Savvy's Resolute Adventures

Cross the River by Feeling the Stones 摸着石头过河: Know Thy Consumer: Diverse Preferences, Growth in Luxury Goods

 

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

Cross the River by Feeling the Stones 摸着石头过河: Checklist for Working with Chinese Government

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

The following is a list of best practices to navigate government policies successfully:

• Understand how the Chinese government interacts with businesses
• Align corporate strategy with the direction of government policies
• Keep a constant open dialogue with authorities that regulate your business, especially since personnel and responsibility changes in government are frequent and deliberate to prevent corruption. When Burt's Bees was working trying to figure out the regulatory landscape in China regarding animal testing, the government body in charge of this issue changed – it moved from one ministry to another, adding to their timeline.
• Be prepared to give up – earning government approval often requires compromise in areas such as business policies and intellectual property rights
• Attend events that show commitment to the CCP. Show support to local government and their affiliated administrative organizations in charge of operation of Special Economic Zones.

It should be noted, however, that challenging government policies create new opportunities.  Competition amongst provinces, cities, and even districts for foreign direct investment means some localities offer a myriad of incentives to attract job-creating influxes of capital.  The competition between the ministry responsible for the Water Cube and that for the Bird's Nest offered Cree a wonderful opportunity to light up two massive Olympic venues.

Tax breaks, preferential policies, and other benefits increase directly with the size of investment.  Free trade zones are a prime example.  One of the largest free trade zones is Waigaogiao located outside Shanghai.  Waigaogiao offers foreign companies numerous advantages by loosening government restrictions and providing tax incentives, simplifying customs requirements, duty exemptions, and looser importer/exporter quotas.

Longistics’ Suzhou Industrial Park (SIP) International Commodities Exhibition Center is an Integrated Free Trade Zone which allows North Carolina based companies to exhibit and send their products there for display without paying import duties. Many local districts now provide discretionary competitive tax incentives which can include  rent subsidies and tax rebates for senior management.

Cross the River by Feeling the Stones 摸着石头过河: Work with the Government

 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. 

 

Cross the River by Feeling the Stones 摸着石头过河: Understand the Government

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.

Cross the River by Feeling the Stones 摸着石头过河: Listen to the Government

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.