What Lengths Will You Go For China’s Market? What are You Willing to Give Up?

Friday, March 26, 2010 3:56
Posted in category Uncategorized

Following up from my recent posts A Few Rules for Succeeding in China and  What is China’s Obligation to Make Firms Feel Comfortable?, and the fact that Google’s decision to finally pull the trigger has driven so many to question why Google did it.. and whether or not it was the right move…I felt the need to write another piece.  I do so hesitantly because I am really not that interested in entering the great Google debate, whether or not their move was driven by a moral imperative vs. failure to be the leader in the market, and while I have my opinions, I am not looking to chase the “will Google change China” analysts with my own post.

However, where the Google case for me is so interesting is that many of the analysts who are supporting Google for how brave they are doing so as Google is making such a decision given the size of China’s potential market, and on the other side you have analysts against them saying that they are idiots for making the decision they did and possibly forgoing the potential China market.

Or as the PC World article Google’s China Decision Ignores Conventional Wisdom opens with:

Google’s decision to stop censoring search engine results in China flies in the face of common wisdom when it comes to doing business in the country.

China is supposed to be too important to ignore, the promise of a market with more than 1 billion people too lucrative to pass up. Common business wisdom holds that no company can afford to ignore, let alone walk away from, China. But in a blog posting Monday, Google said it has taken the first step: redirecting search, news and image results from Google.cn to servers in Hong Kong, “where we are offering uncensored search in simplified Chinese, specifically designed for users in mainland China,”

The commonality of both being the important of the Chinese market, and the hidden implication in both sides that there is an amount of justifiable fudging previous agreed upon business values, culture, and integrity that can be accepted.For me, this is where my interest lies.

That China is too big to pass up.  that every company needs to be here…. and to leave this market.. well, that is just crazy.  I respectfully disagree.

That, while China’s market is a large one, and there are certainly opportunities within the market, it is neither a market for everyone, nor is a firm failing investor expectations by making the decision to stay away from this market when their core values as a firm do not line up with the realities on the ground.  this point for me is made even more laughable while watching the recent interview of Dan Harris of China Law Blog on CNBC.  That, while just 2 years ago these same 3 people failed to do their job when “conventional wisdom” was sending the markets off the cliff, they were somehow in a position to provide a credible framework for defining “conventional wisdom” for China.

So, in the spirit of uninformed conjecture, here are a few nails in my frame for what “conventional wisdom” for China should be:

1) China’s big .. REAL big… but not all roads should (or will) lead to China, and regardless of regulations and preferential lending practices, it is only getting tougher

Sure, there are 1.4~1.6 billion people who occupy the borders of China, but there is plenty of proof to show that few companies (if any) have ever reached all of them beyond perhaps China Post and Wahaha.  There are firms like Coke, P&G, and Dell that have certainly made significant progress in China, and have cracked China’s markets about as far as the average national Chinese brand, but “conventional wisdom” in China is that most firms (foreign ones in particular) are only competing within the 1st, 2nd, and 3rd tier cities.  Over time this will change, but for the “average” foreign firm, it is unlikely that they will.

Perhaps the one fact that I found more interesting, and was quickest to be ignore, about Google’s position in China was that while it had 30% of the market, and only 2% of its revenues were from China, the vast majority of its revenues were not from advertisers looking to capture the eye balls that they 30% represented.. but were from a completely different market looking to advertise on Google’s .com address in an effort to attract foreign businesses to invest in, buy up, or enjoy something in China.

They still had a long way to go, even as the #2 to cracking the China market, and it only makes the comments by analysts even more misguided.

There has always been the people screaming “you gotta be here”, but they do not last long.  I have heard countless FOBs new to the market say similar things after landing their first deal, and on the whole I would say upward up 80% of those people who come into China (good ideas or not) will leave China in under 2 years.  It is not that they had a particularly bad idea, or approach, but their plans did not work out because ultimately the plans they developed using conventional wisdom did not provide a level of value that was supported by the market.

2) To succeed in China you DON’T have to beg, borrow, and bribe.

