International Law

Are You Too Late for China?

By Dan

By Stephanie Henry

Stephanie has been a world class legal assistant with Harris & Moure for about a year now. Stephanie will be starting the Masters in Communications program at Johns Hopkins University in Fall 2010. This is her first solo post.  

Are you too late to enter China?

In the April edition of Harvard Business Review, in an article, entitled, "The Globe: Is It Too Late to Enter China?" Howard Tse presents five questions all businesses should consider before venturing into China. Businesses considering establishing themselves in China must first look at what he calls the 'China context,' and ask themselves the questions that will determine the success (or failure) of their China strategy. Three factors must be assessed in developing a company's China strategy to ensure it will endure amid China's changing context: 'Official China,' 'Competitive China,' and 'Consumer China.' This post covers the latter two points.

Consumer China has grown stronger from the development of a burgeoning middle class with little brand loyalty and a diverse taste in products. China's marketplace is flooded by brands and products, meaning consumers will have more choice and companies will have less stable footing. China's rapidly growing cities will expand urban markets and create additional avenues for businesses.

The accessibility and expansion of these markets will further the competition among established and new businesses, and should cause businesses to reconsider their preconceived views of Chinese companies and consumers. Foreign businesses must view Chinese companies as potential competitors, not just as suppliers. Likewise, China's expected shift from a rural to urban nation should cause businesses to consider China's marketplace as one of 'differentiated and multi-tiered segments,' with tastes as differentiated as those of Western consumers.

Businesses that develop strategies rooted in a firm understanding of China will gain footing in China – footing which will enable them to go beyond previous strategic approaches focused solely on selling or sourcing from China. Tse believes these new strategies should 'integrate the China business with [the companies'] operations elsewhere, so that China can provide them with a global competitive advantage.' Tse dubs this strategy a 'one-world strategy with China at its core.'

To develop such a strategy, Tse presents five questions to aid businesses considering China:

1) How open is – and will be –our industry in China?

China's government still enforces legal controls on products, services, and corporate ownership. If and when the industry in which a company operates is deregulated, executives should act quickly to secure a license and follow China's (often complex) rules within that industry.

2) What business models should we use?

Sourcing-centric or Sales-cetric? Tse's advice? Combine and conquer, when it comes to China's segmented market place.

3) Can we live with China's uncertainties?

Tse's summary on this is a good one: 'it's better to be approximately right than precisely wrong.' In other words, 'anticipating specific changes is impossible, but leaders should be ready to act when opportunities or new constraints appear.'

4) How can we integrate our China operations with our businesses elsewhere in the world?

Companies re-evaluating their business models to reduce costs in the wake of the financial crisis should consider '[integrating] their China operations with their businesses elsewhere.' Though '[this] will make management more complex… it will be essential if these enterprises are to remain globally competitive.'

5) Can we move more parts of our value chain to China?

Companies that advance their operations into China and expand their value chains from the region may capitalize on 'China's growing markets, its increasing dominance of parts of the value chain, its talent polls, and its integration with global communications and transport networks.'

Tse cites Honeywell as an example of a company with a forward thinking – and successful – China strategy. Honeywell transferred its Asia-Pacific headquarters to Shanghai in 2003, and has since established a new R&D center there. Since then, the company has introduced new products into the Chinese marketplace, which domestic competitors' have been yet unable to challenge. As a result of their progressive strategy, Honeywell has seen profits '[rise] nearly fivefold from 2004-2009.'

Companies that have yet to enter China may be down, but are by no means out. The opportunity to take advantage of China's burgeoning and diverse marketplace remains, and holds a vibrant future for those who wish to compete. Those businesses entering China with a strategy that considers contextual variation will be prepared to respond adeptly in China's changing marketplace, and poise themselves for success in their global business endeavors.

Full post as published by China Law Blog on June 09, 2010 (boomark / email).