Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/10/09/1548419/in-china-too-know-your-market.html
Competition in China is fierce and product offerings are often broader than in the U.S. Further complicating the market is China’s huge population and sprawling landmass, which translate into diverse consumer preferences. The majority of Chinese consumers have historically been price-conscious, and brand loyalty is generally absent. Consequently, market share can shift dramatically. Some strategies for responding to these challenges include: (1) tracking customer preferences by province and (2) creating a feedback loop by fostering a relationship of trust with existing customers.
On the other extreme, according to McKinsey & Company, China will account for $27 billion in global luxury-goods sales by 2015, which equates to 20% of the global luxury-goods market. Bain & Company estimates that China is already the seventh largest market for luxury-goods by sales.
Large foreign companies have been slow to position themselves to capitalize on this growth. For example, Luxottica, a leader in high-end eyewear for over 50 years, will now offer Asian collections of its popular Ray-Ban, Oakley, and Vogue sunglass lines. According to Chief Executive, Andrea Guerra, Luxottica recognizes that to capture this growth the company needs to “really become domestic in these markets” so it can design product offerings consistent with domestic preferences and the physical differences between Asian faces and those of other nationalities. In 2009, the company established a new design hub in Shanghai.
Two conclusions can be drawn from this example – a local physical presence may be a competitive imperative at some point, but smaller companies can be more nimble in adapting to local markets than their larger competitors.
Aside from the regulatory animal testing issue mentioned earlier, pricing has been the other big challenge for Burt's Bees. Geikie shared their concern of being "not premium enough...you need to be luxury or mass or you're in trouble. We are an accessible brand. Does the affordable luxury channel really exist in China?"
Cross the River by Feeling the Stones 摸着石头过河
Dr. Binshen Meng highlights new energy technologies that ENN is including in its EcoCity project as the Duke Energy group tours the construction site of this project.
Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/10/02/1530065/cree-nurtured-its-ties-in-china.html
Chen, former Red Hat China general manager, shared that while it is "super important" to build PR and image with the Chinese government, it is most important if your product is sold to the government or if competition includes local players. His team would identify key government stakeholders to invite to events where they would communicate what value open source could bring to Chinese companies.
Companies should carefully manage their interactions with numerous Chinese government authorities and agencies. Soon after Jim Rogers, CEO of Duke Energy, decided that they should determine ways to collaborate with China on clean energy development, he and CTO David Mohler met heads of key government groups who in turn introduced them to the chairman of the National Development and Reform Commission (NDRC), a powerful organization in the Chinese government.
This started a series of high level government relationships which have facilitated Duke Energy to have within three years a full plate of partnerships with key China players: ENN in clean energy development, electric automaker BYD (Berkshire Hathaway owns 10%), and Huaneng, China's state owned utility and largest power generator.
Similar to the U.S., there are several agencies that regulate businesses, such as the Bureau of Commerce, Bureau of Taxation, and Customs. If a company has a positive relationship with Customs, for example, the company may get a break from the random audits that the entity frequently conducts. Furthermore, free trade zones are controlled by the CCP, and there are specific administrative committees assigned to specific economic zones.
Dennis Gillings, CBE, Chairman & CEO of Quintiles and Jin Li, director of medical oncology, Shanghai Fudan University Cancer Hospital as part of the company’s delegation to Shanghai in January, 2011
Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/10/02/1530065/cree-nurtured-its-ties-in-china.html
Companies should educate themselves about the central government’s policies toward their particular industry and also the local government’s role in regulating their business. While the central government is still the ultimate decision-maker, local authorities are powerful, and the interplay between both can be convoluted at times. Keep in mind that courts are all about "stability", not justice in conflict resolution.
Despite the success of the “Open Door Policy” over the last three decades in attracting large numbers of foreign companies, many Western businesses still face political and regulatory obstacles, such as restrictions on ownership rights and protection of intellectual property. These challenges can result in firms having to spend an unanticipated and disproportionate amount of time working with Chinese authorities.
The degree of economic ownership and product restrictions imposed by the CCP varies by industry. Generally, the media and telecom industries have more government restrictions than consumer goods. In sharing the contextual background of China, Wollman of Quintiles shares that "regulatory timelines are long and unpredictable." "Our growth in China has been slower than other emerging markets."
A recent campaign of “indigenous innovation” has increased government support for local companies in many sectors. A timely example of the central government’s influence on a foreign company’s operations is Google's decision to relocate its Mainland China search service to Hong Kong after losing its censorship battle with the Chinese government in early 2010. After its move, Google’s user base in Mainland China decreased by 50% as it ceded market share to leading Chinese language internet search provider Baidu and its U.S. partner, Bing.
Cree Lights up the Bird's Nest at the 2008 Beijing Olympics
Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/10/02/1530065/cree-nurtured-its-ties-in-china.html
New entrants often make the mistake of approaching the Chinese market with a narrow focus on sales growth. This myopic focus generally fails to address the Chinese market as a whole, specifically overlooking the intricate role that government plays in the domestic economy. When the government speaks, all should listen.
Burt's Bees listened very carefully for many months. They discovered that animal testing, which Burt's does not do, was required for imported cosmetics. To make sure they understood the regulatory issue thoroughly, they talked to 18 agencies at the federal and provincial levels. It took two years to figure it out.