Getting a bit closer to the moralities of doing business here, it has been professed my many that “conventional wisdom” for China is that you need to “play by the rules”.  Often that is followed by the advice that “Guanxi”, “KTV”, and a monetary incentives can go a long way to further ones goals, but as my good friend Jay Boyle from Expat CFO eloquently said once.  Guanxi either retires or goes to jail. As Stern Hu will certainly attest to… and perhaps more interestingly Daimler who is now reported to have made payments to more than 20 governments!

But, that is not even the point really.  That by breaking the law, you are at the obvious risk of going to jail. What we are talking about is working in a market that may offer some moral grayness that firms are not comfortable with, yet is by “conventional wisdom” worth the move from the prime directive to the profit motive.  It is at this point where the question should be asked: What lengths are you willing to go in China to “make it”?

That, if according to “conventional wisdom” you have to be here, and that by some accounts of conventional wisdom” stipulating you need to bend various morals, values, and laws in order to do it…. is it worth it?  Or, should China be a market that, even when accepting the conventional wisdom on its opportunities for a product or service, is left alone because to operate with a sense of integrity is more important to the firm, its managers, its customers, its investors, society at large, or all the above…. and it is here where organizations can easily find themselves in a downward facing dog position.

3) To stay in China, you don’t have to play by China’s rules.  You have to meet and exceed them

Playing by China’s rules is certainly a minimum expectation, and sadly that minimum expectation defines “conventional wisdom” about the standards that firms need to apply here.  Yet, I would caution anyone to just “play by China’s rules” because at the rate by which China writes and passes new laws, playing by today’s rules maybe breaking tomorrow.  A point the recent interview of Google founder highlights.

What firms should be doing is playing by global standards that exceed China’s.  Building factories that exceed today’s regulations, and ignore the fact that local rules may look past those who fail to meet those rules TODAY, having global labor standards that exceed local “Conventional wisdom” and regulations, and implement global codes of conduct on managers related to bribery.

That, in fact, while firms need to certainly abide by China’s rules, it is the firms who exceed those rules who will ultimately have the most sustainable business models, even if developing these models require an upfront higher cost and may limit the short term opportunity that would only be accessible to those who are willing to bend over their moral lines.

4) There are relationships that should never be built.  No matter what.

The power of denial is powerful, and firms who think that by giving up the goods today it will somehow work out in the end is perhaps one of the most effective tricks firms have pulled on themselves in China. Entering into a JV that effectively created a competitor (local or global) is perhaps the most common example of where things can go wrong, and is perhaps the best example of where a firm should have asked themselves just what they were willing to give up in order to enter the market.

It is a condition that continues to this day as firms look to develop partnerships, agency arrangements, and buy the worst hornets nest organizations just to get into the market 2 days sooner than had a greenfield operation been built from scratch. In many ways, it is the need to develop a solution fast when “conventional thinking” in China would be to take ones time, but that is not what consultants get paid for and as few executives last more than 2-3 years on the ground here… there goes any incentive to develop a platform that requires 5 years to build.

5) There is always an option, and sometimes that option is to burn all bridges and rebuild.

This gets a bit beyond the Google case, and perhaps is more valid for a Apple who have built perhaps the best example of a relationship that by “conventional wisdom” would never be walked from, but at the same time, the case for doing so was made 2 years ago.

There are firms who quickly find themselves trapped in a bad relationship, and when it happens it is quite easy for them to gloss over the facts of just how bad it is when conventional  wisdom” enters the conversation.  They are conversations that start with “We suspect our partner, …..”  and could involve a situation where a partner or supplier has failed to produce a product to spec, is suspected of violating a code of conduct, perhaps has set up a line without approval for unknown reason, or has somehow put the economic condition of the relationship in peril.

The rate at which that same conversation can move from shock and awe to helplessness and apathy can be shocking.  that without THIS SPECIFIC partner or supplier, their China plans are forever lost or their global operations are now vulnerable, becomes the focus.. and not even in the good way.  That, in the urgency to establish the relationship, the firm failed to properly assess the risks or develop more than a single conversation before selling themselves into the relationship (i.e. falling into the trap), and feel their only option is to continue with “conventional wisdom” by continuing the relationship rather than burn a bridge that would run counter to “conventional wisdom”.

