion paths attract and retain the best employees because they are still pretty rare here.

There's No Escaping The Man

The government and Communist Party of China not only run the country, they compete in most of the major sectors of the economy.  They do this through fully state-owned enterprises (SOEs), quasi-SOEs, and enterprises owned by well-connected friends & family of government officials.  Some of these companies are very well run, some get by only because of their guanxi, but you can bet that there's at least one of them owning major market share in your industry.  If you treat the government here like you do in the U.S., you'll probably end up the last man standing – in a game of musical chairs.

Our recommendations

- Go on the Charm Offensive.  Take every government official you meet to lunch and drinks as often as possible.  It's an endless process, but they have invaluable insight into your market (past, present and future), and there is no substitute for good will in key offices.

- Fight fire with fire.   If your competitor is the scion of a top-ranking official, fear not.  The Chinese government is not monolithic.  Aside from warring factions within any level of government, there are always turf battles between Beijing and the provincial or municipal governments.  Find out which influential agencies and officials are not allied with your competitor and then find a way to help each other out.

- Be Good for China.  Partly because there are so many public servants in private industry, partly because this is still a huge, developing nation, business here has a strong patriotic flavor.  In all your pitches and positioning, emphasize how your success will contribute to China's growth and prosperity.

- Don't obsess  As powerful as they are, government players may be the least of your concerns.  In many industries, you'll face a more serious twin threat of mongo multinationals above and myriad startups below. 

Partner Up

Most companies are better off partnering in China.  In some cases, it's actually a government requirement to partner, but even when it's not, partners bring local resources, patriotic credibility and access that can take decades for an outside firm to acquire.  They can sometimes bring capital, as well.   On the other hand, the newspapers are filled with stories of U.S.-China partnerships gone wrong, which can cost a company lots of money, time and face.

Our recommendations

- Don't rush.   A wise man once told me nobody should sign a binding partnership in China until they've been there for at least two years.  It takes at least that long to learn enough about the market to make an informed decision. 

- Date before you marry.   Work on an invoice basis before a contract basis to gauge chemistry and character. 

- Date around.  Don't sign any national exclusives – regional at most -- for as long as you can avoid it.  Work with as many potential partners in as many provinces as possible.  Along with giving you more selection, it'll strengthen your ties to local governments.

- Be fine with 49%.   Full partnerships often take the form of joint ventures, and the $20,000 question there is who gets control.  Many U.S. companies insist on control (greater than 50% ownership) or at least 50% ownership.  In some ways, that's the worst of both worlds:  you surrender upside, but you still have to dive into China enough to intelligently manage your big stake – and your operational contribution is just as likely to be hurting as helping.  Instead – for medium-sized companies in particular – it may make more sense to take your time, do your diligence, find the right partner and craft a great agreement which has clear performance-based milestones but leaves you only 49%.  Let that partner do the driving in China while you focus on the rest of the world. 

Be IP Smart

Many U.S. companies worry about Chinese competitors (or partners!) ripping off their intellectual property.  There have certainly been some high-profile cases of Chinese companies “drawing inspiration from” or “improving upon” designs, formulas or software code lifted from U.S. companies.  But we hear this concern less and less frequently.  Maybe the government is protecting IP more, but maybe U.S. companies are getting savvier. 

 Our recommendations

- Register your patent in China.  This seems obvious, but some companies don't even do this.

- Don't get too defensive.  Even with somewhat stronger IP protection by the courts, it's crazy to bank on keeping the IP to yourself.  Assume a short life for your exclusive on that IP and maintain your advantage by speeding up your product development process, building strong trade relationships up- and downstream, establishing your brand and focusing on manufacturing or service excellence rather than just secret sauces.

- Get a big brother.   A local partnership gives you someone on the ground who'll actively fight for your IP – and who the government may be more likely to side with if it comes to court action.   

Stanley Holt is the COO and president of OnGreen, and splits time between Shenzhen, China, and Los Angeles, CA.  OnGreen is the global social marketplace for cleantech funding, technology and product.