Setting the Stage

Along with a good business model, the following elements can help your company succeed in China. Some of them may seem self-evident; however, many foreign investors forget them by the time they start getting serious about China — or never knew them at all.

Being in the right state of mind

Avoid having a must-do attitude about China. China isn’t the right place for many businesses (see Chapter 1); however, some of them don’t find that out until after they’ve already made the plunge. If you go into your feasibility study thinking that your company absolutely must be in China, then your evaluation process is going to be flawed. You’ll almost inevitably conclude that your company will do well in China. When you’re operating under this pressure, you may compound the mistake by rushing and cutting corners.

The proper approach is one of cautious optimism. If you think China may have an opportunity for your company, you should investigate it impartially. If your original notions of how to do business there look like they may not work, see whether changing the model works better. Above all else, don’t lose objectivity.

Budgeting enough money

China is an expensive place in which to do business. You’re going to need to hire good lawyers, accountants, and consultants. Partly because of China’s bureaucracy, its developing legal system, and the language issues, these professionals take longer to do their work. No doubt about it — you’re going to rack up some serious fees. And don’t think you can send these people home after the initial documents are done, either. Having good outside professionals involved on a continuing basis can reduce the very real risks that you have a rogue, noncompliant, or dysfunctional operation, so keep these people on payroll (see Chapters 9 and 17 for more on dysfunction and risks).

You also encounter many hidden costs. See the upcoming “Underestimating costs” section for details.

Garnering strong support from headquarters

Your company’s CEO and board should be fully supportive of the China activities. Beyond that, headquarters should have people responsible for liaising with, supporting, and keeping their fingers on the pulse of the China operations. These people should frequently visit China.

Your company also needs to be committed to China for the long haul, which usually requires the full support of the CEO as well as the board of directors. The Chinese judge your company’s commitment by your senior management’s participation in the China business planning and execution. With a CEO-led market entry, you can show the Chinese officials and business contacts that your company is committed to the China market. Some of the biggest success stories in China today can be attributed to the direct involvement of CEOs.

The China team needs dedicated resources, a sufficient amount of patient capital, and access to decision makers. Therefore, without the full support of your company leadership, the people responsible for executing the plan may not be able to live up to their end of the deals with the Chinese.

Too often, board members don’t really understand the China market and as a result have trouble making informed decisions. Therefore, educating the board continually is important. Some forward-looking companies even hold occasional board meetings in China in an effort to provide a setting for members to better understand both the opportunities and challenges.

Think about how you can get your company’s board to understand China better. If you plan a board meeting for China, make sure board members see the less modern side of China. Consider taking them outside of Beijing or Shanghai to show them a little bit of rural life so they can better understand the limitations you’re dealing with.

Designating the China manager — the earlier, the better

Identify your in-country manager early. His or her involvement in the planning from the beginning can help tremendously. (See Chapter 9 for a discussion of finding management and other employees.) Having longtime employees of your company initially manage the China operation is far better than the alternative.

If you’re going to bring somebody in from the outside, identify this person soon so he or she can also spend time at headquarters. This orientation is important because the manager needs to know something about not only your business but also your corporate culture (see Chapter 9). The China manager will also be able to develop important relationships with people at home.

Although having the new general manager (GM) involved in planning and negotiation is great, it’s best not to have him or her leading the efforts. Remaining unbiased about the prospects in China is tough when your career is closely tied to going forward with the operation.

Don’t send people to China just because you don’t like them and/or don’t want them around. This move is often a multimillion-dollar mistake!

Staying flexible

Even the best-researched and thought-out business plan becomes inapplicable after a while — particularly in China, where certain things (especially the market) change so quickly. Be ready to use your plan as a guide, but don’t be afraid to reevaluate it if circumstances change. Get your top management and board to understand that the plan shouldn’t be set in stone.

The CEO support of Hammerin’ Hank Hank Greenberg, the former CEO of American International Group (AIG), provides an excellent example of a successful CEO-led China effort. AIG was actually founded in China in 1919. The business thrived until the foreign capitalists were forced to leave in 1949. Soon after Richard Nixon’s historic 1972 visit to China, Greenberg had a vision of reopening AIG there. He made his first trip to the Middle Kingdom in 1975, and by 1980, AIG had one of the first foreign representative offices in China. Greenberg continued to lead AIG’s China strategy for many years, making dozens of trips to Beijing and Shanghai. During these trips, he cultivated close relationships with Chinese leaders. Greenberg’s involvement has paid off for AIG in many ways, including in 1992 when it received the first insurance license issued to a foreign company in China. In part due to having such an actively-involved CEO, AIG was able to get a head start on its competitors.