Wrapping this up, the fact is that “conventional wisdom” in China is not constrained by the single angle of potential markets, and that while at times there are significant moral and legal differences to China’s market, that does not mean a firm must bend over to succeed.  Firms have choices, and SHOULD exercise them at any point, even when the commonly accepted “conventional wisdom” says otherwise.  Because at the end of the day, in China, there is no “conventional wisdom” for this market, or for the way any firm should operate here.

China is a massive market, full of potential, but not for everyone. And while some firms are going are going to grab share by greasing the wheels or exploiting a system/ group of people, that is a condition that is in itself a trap as those opportunities are not sustainable.  Firms can, and should, have lines that they defend.  Lines that one would hope that are well above and beyond anything that would be found locally, and would perhaps represent a global standard that others could look to instead of providing an example of a firm that “got by” using the conventional wisdom of the market.

In China, and elsewhere in the world, the simply reality is that options and knowledge are power, and the firms who enter the market armed with knowledge that not only reflects the realities of today but understands the trajectories of tomorrow are going to be in a position of power.

That while Steve Jobs may feel helpless to push Foxconn and Wintek to act in compliance with China’s basic labor rights, they have options.  They could have begun working with multiple suppliers 3 years ago when the first reports of labor abuses came to light, they could have publicly sanctioned Foxconn and opened up their lines to external parties, or they could have worked to build a coalition of buyers and turned Foxconn’s power into its weakness.  Options that Apple has not exercised, that should serve as an example for everyone else, as Apple maintains a business in China that includes 50% of suppliers failing to comply with supplier codes of conduct, failing to pay overtime wages, failing to operate facilities that meet local environment standards , the suicides, and the most recently poisoning of 100 workers.  A horrible way to operate a business anywhere, and one that ultimately will end in a significant amount of pain for Apple, its suppliers, or both.

So, to those at Google who were behind the decisions made, my hat is off to them for having and upholding a line that I believe has caused some to question “conventional wisdom” of this market.

It is a big market, and I wish that everyone would find their place in it, but you want to walk into the ring standing up. Not bent over.

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11 Responses to “What Lengths Will You Go For China’s Market? What are You Willing to Give Up?”

  1. All Roads Lead To China | On Planet China says:

    March 26th, 2010 at 4:26 am

    […] reading here: All Roads Lead To China Related: Wild Swans : Three Daughters of China Inherited: One Child (Desire Large Print) Results […]

  2. Jesse Covner says:

    March 26th, 2010 at 6:48 am

    You don’t like what Dan Harris says? (I have not seen the clip yet…my VPN is crappy)

  3. Jesse Covner says:

    March 26th, 2010 at 7:41 am

    Hi,

    I posted on my blog and others that Google didn’t have to burn the bridges…which is what they did last Monday. More importantly to me, I maintain they did not have a moral high-ground to begin with, and their exit from China was NOT a righteous decision because it hurts Chinese people. But I will agree with you… they had the courage to go against the Conventional Wisdom. But they just didn’t have to unilaterally put a re-direct to Google.com.hk. That was a slap in the face to the CCP and reeks with bad symbolism in China.. Unnecessary. That action makes me think that they didn’t know anything about business in China from the start.

    I disagree with the idea that Steve Jobs / Apple is “helpless” to push Foxconn even today. In fact, I think that is laughable. According to the reports, they are not even hiring their own compliance team, but are requiring their vendors to hire their own consultants. And how much would it cost Apple to open a supply-chain management center in China? I think there is a reason that Apple manufactures in the way it does…and that reason is greed.

  4. Bill Rich says:

    March 26th, 2010 at 8:27 am

    I love to see my competitors using these “conventional wisdom”. Conventional wisdom are strategies everyone and his dog uses. Using these strategy will mean getting results no better than any of your competitors. In a competitive market, that means you fall right in the middle of the pack, and never out front.

    To be an industrial leader, one must be way ahead of the pack. Using a strategy that will doom you to mediocrity is a nonstarter.

  5. Rich says:

    March 26th, 2010 at 9:06 am

    Jesse

    My comment on the CNBC clip was actually directed to the CNBC staff, not Dan. They were only looking for Dan H and Dan G to say that China was evil, or that Google was run by idiots.

