China's Consumer Market Mentality

All the major international corprations rushing into China is doing so to get in on the action of the largest consumer goods market the world has seen in a while. There is no doubt that the consumer market is the hotest market to get into in China with the most possible growth and upside for a company, but it is one with its own peculiar dynamics that we are not very familiar with outside of China (of course I mean mostly the US in this case since I'm only somewhat familiar with consumerism in Europe and none about the other continents.)

1) Name Brand Worship
The current wage earners of China grow up under a system where independence is not encouraged and following the crowd is the rule. So your product is a Name Brand and they've seen it on TV, preferrably used in Hollywood movies, you're halfway there. It doesn't mean you can't fail, but you're halfway there. When you have the brand, there's no such thing as shelf placement in China, they will hunt down the one they saw on TV, even if it's bottom shelf left corner. In fact premium shelf placement tend to lower the product's value a little bit, the thinking is "if it's so easy to find, maybe no one else really wanted it." There was also the case with Heineken I believe when they found that consumer didn't buy the beers with the specialized packaging targeted for china, they still bought the exact ones that the US gets cause it looks like what they've seen in the movies and it's the same as the ones used in the US. However, Heinken was smart enough to realize that the majority occasion when people bought imported beer it was for parties, and they focused on the larger party size bottle for china instead of the "singles" we're used to. Name Brand worship does get to an unheard of degree in China, as many of us are familiar with the Asians coming out of designer shops with head to toe logo wear. It is to a degree that it doesn't matter there are alternative better or the same products with a cheaper price, it is about buying the brand. And if your strategy is all about the brand, make sure it's very visible on the product. After all, that's the product you're selling. So what if you don't already have a big international brand? There's actually a very easy solution to that in China, advertising. You put anything on TV enough, it becomes a name brand. Pure and simple. There is of course a negative side to Name Brand Worship, knock-offs and the Chinese have gotten knock-offs to an artform. Assume that knock-offs will happen, don't assume that you can do anything to control it. Given that, your corporate strategy simply have to make a few decisions.

2) Time is not equal to Money/A penny saved is a lifetime pursuit
The chinese have these two opposing views about cost. On expensive things, the more expensive the better, money is no object. On everyday things, they will nickle and dime and most cases penny you to death. This comes almost in every consumer subsegment, sometimes the same individual will have both mentality for different items, and I have not yet figured out how to predict which one is which. This comes from the fact that in China there's no general cultural concept that Time is Money. With so many people and many of them without labor or enough wage earning power that they pursue saving money like an occupation or life long destiny. Here in the US, I always go to the gas station on the right side of the road even though the one of the left side is 1 cent cheaper per gallon. This causes the 2 gas stations, 2 starbucks in one intersection phenonmenon. In China however, the gas station on the right side can have absolutely no lines but cost 1 cent more and everyone will be lined, blocking traffic for miles to get into the gas station on the left side. This happens with groceries, everyday items, airplane tickets, just to name a few. My example is across the street, but people will go across town, take 3 buses and a subway in the middle, push through huge crowds to save two cents on bok choy, even if that's the only thing this particular store has that's cheaper. I visited both Carrefour and Walmart in Shanghai this past trip just out of curiosity. I can tell you for sure that Carrefour would win in the US market because it was better managed, the site better planned, cleaner more pleasant environment with good products at good prices while I found Walmart to be terrible planned in terms of site, and disorganized and a much worse atmosphere in general. However, Walmart was mobbed, because they always made sure to advertise 2-3 items that were 2-3 cents cheaper than Carrefour. I have a feeling that despite my opinion on the overall quality of the shopping experience, that one CD holder for ￥3.98 will keep Walmart in business and at the top in China.

