Networking in China: How Relationships are Changing

Saturday, October 14, 2006 2:55
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Where as previously doing business in China meant a foreign executive was interacting only with Chinese business men in China (whether for sourcing from, investing in, or selling into China) introductions were critical and relationships were coveted. Meals were eaten, sites were visited, families were introduced, gifts were given, alcohol was consumed, and relationships were nurtured.

It was the first step to doing business in China, and those relationships were critical to the future stability and success of operations. Government relationships were in many cases most valuable in worst case scenarios, customs contacts helpful as well when importing products for the first time, knowing various suppliers and distributors lead to the ability to produce and sell products in China.

Essentially, everything 10 years ago came down to relationships. However, in recent years this has changed for many companies and foreign managers on many levels. In fact, with some many different types of networks (Gov’t, manufacturer/ supplier, distributor, and customer) there are many different dynamics occurring.

Relationships with Government officials:
One of the biggest reasons for this is that as companies found success and grew from small operations, Chief Reps (GMs) began delegating these responsibilities to government relations personnel and supplier compliance staff. When operations were small, it was their primary responsibility to build and maintain these relationships, but as business stabilized and grew, they were able to pass the torch to local staff while they focused on managing operations and client relationships.

(1) On the east coast: Whereas 10 years ago, the news of a foreign company coming to visit may have brought an appearance by a mayor, sometimes provincial staff as well, this has changed. With so many companies, many inquiries are now handled by foreign investment departments, and unless the investment is in the 10s of millions, it may create little government attention on the East Coast.

The fact is that with so much of the FDI being concentrated on the east coast, these government (while a little spoiled) have put in proper structures and processes to work with foreign investors and manufacturers looking to bring money to their area. The Special Economic zones (Economic Development, Technological, or Foreign Trade) all have representatives that are eager to bring in foreign investment to their zone, and they have the strong government connections

(2) Off the East Coast (Northeast, Central, and Western provinces): For those missing the ways of the old days, companies going west will experience a higher level of government involvement. this is rooted in the fact that they have not been the primary focus of investors, and in many of these areas there is a real need for investment in local industry. while not bringing out them mayor, meetings with vice mayors and department heads are still the norm if a company has a successful track record in China and shows real interest in the area. for those without a track record, lower level meetings will occur first, but the climb to the top can occur quickly.

Relationships with Manufacturers/ Suppliers:
Of course, above all, mutual quality and price agreements will define the ongoing success any supplier/ buyer relationship in China. The process by which those relationships has changed dramatically and systematically in the last few years (see our report How the Internet Changed Sourcing), and these changes while making it much easier to take the first steps have also made it more difficult to create relationships.

Not discussed as part of that post is the fact that Chinese manufacturers are much wiser now, and have heard it all before from foreign companies who are interested in placing big orders. Whether it is receiving 10 inquiries a week via a Global Sources promotion, or talking to foreign executives at the Guangdong fair, business development staff are more likely to be skeptical of the end results. The majority of this comes out of having more failed discussions that before (while less efficient in some regards, introductions yielded a higher closure rate), and also without personal introductions there is no personal bond or obligation to anyone to create the catalyst.

Often times when we approach a new supplier, the sense of wait and see is palatable. While suppliers are happy to jump through some hoops, provide some samples (now, the cost of samples is borne by the buyer, not the supplier), and bring a quotation, many suppliers will not go much further until after the first P.O. is placed. this has very real implications in terms of pricing, order placement, fulfillment, and engineering support in the beginning as established customers will always have preferred terms and access.

Once a P.O. is issued and orders begin moving though, the skepticism will begin to disappear as the supplier sees their initial efforts result in success, and it is at this point that renegotiation and flexibility in pricing, order placement, ordering of raw materials, and payment terms can occur more freely.

Relationships with Distributors:
Relationships with distributors for companies entering China are critically important to the long term success of future operations, and some of these changes we highlighted in the post The Changing Nature of Distribution in China.

In addition to the changes highlighted in our previous post, there are a number of other factors that are changing the nature by which distributor relationships are developed and maintained.

Much like manufacturers, distributors have become very savvy when building relationships, and while a “distributor” or “agent” ten years ago was eager to get their hands on anything, many are now consciously developing strong product portfolios. This means that distributors are evaluating more on the properties of the product at first to ensure that the product(s) meet the needs of the market rather that trying to make new markets for unproven products that are not consistent with their own portfolio.

In addition to being conscious of their portfolio, many distributors are also now only willing to deal with suppliers who provide ongoing technical assistance and work with the distributors to truly develop their business. Where as once flying in a team once a year for some training used to be enough, many distributors we meet with are working only with companies that have China based support teams who can go on sales calls with them and will work with them to develop products that can be pitched to potential clients.

Relationships with customers:
As with all the other stakeholders above, the relationships with China based customers have changed in a number of ways.

From the Chinese consumer’s perspective,Chinese consumers have begun to increase their focus on quality for many goods in the last few years, and this has fundamentally changed the relationships between buyer and seller. It is a direct result of consumers being offered dozens of choices and with personal incomes rising, they are willing to pay a little extra for quality (Note: Chinese consumers are no different than western, if you increase price by 1, you must increase quality at the same or a higher level). As China based customers now look for a much higher level of quality,Dell and P&G have both recently come to understand, a higher level of customer support and technical support is required to ensure that customers not only get the sales support they need, but also the prompt support they need when things go wrong. .

Relationships with industrial customers have also changed dramatically as a result of major OEMs like GM, Dell, and Nokia moving operations to China. this systemic shift ha allowed component suppliers from other markets to follow existing customers with contracts in hand to China, and thus a China entry strategy required little business development. These component suppliers, only coming to China to follow their previous customer, did not require any long term Guanxi once the factory was up and running and therefore efforts could be focused on building the operations side of the business (or the import logistics). Relationships were for the most part managed by a global account executive in another country.

Some Conclusions:
Relationships always change over time, and in China, this is no different. What is different is the pace by which the various relationships can change here, and foreign companies (and executives) entering China need to understand that the demands of relationships for foreign companies have increased (particularly on the east coast). China is no longer a 3rd world nation that is in desperate need for foreign business, the last 10 years have brought double digit growth in GDP and personal income alike, and with more and more foreign companies still coming to China, the point continues to prove itself.

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