The dragon in the room

1/17/2007 - The world’s fourth-largest nation, and its most populous, is impossible to ignore, particularly today as China’s economy continues developing in ways conducive to Western-style corporate investment, said Kellogg School experts during a Jan. 15 Dilemmas in Business course.

While this transition from Communism to a market-based system is sometimes halting and complex, in the coming decades China will be at the center of what some have called the Asian Century as business booms in a land where Mao once loomed.

“Every major company should have a ‘China strategy,’” said Donald P. Jacobs, Kellogg School dean emeritus and the finance professor whose Dilemmas classroom invites practitioners to share their experience with Kellogg students. “You don’t necessarily have to bring your company into China, but you do have to understand it. It’s too large a piece of the market — now and in the future.”

To drive the point home, Jacobs introduced three guests who are implementing strategies that reflect China’s importance for their companies: Brian J. Henry ’85, senior vice president of finance and development for Terex Corp.; Ming Mei ’02, China managing director for ProLogis; and Jim Reiman ’80 (NU Law), chairman of mobile-phone retailer EBT Mobile.

Though their businesses reflect three different sectors — construction, industrial distribution facilities, and mobile communications — their experiences in the Chinese market reveal consistencies too, especially with respect to marketing, finance and cultural challenges.

Henry offered an overview of the construction equipment manufacturer’s China strategy, identifying both threats and opportunities. He noted China’s bustling construction market — the world’s largest, he said — and the ability for firms like Terex to reduce equipment costs there. “But indigenous Chinese manufacturers are getting more competitive,” he added. The ability of these firms to compete on the important dimension of service, however, remained an open question.

“You need to get equipment up and going within 24 hours [after a repair],” said Henry. “To do so, you need local service partners.” Behind only Caterpillar and Komatsu in sales for its segment, Terex is positioned to capture customer value in China by using strategies modified for each of its major divisions, such as aerial work platforms, cranes and construction, said Henry.

For ProLogis, an industrial distribution facilities owner, manager and developer, China presents similar potential reward and risk. Doing business in both industrial and retail spaces, ProLogis builds warehouses as well as shopping malls. There is a huge demand for both, said Mei, particularly as more Chinese customers increase their personal consumption for a huge range of products.

However, the Kellogg graduate cautioned businesses looking to enter China to acquire assets, not companies, when trying to establish their footprint there. “Don’t build if you can buy it,” Mei advised, noting bureaucratic hurdles associated with real estate legalities as well as the government. He agreed that corruption and intellectual property abuses remain significant problems in China but said the country also demonstrates vibrant pro-market tendencies that have led some of his colleagues to describe China as “the most capitalistic state [they’ve] ever seen.”

Said Mei: “China truly has a five-year plan and numbers to hit. The government runs the country like a business.”

Supporting the point, Professor Jacobs observed that mayors in China are evaluated by economic performance. “If you do well, you get to run a bigger city,” he said.

For Reiman’s company, running a bigger retail enterprise in the competitive Chinese market presents many challenges, including scaling the business up by leveraging brand value. “You can’t sell on price,” he said. “Someone will always offer it for cheaper, so you focus on quality” and on identifying customers who want a superior product and service. One way to deliver, he said, is by increasing staff to meet the needs of consumers who often shop in large groups. Such customer focus is especially important in Chinese “hypermarkets,” crammed with competitors directly adjacent to one another at counters and kiosks, making it easy for poor customer service to lose business.

“You often have to disregard your own instincts to understand the local markets,” said Reiman.

But brand building in China presents exceptional challenges. The speakers agreed that China, with its massive geographical size, is split along many cultural dimensions from province to province and city to city, a circumstance they likened to cultural differences in Europe across nations there. While some established foreign brands can enter China and go national, many enterprises, including Reiman’s firm, are still working to gain widespread recognition in China.

“It’s our biggest challenge,” said Reiman, though he also noted the “real sense of ascendancy, of optimism, that pervades life in China.”

The future of business in China and the rate at which the market develops will depend in part upon critical elements that include good corporate governance and access to capital — something Reiman considers the most significant constraint on entrepreneurship there. Jacobs agreed, noting that “leadership in China needs to be more transparent” and that true shifts to a market economy will require additional privatization.

For now, success is often a matter of keeping local officials and potential partners and employees happy, said Mei.

“The first thing to worry about is the guy sitting across the table from you who has worked for the state for 15 years and is only concerned about his job,” he said. “You have to take care of him.”