DiligenceChina

Sales is usually an operational or marketing issue – not a specific due diligence concern. I’ve spent the last 4 years in China, training and consulting on sales teams and I’ve come to the conclusion that sales is, in fact, a major area of concern for new market entrants. Not only are many newcomers to the China market unprepared for the realities of managing on-the-ground sales teams, but they often enter into inappropriate partnership or JV relationships to take care of their distribution needs.

Selling into China is a paradox. On the one hand, that’s where the true potential for China riches lies – and always has. Manufacturing in China has always been a mixed bag for small & medium sized companies based overseas. But the China Market has excited people since the dawn of man (since the Cro-Marketers ?). Well, you know what I mean.

The problem is accessing the market. Or as we’ll start saying right now, markets, because China is in fact a wide range of different – often overlapping—markets.

Let’s start by dispelling a few myths:

Chinese people love western products.
Chinese people hate western products.

Which one is right? Unfortunately, both are. If a product has all the features, functions and design elements – and if the image is “cool” or associated with high quality – then being an overseas brand will help a lot.

But if the product or service is considered overpriced (as opposed to expensive, as we’ll discuss momentarily), hard to use, inappropriate for the Chinese market or otherwise questionable, being a western brand may very well hurt. This is particularly true if you are going head-to-head with an established Chinese brand. (We’re all watching Best Buy and Wal-mart so see how they do going up against potentially hostile market sensibilities). Baidu has been playing up its “Chinese-ness” again Google, though its still more sizzle than steak.

International designers and marketers who laugh off local market preferences as naiveté and lack of sophistication tend to get their heads handed to them.

Chinese people have no brand loyalty.

Nope. Just not true. It may have been so 15 years ago (though there are plenty of professional marketers who maintain that even that isn’t true), but the new crop of graduates and job-seekers are as up-to-speed and sensitive about brand preference as their NY or LA counterparts. But just because a brand is a big hit back in the US doesn’t mean it will automatically cross the water as a pre-sold superstar. Overall, however, western mega-brands have been having more and more success pushing the buttons of young Chinese consumers. Coke and McDonalds have already won over the young generation of Chuppies (God help them). More telling, the big international advertising, marketing and PR firms have already burrowed deep into the flesh of the Chinese market.

Chinese people are price sensitive.
Chinese people are conspicuous consumers.

Old people tend to be price sensitive. Same with small-towners and low income people. Young people like flashy brands for consumer electronics, cars, clothes, etc. Mothers (and therefore fathers) will spend just about anything to promote the health, happiness and future prosperity of their child or children. Wealthy men like fast cars. Any of this sounding the least bit familiar?

Relationship is everything.

Still true, if you are selling to governments and most SOEs (State Owned Enterprises). Changing rapidly for private Chinese companies and Chinese managers at MNCs. Old style “guanxi” relationships are problematic for international managers. (By the time you are familiar and experienced enough to actually benefit from guanxi, you probably won’t need to read this.) The new relationship that international managers WILL have to manage is the Chinese point of contact between two international MNCS.

Goal in China: If you plan on selling into the China market – and doing it strategically – you are going to want your own sales team lead by bilingual, experienced managers who are loyal to your organization and share the same goals. Sound a little expensive, don’t it? But that’s about the only thing that is going to work in the long term. Long term here means 366 days.

Sales and Marketing in China is definitely not an area where you want to just drift with the tide. There will be a steep learning curve and plenty of unforeseen developments, but you still need to set your own goals and long-range strategy. As always, be flexible and monitor the environment carefully.

Let’s take a look at some due diligence issues you should examine before making a decision to enter the China market as a seller of goods and services. Remember – giant MNCs have money, time and resources to recover from early sales blunders – you might not have such deep pockets.

Pre-entry research

If you don’t have the ability to do this yourself, hire a firm that specializes in market research and competitive analysis. Start your investigation as broadly as possible, and as always – assume nothing and ask naïve questions at the beginning. Chinese market research is still in its early days. You can expect the quality of a market research firm’s conclusions to range from insightful and clear to counterproductive and incomprehensible. The price will range from merely expensive to wildly exorbitant – so do as much of the legwork yourself as possible. Don’t underestimate the value of spending a couple of days walking around shopping malls and supermarkets in Shanghai and Beijing. You may just find that it’s some of the most valuable time you spend. (Note to overscheduled power-execs – the stuff you see from the back of the hotel Townecar and in the lobby of the Portman and the Jing Mao Tower is NOT representative of 99.9% of China. Sorry. )

Some Market Entry Consultants have a specialty in market research – more say they do. Ask for specific client references, and check them carefully. Also, be aware that lots of western companies pay hefty fees for customized research projects, only to see it get sold to the general public the next week. Only deal with reputable market researchers whose references check out and have experience in your area.

