Among the more than 300,000 foreign-invested companies in China it would probably be difficult to come up with a truly novel market entry strategy. In addition, it is possible that an identical strategy could succeed in one instance and fail in another. It would in fact be interesting to develop a kind of taxonomy of successful and failed strategies organized by parameters such as company size, industry, controlling interest, etc. As such a tool has not yet been developed, we present here a sequence of cost-effective steps that has proved successful and could have wide application.

For many companies, China is still a kind of "black box." And they know from the media that China continues to thrive during the financial crisis that has swept the rest of Asia. China’s currency remains stable and hard currency reserves reached $140 billion recently, the second largest in the world. They know it is a huge and growing market, but they don't know where to start or the kinds of costs they will encounter in follow-through. A step-by-step approach is therefore needed such that time, costs and rewards become more predictable.

Here we tell the actual story of a well-established U.S. capital equipment company which we shall call "CEC" for convenience. CEC has annual revenues of about $30 million. Its products are commonly used by a wide variety of manufacturers and have certain advantages in energy efficiency. When management began to look at China, foreign sales were limited to Canada and some of Latin America. China became a prime target because of its prodigious infrastructure growth.

The following were the key strategy components. There is nothing novel about any particular one. But when they are put together and sequenced, they provide a series of discrete decision points which made the process more predictable and manageable.

1. Market research
2. Partner search and analysis
3. Trade shows and seminars
4. Selection of partners and initial agreements
5. Distribution through China partners
6. Partial assembly and distribution through partners
7. Joint ventures
8. Asian expansion

The central aspect of this strategy is the use of prospective joint venture partners as initial distributors. This speeds market entry by by-passing the use of traditional agents or distributors, and obviates the need to establish a representative office. If and when CEC does establish a representative office, it will not be to generate sales but rather to manage sales that have already been generated. But at this point it was decided that the cost of maintaining a representative office is too high with problematic returns, especially since, according to Chinese law, such an office cannot be directly involved in sales activity.

Market Research

The best way to take the mystery out of the “black box” is in-depth market research. And market research indeed laid the foundation for all of the remaining steps. For less cost than a couple trips to China, the company used professional investigators to gather all of the information needed on which to make an initial "go, no-go" decision. This included market size and growth, current technology level in China, domestic and foreign competition, pricing, reactions of potential end users to CEC products, and law and regulations governing foreign-invested companies.

It is important to note that the research did not include a specific search for agents or distributors, or even for enterprise partners. Rather, it was decided that the first priority was to gain an understanding of the market and then, based on that understanding, decide what the best possible partner should look like. It turned out this approach was correct. If CEC had decided simply to seek an agent or distributor without market research, it would have lost valuable time in positioning itself properly. Moreover, the research information gave them a negotiating advantage -- CEC knew what the market potential was and did not have to rely on what a potential partner might tell them.

Results showed a rapidly growing market in which demand was outstripping supply, and in which the retrofit market was growing as fast or faster than the new construction market. Output and sales were growing at a much higher rate than the national economy itself, as illustrated below.

But there was still a big quality gap between domestic and foreign-made products. This was the time to make a move in this market, so the company continued to step 2.

Partner Search and Analysis

CEC management decided that a joint venture held the greatest potential, provided it could make some early sales both to show progress to its board and to defray costs. Moreover, the research showed that domestic producers did not view CEC as a competitor, but rather as a source of new technology that might help them compete more effectively. Thus there was the prospect of a partner with good technical know-how and built-in marketing channels. The question was, which one was best?

As part of the competitive analysis, over a dozen key domestic and joint venture manufacturers, ranging all over China geographically, had been identified. CEC now commissioned an in-depth look at the top six, as judged by the market research team. Information was collected on physical plant, work force composition, products and production trends, sales, R&D capability, and so on. CEC could now evaluate where the best fit seemed to be, at least on paper.

