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Partnering With China for
Mutual Benefits

June 3rd 2009 Jerry R. Mitchell 1

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: jerry@jerryRmitchellandassoc.com
Website: www.jerryRmitchell.com
Blog: jerrymitchellblog.com


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