Geikie said that working with the Chinese government was "totally important" during the assessment stage. The global consulting firm they engaged had their own government relations arm and Burt's also worked with a local Chinese law firm. When they got contradictory points of view, they kept digging deeper until they heard consistent answers. With China's strict 5 year plan, they wanted to make sure they were basing their decision off the right data. They now have additional government relations help from Clorox as well as the partner they ended up choosing, so Geikie is comfortable they have good resources to work with the Chinese government effectively.
Just over five years ago, Chris James, vice president of strategy and business development at Cree, recalled the moment when he received a request from a woman representing the solid state industry in China wanting to bring a delegation to pay Cree a visit. It was fortuitous that Cree accepted this meeting as it marked a key moment in their China adventure.
"China fully understood both the energy dilemma they faced, and the potential to mitigate a large portion of the problem through LED lighting as they projected the country’s growth rate and likely future energy requirements. They had done the math and had taken action to address what they saw as a real crisis. Today, there are still scheduled blackouts in China because of the need to conserve energy," said James.
He continued, "the delegation which included half private manufacturers and half government people shared with us their calculations on the potential energy impact of large-scale adoption of solid state lighting." Having spent 14 years in Canada, the delegation leader had the east meets west ability to foster what would soon become a winning relationship for the Chinese government, Cree, and Chinese manufacturers. Together, they could tackle the cited Chinese government’s challenge.
During the work up to the Olympic games, where the government wished to display technology prowess by demonstrated LED lighting on a grand scale with LEDs from Cree, the head of Cree, China, received a call from the governmental agency in charge of constructing the Water Cube. At the same time, Professor Luoxi Hao from Tongji University in Shanghai, suggested the Water Cube as a marquee site to light up. A complex project that ran into issues, Cree dug in and worked diligently with the team to solve and light up the cube in very short order. Then, in February 2008, the minister responsible for the Bird's Nest who had seen the light of the Cube now wanted his venue to be made LED, providing Cree yet another monumental opportunity to shine.
The Olympics were the deciding factor for launching their success in China mightily quickly. Cree lit up the Olympics not only in the water cube and the bird's nest, but the journalists' building and opening ceremony. Every manufacturer that Cree cared about knew about Cree before the Olympics were over. From negligible revenues in China, Cree now has 36% of their total revenues from China.
Grancrete, Inc. production facility in Morehead City, North Carolina
Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/09/25/1512399/burts-bees-saw-opportunity-challenges.html
New entrants may also want to consider whether to establish local partnerships, such as joint ventures. The traditional benefits of this option is that it allows a firm to leverage existing government relationships, market intelligence, hiring experience, and manufacturing expertise rather than developing these resources and capabilities internally. Currently, there are two types of joint ventures permitted in China, either a cooperative joint venture (“CJV”) or an equity joint venture (“EJV”).
The joint venture decision is company specific and should be researched carefully because the Chinese government mandates that the Chinese partner own at least 51% such that the foreign company cannot take back the technology and know-how. JVs are hard to unwind, and while Chinese companies love them, for U.S. companies, it is something they should think twice about. Those JVs which are currently ongoing are those which were started way back when that was one of the only options (or which carried preferential treatment/benefits).
Jia did not consider a JV, rather is pursuing the status of wholly owned entity. "Most U.S. companies would like to set up wholly-owned for control and IP protection. Certain industries such as telecom, natural resource related projects, and finance require JV. China publishes a catalog of when a JV is required." He expands, "Historically, JVs have always had problems. In a recent WTO commitment, China is requiring fewer JVs."
A wholly foreign-owned enterprise (“WFOE”) is now the most common way that foreign companies invest in China. This alternative requires the firm to establish a separate Chinese subsidiary. Jia explains their current China entry status, "We have applied for a direct selling permit and only 2 or 3 get it per year. 27 companies including Avon and Amway already have. We may have to wait 5 years. We are willing to be patient."
Despite the array of options, new entrants should be cognizant of the fact that a substantial investment is required prior to operations because the approval, permit, and hiring process may take up to a year or longer to complete. FIEs will need approval from the Ministry of Commerce of the People’s Republic of China (“MOFCOM”), which will conduct a foreign investment review. They must also register with the State Administration of Industry and Commerce (“SAIC”), which will issue a business license. However, these are not the only legal requirements for establishing a FIE, and new entrants would be wise to consult an attorney about these issues.
In addition to legal issues, companies also need to make business choices, such as: (1) decision-making hierarchy between corporate and China operations, (2) importing or local manufacturing, (3) channels of distribution, and (4) marketing strategy.
Grancrete does not have its own offices in China, but sells its products into the market through partners. No one partner is going to have reach into their three target industries, so they need multiple partners. "Each wants exclusivity, which is challenging for us, so we must shy away since this is limiting," said Melton. "Finding the right partner has been absolutely critical." They have a long list that didn't make the cut including those that had sense of inability to move forward, with whom they had same conversation over and over, and with those who wanted all of China for nothing."
Suzhou is known as The Venice of the East
Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/09/25/1512399/burts-bees-saw-opportunity-challenges.html
There are compelling reasons for a company to consider offering its products or services in a test market. Well before reaching this stage, however, market research should be conducted on the market opportunity. Ben Liu, President of Plexigen in Cary, which he founded in 1999, was born in Shandong province and came to the U.S. in 1985 and joined the faculty of NCSU in 1992. He shared that in 3 separate instances he invested "a lot of money" in hiring a consultant to conduct market research with customers and potential users to find out if there was a real market opportunity. In a couple of instances, what Plexigen thought could be an opportunity turned out not to be. The upfront research ensured that time was not wasted.
