DiligenceChina

There have been 2 China business headlines in the last couple of days that may slip through the cracks if you’re not careful.

Wal-Mart has hired Ed Chan to take over its China operations. He will succeed Joe Hatfield – probably around February. (http://www.rttnews.com/sp/breakingnews.asp?date=10/23/2006&item=10)

The good folks at China Economic Review report that Starbucks http://www.chinaeconomicreview.com/subscriber/newsdetail/8044.html is acquiring 60 or so retail outlets in the Beijing area.

Chan used to work at the HK based Dairy Farm Group as the Regional Director of North Asia.

Starbuck’s bought the company that was already operating its stores in the Beijing & Tainjin area.

All – in – all, some pretty boring news… or is it?

Ed Chan is an acquisitions expert, and was one of the driving forces behind the bucolic-sounding Dairy Farm’s purchase of the 7-Eleven Chain in HK and China. He knows how to put stores on the ground in China. Lots and lots of them. Wal-mart has not made any secret about the fact that it plans on overtaking Carrefour as the #1 foreign retailer in China.

Starbucks bought those retail outlets from itself, more or less. The previous owner was the Singapore outpost of H & Q Asia Pacific (http://www.hqap.com/index.html) — more commonly known as Hambrecht & Quist. Coffee lovers and barristas throughout the world know H&Q as a venture capitalist and boutique investment bank that is better at counting beans than grinding them. The move is intended to give Starbucks greater control over its China operations.

So what?

American companies don’t really like building markets – they prefer buying market leadership once the markets have already developed. Oh, sure, a few big brands such as Coke and McDonalds like to start early – but the typical US corporate model is to wait until the market achieves critical mass that can support a large, systematic roll-out. And it looks like US board-rooms have decided that the time is right for them to bust a move, China-style. Citibank, Morgan Stanley, ADP, and other low-profile giants have recently increased their activities in China. These guys don’t open a rep office and put 12 people on staff. They work with headcounts of tens of thousands.

How will this change the environment for small & mid-sized business entrants into China?

Well, there’s good news and bad news.

The good news? More customers, more clients, more services. If you were considering entering China or expanding your China operations, there’s a good chance you will see more familiar faces around the 3 major cities of Shanghai, Shenzhen and Beijing and the host of “second cities” like Wuhan, Tsingdao and Nanjing. There will be more services – both B2B and consumer. And there are going to be more highly-trained human resources on the street as the giant US-based MNCs crank up their training apparatus – and spit out those who can’t stomach a life in the machine.

The bad news? Cost bases are going to rise (even faster) at the high end. US companies will buy or rent premium properties regardless of price. The same goes for the top people. Americans believe in the “star system” when it comes to hiring – pay the best people whatever it takes to get them in the door. British bankers in HK watched in horror as their entire staff walked out on them when the US giants first came to town (and laughed when they packed it in and left briefly in the 80s – but that funny story will wait for another day).

Some of our European friends have opined that there were already plenty of Americans on the streets of Shanghai and Beijing. Well, sorry Francois — you ain’t seen nothing yet.

More on this as it develops.