China Business

China Product Distribution: Getting Past The Hype Of China’s 1.3 Billion Customers

China distribution contracts

Very informative post on China product distribution over at Paul Denlinger’s new China Vortex blog. The post is entitled, Getting Past The China Market Hype, [link no longer exists] and it nicely sets out some of the common mistaken assumptions businesses have when they first think about doing business with China/entering into the China market.

The post starts out with Paul expressing amazement at the “sheer number of overseas investors seeking entry to China, who have a hard time seeing past the most basic facts and figures about the size of the Chinese market.” Paul postulates that most of these firms are American because Americans are “generally speaking, more addicted to numeric data than their European and Japanese counterparts.” Paul’s post then goes on to cite various numbers American businesspeople frequently cite to justify their China business:

  • The number of mobile phone subscribers in China is now greater than the US
  • China is now the world’s second largest auto market, trailing only the US
  • China’s demand for oil imports has far-reaching influence far outside its borders

The post sees danger in relying on these numbers because they make no allowance for the fact that the “Chinese market is complicated” and “filled with traps to capture uninformed executives who fail to grasp the difficult realities of China’s markets.”

The post goes on to say that though China’s consumer market is huge, there really is no single national market and product distribution deals need to be negotiated city by city. The main problem with this city by city distribution is not so much the high costs, but the time it takes to roll out.

The post then makes some very good points on the pros and cons of partnering with a Chinese company to achieve national distribution. Those Chinese companies that are willing to take on partners are oftentimes in trouble. “Many of these are state-owned enterprises which lack business marketing skills, and are trying to translate their monopoly charters into revenue with the foreign partner’s help.”
China’s successful consumer companies typically have the following characteristics:

They are new, and while they did have some government backing and connections in their very early stages, they have now transformed themselves into privately-owned businesses with their own management team and CEO. For the most part, these companies are very centrally managed by their founder/entrepreneur. Unless a foreign company is able to present a very strong case for partnering with them, they will prefer to build and distribute on their own. Why should they share their profits and revenues with another company, and help to build another brand which may become a future competitor? After all, that’s how they became dominant in their own sectors; they’re not about to make the same mistake themselves.

I particularly like how the post discusses the need to be wary of China’s state owned companies:

As China’s economy becomes more market-oriented, China’s state-owned enterprises are struggling to define their roles in this new economy. It is not enough to have a government-granted monopoly charter; they need to become profitable. This pressure for profit usually comes from the Chinese government’s State Council, which is China’s cabinet.

Their preferred solution is to set up a joint venture with a foreign company, which injects startup capital since the Chinese government, as a matter of policy, does not inject capital into joint ventures, instead offering other fuzzy stuff like “markets” and “connections” into the joint venture.

Most of these joint ventures fail because the two sides fail to do the hard work to ensure that there is a complete alignment of interests and accountability for their investment in the JV. Most of the time, I blame the foreign partner’s inability to see past the market hype and think and discuss the whole project through with the Chinese government partner and for failing to clearly define which partner has responsibility to perform what needs to be done.

The endless procession of foreign companies who come to China and throw good business sense to the winds without performing proper due diligence in order to secure a footing in the “China market” never ceases to amaze me. Why is it they seemingly only do this in China? Do they think that the Chinese will throw them out of the country for asking good legitimate business questions?

Exactly.

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