A test market lowers the risk of full-scale entry because it is less capital intensive. Furthermore, it provides important customer feedback about a company’s product or service that can improve a company’s business plan before a larger investment. Location is very important. It is hard to find qualified staff in smaller cities and expats face problems, too. While these issues can be offset by financial incentives, these may not be worthwhile in the end.
Geikie states "you don't launch nationally. We will test in a couple of Tier 1 cities and iterate. Learnings from ecommerce also help."
Remember that China is a huge market and approaches to doing business in different regions can be vastly different. "We've been everywhere from the Mongolian border to Shanghai and areas further south," said Melton. They go where the infrastructure needs take them. "Three Gorges Dam is already in need of repair."
Longistics offers a low risk, turn key program for NC businesses not ready to set up a full blown office in China to test the market. During Governor Perdue’s visit to China in October 2009, Duane Long and wife Pat, also a co-founder, announced a partnership with the Suzhou Logistics Center to open the Suzhou Industrial Park (SIP) International Commodities Exhibition Center, an Integrated Free Trade Zone which allows North Carolina companies to exhibit and send their products there for display without paying import duties.
As economic development thinkers and import/export logisticians who knew that agriculture is the largest industry in NC and that less than 1% of US companies export, the Longs determined that an exhibition opportunity in China needed to be created in order to market Beika [chinese for NC] to China. Their passion and spiritual drive directed them to want to help their friends in China, help NC, and the SIP International Commodities Exhibition Center can help support President Obama's initiative to double US exports in 5 years and leverage the trust China has for western products.
Cree lights up the Bird's Nest at the 2008 Olympics
Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/09/25/1512399/burts-bees-saw-opportunity-challenges.html
Cree, a Durham-based LED innovator, has always been a global business but it took a long time for the business in China to grow. A key factor in the development of the business there was the commercial - and then personal - relationship with a company called COTCO Luminant Devices, and its owner, Paul Lo. The founders of Cree were big on trust which fit with building "guanxi", critical in Chinese business relationships. Top Cree executives got to know Lo well and in turn learn about China.
In March 2007, Cree acquired COTCO Luminant Device Ltd, one of Lo's holding companies. Owning COTCO provided Cree with a low-cost manufacturing platform and would offer strategic access to the important and fast growing solid-state lighting market in China. While the deep science work remains in RTP, Cree now has manufacturing and business development functions in China. Investing in a well rounded presence on the ground in China builds critical goodwill.
There are several alternative methods to enter China as a foreign invested enterprise (“FIE”). Some of the key alternatives that may be pursued separately or together depending on a company’s resources and level of expertise, include: (1) test markets, (2) partnerships, joint ventures, or alliances through a third party to set up a 'representative office', or (3) a wholly foreign-owned enterprise.
Quintiles, headquartered in Durham and best known for its global management of clinical trials for biopharmaceutical products, has had a presence in China since 1997. In recent years, China has been given elevated strategic priority and as such, at the start of 2011, nearly 100 of the worldwide leaders of the 20,000-person company traveled to Shanghai for their Quintiles Global Leadership Meeting to be exposed first hand to China's healthcare system.
Thomas Wollman, SVP of Global Central Laboratories and Cardiac Safety for Quintiles, is responsible for all global lab operations and lab project management. He shared that back in 2003, they worked through contacts in China to identify 19 potential partners from which they chose their final partner.
In 2004, Matthew Szulik, past CEO of Red Hat, had the foresight to make China a major corporate priority and hired Michael Chen, a native of China with U.S. graduate degrees, to be general manager of Red Hat China. Chen had spent the prior summer helping to put together a China market feasibility plan looking into entry options of (1) greenfield (2) joint venture or (3) acquisition. Red Hat decided to pursue a greenfield approach and build from the ground up. With the backing of corporate that China was a strategic priority, Chen was empowered to grow and develop product and pricing specifically for the Chinese market.
Burt’s Bees team offer hand massages at the Hong Kong PR event
Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/09/25/1512399/burts-bees-saw-opportunity-challenges.html
It may seem self-evident but cannot be overstated that the first step is to create a comprehensive strategy. What are your key goals in China? Decide why you want to enter China - is it for manufacturing and supply chain, the market opportunity, or for bioscience, computer science or clean technology partnerships?
Jim Geikie, vice president of global marketing at Burt's Bees, shared that since their acquisition by Clorox in 2007, one of three strategic imperatives was international expansion. The global management consulting firm they hired helped to map out the competitiveness and market attractiveness of Burt's Bees in various countries to determine where to focus their resources.
China is the #3 beauty care market in the world and soon to be #1. While most companies enter China for the size of the market, Burt's Bees was interested because "natural" and "product safety" ranked very high on the list for Chinese consumers. It is common in China for consumers to make their own products at home; there already existed an underlying belief in the power of natural ingredients. They wouldn't have to invest in convincing consumers.
China's intent-to-purchase scores came out very strong out of the 30 countries tested. American brands are still aspirational in China and the 'quirky' Burt's brand with truly natural formulations stood out. Burt's also had the opportunity to make a market as lip care in China is virtually non-existent. "There were lots of reasons to be excited", said Geikie.
Due to the animal testing requirement for imported products, Burt's researched various entry strategies including acquiring a local brand, co-pack and distribution alliances or setting up their own shop including manufacturing and running their own stores. Each was quite complicated with different sets of pros and cons that they weighed through.