CEC's China team recommended three capable and strategically located finalists, one in Guangdong in the South, one in the Shanghai region in the East, and one in the Beijing region in the North. It was further recommended that CEC consider relationships with all three in order to position itself properly in these heavily industrial areas. The next step was to pay a visit to the leading contenders.

Note that, until this point, no resources were expended for CEC personnel to travel to China. Everything had been managed behind their desks. And now that they were ready to visit, a tight and productive agenda could be arranged.

Trade Shows and Seminars

At this juncture, a bit of good luck intervened. A major national trade conference was scheduled for Chinese manufacturers of CEC-related products. While foreigners were not permitted to attend, we knew that the industry leaders from nationwide would be there, including the pre-qualified candidate companies already profiled. CEC's China team suggested arranging a CEC-sponsored seminar next door to the conference but not part of it. CEC decided this would be helpful in several ways: it could efficiently hold introductory meetings with the leading candidate partners and it could help CEC get its own "feel" for the market by seeing who attends and gauging reactions. Arrangements were made accordingly for a technical presentation by CEC and notice was sent to dozens of companies.

The response was exciting. Some companies flew in especially for the seminar. CEC was indeed able to meet with the finalists and to get a sense of market potential. More important, a new potential partner in North China emerged which had not been in the final six. It had not been in the final six because it produced supporting products, but not the technical products of interest. However, what the company lacked in know-how it made up for in enthusiasm and willingness to invest. CEC's President then visited the facilities of all three recommended finalists, plus the newcomer.

CEC later participated directly in a trade show held in Shanghai which was open to all. This was an opportunity for CEC to see who its chief competitors were and evaluate their products and prices. It was also the first time CEC had actually shown its products to Chinese end users, which helped them compare reactions first hand against the market research conclusions. The show was a big help to CEC in finalizing its pricing policy.

Selection of Partners and Initial Agreements

The candidate partners recommended for North and East China were eager for a tie-up with CEC -- not an uncommon posture among Chinese companies. But in this case, the homework had been done and CEC knew that the companies were sincere, capable and well-positioned in the industry. CEC selected the Guangdong and Shanghai companies and the newcomer in Tianjin (over a Beijing company).

The next step was to compose and sign appropriate agreements. CEC drafted three agreements in order to control implementation of its strategy. These included letters of intent (LOI), confidentiality agreements, and distribution agreements. The LOI described an overall three-stage relationship. In stage 1, the partners would act simply as CEC distributors in China. In stage 2, the partners would add value through certain assembly operations in China. In stage 3, CEC would enter into 3 separate joint ventures. The three stages were to take at least one year. The other two agreements supported the LOI and implemented the first stage. (Of course, appropriate training, trademark and technology protection, etc. were also addressed in the documents.)

The staging provided in these documents was actually the core strategy, spelled out for all to see. The strategy achieved three key objectives:

• It allowed CEC to make some early sales to defray costs as soon as possible
• It allowed CEC to test the marketing and after-sales service capability of the partners, and
• It provided time to build guanxi (relationships).

The negotiations were quite open and frank. Each partner knew about the other two and all three agreements were essentially identical. There were, of course, some rough points. Initially, each partner wanted China-wide exclusivity. However, CEC felt that one company simply could not cover adequately all of the opportunities available. CEC's China team agreed, and believed the partners would eventually agree also. Importantly, the China team believed that multiple partners would establish a certain competitive environment which would favor CEC and also benefit the partners. Unlike other countries -- Japan, for example -- China's business culture permits this kind of strategy. The partners did sign. The resolution involved setting territorial "priorities" with a kind of "first-to-sell" implication.

More difficult was the China-side desire to move much more quickly than the agreement called out. The newcomer, particularly, pressured CEC by claiming the imminent loss of certain facilities and money if a joint venture was not quickly concluded. CEC stuck to its strategy guns, and all three eventually signed the LOI. The negotiation process took only about three or four months.

