Partnering with china6 3-2009#6

June 3rd 2009 Jerry R. Mitchell 1

Partnering With China for Mutual Benefits


It is an honor to be here today, and to spend part of the day among people whose lives and

work are defined by innovation, and collaboration. There has never been a time

when those qualities are in greater demand in America and the world.


We are, indeed, operating in a new economy today – one that has its roots in the industrial and information ages, but that is dramatically and fundamentally different. This new era of

global competition is marked by an unprecedented level of interconnectedness

among individuals, businesses and nations… connectedness that extends beyond

telecommunications and the internet.


In many industries we find ourselves in a truly global workplace, unconstrained by time zones,

language, physical proximity or traditional corporate boundaries. Our competitors are no longer far removed from us—no matter what

their geographic location.


Your presence at this seminar and your involvement are encouraging evidence that

there is a wealth of potential. We must ensure that investment, infrastructure and intellectual

resources are “optimized for innovation”.


The era of China as a low-cost, manufacturing-for-export market has come to an end.


Companies that integrate China into their global supply chains as a source of competitive advantage are far more successful than

companies that pursue narrower objectives in China


Specifically, companies that pursue China as both a growth market and a market for lower-

cost labor and sources, and integrate these operationally, enjoy significantly higher profits

than companies pursuing just one of those objectives.


Furthermore, production is not migrating to China only to pursue low costs, but also to

follow manufacturing customers, and to serve the large and growing Chinese domestic market.


Companies considering a move into China often initially believe that means setting up their own manufacturing facilities. However, this might be the very last thing to which a company should

allocate its resources.


Setting up a manufacturing company and facility is a major investment of time, assets and people.

Though building bricks and mortar in China is not the fundamental objective, it can happen

very quickly that every available resource and relationship is caught up in the construction

project and start-up.


The likely end-result is a bright, new and expensive manufacturing facility where the

costs are not nearly as low as expected – and no sales. This happens over and over again.


A company should carefully consider why it thinks it should build a manufacturing facility in

China. Foreign-invested manufacturing companies have a way of turning into replicas of

the home-country’s facilities, complete with exercise equipment, artwork lining the halls and

luxury offices.


Local Chinese competitors see this behavior and experience relief. They realize immediately that the foreign company is no competitor after all.

They know that given time, the foreign business will die from its own weight.


This scenario has been replicated over and over again during the last 10 years. Chinese

companies plan for five years, 10 years and 50 years. American companies must adopt this kind

of thinking if they are going to be successful in China.


The Secret to Success in China


Personal relationships are generally not considered the essential business driver by

American business people, especially those from North America.


A group of total strangers can meet in the morning, discuss what needs to be done and then go out that afternoon and “do a project.”

They will part that evening and possibly never see each other again. Americans can do this. In

China, such a scenario could never play out


Absolutely no business results will be achieved until after a solid personal relationship has been developed. Whether this takes weeks or years,

the most important thing is that the relationship must be firmly in place before any business

results can be expected.


The development of good relationships is predicated on the notion of having top talent on

the ground in China that is empathetic to its unique environment.


Good relationships are not just a Chinese custom. The building process is more a form of

due diligence.


During this period, the potential Chinese business associate is evaluating every move of the potential new partner to assess his or her

trustworthiness and reactions in certain situations.


This may be an arduous process, but once established, the relationships will last for a

lifetime. Most importantly, one must note that relationships in Chinese are between people, not

between companies, which can seem very foreign and possibly scary to Westerners.


There are at least a thousand ways Americans can get into trouble in China. The best way to

set oneself up for failure is to “just be yourself,” conducting business “as usual.” In practically every component of business behavior, the

customs in China are diametrically opposite of what foreigners instinctively do.


Consequently, no Westerner should be permitted to have contact with anyone in China

before some formal cross-cultural training, a mandatory first step to business success in

China.


Here are a few examples of the challenges Americans can face in China:


Americans tend to have limited knowledge of other cultures. This can be an obstacle in

concluding deals in China.


Americans tend to prefer negotiating alone rather than in teams. This can become

overwhelming, especially if the other side has a large team.


Americans often emphasize the short-term. The Chinese want to know what the long-term

effects will be.


Americans usually focus on content over relationships. In China, relationships are very

highly valued.


Americans’ emphasis on legal contracts and constant deference to attorneys are seen as an

insult in China.


China's changing economy is a threat, but it also is an opportunity. The threat comes from:


• An 85-cents-per-hour fully loaded manufacturing cost.

• $10,000-per-year managers' and engineers' salaries.

• Little direct labor wage inflation. • Growing technology expertise. • World-class manufacturing quality in many

industries.• The migration of manufacturing industries to

China; for example, electronics and textiles.


The opportunity for U.S. businesses comes from China having:


• One-quarter of the world's population. • A very high economic growth rate. • A middle class of 100 million that is growing by 1 million per year.


• A rapidly growing export market for U.S. products. • The largest market in the world for many products including cell phones, low-price TVs, and furniture. • The fastest-growing world market for automotive components and assemblies.


Many companies have lost business when their customers moved their entire manufacturing operation to China.


Anyone selling to the computer, consumer electronics, clothing, or furniture industries experienced this years ago. Other industries, such as first-tier automotive suppliers, are in

the process of moving some of their production there right now.


One stamping house that also designs and manufactures small assemblies of stamped

parts had a primary customer base of automotive suppliers in the U.S., but these

large customers were insisting that the stamping house open a facility in China to

service their facilities that were already there and to ensure that this supplier was getting

the best price.


The stamping house's solution was to form a strategic partnership in China with a Chinese

stamping house to service automotive companies there and to export to the U.S. some products that required a significant amount of

assembly labor.


Single-piece stampings continue to be made in the U.S., as are short-run specials and prototypes. The company is beginning to

source its tooling to China.


U.S. manufacturers' relationships with China don't always have to be in terms of importing,

however.


There are more opportunities to export to China than most people realize.


Some of the U.S. products that are in demand in China are construction products, capital equipment, raw materials, branded

consumer products, and high-tech products.


China not a threat but an opportunity


• Initially export to U.S. transplant companies in China• Market full-scale across China with a strategic partner and subcontract add-on products to fill out the product line.


For small businesses, strategic alliances are a way to work together with others towards a

common goal while not losing their individuality.


Companies participating in alliances report that at much as 18 percent of their revenues come

from their alliances


Rather than take on the risk and expense that international expansion can demand,

one can enter international markets by finding an appropriate alliance with a

business operating in the marketplace you desire to enter.


Alliances are formed for joint marketing, joint sales or distribution, joint production, design collaboration, technology licensing,

and research and development.


Risk-sharing will feature among the motivations for alliances, but it may not

be as important as gaining access to complementary resources, influencing industry standards or beating rivals in

the rush to market


The company first invests in an alliance and then has the option either to exit or get more

deeply involved after it sees how the business develops. The cost of entering a

relationship is relatively small in this case, as is the cost of exit; but the value of the option

to grow the relationship may be high.


We are in the planning stages of arranging a trip to China to introduce American

Companies to potential business opportunities in multiple cities.

If you are interested please give me your business card or send me an email.


Contact information:

Jerry R. Mitchell

Tel: 630 305-0005;

Email: [email protected]

Website: www.jerryRmitchell.com

Blog: jerrymitchellblog.com

mailto:[email protected]

http://www.jerryrmitchell.com/

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Partnering with china6 3-2009#6

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