They finally chose a partner that has local manufacturing and established go-to market channels and, most importantly, shares Burt's Bees core fundamental values.
Reception for Gov Purdue, delegation to introduce Longistics partnership in Suzhou.
Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/09/18/1494316/china-challenges-western-entrepreneurs.html
It is important to note that China is making moves to invest in doing business in NC as seen in XY International’s partnership with The Hamner Institute. Announced at the NC-China Trade & Investment Seminar, the Biosciences Partnership will involve a one million square foot global translational biosciences research, technology, and business development cluster to be built on the Institute's campus. At the start of 2011, a delegation from China paid the Triangle a visit for a signing ceremony before heading to D.C. for the first state dinner for President Hu.
"The Chinese are very sophisticated in their planning and have seen NC and RTP as an excellent place for them to do business," commented Duane Long, co-founder and chairman of Longistics, a provider of global logistics services headquartered in Research Triangle Park. "They describe NC 'like a garden' - they love to be here. We are becoming a destination." He adds that "Lenovo is a large influence on the Chinese mindset - they are very well respected in China. Their executives back in Beijing are saying great things about NC."
Working with China can positively benefit the U.S. and North Carolina. What Duke Energy is doing can create jobs in NC and other regions they serve. CTO David Mohler explains, "if our electric car maker partner BYD manufactures here, they could build a plant here and create jobs. We aren't shipping jobs to China. A lot of Chinese investment is coming here. 70% of the jobs/value go wherever the asset goes."
He concluded our interview with his observation, "China and Chinese people are not what we in the west think. We have a vision of the 1960s and the Cultural Revolution. Now China is a hugely dynamic country. Deng Xiao Ping made huge changes and introduced a market economy with great leaders. His philosophy was to 'cross the river by feeling the stones 摸着石头过河'. "
Originally this meant to move ahead with economic reforms slowly and pragmatically, and has more recently come to exemplify capitalism and taking entrepreneurial risk. If you are not certain in trying something new, just make it across the river by feeling the stones.
The underlying proposition of this series is that the goal for new entrants is to minimize risk while at the same time positioning for maximum future gain. In the coming weeks, this series will present the top ten strategies for establishing a successful business presence in China based on the research of Savvy Marketing Group's China practice team and interviews with ten distinct N.C. companies.
Burt’s Bees counter in Wing-On Department Store Hong Kong
Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/09/18/1494316/china-challenges-western-entrepreneurs.html
Furthermore, companies lacking a solid grasp of local economic forces often underestimate the complexity of the Chinese market. Chinese companies are no longer relegated to merely low cost manufacturing. While these companies secured a toehold by manufacturing components at the lowest cost, they have since used strategic acquisitions, licensing and partnerships to gain additional technical and management expertise. This has allowed Chinese businesses to vertically integrate to the point where they can produce entire products in several industries, such as the automotive and aircraft industries. Although in the first nine months of 2010 the Chinese manufactured only 1.6 million automobiles, by 2020 the nation aims to export 25 million annually.
In fact, while Western companies have been preoccupied with internal problems precipitated by The Great Recession, the economic fundamentals in China have strengthened through increased productivity and consolidation. Chinese firms are now using excess capital for larger foreign acquisitions. Furthermore, while many state-owned enterprises (“SOEs”) have been privatized or done away with altogether, several industries remain dominated by government-owned companies that often lack transparency. Top executives at SOEs may even be former members of the Chinese Communist Party. It is critical to never underestimate the significant local advantages afforded to state supported businesses.
Therefore, firms should extensively analyze how to seize opportunities and confront inevitable challenges so they can be responsive post-entry. Moreover, new entrants must be nimble or risk falling behind because China does not buy older technologies; it buys the technologies that will be used in the coming decade. The majority of companies entering China prefer to hire outside experts when formulating their market strategies.
When Burt's Bees in Durham, NC prioritized global expansion, they hired a leading global management consultancy to help. When China arose as a top opportunity, they engaged the consultancy's China office to work closely with them on a wide range of issues from finding a partner to legal issues.
Outside consultants provide invaluable tools for understanding the Chinese market because they can offer third party perspective through informed market research, counsel on strategy, and therefore optimize market entry. Firms focused on consumer preferences might choose to partner with local Chinese firms in order to understand the distinct market segments within China, which can vary widely from region to region because of local tastes and traditions and economic dynamics.
Gancrete Production Facility in Morehead City, NC
Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/09/18/1494316/china-challenges-western-entrepreneurs.html
Sam Jia, international corporate counsel for Market America, a product brokerage and internet marketing company headquartered in Greensboro, states "for U.S. companies, especially for consumer product companies - China is very attractive." They ran across compelling research that showed a correlation between companies that had entered China successfully and those with strong financial leadership. While, even if not causal, the two factors compelled his firm to investigate.
Although China surpassed Japan as the world’s second largest economy in 2010, the country is not a panacea for slower growth in developed markets like the U.S. The Chinese Communist Party (“CCP”), after 30 years of market-driven reforms, is still grappling with how to govern the world’s most populous nation. The CCP will remain the sole ruling party for the foreseeable future so foreign companies need to understand the government’s role in the domestic economy. Since vague regulations and selective enforcement are the largest barriers to foreign investment, the most critical step for new entrants is building relationships with government authorities. Thus, smaller companies should consider hiring advisors with contacts and expertise in order to manage their interactions with government officials prior to problems arising.