3) The longer the line the better the product
One of the pure effects of the population density in China is that you wait in line for everything, it is a simple fact of life. This has the curious effect that they distrust anything being sold where there's no lines or crowds: it must not be good enough for people to want them. It's the equivalent of complete silence and only the humming of flies at a place of business in the US, in China that relative "no-one there" simply starts at a few hundred people. So because of this, a lot of Chinese businesses hire people to create a line, create a crowd and in general make a business look very busy. Understandable in the restaurant business, but they do this for selling apartments too, hire people to wait in lines and exclaim about the absolutely unheard of deal that this 3000 square foot apartment is. And on a less ethical side, they also do this for private hospitals. I'll just leave you to think about that one.

4) Plan for scale
Speaking of the population density, a lot of consumer businesses from outside of China do not plan for the right scale, and I mean scale in terms of handling the amount of people in a single day. I'll use Walmart again as an example cause it made such an impression on me. When the first Walmart opened in Shanghai, traffice was stopped for miles around the site due to congestion. A couple of bad planning that simply didn't plan for the number of people coming and going caused this. 1) The doors were too narrow. They were just like the ones in the US, where you can maybe have two people side by side growing through one door, cause there were also the security detection things right on the inside. There was literally a congestion at the door because people couldn't get out or in fast enough. 2) The main doors were right on the corner of the main street coming into the site. So the people who were waiting to actually walk in the door now are in the streets blocking the cars from coming in and parking so more people can be waiting to come in. 3) the escalator to the 2nd floor with all the cloths and electronics is a single normal escalator like you see in the US. You can guess by now what percentage of people actually made it up to the more expensive and I'm guessing profitable section.
When you're planning for capacity or average flow, take what you know about the US, and multiply by at least 100. For example, I watched the finale of the Chinese equivalent of American Idol with the phone in votes and everything. The votes for the 3 finalists were on the order of hundred thousands and this was a show that appealed to only early teens, mostly girls.

Remember that the sheer size of the consumer market in China is what you came for, so don't miss out on a huge percentage of profits because you didn't plan for tens of thousands of people to show up during the first hour of your opening.

China's Business Environment -- business loans

It's true that nothing makes you appreciate what you have more than when you realize that other people don't have it. I have 3 business entities to my name and yet it never occurred to me how friendly to small to medium businesses the U.S. is, until I learned about the business environment in China.

China is a business environment that favors huge state owned enterprises over small to medium businesses. The amount of small to medium businesses that exists and survive is almost despite the system. In a previous post I talked about what it took to create a business entity in the first place. This one we'll focus on loans.

The chinese commericial economy used to completely dominated by state owned enterprises, where the management in them were basically government officials who managed the businesses by following the memos and memorandums that were passed down the chain of command. They had no personal gain attached to the actual profit of the business. Imagine if getting your cell phone is pretty much the same as getting your passport. When market economy arrived in China, the government basically waved a wand over a lot of the state enterprises and said "now you're a private enterprise." Now the same officials became businessmen, and the profits go straight into their pockets as there are no stock holder interests to be concerned about. However, as far as commercial loans are concerned, these are still the "state" enterprises. Remembering that the big banks are all still state owned enterprises, if a bank loans a few hundred million to a "state" enterprise and the loan defaults, there's no responsibility, no punishments, no downside, for anyone. Since it's all the State, it's like it's in the family, except not in the Italian mafia style. On the enterprise side, there's no fault in loosing a lot of money trying to business, because you see, that's actually much better than the money disappearing through corruption. So you get into a situation where the banks actually push loans onto large enterprises, the ones who don't really need the monetary support. I have family who used to manage a branch of China Bank, and it's very interesting how the loans operate. Each bank's loaning institution gets a quota handed down from the governement every year about how much they need to loan out for a specific industry that's the development focus. If you don't use the money then it's gone, it's not like you can even move it around to loan some extra to another industry. With that, and given the few "no-fault" enterprises that you can loan to with no personal risk, the banks literally wine and dine large enterprises to push money on them.

