Why go to China Part II. This article appears in: http://www.chinnovate.com/why-go-to-china-part-ii/

Getting human resources right.

The key to success in China is hiring the right people. As one senior manager expressed it, ‘if you can’t make the people issues work, forget it.’ Culture, language, style and communication permeate everything, including recruiting, retaining, motivating and managing issues that are unique to China. The main point to remember is that every investor has to manage the gap between two (or more) cultures. This will entail investment in training for skills as well as for cross-cultural relations, for Chinese employees, for senior management staying in the home country as well as for senior management staff going to China. This might be costly, but will help those in the headquarters to understand the challenges that their expatriate staff may be facing and also facilitate effective communication with Chinese staff.

Opening up the prospects for local, white collar employees to reach board level in the longer term is a sina qua non to retaining them. Chinese people work hard for the benefit of their ancestors and for their progeny, and their progeny’s progeny. The first step for them along this path to the top involves bringing senior Chinese staff to other sites around the world as part of their career development programme.

Doing things well.

A further requirement for success is to remember that when setting up operations, not everything can be done simultaneously. The first thing to focus on is quality, which is the foundation of the premiums which a foreign investor will tend to be charging in China and that is a prerequisite for retaining the loyalty of your customers in the rest of the world. After quality comes cost and engineering issues, followed by delivery. Then there is the vexed matter of patent policy.

The bottom line is that precautionary measures have to be taken in house, rather than outsourced to the public regulatory system prevailing in China. Such measures include a decision about how much research and development stays at home. To accentuate intellectual property strategies to stay ahead of the local competition is no easy task given the skill shown by Chinese companies in re-engineering, and in the rapid learning curve they have gone through in developing their own corporate counterfeit strategies. Depending on the choice of location, it may be possible to have local government support in policing patents, trademarks and copyright. This may involve taking the official route through the court system, using the official hand to catch and jail the miscreants. Of course, if the miscreants are public officials, or in the extended business family of public officials, the chances of success are low to non-existent.

Global operations and the China component

A firm entering, expanding and consolidating its operations in China and ultimately integrating them into its world-wide operations, will have to adapt its policy and strategy as conditions change and corporate savoir-faire about the Chinese market grows. All through the process, you have to remember that corporate HQ must allow its China operation plenty of autonomy. Processes that work perfectly well elsewhere will have to be adapted, because what may be best practice, say, in Germany or the U.S. might not work so well in China. Products, branding and design will all need to be developed ‘on the ground’ rather than in an HQ building on the other side of the world. Logo, name and pricing cannot be decided in a meeting room thousands of miles away, possibly by people who have never even been to China.

If the China operation is to be fully integrated, then how it reports upwards will be an important reflection of how China fits into the organisation as a whole. Some companies view China as part of the Asia-Pacific region (Asia-Pac) and the Chief Executive Officer for China reports to Asia-Pac rather than directly to global headquarters. Other companies take the view that China is virtually a region in itself, with all its different markets and massive geography, so the management team in China reports directly to the central organisation. For instance, the head of Samsung in China is one of the three top decision-makers for the entire company. The position of China in the organisation does not go unnoticed by your Chinese hosts, and the stronger the connection to HQ the more the company will be respected in China.

So, why go to China?

To summarise, the lessons for companies operating in China are that they must develop their corporate learning capabilities; they must choose the ’right’ locations, and the ‘right’ people; they must manage the complex tangle of operational issues; they must be, indeed, they will be aware of intense competition; getting government policy ’right’ is crucial, and the counterpart to that is adopting in-house precautionary measures. Those measures start and end with the loyalty of your workforce. Ultimately, the calculation on the cost side is not the rock-bottom wages you find now in the rural parts of China, but the total operating costs involved in learning how to manage the complex process of doing business in China.

You can be bold, but remember that the Chinese are in a hurry, and will be for a long time yet. As former Prime Minister Li Peng answered in response to a question asked by Ken Courtis, then Vice-Chairman, Goldman Sachs, Asia Pacific, about why he took so long to crack down on inflation in the early 1990s: “Mr Courtis, imagine you are running a marathon as fast as you can with 1.3 billion Chinese pounding along, as fast as they can go, would you turn around, and ask them to stop?”

Ultimately, the reason you want to go to China is because the Chinese people are running China, and they want to get rich. But go there because you have a clear idea of what you wish to achieve, because China has great potential, and because you know you’ll need to learn about operating there in any case.

These article s”eries id rawn from my ‘China Uncovered – What you need to know to do business in China’, FT/Pearson. The Arab language translation, same title, is published by Librairie du Liban, one of the leading publishers in the Arab world.

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About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) (www.chinauncovered.net) His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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