James Melton, President and CEO of Grancrete, an advanced materials company based in Morrisville, shared "international markets have become more appealing due to the U.S. crisis. China offers the most growth even with the recent slowdown. We can't ignore China as it offers projects ten to one hundred times larger than anything in the U.S. This results in expansion in both our NC facilities as well as our needing to build capacity in China."
Left: Dr. Zhongxue Gan, CTO and Chief Scientist of ENN
Right: David Mohler, CTO of Duke Energy
Photo at ENN's headquarters in Langfang, China
Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/09/18/1494316/china-challenges-western-entrepreneurs.html
While many American companies, including those in North Carolina, are investing in opportunities in China, the hurdles to entry are unique compared to those encountered in the U.S. Strategies may be more difficult to execute for a number of reasons. Cultural differences, public relations issues, and conflicting regulations are some of the major stumbling blocks foreign firms encounter. Often U.S. executives are ill-equipped to tackle the country’s distinct challenges absent significant Chinese business experience. Overcoming these obstacles can be arduous and time-consuming because the Chinese business world demands a repertoire of skills beyond and often conflicting with Western business practices. U.S. executives need to understand that a successful presence in China entails more than a local sales team. A comprehensive understanding of the local industry, competitors, customers, business culture, and the trajectory of the market and government policy are a few of the considerations that should dictate a strategy of entry.
When David Mohler, CTO of Duke Energy, started looking into clean energy relationships in China, he studied a dozen books including How China's Leaders Think by Kuhn and Governing China by Lieberthal. He is also working with a tutor to learn Chinese. While a difficult language to master, it is already helping his pronunciation of names of new friends in China.
China’s rapid economic growth, large population, and urbanization have created unprecedented opportunities. In June of this year, Red Hat announced that their sales will reach $3B in 5 years with the fastest pace coming from China.
Bryce Roberts interviews Grace Ueng
produced by Tingting Liu on location at
The Umstead Hotel and Spa
Behind the Scenes: The Making of the Savvy China Series Part 1
Question: When we talked about hiring, as a follow up, what about outsourcing? In the last 5-6 years, U.S. companies have also started to invest heavily on the ground in India and China. All large companies have big operations there now. How should startups approach?
Dr. Fernandes: In my first company about 15 years ago, we did have laboratories. We learned that they burn a lot of cash in the U.S. So after that, we decided we would not have laboratories. After all, what do we do as managers? Manage the research. You have to know what the pricing is. Then choose the right laboratories that have the expertise to the work. We now have all our work done outside. We only have offices, we do not have laboratories. We find the right person to do the work under contract to us and we own the IP.
They can be in China, in Japan, they can be anywhere in the world. We work with people all over the world. And the wonderful thing with Skype, is you can easily communicate and even see the lab. We have laboratories working for us 24 hours a day in China, in Japan, in India - they are working while we are sleeping. It's a great way to run a business and we have made a lot of progress with that. The nice thing is that all nations are accepted. They don't look down if the work is done in China, in India or anywhere else.
Dr. Wang: Really depends on the stage of your company and business model. Maybe you have an idea in the high tech area, early on, you will be in technology or product development. At that stage, you need to focus on making something that will work rather than considering China or India. Later on, when the product is ready and customer is responding, it is a natural to consider operational efficiencies outside the U.S.
I would caution you in China - IP protection is a serious issue. Time and time again, it is tough to win IP fights in China. There are ways to get around it - for instance, just send one component to China. Don't "give up" your IP. This is critical issue for any high tech company.
Ms. Ueng: I've seen in various situations companies have assumed that if they outsource, they will automatically save money. In some situations, they've had to take back to the U.S., because there are hidden costs in outsourcing overseas. You have to make sure you have the right manager in place here who has the cultural understanding to manage the outside group - is Chinese, or Indian, or has experience with the culture. Otherwise, the hidden costs can outweigh the hard cost savings. That is what I have seen on the outsourcing of technology, QA, or software development.
As far as non technical outsourcing, what I often get asked to do is to serve as an outsourced or interim resource. That happens for a lot of reasons. As Frank was alluding to, it can be very hard to find the right person, but the client still needs the work done. Also, they may not yet need a full time headcount. So often times, we're asked to come in on a part time interim basis, and really get to know the situation and culture of the client. We then help the client find the permanent leader through my connectivity locally, regionally, or sometimes nationally (depending on where they can hire), and find that right person that has the competency and just as importantly, the right fit with the founder and the team. This outsourcing happens a lot, not just with the marketing function, but also the financial function and others as well.
Question: Regarding product development, how do you decide what to work on, have you had to walk away from an idea that you have been working on for quite some time?
Dr. Wang: We see a lot of problems in the world right now. We cannot solve all of them. It depends on your team members - what can they do? You must be sure that you can do it. Like Grace said, try to address a big market. Part of your business plan should be to size the market opportunity.
Ms. Ueng: I've worked with entrepreneurs that are so passionate about their technology that they work on it for months and years. I caution you to have the wisdom to know when you have to redirect yourself. Some entrepreneurs can be quite stubborn, which is a good trait as times you have to be dogged. But it's a trait that if you have for too long, it may cause your demise.