Marketing material, brochures, etc

Here’s an area where many established companies fall down. The material you use to market your products and services are not appropriate for this market. You can have them translated – but then they are likely to be ineffective for 2 reasons – the format is all wrong and the translation is probably flawed. Marketing to China means more than just translating “We Bring Good Things to Life” into bad mandarin (which I believe was once mistranslated as ‘we will resurrect your dead ancestors’, but that may have just been an urban legend. Drop a line if you know the real story.) You will have to have all your materials redesigned. It is expensive, time consuming and difficult – but if you don’t do it, you’ll get slaughtered in the marketplace. Trust me.

Distribution

Unless you sell electric power, railroad tickets or MAYBE bottled water, China doesn’t have a single national market. You will have to contend with a dizzying range of market segments, demographics, territories, etc. Make sensible choices early. Shanghai, Beijing and Shenzhen are reasonable points of entry. These cities are far apart, speak different languages (more or less), and buy differently. Don’t be a boob. Pick one, do a reasonable job, move to the next. Newcomers with tight budgets who try to break into multiple markets in a country they don’t understand run into trouble.

Sales models

The goal is to have your own sales force. Top down is the way. You want a sales manager who is capable and independent – but still loyal to your organization. You have a lot to be concerned with here. Some salesmen are all talk (just like anywhere). Good salesmen will make or break you in China, but there are issues with staff retention, turnover and motivation. See Chinasolved ( http://www.chinasolved.com/blog/?p=107 ) for strategies on dealing with sales teams in China.

Working with sales & marketing partners: Due diligence issues

If you are a typical western business, you are considering finding a local company with established marketing channels and a sales operation that targets your potential target market to partner with. It’s a sound plan, and it may work. BUT this is where western businesses typically have the most problems in China.

You will have all the usual China due diligence precautions, plus a few new ones. Concern number 1 is time wasters. Distribution and marketing is where you’ll run into a lot of ‘first-timers’ who don’t have solid experience dealing with westerners – or are new companies started up by ambitious youngsters. They will talk you to death learning the business from you, and will probably ruin your reputation and try to steal your IP in the meantime. And they will sell nothing.

Theft is concern number 2. They probably won’t steal your actual product – more likely they will steal your IP. Now, I am talking about trademarks and copyrighted materials — but there’s more. Chinese sales partners will also steal your designs. Ok, no surprises here. They will also steal your slogans, your advertising, your promotional materials (which they will mangle to make more local) and anything else you have. It’s not always a big financial concern (although it could be), but it could end up costing you in terms of time, opportunity and reputation. Get references early, and check them out before you start meeting and greeting strangers. DiligenceChina Hint: Don’t start the never-ending cycle of meetings with a partner until you check some of his references first.

Beware the ‘guanxi salesmen’. Everyone you deal with will be expected to have the necessary connections to do proper business. BUT if those connections are the only thing they have to offer, you should get out of that conversation early. For every 10 China market entry disaster stories you hear, 9 of them start right here. Do not give gifts, bribes, promises, signatures, or blank checks to potential partners in China. DO NOT GIVE GIFTS OR BRIBES. Is there a way to make that more clear? DO NOT SIGN CONTRACTS IN CHINESE IF YOU DON’T READ CHINESE. (Oh hell – go here http://www.chinasnippets.com/2006/10/21/china-business-scam-follow-up/ and then here www.chinalawblog.com Let them tell you. I’ve done my best.)

If you do find a marketing partner that you think you can live with and whose references check out – negotiate for a desk and a phone, and hire a dedicated sales representative or coordinator who will be responsible for your business. You hire them – don’t let the partner do it. Your business entry consultant should be able to help. Develop a regular routine of communication with this person – and take precautions against them being “co-opted” by your partner.

Incremental approach

Entering the China market doesn’t have to be a big-budget affair. It is best to take an incremental approach by finding appropriate partners, consultants and individual hires early, and gradually building to a full-fledged market presence. Your lawyers and market entry consultant can help you plan and establish your initial steps. The point is to take a measured, incremental approach that ends up with you running your own sales team with a bilingual sales manager who is loyal to your organization.