Deciding What You Want (and Need)

When doing any business plan, you need to address a lot of questions. The following six considerations are part of any proper plan. However, you need to be aware of some important China twists in order to keep it realistic.

You obviously need to know what business you’re going to do in China. However, you should think a little bit deeper than that. What are your business goals? As you research, consider whether they’re realistic.

Where to locate

One of the first questions you need to answer is location. (See Chapter 7 for a general discussion of China’s regions.) Your company’s location is vital to its ability to find qualified office staff. You don’t necessarily have to be in a top-tier city (for instance, Beijing or Shanghai) to tap into a solid talent pool. Many second- and third-tier cities (such as Hangzhou and Chongqing) have good worker bases. If you’re going to be manufacturing in China, be careful not to fall into the trap of focusing on incentives. Being near suppliers, customers, and reliable utilities is more important. See Chapter 13 for more information on factory site selection.

The governments in large, first-tier cities are generally more transparent and reliable. However, unless you’re a major investor, they’re unlikely to guide you through the various approval processes. Cities that are hungrier for investment may be more willing to help you through the red tape, but the potential for bad surprises is greater.

Staffing and worker requirements

Be a little aggressive in your assumptions about the number of office staff you need. As you can read in Chapter 9, Chinese employees have certain strengths and weaknesses compared to their Western counterparts. In general, you may need a slightly greater number of workers in China than you would in the West. Most Chinese workers aren’t as good about wearing multiple hats as Westerners are, so you may need to have a bit more staff.

We can name two other caveats about staff planning. Figuring out what the appropriate wages are is really difficult. In many of China’s booming cities, wages for well-qualified office workers are inflating rapidly. When forecasting your financials, be a bit aggressive on the wage and wage inflation rate. Another issue is that office staff turnover is very high — especially in hot markets. Plan for significantly greater turnover than you’d expect in the West.

One of the big misconceptions that companies have about China is that the factory labor saving is substantial. In many cases, your per-unit labor costs will be about the same as they are in the West. Yes, Chinese wages are much lower than in the West; however, most products don’t have that high of a labor component, anyway. In addition, Chinese laborers aren’t usually as productive as Western workers. You therefore need more workers for the same task than in the West. See Chapter 13 for more on factory labor.

If you’re wondering whether it’s a myth that you’re able to produce in China for less, it isn’t. In Chapter 13, we explain that the cost savings in China are lower utility and input costs, as well as efficiencies gained by using newer manufacturing models.

Building up: Whether to walk or run

Your company can get its feet wet by setting up an office in China just to do some sourcing (see Chapter 12). Maybe your goal is to manufacture in China for your U.S. customers today and sell in China tomorrow. Or perhaps you’re going right after the Chinese consumer with your own sales network (see Chapter 14).

The slower you build up in China, the less costly your mistakes (which you’ll inevitably make) will be. You’re also less likely to leak proprietary intellectual property (see Chapter 17). On the other hand, regardless of whether you leak IP, you’re likely to see the competition develop quickly. Part III of this book can talk you through the major factors in this decision.

How to sell in China

If you’re looking to sell consumer products in China, be aware that distribution is very difficult. As we discuss in Chapter 14 on selling in China, third-party distribution isn’t usually a good long-term plan. Doing a joint venture with a Chinese company has drawbacks, too. Usually, for long-term success, you have to build a sales force on your own.

After you figure out how you want to distribute, you have to decide whether to go into multiple markets at once (beating out competitors but possibly making costly mistakes) or start with one market and then scale (mistakes will be cheaper, but competitors can beat you to the new markets). One thing is certain: If you don’t have your distribution in place before you start selling, you’re destined to fail.

Perhaps you’re thinking of selling services in China. In that case, you have to be ready to educate customers on your offering. If you’re going to sell to businesses, you may have to deal with both state-owned enterprises (SOEs), which make purchasing decisions by committee, and privately owned Chinese companies, in which the owner decides all.

How to maintain competitive advantages

As we discuss in Chapter 2, after you taste some success in China, you should expect competition to come at you from all sides. You have to think long and hard about how you’ll maintain your competitive position. You should be prepared for a scenario in which the competition is able to quickly commoditize your early offerings. Some ways to develop and protect competitive advantages include

✓	Building your brand (see Chapter 14)
✓	Protecting intellectual property (see Chapter 17)
✓	Doing your own distribution (see Chapter 14)

How to finance the venture

Chapter 10 is a must-read for anybody thinking of setting up an office in China. China’s currency, the RMB, isn’t fully convertible. In other words, getting money into China is easier than getting it out. Consider using shareholder loans, intellectual property licenses, and consulting agreements to get money out of China (in addition to paying dividends when permitted to by law).