Have the wisdom to seek counsel from experienced individual(s). As an unbiased outsider, they can look into your situation and counsel you to go down a slightly different path if needed. If you are seeking outside money, investors will require scalability and leveragability so there will be the expected valuation multiple. If you have a service, how can you productize to scale? I worked with one client that had to demonstrate how he would do this in order to gain outside investor money. I encourage you to be dogged, but know when to redirect.
Dr. Fernandes: In our business, things can be difficult a lot of times. In big companies, one of the reasons they don't have new products is they very readily kill them. It is easier not to make a mistake if you don't do anything at all. In big pharma, they currently don't have products because they have killed everything that has a chance.
So in biotech companies, like Grace said, there is a problem that there are some people that keep at a problem year after year for too long and they eventually have to ground the company because they run out of money. So killing fast and killing early is very important if the problem is not solvable. If it is solvable, you have to solve it. How do you get the runway to solve it? In my companies, we have more than one product. So if one is going slowly, there is another that is going well. So our approach to product development is to have a diverse portfolio.
It is important to do what Grace said, kill fast and kill early. You do not want to throw good money after bad.
Question: As an entrepreneur, how do you approach hiring?
Ms. Ueng: If you are truly passionate about your business, it will come across when you interview prospective employees. It has to be a good fit. Not all people will do well in entrepreneurial companies. I once hired an individual who only had worked at large companies, and it was not successful. It takes a certain type of person who will enjoy and thrive in an entrepreneurial setting. The first transition to smaller company is usually very hard for a big company person.
When I looked at entrepreneurial opportunities to join, I would look at 4 Ps: (1) People - does the CEO attract top notch 'A' players who will take the venture to the next level? (2) Product - is it strong enough to be well positioned? (3) Potential - does the category offer a strong growth rate? (4) Passion - do I have passion for the venture and do the people already there exude passion as well?
As a leader, I would empower my people in order to maximize their potential. I would hire people who are self starters as that is critical in start ups.
Dr. Wang: This can be a struggle. To keep employees loyal, you have to treat them very well. Companies usually give stock options or try to pay a little more as financial incentives. As a startup, you have little money and limited resources. How do you get your employees to be loyal to you? My idol is Steve Jobs - he knows how to motivate people to make them feel good which is very important. He praises them and tells them they are doing the best. I like to have data to back it up - that is the difficult part for me. You have to serve as a role model by working hard and to be someone that they will look up to.
Dr. Fernandes: When we start a company (this is my 4th startup) and start hiring people, you are restricted to the area. You don't have much money, and you are just starting to raise money and you really don't have much security. No one is going to leave a good job to join a high risk situation unless they already have financial stability. So you are not necessarily able to attract the right people at the start. Some will be able to see the potential based on your past track record and take the risk. As we've become more stable and successful, we are able to have the best. We usually try to hire locally, but that is not always possible.
The people you hire at the start are not necessarily the people that you need later when you reach the product stage. You need different areas of expertise. That is one of the hardest areas for me. Venture capitalists will get after you to reduce headcount and get the people fit for the job later. That is very hard for me, because I get close to my staff. When you have someone who has worked very, very hard for you, as is true for many entrepreneurs, you work many hours together, so it is hard to let these people go. You've got to have enough equity to offer your team so that the people who have worked hard with you will be rewarded when the company goes public or is acquired and be fully vested at the time you may have to change the people.
Q: We hear many stories of being disadvantaged as a woman or Asian. Is there a situation where this can be an advantage?
Dr. Fernandes: That is an interesting question. I can tell you in major companies before I founded my own company, it can be used as an advantage. I was the only female out of one dozen EVPs at Bristol Myers Squibb. They could call each other pretty bad names, but they wouldn't call me the bad names. That was certainly an advantage. Someone who is petite or a foreigner or a minority; they don't view you as a threat. Men, on the other hand, are very competitive with each other. They didn't view me as competition to them. In some ways, it is an advantage. It can also be disadvantage because they don't recognize you as one of them. So it can be both sides of the coin.
Dr. Wang: You ask an interesting and important question. We (Chinese) are a minority and in some situations are not treated fairly. I have experiences as such. On the other hand, you have to be confident that you are a very important person. Right now, China is a big story. In fact, more people are interested in China than ever. In terms of business, we have an advantage being Chinese now. Though people do have many stereotypes. Right now China is growing very fast and offers so many financial and market opportunities of huge potential, so indeed of interest to America right now. This is the best time to be Chinese.
Ms. Ueng: It's interesting to look at this over time. Earlier in my life, I was very much of a "banana". I wanted to be white and mainstream. In my executive roles, I was the only female, and only nonwhite on my executive teams. I tried very much to be male and white...I was a banana! I thought "how can I get ahead if I'm not manly because all these other people are men."
Fast forward, now that I'm in my later 40s, things have changed. It is "in" to be Chinese. It can be an advantage to be female. It's interesting how big companies at the board level are trying to add women and non white women. Data shows that companies that have diversity on their boards perform better. While the correlation is not causal, the data definitely bears out a connection. There is pressure for diversity. These companies have more innovation in their HR practices and are usually more successful.
The good news is now that I'm older and hopefully wiser, I am no longer a banana. In fact, our company is now helping companies with their China initiatives, as that is an area that larger companies as well as smaller companies are trying to figure out.
You have to accept that you are who you are. People will be interested in differences and people now are more open to understanding and embracing the differences.
Dr. Zhiyong Li: Getting new customers - how do you recruit and then keep new customers?
