By: Peter N. Rasmussen
Everything changes so fast in China that an opportunity discovered today may be gone tomorrow. Exploited by competition, changed or outdated. Predicting and understanding market dynamics in China can be a huge challenge - especially when information is absorbed through a cultural filter.
Do these challenges mean that you should stay out of China? The answer to this question is of course no! But you must approach China differently.
When launching a business in China you may have a sense of overall direction and its fine to head in that direction. As you move ahead you must measure, learn and adjust – because you might find that your target (and your understanding of it) are moving too. Treat your China entry like a guided missile chases a moving target. You’ve got to be able to move with the target as it runs its course. Otherwise, chances are that you will totally miss and end up having wasted a whole lot of time and money!
Products that sell successfully in Western markets may not catch on with Chinese consumers. Your design may be unfit, your cost and price levels may be wrong or the problems your products are believed to solve may not be perceived as problems by the Chinese buyers. In other words, your assumptions and hypothesis about market and consumer behavior may not hold in China.
For an existing western company, starting up a subsidiary in China is practically like starting up a startup from scratch. The good news is, there is a lot of good stuff to learn from the startup world.
Startups launch on the basis of assumptions and hypotheses. Founders quickly learn that reality is different from imagination. Customers react differently when presented with real products. Management challenges are different. There might even be legal challenges that had not been expected by the founders before launch.
Following the “Lean Startup Philosophy” founders develop a so-called “minimum viable product” (“MVP”) very early on, and subject it to real-life customers before spending lots of time and resources perfecting it. This way they avoid developing fancy products nobody want! Founders learn from the feedback they get from the market, they adapt their products, and then continue iterating until they get it right.
When setting up your subsidiary in China, learn this from the startup world. Think in terms of “Minimum Viable Project”. Build (adapt), measure, learn. Repeat until you get it right! Test your assumptions and hypotheses on real Chinese customers before spending too many resources.
Chinese manufacturers often display prototypes of new machines at exhibitions and fairs. If someone wishes to buy such a machine, they will sell it right away and even take orders for more! As long as the product is cheap and fast to market, customers have a lot more patience and are willing to accept flaws and give feedback.
When Chinese products fail, manufacturers simply keep on fixing bugs until they work. Not long after putting out the first prototype, version 2.0 of the product is introduced to the market with significantly less problems. Chinese companies are often already at 3rd or 4th generation versions of a product when foreign companies release their first generation. The thinking is that there is room for continuous improvement, and this is not seen as a big issue. That is just how everything works in China.
I have witnessed it many times over the years – how devastating it can be for a Foreign company to learn that the Chinese market doesn’t care for a European bestseller product --- and learning this only AFTER an expensive production facility has been established.
Start with a pilot-scale project if you can. One way to do that is to export to China from your home base and sell in China first. Think “lean”. Experiment with designs. How fancy does it need to be? Re-think the choice of materials. Source materials and parts in China and implement these from the outset. Experiment with cost and price levels in the Chinese market, even if that means losing money in the beginning.
Another way to set up a pilot-scale project is to think in terms of “pop-up”. Find an existing production company in China that is willing to lend you some square meters and lend you a few people to help you experiment.
When your product and supply chain are just about figured out, that’s when you can get going with solely assembling in China. Only when you are sure about what your customers want and how to deliver it, then you should go ahead and set up operations on full scale in China.
With your pilot project comes the benefit that you get some experience with Chinese employees and the Chinese business environment BEFORE you commit to larger resources, and costs of changes or failure are high.