Don’t Get Lost in Translation: Building China into a Winning Global Footprint
Misconceptions about the low costs of manufacturing and product innovation are rampant. It is essential to assess your expansion into China as a total cost equation.
China is now the fourth largest economy in the world, giving the U.S., Japan, and Germany a literal run for their money. The country has experienced 20 years of steady growth, and despite current slowed economic conditions, China is still the fastest-growing economy in the world. To capitalize on China’s significant market and operational advantages, international businesses by the droves are relocating or starting organizations there. Yet, as companies look to expand into China, many do so without a clear understanding of the country’s inherent risks.
Viewed through rose-colored glasses, China is a booming, low-cost economy. Up close, it is a hotbed of economic, social, and political challenges that, if ignored, will hurt rather than help your bottom line.
Businesses can successfully navigate through China’s danger zones by considering the risks and defining the right operational strategies. We have found there are a few key issues to consider.
First, be realistic. A Western business model may not be successful in China. Ask the hard questions up front. What changes will you need to make to your strategy to operate for maximum business impact in this society? Assume there will be changes and get ahead of them, rather than hoping the translation will be seamless.
Misconceptions about the low costs of manufacturing and product innovation are rampant. It is essential to assess your expansion into China as a total cost equation.
While the cost of manufacturing one single item may be low, there are many hidden costs of doing cross-cultural, cross-border business. These include higher logistics costs, astronomical employee turnover rates, rapidly rising salaries, IP protection risks, and an environment of political and social unrest.
Think very carefully about where you want to do business in China. The government actively focuses on the development of specific regions of the country, most notably the coastal zone. Great disparity exists between this area and interior China, where many people make as little as $1 a day. This reality has far-reaching implications for the quality of business and life in these regions.
Be prepared for a staggering lack of local talent, particularly for senior management positions. The country’s growth has exploded so rapidly that there simply isn’t enough local leadership talent to go around. When you do successfully recruit a Chinese manager, you will often find them ill equipped to lead in the environment of change and complexity that now defines China. This challenge has deep roots, including far too few business schools and the Cultural Revolution of the 60s and 70s, which disrupted the education of the generation that now sits at the heart of China’s labor force.
Keep in mind that today's economic storms have hit China. Its GDP will likely decline to some extent during the recession. For the first time in decades, China's markets have been interwoven with Western markets to the point where it is impacted by international financial losses.
Despite these considerations, the upside of doing business in China is significant. Management best practices are becoming readily accepted. China’s entry into the WTO implies better protection of IP, asset rights, and economic rules. The government is investing more in innovation and the environment. And the major cities have good infrastructure for roads, telecommunications, and airports.
Starting or expanding a business in China requires exhaustive due diligence and a balanced assessment of opportunities and risks. With a firm grasp on the landscape, you can move forward to align your business strategy and operational model with the economic opportunities posed by this intriguing and complicated country.
Authored by James So, a partner in PRTM's Tokyo office.
