Foreign B2B in China – A Case Study
Introduction:
Our client is a manufacturer of high-end custom windows and doors in British Columbia. Its signature product is a much-touted wood-vinyl combo window: wood on the inside and vinyl on the outside.
As a typical medium-sized producer of specialty building products, it was finding it difficult under the economic conditions since 2008 to expand its business in its traditional market area, Western Canada and the US. But while many of its competitors during the previous 4 years have had to close their doors, our client has been able to increase sales by hiring sales staff and increasing its production facilities but it has now reached a new limit to expand.
Accordingly, our client decided to explore the Chinese market.
After carefully having considered export opportunities it came to the conclusion that the Chinese market for higher-end residences is now materializing and is expected to grow at a rapid rate. Obviously this opens up opportunities for custom windows and doors.
But even more importantly, Canadian building production standards meet, and in many cases exceed, those in China. Accordingly, our client would not have to adjust its production technology to the Chinese market which is of course a major advantage. And most importantly, it found that in China, the better-educated and more demanding middle and upper-middle class consumer is aware of this and prefers and is willing to pay a premium for Canadian quality building products such as custom windows and doors where price is not usually the most important purchase criterion.
The catch of course was that the foreign product still has to be competitive and our client quickly discovered that its costs of production in Canada were too high to offer its windows and doors at competitive prices in China. Therefore, the only way to enter China would be by way of a direct investment in production as well as sales operations in China and the decision was made to explore this option.
The China Entry Strategy
In order to carry out this plan, in October 2010, our client hired Summit-ZJRC to formulate a China Entry Plan (“CEP”) that would allow it to explore the Chinese market carefully with the objective to open a sales office and manufacturing facility by the end of the lunar year 2011, in other words March 2012.
Our client hired Summit-ZJRC because of its advantage of having its main office located in one of the most developed parts of China, its obvious expertise and because it offered a cost-effective alternative to establishing a beach-head/representative office manned full-time by our client’s staff.
Moreover, Summit-ZJRC primarily employs Chinese professionals with western education rather than expatriates and is therefore able to offer its services at Chinese professional fee levels rather than what expensive foreign consultants charge, fees that in China often exceed those they charge in their home countries.
Accordingly, Summit-ZJRC developed a China Entry Plan for as follows:
The China Entry Plan
Step 1: We asked the company to do a thorough analysis of its strengths and weaknesses as experienced in their current markets (“SWOT-analysis”).
Step 2: We organized a management retreat in Shanghai for our client’s senior management where we invited experienced “China-hands” to tell their story. In addition, we invited several municipal foreign investment bureaus to send a representative to meet our client’s management and to offer them the opportunity to extol the benefits of their respective locations. This retreat was a huge eye-opener and morale builder for all those involved in our client’s new venture. It also led to extensive discussions and several question-and-answer sessions with Summit-ZJRC as a result of which we were instructed to do carry out several strategy-related assignments for our client and to project the results of the SWOT analysis on the situation in China. As a result of this process, the decision was made to further explore the opportunities in China.
Step: 3 Accordingly, four months later we organized a second management retreat and this time we held it in Nanjing which was selected as one of 4 locations where our client might establish its first sales and manufacturing facility, the others being Shanghai, Suzhou and Wuxi, the latter two along with Nanjing being located in the province of Jiangsu. At this retreat we invited local government and building professionals to introduce themselves to our client. At the same our client visited a number of residential developments to familiarize it more with Chinese tastes and preferences.
Step 4: Following the 2nd retreat, Summit-ZJRC was instructed to develop a budget for our client’s first operation in China. This budget was prepared by staff at the Nanjing Institute for Industry Technology (“NIIT”) that is one the oldest institutes of higher applied technical education and research in China. For this assignment the budget team made two visits to Chilliwack to discuss the details of the budget, the remainder of the consultations having taken place by e-mail of course. Summit-ZJRC and the Nanjing Institute of Industry Technology are closely affiliated and its expertise and network are indispensable to our client’s success in China.
Step 5: The budget proposal that resulted was audited by our client’s Canadian accountants and by one of Summit-ZJRC’s associated accounting firms in Nanjing, China.
Step 6: As a result of these activities , ten months after its first management retreat in Shanghai, our client approved a preliminary budget and met again in China, this time in Suzhou, near Shanghai to discuss the location where to establish its Chinese operation.
After careful consideration, our client decided to locate in Wu Xi a city with 9 million inhabitants and a vibrant economy driven by high tech industries and foreign direct investment. Wuxi is between Nanjing and Suzhou and our client felt that Wuxi was the best location to start as from there it could also serve Suzhou (50 km) and Nanjing (170 km) and have a combined market population of 27 million people, all within an easy 2 hour drive.
Step 7: Our client decided to set up a subsidiary by way of Wholly Owned Foreign Enterprise, popularly known among western businessmen in China as “WFOE”, a Chinese limited liability company that is wholly owned by our client. It also considered to enter into a joint venture with Chinese window and door manufacturers and acquiring a Chinese window and door manufacturer but for reasons of quality control and profitability, a “greenfield” investment was chosen.
Step 8: Summit-ZJRC was instructed to arrange for the incorporation of the new company which was named Canadian Windows and Doors Manufacturing Co. Ltd. and to obtain the necessary permits. Summit-ZJRC sub-contracted this assignment to a local law firm and local accountant in Wuxi as they would be the best positioned to obtain the necessary approvals and licenses.
Step 9: At the same time Summit-ZJRC arranged the rental of office, production and showroom space and hired the first staff. The first staff consisted of a plant manager who would work under the Canadian president of the company and a human resources manager. Both were Chinese born and raised but had studied in North America and had worked for foreign companies before. Thirdly, a sales manager was hired who had no North American education but who had excellent credentials as a former sales manager for another window and door manufacture in China.
Step 10: On October 1, 2011, our client sent its vice-president of sales and two production planners to Wuxi for 4 months period to prepare for the purchase and installlation of equipment and set-up of offices and showroom. All equipment was locally purchased and installed by the respect manufacturers and tested by our client’s staff. In the meantime sales staff was hired and a detailed marketing plan developed by the sales marketing manager.
Step 11: On January 24, 2012 the project was completed and our client was ready to open its subsidiary in Wuxi. At the advice of its Chinese staff, the opening took place on an “auspicious day” in accordance with Chinese popular belief and custom.
Step 12: Summit-ZJRC is under contract to monitor the progress of our client’s business in China and acting as a back-up for our client’s Canadian management.
We are confident that our client will do well in China.
Most large, consumer-facing companies have long realized that they will need China’s growth to power their own in the next decade. But to keep pace, they will also need to understand the economic, societal, and demographic changes that are shaping consumers’ profiles and the way they spend. This is no easy task, not only because of the fast pace of growth and subsequent changes being wrought on the Chinese way of life, but also because there are vast economic and demographic differences across China. These are set to become more marked, with significant implications for companies that fail to grasp them. In the next decade, we believe yawning gaps could open up between companies that have similar sales turnover today but display different levels of focus on the best growth opportunities for the future.
Don’t do any business deal that defies common sense. Yes, that is pretty basic, but in many ways it is the key. If it looks “too-good-to-be-true” it usually is and it will not happen.