The small to medium businesses however, have a very hard time getting business loans. If a loan officer grants a loan to a non-"state" businesses and there's a default or late payment, the loan officer gets fired. Simplicity has its merits of course, but remember that this is also a country with no credit system to check on the credit of a business or person and there's no established processes for what happens on loan defaults: 1) there's no actual property ownership so it's not like you can take away the business property 2) there's no bankruptcy laws that I'm aware of and 3) there's no formal collecting agencies outside of literally hiring some thugs. So how do small-medium businesses get loans? If you're just starting, unless it's your life savings then you used to work in the state somewhere, preferrably a bank, and you have connections. If you've been in business for a while, hopefully your industry actually has a quota for loans and you are based in and apply in an area where you're even close to being medium sized fish (that means your chances are better in Chengdu instead of Shanghai), and you've developed your connections over the years with the right people. Oh yeah, every loan application is accompanied by a business plan on what this is used for, and how much. The banks will loan about 70% of total amount to your investing 30% of the total money required, and that business plan is usually 50+ pages with lot of how this will help the country as a whole. Interest is right now 8.5% and if you're looking for loans around a few million dollars, you can just forget it. There's simply no such amount of loans for small-medium businesses, even though the banks throw the equivalent of hundreds of millions of dollars at the large state enterprises.

Incorporating in China

I just incorporated in the US. I sent in my $165 with my application, incorporated, got a business license and a tax-ID and that was it. I had a business entity to conduct my own consulting business. It's not so simple in China. If you want to start a strictly chinese based business, you need to apply for a business license, register with the state and register a certain amount of funding with it. This means you actually have to put up money into an account that the government has control over for a while, after the approval of your business license, you get that money back, into your own account. The amount that is required for your business license depends on the industry and the type of services your business will provide. I know of a small 3 person consulting company who put up 300,000 RMB for their funding. Certain businesses like real estate brokerages (same as the US) need specific additional licenses. These are the regulated industries. Doesn't sound too bad right, except that whether or not the government agencies are still issuing new licenses for specific industries is not really public information, the process takes at least 1-2 months just for applying and not counting actual paperwork preparation, and unless you have the connections to find out, they may not be issuing anymore licenses for your type of business. For example, in Shanghai when I last checked, they're not issuing anymore new licenses for real estate brokerages. We got lucky that we knew someone who wasn't going to use theirs anymore. And for a brokerage license to be fully approved, you have to have at least 5 agents, at least you have to pay monthly fees to the government for 5 agents. There are other industries that are in operation that have also stopped issuing licenses for their type of business, but this was done as a preparation of deregulating the industry. Example, immigration services. However, you're currently in the state of not being able to get new licenses, but the industry's not deregulated and so you actually still need a license to operate until whenever that no one but the government knows. Oh, and did I mention that these business license are registered with the state police department and they do yearly inspections. Exactly what that entails I'm not sure, I'm just happy to have my very well connected Chinese counterparts handle it.
So if you want to start a small business in China (the rules are obviously much different if you're a big corporation with lots of moola and actual international brand equity), decide exactly where and what type of business. Go there and find someone you can trust who has the same type of business, then you can find out the exact requirements and how much funding you need to put up, process, paperwork, etc... Of course I know a small consulting company in Shanghai who can do this if you really don't know where to start. As for creating a branch of a US company in China, you need to maintain a class A office space, with address and actual operations out of there, funding money and a process that registers you with the police department etc... or you can do it as a WOFE (wholly owned foreign entity), but the details of that is really beyond my expertise.