Ms. Ueng: In the beginning, you will want to focus on gaining initial users - beta customers or early adopters. As far as how you price, I would never give away your service for free since that is an indicator of value. Your first customers are those that are ideally very articulate and very passionate about their experience with your product or service so they in turn can serve as your evangelists and the news can trickle from there. These days, there are so many channels of communications that if your early users become evangelists, they can spread the word rapidly, especially if they are very happy.
And while you always want to over serve your customers, serving initial customers is critically important. You want to spend time with them, find out how they use your product, what might go wrong and how you can improve. If you have a close relationship with them, they can provide articulate feedback. You could perhaps offer them a discount off of the initial pricing in exchange for their time.
Dr. Wang: Grace really hit on good points. For us, when you try to get a client, when you start off, your best customers are your friends, people you already know. In the beginning, you don't have credibility yet. So in our case, we go to professors that we already know, so they trust us. Otherwise, it is very difficult because the company's name recognition is not yet there. For us, we approach prospects based on our existing relationships. It is very important to engage in building relationships on an ongoing basis, so that when you start a business, you will have customers who can also offer helpful feedback.
Dr. Fernandes: We discover and develop new drugs, a process that takes 7 or 8 years. In the start up stages, we don't need to be talking to the people who will be buying - customers/pharmacies. But what we do find out, and is a required part of the presentations we make to investors, is what will these people will pay for. That is a fundamental part of the market research.
It's hard to predict due to changing medical care and insurance changing right before us every day. What could we possibly charge here in the U.S., in Europe, and in Japan? You cannot have much difference in pricing. There is a lot of thought that goes into this many years in advance. It is so hard to predict due to change in government, change of laws. We have to have credibility to predict this and tell investors with an honest face based on having done a lot of research.
Dr. Zhiyong Li: Let's move on to Product Development. There are so many things you can think about especially with internet advancement. We have Google, Facebook, Twitter, and now, Groupon. With so many options, how do you know if you have the right idea?
Dr. Wang: When you start a company, you have an idea of something you want to develop. I then go to the end customer. My current company is BioMedomics, a medical diagnostics provider. We spend a lot of time talking to doctors. We are very fortunate here in Research Triangle Park that we have Duke and UNC. One of our company advisors is a senior administrator and leading cardiologist at UNC. We go to him and ask his needs and probe on what is missing. He gives insightful answers on what the market needs. We listen carefully, since we must develop something that we can really sell.
Also, I suggest going to strategic partners such as Johnson & Johnson and other big companies that could become your customers or one day buy you. Go to them and ask their needs, what their problem is, and what is missing. Get into a conversation, and they will identify areas where they have no solution. Go in there as soon as possible to help define your product early on.
Ms. Ueng: You have to really understand your market. You can't develop your technology in a vacuum and think because it is "such cool" technology that all these people will want it. While that could happen, if you are in market of only 2 people who will want it, certainly that is not commercially viable!
I can't emphasize how much you have to listen to your market and understand their needs and make sure that your product has the features that meets those needs, assuming you want to have a product that has a sizeable market potential in order to grow your business.
Do your market research, whether it be qualitative research or quantitative research, and ideally, a combination of both. Then make sure you are uniquely positioned so that you have a chance to stand out and be the leader in your market space.
Dr. Fernandez: We have a renewable business because bacteria become resistant. You have to find out who else is doing what, and how to differentiate your product. Research on competition is very important: we have to find out what's available, what's coming along, what's ahead of us, what's side by side us, and what's behind us. We do a lot of this research so that when we get the FDA process done, there is still a place to sell this product.
Some of the knowledge is common sense having been in the industry for a long time. You should, however, get key opinion leaders to tell you there is a need, as investors will ask the key opinion leaders. It is important that you have a core set of people who believe in the same thing you do.
Dr. Li: A lot of people talk about writing a formal business plan to start a company - do you really need one and when?
Dr. Fernandez: Having a business plan is almost old fashioned now. It might have been more important back in the 90s. I only did one for my first company. After each investor presentation, you realize you want to make a modification, so you have to keep changing it. It's sort of like an idea that rapidly blossoms. So, I recommend making a powerpoint presentation which is flexible and easily changeable.
What does a business plan do? It should clearly tell how to take your idea to a product & how much money it will take to get from here to there. You should be able to say this within 12 slides, not a 45 slide deck.
Dr. Wang: For any start up or existing company, you constantly need to be doing a 'business plan'. In fact, right now I am doing a business plan. The reasons for writing a business plan are very important. If you want to raise money, you for sure have to have a business plan or no one will give you money. Even if you aren't raising outside money, there are reasons to have a plan. As Grace talked about, you have to have a clear understanding of your market. You have to understand who your competitors are. What is your market and your niche?
Human beings talk about a lot of things. But when you write it down on paper, it takes on a different purpose. It's much more serious thinking. When most people talk, they don't give as deep thinking as when they write it down. In engineering terms, writing down the important steps on how to run a business would be described as a simulation. As a former engineer, this is not a challenge for me.
For investors and for entrepreneurs, the financials are key. You need to take detailed steps to simulate the financial outcome: if I hire this many people, what revenue can I expect? You can then really get a clear idea if your business will make sense and how long it will take to get a return. Otherwise you will not really find out if the business is good or not. One of the key things you will ask is "What is my business model?" "How will I make money?" Testing assumptions to make sure they make sense in a detailed financial model will tell you how you can make money.
