China Business

The First Mover Advantage to Going into China

China MOU LOI

Interesting BusinessWeek story, entitled, Apple vs. Google: Starkly Different China Experiences, comparing Apple’s China successes with Google’s purported failures. The thrust of the story is that Apple succeeded in China by holding back on doing business in China while Google failed because it moved too fast.

I agree with the first half of this equation but I disagree with the second half of it. Google’s alleged failures in China (I say alleged because in looking at what Google faces in China, I am actually impressed with what it has accomplished) are far too complicated to ascribe solely to its having gone into China too early. I am not even sure Google’s so-called early arrival in China has had any impact on its China business at all.

The BusinessWeek article contrasts Google’s go-fast approach with Apple’s go-slow approach:

In its rush to get into China fast, Google made mistakes. It had to fight in court just to get the Microsoft executive, Kai-fu Lee—four years later, Google was still badly lagging Baidu and Lee had left the company. Google also couldn’t decide what it wanted to do about China’s censorship rules. Eventually the company decided to relocate its search service outside the mainland rather than succumb to Chinese censors, a move that won kudos from free-speech advocates in China and overseas but also embarrassed the Communist Party leadership and jeopardized Google’s other China plans. It now has just 16.6 percent of the Chinese search market, according to Chinese research firm Analysys International. Baidu has 78.5 percent.

With its haste to penetrate the China market, Google even ended up with an awkward-sounding translation for its name in Chinese: Gu Ge—which sounds a bit like Google but means “valley song,” a rather odd, amorphous phrase.

No such problems at Apple, whose name in Chinese is simply Pingguo—Mandarin for apple. Apple successfully took the long view when it came to finding Chinese partners for the iPhone. The company negotiated with the market leader, China Mobile (CHL), but was willing to walk away and team up with the No. 2, China Unicom (CHU). That was a major risk because Unicom not only was much smaller but also had a reputation for poor service

The article implicitly says that going slow on China is the best way to go and I just do not believe that is always the case. There is no one-size fits all answer on doing business in China and I recently received a couple of emails that highlighted that for me.

The first is from someone who wanted advice on closing down a China WFOE. I have modified the email to hide any possible identifiers, and it now reads as follows:

I set up a WOFE in last year with me (from the US) and another American.

My partner and I decided to part ways and I bought him out (although that wasn’t formally completed), and then due to a lack of capital I was unable to keep the business running with the office requirements etc. I then set up a cheap office for six months, but then returned to the US.

We did not register the company properly and we never set up a Chinese bank account. We did not receive any money, and we do not have any debtors, we did not hire any staff or pay any salary. Our registered capital was 250,000 RMB, which we just transferred in, and then took straight out.

What are my options are for this going forward? I have been told it will cost 20,000 RMB to close down the company officially by going to the relevant departments — however I am not sure if we decide to go down this route how much we would end up paying – I don’t trust that it would be only 20,000 RMB.

A friend who opened a Rep Office said he let his Rep Office close, and he has never had any visa issues. And a Chinese friend says I should just let it go and there will be no problems.

My co-founder (whose name is still on the company as a shareholder) has a small WOFE in China and I am concerned about the consequences for him.

I also intend to travel to China in the future and set up another company.  I can speak Chinese and I have many friends there and I definitely do not want to close any doors there.

There is some urgency since we have to file the annual report within a month, so I’m guessing if we don’t file this then fines will start to add up and it may be a bit more messy to close.

Appreciate any advice you might give.

My initial instinct when I get an email like this is to respond by pointing out the specific complications and nuances involved in both the questions they are asking and in what they are seeking to do. I also was chomping at the bit to point out that just because he has one friend who let his Rep Office close (note that it was not a WFOE) without visa issues (so far) no more means that smoking is harmless because I know someone who smokes like a chimney and is still going strong at 77. But instead, I wrote something back something along the following lines:

I’m sorry, but there is no way we can even give you any worthwhile advice beyond telling you that every situation is different and dependent on the facts. For me to be able to think about the best solution for you, we would need to first think of the additional facts we would need from you to access your situation and then work with you in gathering up those additional facts. At that point, we would then need to figure out the applicable legal issues and research them. From there we would want to speak either with lawyers in the appropriate city (or cities) and the appropriate government officials as well.

My e-mail is really just a long-winded lawyer’s way of saying, “Dude, it really depends on the specific circumstances; there is no one size fits all.”

The other email I want to discuss is one I received today from a highly qualified China business consultant. It was this consultant who alerted me to the BusinessWeek article and he did so with the accompanying email:

I for one advocate a go-slow approach for most companies intent on entering the China market. Top speed usually ends up in a crash landing. People don’t seem to realize that if they truly want to be in the China market trying to be first in means having to plow your own path. The market has just begun to grow and slow and steady wins the race. Companies need to understand that many consultants will push them to enter China quickly (no matter what) simply because that is how they make their money.

His email is really just a long-winded China business consultant’s way of saying, “Dude, it really depends on the specific circumstances; there is no one size fits all.”

What do you think?  Is the first mover advantage for China (or for anywhere else) all it is cracked up to be?  Should all companies go slow in China or go fast, or, like we lawyers are always saying, does it really just depend?

2 responses to “The First Mover Advantage to Going into China”

  1. Of course it depends.  Intel was one of the earliest in, went in big and with both feet, has remained relatively quiet, and is raking it in.  They are actually doing better than Apple and Google put together in my opinion, but much more under the radar.  And that’s the point: their product is so apolitical and uncontroversial (and also irreplaceable, in effect) that they have an unassailable advantage over most companies.  Apple’s product is relatively removed from the “content” minefield, but not completely, so the going has been relatively smooth for them but still not perfectly so.  No matter what Google had done or when, they would have run into the teeth of the problem: the internet is at the crux of a great power struggle in China.

  2. Everything depends.
    In my industry, agribusiness, China is in the infastructure stages. There is little established cold chain, supermarkets are essentially stagnant in the teir one cities, the production processes are usually lagging behind, and the marginal rate of return on the initial stages of investment are usually negative.
    But, companies that have grown slow and steady are seeing massive returns. These international brands have in many cases built up there own infastructure, which has necessitated a slow and steady approach. The greatest contrast is between Yum! China (KFC) and McDonald’s.
    A new KFC opens every 14 hours in China. There is actually a severe labor shortage at all levels of the supply chain, which keeps these successful companies from meeting demand.
    On the reverse side is McDonald’s, whose China success has been far more limited. They entered too quickly, expanded rather rapidly, and failed to properly invest in human capital. This lead to a string of recent food poisonings in McDonald’s Beijing branch do to food poisoning, and a subsequent loss of profit.
    For agribusiness slow and steady is the winning approach. KFC’s Chinese slogan is roughly translated as “we changed for China.”
    In my opinion that is exactly why Google failed. They came into China with lawyers, a mind to take on the domestic law, and from personal experience they product is now far inferior. Google did not change for China – nor were they slow and steady.
    Google has some of the most intelligent people in the world. Their failure, and from a quality control standpoint they have failed (yahoo mail versus gmail reliabilty), stands to highlight that even the most intelligent Westerners can complete and utterly appear infantile when confronted with the Chinese market.
    As much as I love Google, I can no longer effectively use them in China.
    Back to agribusiness: the slow and steady approach doesn’t mean you should be slow to enter the market; the time to be in China was yesterday. But that does not mean you shouldn’t be careful, that you shouldn’t be prepared to lose money in order to develop a long term strategy, nor that you should sacrifise expertise for speed.
    The proof is in the pudding, if you’ll excuse the pun – last year KFC sales in China surpassed that of the United States.

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