During this time the director of one of the partners came to the U.S. on other business and used the opportunity to visit CEC. It was also an opportunity for CEC. CEC's President personally drove his Cadillac through a heavy rain to greet his partner at a New York airport, and when business was concluded the President personally saw his guest off at a Washington DC hotel. In Chinese culture, this treatment gave his guest great "face" and helped to develop genuine guanxi. This was the only visit to be made by any of the partners. One month later, this same partner placed its first container order.

Distribution Through China Partners

It was time for sales to start. In fact, however, sales efforts had already begun in earnest by two of the three partners even before negotiations had concluded. They had begun to represent CEC products in the market and had arranged several sales conferences. On one hand, this was somewhat troublesome because the partners were not yet authorized to represent CEC. On the other hand, the partners genuinely saw immediate sales opportunities and used these to push the deal forward. It was a good tactic from CEC's point of view, with minimal risk, since CEC had already established a good rapport with the management of the partners.

Shipping logistics and payment terms were initially difficult to work out, but delays were not serious. The first container of CEC products was shipped to Guangdong almost exactly one year after CEC had begun the whole process.Containers to each of the other partners followed. Then second round orders for containers came, first from the Guangdong partner and then from the others. Further, it seemed that the decision to create a competitive environment among the three partners was working. The first Guangdong order appeared really to push the following orders from the other partners.

When the first round of containers arrived, CEC sent personnel to China to train the partners in sales and technical service. At the same time, they talked about the joint venture structure.

Joint Ventures

Three more containers were shipped before CEC officially began joint venture negotiations with all three Chinese partners. After about a year of negotiations, during which time shipments continued, CEC successfully established its first joint venture with the partner near Shanghai. Although the Guangdong and Tianjin partners were disappointed, the basic Guanxi was still there and they continued to place orders to CEC. Undaunted by the Asian financial crisis, the Guangdong partner continues to place orders.

Key points in the joint venture structure included majority ownership for CEC, the partner’s management and sales capability, categories of founding capital contribution, territories and intellectual property protection. Control of management, marketing, sales, technology, pricing and personnel, are key to establishing a successful joint venture in China. In fact, for this reason there are today increasing numbers of “wholly foreign owned enterprises” (WFOE) in China.

While considering a joint venture in China, CEC began to gather information on other Asian markets. The idea is to use China as a production base and platform to enter neighboring markets. Exporting from China could be attractive because of the joint venture tax benefits, and because costs and margins can be improved. The Asia financial crisis has slowed this approach, but the long term potential of the greater Pacific rim market is still there.

Use of Outside Assistance

Throughout this process, CEC used the services of outside experts on China from the beginning. They performed the initial research and helped to develop and implement the strategy. The team had professionals both in the U.S. and in China which simplified communications and minimized misunderstandings. CEC continued to use the team to act as liaison with the partners after they had been secured. Important communications with the partners were in Chinese, and then translated for CEC, which raised the level of comfort of both sides. The team also helped straighten out numerous problems with ports, letters of credit and documentation, visas, and so on. Most important, use of the experts as liaison was considerably less expensive than hiring a dedicated staff person to manage the business. Such hiring can be done when the sales volume fully justifies the transition.

Summary

Unfortunately, not all China strategies go so smoothly. We know too many companies that have expended enormous amounts of time and money only to be frustrated time and again. (Interestingly, the frustrated companies we have encountered are all very large organizations.) But there are surely some useful lessons in the CEC story. One is that you don't have to be a multinational to succeed in this distant market and culture, and you don't have to mortgage the company either. But perhaps the most important lesson is the value and cost-effectiveness of solid preparation. CEC succeeded in entering the complex Chinese market because it understood the market in advance, because it had reliable information on prospective partners, and because it combined this information into a novel and cost-effective strategy.

A famous Chinese saying is "Shi Bei Gong Ban," which means a 100% effort only partially achieved the goal because the methods used were not quite right. The sister saying is "Shi Ban Gong Bei," which means a 50% effort achieved 100% of the goal because the methods were right. We wish all American companies who want to do business in China the good fortune of "Shi Ban Gong Bei.