China Market Entry: Best Practices For Private Companies

By: Gordon C.C. Liao and Rob Ospalik, Baird Capital Partners

“The next superpower.” “The world’s factory.” “Kings of the 21st Century.” These days, it seems all the buzz is about the threat and opportunity of the most populous country in the world -- China. For those in the U.S. business community, the news over the last decade or so focused on the supply chain advantages of China. China became a massive export machine and manufacturing juggernaut, with its low labor rates, stable currency, highly disciplined workers, and excellent logistics infrastructure. Although there are still supply chain challenges with sourcing from China, China has proven to be nimble and capable of producing ever more complex products. Ongoing quality improvements, productivity gains, and increased management sophistication will further solidify China’s manufacturing prowess.

Most successful companies today, regardless of revenues, have created a concrete China supply chain strategy, thought about a China supply chain strategy, or figured out a way to combat a China supply chain strategy. However, moving forward it is clear that most global businesses will be talking about something else with respect to China -- market-entry opportunities.

The United States has roughly 300 million people, growing about 1 percent per year, with 80 percent living in cities. In contrast, China’s cities are poised for considerable growth -- currently only 45 percent of China’s population, approximately 600 million Chinese, live in cities. New research by the McKinsey Global Institute projects that the country’s urban population will reach 926 million by 2025, and top 1 billion by 2030.1 There will be an enormous opportunity for global companies to support this trend with products and services.

It is no secret that 2009 GDP growth in the United States is expected to contract by 2.5 percent, while China is expected to grow by 8.5 percent. China has had the fastest growing major economy in the world for the past 30 years, with an average annual GDP growth rate above 10 percent and per capita income growth at an average annual rate of more than 8 percent. China’s economy now ranks as the third largest in the world behind the United States and Japan, but ranks second only to the United States in terms of purchasing power parity.

As per capita income has risen and wealth creation has exploded, Chinese consumers and businesses have become bolder in their purchasing habits, buying Western brands and looking to utilize strong cash positions to purchase more. Consequently, in 2010, instead of further refining a China supply chain strategy, companies of all sizes will find it necessary to execute a China market entry strategy.

Baird Private Equity invests in the United States, Europe and Asia, and has been building supply chain and market-entry capabilities in China since 2003, so the group tends to take a global approach to portfolio management. Baird Private Equity’s China-based operating team supports the firm’s 43 portfolio companies with activities such as supply chain management, quality assurance, supplier qualification, lean manufacturing implementation, and market entry support and implementation.

Though Baird Private Equity’s experience in China is not without some ups and downs, the team has compiled many best practices that companies should consider when implementing a China strategy, whether taking a supply chain or market entry focused approach:

• Strategic Fit – Truly understand why China makes business sense. Certain business models have a very strong China angle, while others do not. Just because everyone else is going to China does not necessarily make doing so a fit for every business.
   
• Relationships – Relationship are extremely important in Asia. Visit the country several times, learn as much as possible, and build relationships with potential partners. The Chinese focus on establishing the relationship first and foremost and, if a trusting personal relationship is cultivated, business transactions may follow.
   
• Local Support – There are a number of complexities involved in setting up shop in China. A company should be comfortable working with government officials and should understand the legal landscape. The best way to manage these challenges is for companies to have a strong, trusted local presence on the ground in China.
   
• IP Protection – The laws, practices, and challenges associated with intellectual property in China are significant. There are several strategies that companies can use to protect IP, so be sure to give this due consideration before jumping in. Many Western companies have gotten burned in this area.
   
• Flexibility – Things move and change very quickly in China, so be prepared to adapt and adjust business models and practices. Don’t be afraid to recognize and correct mistakes. Chances are most companies will not get everything right the first time and even if they miraculously do, the capricious business environment will force them to make large and fast changes to keep up. That is why is so helpful for companies to have local support and experts who can help them be successful.
   
• Be Patient, But Have Fun – There is enormous opportunity in China. It is truly a unique place and many businesses will be wildly successful there. Take some time to soak in the culture, the atmosphere, and have fun. Western businessmen are often impatient, but the Chinese way of doing business is different. Respect and learn from it. The road to business success in China can be challenging and long, but be patient and enjoy the experience.

Gordon Liao, Vice President (312-609-4671) and Rob Ospalik, Principal (312-609-4930), are with Baird Capital Partners, the U.S.-based buyout fund of Baird Private Equity. Baird Private Equity, which makes venture capital, growth equity and buyout investments in the United States, Europe and Asia, has raised and managed over $2.6 billion in capital and invested in over 235 companies since the 1980s.

(1) “Meeting the challenges of China’s growing cities”. The McKinsey Quarterly 2008 Number 3.