China investment: 3 things to know before going big

ADG China

Written by ADG China

10/31/2017

China Money.jpgThe China market for technology companies is huge and Chinese technology companies are getting stronger and going global at an accelerated pace. While China shouldn’t be ignored, most Western technology executives have heard the many stories of failed or loss making China efforts or have experienced it themselves, making them hesitate on making a large China investment. Even in China today, it is still easy to be fooled by the lure of huge numbers and opportunities.  Attractive deals and partnerships do exist but they often come at a cost. 

We typically don’t recommend entering China unless you are committed and have the resources or need to be in the market. However, for those that have made the decision to address China or cooperate with Chinese companies going global, there are ways to de-risk the program and significantly increases your chances of success.

Consider many of the strategies often used to engage with China. Many companies start with a China “fly-in-fly-out” strategy trying to develop China from afar by leveraging their investors or relationship network for introductions to start having conversations in the market.  Many others start their China investment by setting up a legal entity and hiring staff and beginning the process to see how and with who they can monetize China. 

In practice, we see many cases where after 6 to 12 to 18 months of trying the “fly-in-fly-out” strategy to develop China partners – executives find they are having lots of discussions but not making much real progress or transparency and not meeting their expectations. This often leads to a conclusion that China is not a good fit or just too hard and they give up.  In many cases this could be true – China is hard.  But is it a solution-partner fit problem, poor strategic positioning, lack of understanding the market or are they just not finding the right partners or right path?

Another model executives pursue is the strategy of “if we are going to China, let’s just jump in” and they begin setting up a China legal entity and trying to build their team.  After several quarters of going through the administrative processes, finding office space, hiring a legal representative and going through all of the statutory steps required, they realize they are just at stage one of building an effective local team.  Most companies end up going through several county managers or GMs before they get it right.  They discover mismatches in capabilities, expectations and understandings.  Often their sales teams end up leaving after they realize the product may not be ready for China and the company may not be as responsive as a local company.  Sometimes, the team doesn’t fit the eventual strategy (you don’t need a sales guy to manage a JV or a country manager to manage a master licensee), turnover can be a big problem, or the partner or business model selected was incorrect requiring a restart. 

We have seen these examples happen over and over.  Some eventually get it right but have wasted precious time and money along the way while others have exited completely becoming another China story for the books. But yet there are also lots of real success cases.

So what is the answer?  Before investing your time and energy, you need to answer several questions:

  1. Should you be in China?  Is there demand for your current product/solution?  Are you looking for commercial sales or strategic relationships?  If commercial, will the market accept the price to justify the investment?  If strategic, do you understand what the China partner really values?  Too often people get this wrong. 
  2. Are you ready to make your China investment in time Are you willing to respond quickly and localize your product, if needed? What are your strategic options and what is the right strategy that meets your objectives?
  3. Who are the right partners? Have you find the partners that are trustworthy, share your vision and aligned to protect your interests? Are they strong and influential enough to influence the regulatory and political regime if needed?

After engaging the China ecosystem and a completing a initial assessment, honing the right China go-to-market strategies and confirming the qualified partners to pursue, companies can start to gain real partner and market traction. That’s when you know where and how to invest for growth.  What type of entity is required and what location; what type of team and resources to deploy; what level of investment to make or what the other China parties can contribute to the investment or venture.

The good news is for those that have made the decision, finding opportunities is not the most challenging part considering the growth in China compared to other markets.  The challenge is to stay focused and find the right opportunities and the best partners to meet your objectives and ROI.  Too many companies are willing to give away the house for the perceived strategic value of the deal which may or may not really be there.

Getting on the right path in China – with the right strategy and right partners – prior to making a larger China investment can help you avoid significant time and money lost and greatly accelerate meeting your China growth goals.

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