Ms. Ueng: I've worked in house as an executive for several venture backed companies and also as a consultant for entrepreneurs seeking to raise capital. In most cases, you have to have a business plan to raise outside money. The traditional lengthy business plan may not be as relevant today, but you should plan to have an executive summary. Usually to get there, you have to do a detailed bottoms up plan which you then summarize into a tight 1-3 page document.
Often times when I work with entrepreneurs, I say "if you fail to plan, you plan to fail." In the planning process, it can be in your mind, but ideally, it should be put on paper. If you are going to invest your own money as well as a lot of your sweat equity, you want to invest time to fine tune your business model to ensure your business idea makes sense.
The whole exercise is good for you from an internal perspective - it forces you to think through your business. It's mandatory to gain external investors. Venture capitalists and private investors will require some kind of presentation - at least a pitch that summarizes your thinking. This requires putting a lot, a lot of time to boil down concise content that drives a discussion from which they will feel confident in putting in money to take a share of your company. First impressions developed in the first 30 minutes count.
This initial business planning process serves as a foundation internally and externally. Keep in mind that you will always be pitching your company throughout the life of your venture.
Dr. Fernandez: We have raised $80MM from venture capitalists, and we have never written a business plan for my company. The thought process for the business plan is reflected in the slides: competition, financial model, and the market. We have not created pages and pages of texts. In my experience in the pharma industry, VCs do not read business plans. They get so many a week and throw them in the trash. They want to meet the people and what you have to say.
Dr. Wang: I think what you experienced is totally different versus someone who is starting from scratch. The reputation and success you have has allowed people to know you. The risk is removed. That is very different from starting from scratch when no one knows you. That is when you need to provide detail. Because people know you, that is why you didn't have to have a detailed plan.
Dr. Fernandez: Yes - you are right. My first time around, I did have to have a plan!
Ms. Ueng: If someone has been successful at 1 or 2 companies, it is very different - you just make one call and people will take meetings and have interest in investing.
At the 19th annual national Chinese Association for Science and Technology, Dr. Zhiyong Li of SAS moderated an Entrepreneurship panel including executives (l - r):
Ms. Grace Ueng, Founder and CEO, Savvy Marketing Group
Dr. Frank Wang, President, CEO, and Founder of BioMedomics
Dr. Prabha Fernandez, CEO and President of Cempra Pharmaceuticals
Dr. Li: What are the key steps to start a business?
Dr. Fernandez : First key step is to get both the IP and the team. Two things you absolutely must have. Cannot raise money without that. IP has to be very strong when it will be approved, not necessarily at that instant. Team must be strong, loyal to you, and one you can trust. As you will be multi tasking and there will not be time to do everything.
Dr. Wang: When you start a business, the key step is you must have an idea that can make money. That is the starting point. After that, you must have passion that you can go along with the idea and do it. Then you can come up with the funding and team and the IP. Then comes down to execution by the people. I learned a lot in this area in my startups - really comes down to who can work with you, who is good with you and loyal with you.
Ms. Ueng: In addition to having an innovative technology/solution, there needs to be a market need for the product you are going to deliver. You should assess the market for what your technology solves. Understand what other competitors there are that offer a similar solution.
So often entrepreneurs tell me they are definitively the best and dismiss other players or believe that they simply don't have competitors. Then is there really a market need for your solution? There usually are others that do something similar things to what you are doing, as that validates the market opportunity.
Once you properly conduct a market assessment, then you must ask 'what is my unique selling proposition (USP)'? And how do I communicate it & package it up? There are so many brilliant technologists, but only a small percentage of them can clearly and concisely articulate what their product does for their end user.
Speaker's Note:
I'd like to applaud Jing Zhao and Peggy Lim for excellent reporting on this evening which was a delight to moderate - my 4 panelists inspired us all and the packed audience provided excellent Q&A.
**********
Michael Jacobs, John Replogle, Jim Whitehurst, and Tony Frazier…If you ask what these four high-powered Triangle leaders have in common, the short answer is that they all went to Harvard Business School. But that is not the whole story. Last fall, they shared their experiences in a Harvard Club of the Research Triangle panel moderated by fellow alum Grace Ueng on Cisco’s RTP campus. Their insightful remarks left the audience with some key lessons on career development and leadership.
From Guinness Beer to Cuticle Creme
John Replogle, President and CEO of Burt's Bees, said that his two-year experience at Harvard Business School allowed him to “challenge, develop and think” about who he was and what he stood for. Replogle has proven himself as a strong business leader who is also recognized for his commitment to corporate social responsibility and sustainability issues.
Being successful is about discovering who you are. While Replogle has an impressive track record from leading global marketing for companies like Guiness and Unilever, he keeps in mind that he looks for a culture that “fits his entrepreneurial personality.” When Burt’s Bees offered him the CEO position in 2006, he found it a good fit. When asked about his job at Burt’s Bees, Replogle described their mantra called “the Greater Good” which further breaks down to “people, planet, and profit.” The idea is that if a company is socially responsible, profit will follow. Replogle said that it was a place where he could be at his best and also be passionate about contributing to an enduring impact on the planet.
Replogle described himself as a “goal getter” who set personal and career goals every five years. “I had a great mentor who encouraged me to write a mission statement - I wrote down that I would like to make people's lives better every day. I found it helpful as I could make all my decisions centered on the concept. I’ve been writing goals for myself since I was 25, and I believe it is good practice,” said Replogle.