No such thing as bootstrapping

One of my projects involve helping Chinese companies connect with the US. With the hyper competitive nature of any business that even suggests it can make money, having US connections is a huge competitive differentiator and something I thought I was uniquely poised to provide a valueable service for. For this particular company, I found a great/mature US product for the chinese company to sell to customers in China. Why isn't it the other way around you may ask, that's because this involves immigration, and immigrating to the US is still a holy grail in china. Anyways, back to working with this company. Given the product's maturity (9 years), existence of materials already in Chinese, contracts that just need to be translated and lawyer referrals who've been working on this for years, you would think the start of actual transaction would be fairly quick. But we are spending months creating marketing materials and training that documented down to how exactly documents will be translated and sent across the ocean to whom and get a receipt for the fact that it was received. Selling an established product with existing customers, history, marketing materials, contracts etc... in the US wouldn't even require what we generally consider bootstrapping, but not so in China. There's this irony that more/prettier paperwork equals to more trustworthiness and higher value of the product, but the paperwork can be completely invalid since there's nothing governing truth in advertising. For example receipts don't work in china for expenses reimbursement, only invoices, and not just invoices, but invoices with a stamp on it. It doesn't matter that I can go anywhere and just have someone make me a stamp to stamp my invoice that I print on the computer. It's all about paperwork in the end, the right amount and the right look. I couldn't decide on whether this can be called no such thing as bootstrapping or no such thing as Just do it. You tell me if this is an isolated incidence.

Trust and Written Contracts

One very curious and frustrating difference I've encountered in working with a Chinese CEO and a US consultant is that in China the level of trust is inversely related to the amount of paperwork. I've known this CEO since I was born pretty much, our individual level of trust is as high as you can get. He has no experience with Americans, but because of our trust level, he basically gives the nod on everything I suggest, including the hiring of an US consultant on certain monetary terms. Great, I thought I was done, so did the consultant, until we presented the actual contract to be signed for the work and the compensation. It took an additional two weeks in which I had to translated the contracts word for word into chinese, and there were two of us who were bilingual and answered a question about almost every word in the contract, and this was after the consultant himself had explained the contract in a 4 hour marathon session. For that additional week, I was literally at the CEO's house and talked nightly till 2am. Note, the contract totaled 3 pages, 12 point font, and were exactly the same terms that before the CEO had verbally agreed to. Seeing this process, I decided to do mine the Chinese way, by verbal agreement. No paperwork. No issues, and I do get paid in cash and stock.

You may say this is because of the difference in personal trust level between me and the other consultant, but in China personal trust levels are transferrable. They had no doubts about this consultant because he was introduced by me, until there was paperwork. In China, deals between trusted people are done verbally and almost without mentioning of specific details. We all know about getting business done over meals etc in China, but no one tells us that if they trust you the deal is done without actually talking about it or writing down the specifics. Handing a written contract to them actually makes them reverse their trust level, because by writing everything down the Chinese are getting the message that you don't trust them, therefore they revert their position to one of distrust. While in the US, nothing counts except for what's written down.

Note, this is with a company and a CEO who had no previous exposure to working with the US or Americans. The general "message" in China about working with Americans that's in the newspaper stories is one of mistrust. There are a lot of incidents of Chinese companies being completely screwed over by Americans and they have no idea what happened.

So, how to deal with this? Unless you have enough comfort to work without the written agreement, the only thing I can say is be prepared to spend that additional week or two, with translators, with someone they can trust to answer all of the questions correctly and will represent your interest with integrity. Be patient and be persistent and understand that this is not a personal level of distrust against you.

Introduction

Earlier this year after a trip to China I decided that whatever I do in the future, it will be with China. One because I was born there, and two because the growth and excitement in that country is palpable when you're there. These periods of explosive growths do not come along very often in a life time, and for those who dream of opportunities to do big things, I was uniquely poised to get in on the action. So I quit my job, and started on my own company and have been working with a few companies for the last couple of months. I'd be the first to tell you that pay isn't that great, with a 8:1 currency conversion and still operating in the U.S. the salary is not the shining light that moves me forward. However, the learning curve has been tremendous and will continue as I forsee. I was in china for 10 years and in the US for 19, fully bilingual and have tons of family back in China throughout all the major cities. I think of myself as chinese despite my passport and I thought I knew how the chinese worked...