    R

  6. Rich says:

    March 26th, 2010 at 9:15 am

    Jesse

    In response to your second comment, I guess the question (if you believe that Google puling out of CHina hurt the Chinese people) is relative to the time line and frame that you want to put it in, and what the real impacts would be. Perhaps things will take a step backward for now, or perhaps this move will catalyst pressure from consumers (much like the Green Dam issue) to where the doors are forced back open.

    My guess – given the recent news that MII has placed limits on the reporting and discussion of Google in various China based mediums.. they are aware of just what this could mean for the system.

    So, I won’t disagree with you, but I will wait before casting judgment

    With regard to Apple, and Steve Jobs, perhaps I should have phrased that better. He has options, but to date has clearly not exercised them, and I also believe that greed plays a large part in this. In short, Apple and Steve Jobs have failed to do anything to protect their line workers, and it is my belief that any money they have saved through the current arrangement will prove to be a fraction of the lost revenues that will result from a China wide consumer boycott.. which I think only gets easier with every Apple store planned.

    R

  7. Jesse Covner says:

    March 26th, 2010 at 10:32 am

    Hi Rich,

    I’m not sure about the details, but I don’t think the Green Dam issue…or the backlash to it…is relevant to Google. The software was found to have pirated code. It was ineffective. It could be deleted from the computer system. The project management aspect of getting this onto computers sold in China was handled poorly. There just would be no way the vendors could comply with the regulation to install that software (they would have needed a far greater lead-time). In short, Green Dam was seen as ridiculous. Green Dam was seen as something which could damage or lessen the value of people’s property (their PCs). On the other hand, Google, insulted the government, publicly. You just don’t do that here if you want to do business. Chinese people know this; hence, there can be no real backlash.

    Your second comment about the idea of a China wide consumer boycott…. wow. .. I wish Chinese felt so passionate about the safety and health of their countrymen, even if said countrymen are of a lower socio-economic class. That would not happen in the China of today though. People would rather talk on their iPhone while driving in their BMW to Starbucks, than express consideration for workers in Dongguan.

  8. Rich says:

    March 26th, 2010 at 10:51 am

    Jesse.

    Green Dam push back was part software implementation, but it was also the fact that the average person did not want this software on their desktop. that they themselves were perfectly capable of monitoring themselves… this then led to discovery of the convoluted relationships, that led to more questions. The issue of pirated code came after the decision was made to scrap it.

    As for the Google case, again, it depends on the context. Personally, the people I speak with do not see this as a slap in the face on any level, but there is confusion – largely a result of the amount of information that is being reported in the Chinese press here – about what really happened and why.. and none of them have expressed anything more than a bit of sadness at the actions. they liked Google, and still do, and hope that the actions do not prompt the blocking of services like Gmail and Google Music.

    With regard to my comment on consumer activism, it is almost there. There are several cases lately of where foreign and local brands have been stomped online for their business practices, shoddy products, and “treatment of Chinese”, and I think that another 100 Wintek employees in the hospital will be enough … not 100% certain, but the odds are certainly growing.

    R

  9. China Hearsay: China law, business, and economics commentary says:

    March 26th, 2010 at 11:01 am

    […] Rich Brubaker, who blogs about China CSR and other subjects at All Roads Lead to China,  has a mammoth post on the subject of Google, its motivations, the conventional wisdom on the matter, […]

  10. Jesse Covner says:

    March 26th, 2010 at 5:27 pm

    ” Personally, the people I speak with do not see this as a slap in the face on any level…” The slap was to the government, not the people. It consists of
    a) moving to HK, thus emphasizing the “two-systems” in China issue in a former concession port, and
    b) making a big deal about this as a human rights issue in Western media. This may be more of the media’s doing and not Google, but CCP leaders will not care about this distinction.

  11. kamikazewave says:

    March 27th, 2010 at 10:36 pm

    I wish that more news coverage of foreign business in China would focus on the mistakes foreign businesses make, rather than “oh my China doesn’t give us a level playing field! That’s why we suck not because we lack managerial ability or talent.” It’s laughable how American newspapers gobbles up the story given by failed foreign businessmen.

    The Guanxi thing is very true, as can be seen in the recent Rio Tinto case. Personally, I’m sure the evidence against the Rio Tinto executives are very strong, otherwise Chinese prosecutors would be afraid to move against them. Showing once again, that businessmen, like soldiers, who fight this generation’s war with the last generation’s weapons are bound to fail..