China proving to be a tough place for US firms

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#21
A personal investment in China

Geoff Winestock
1590 words
22 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Cultural exchange Even more important than speaking Chinese is understanding how business thinking and management works, write Angus Grigg and Geoff Winestock.

When William Stone left his investment banking job in May he didn't take the safe option. Rather than join another bank and continue his comfortable life in Sydney's eastern suburbs, he packed a suitcase and headed to Shanghai.

On arrival the 28-year-old set himself the near impossible task of learning Mandarin in four months.

It was a defensive strategy.

"I kept seeing the Chinese on real estate deals [while he was working at Investec] and realised they were going to be a huge player in the Australian property market," he says during a break from class in ­Shanghai's former French Concession.

"But the two sides didn't understand each other," he says.

Language was only part of the problem, according to Stone, who says the bigger issue is the cultural divide around how ­business is conducted.Need to speak Chinese

"That's when I realised I needed to speak Chinese because if I didn't, my competitors surely would."

In theory, his timing could hardly be ­better as the just completed free trade ­agreement with China should provide big opportunities for Australian professional service providers.

But while the federal government is ­trumpeting it as a big win for the sector, there are doubts about Australia's ability to capitalise on the opportunity.

The general lack of understanding about China among the business community is the main problem, even if the raw trade numbers suggest otherwise.

Figures released on Friday show Australian exports to China topped $107 billion in the 12 months to June 30, up 27 per cent from a year earlier.

They are impressive numbers, but this trade is dominated by coal and iron ore, which requires little actual know­ledge of China.

"We have done a lot of business with China but we have not done a lot of business in China," Clinton Dines, the former head of BHP Billiton in China says.Key distinction

It's a key distinction, one that makes Dines worry that Australia is not ready to take on such a huge and alien market.

As he sees it, the majority of Australia companies are small, locally focused and have almost no experience of what it's like to run a distribution chain, manufacturing operation or a services company in China.

And as for the idea that Australia is in the region, Dines says that's "nonsense".

"It's quicker to fly to London from Shanghai than it is to Sydney," he says.

Dines has honed this view from his 35 years in China – a period in which the ­country has gone from a Maoist backwater to the world's second-largest and fastest-growing major economy.

With this change you would expect an equally dramatic rise in understanding about China, particularly among Gen­eration Y Australians, who have grown up less attached to the Anglosphere.

But not so, according to Stone and his partner, Lynsey Willenberg, a 27-year-old entrepreneur who is looking to bring her health business to China.Still the exception

"Most of my friends thought I was crazy moving up here," she says.

Willenberg, who boasts clients such as Gucci, and is a brand ambassador for ­clothing line Lulu Lemon, says she remains the exception among her friends.

"The lifestyle is too good in Australia," she says.

Stone adds that his friends understand the logic of what the couple is doing, but have little interest in doing it themselves.

And it appears those that are 10 years younger than Stone and Willenberg are not embracing Chinese or other Asian ­languages either. In 2013, just 902 students in NSW studied Chinese at HSC levels, a drop of 5 per cent from the previous year.

Overall, those studying a foreign language stood at 8 per cent, according to ­figures provided by the NSW Department of Education.Window into different culture

Not that language is everything, but it does provide a window into a different ­culture and is often the first step in ­understanding a foreign country.

Dines, a fluent Mandarin speaker, makes this point and says while businessmen such as Stone and even Facebook founder Mark Zuckerberg have rushed to learn the language, it is "the icing on the cake".

He is more concerned that Australian businesses lack more basic management skills. "If Australian dairy farmers think they have a problem with Coles and ­Woolies, wait till they have to deal with China," he says.

This "playing for keeps" approach to ­business in China saw Foster's lose close to $1 billion trying to break into the local beer market.

Even more extreme was the experience of Rio Tinto, which saw its head of iron ore trading, Stern Hu, jailed for 10 years on corruption charges by a Shanghai court in 2010.

Such experiences possibly explain why few major Australian companies have a meaningful presence in China. Lack of blue-chip namesProperty giant Goodman Group is pos­sibly the largest Australian direct investor in China, with committed capital of $US2 billion ($2.3 billion), although 80 per cent of this has been provided by its financing partner the Canadian Pension Plan Investment Board.

The next largest would likely be ­BlueScope Steel with about $1 billion of assets in China.

This lack of Australian blue-chip names making a substantial commitment to China was reflected in this week's Aus­tralia-Chinese Achievement Awards, announced by Prime Minister Tony Abbott.

The success stories were mostly small niche players.

Take the Launceston-based Bridestowe Lavender Estate, which was a finalist in the awards.

The company has built a thriving ­business packing its flowers into branded "Bobbie" teddy bears, which it sells to ­Chinese tourists or via the internet.

But its success in China has almost been accidental.

The results are not to be knocked, ­however, as the company has run out of stock for this year, although there was one left over for Chinese President Xi Jinping when he visited Tasmania this week.Two key things

Robert Ravens, Bridestowe's managing director, says two key things he learnt about the Chinese market were its obsession with celebrity and the passion con­sumers can suddenly develop for certain branded products.

While Bridestowe was smart enough to capture the opportunity, it was not the result of a concerted China strategy.

That's mainly because lavender, which most Australians associate with their grandmother, is hardly a traditional Chinese thing.

Bridestowe's Chinese story began about five years ago when Wong Wing Chee, better known as Chef Wong from the hugely popular Asian edition of MasterChef, went to ­Tasmania on holiday.

He tasted Bridestowe's lavender ice-cream, which was being developed as an alternative to the dying market for dried ­lavender pillows.

Chef Wong then spruiked it back in Hong Kong, a market that often sets trends for the mainland, and the tourists started arriving at the company's farm.

Then came the lucky part. By chance a Chinese soap opera had decided that ­lavender was the new symbol of romance at the same time as Bridestowe had begun producing the cutesy lavender bears.Social media exposure

It was one of the few products on display in the farm shop, when an actor called LiChen visited and took a Bobbie back as a present to his actress partner Xinyu Zhang, who posted a picture of herself on social media with the caption "sleeping with ­Bobbie on a cold Shanghai night".

Sales rocketed as Chinese tourists literally formed queues at the entrance to the ­lavender farm and, in typical fashion, Ravens had to deal with fake Bobbie bears appearing within a month of Bridestowe bringing out each a new model.

These are lessons about the Chinese ­market for other Australian companies but they are about mass marketing and not about traditional Confucian values.

"It tells you about the power of celebrity and the lemming approach to consuming in China," Ravens says .

"If someone says it's okay, they will follow. They aren't early adopters."

Lion Dairy is another example of a ­smallish player making its way in China.

While lower tariffs on dairy is one of the big wins from the free trade pact, Australian farmers still have to break into what is becoming a hugely competitive market dominated by global companies.

French giant Danone has been operating in the market since 1987. New-Zealand giant Fonterra recently announced plans for a partnership with Chinese listed firm Beingmate.Sceptical about theory

Given this competition, Dines says he is sceptical about the theory that Australia's resources-based mining boom will quickly be replaced with a "dining boom" based on food exports.

For Lion Dairy, a lack of knowledge about China forced it to use an agent or middleman to market its Australian Pura, Farmers Union and Yoplait brands.

In this case it was Chinese Australians, Irene and Andy Lin who moved to Melbourne from China in 1988 and despite being over 50, started a trading business.

For a year Lion Asia has marketed its products through the Lins.

Duncan Makeig, managing director of Lion Asia Dairy, says the partnership with the Lin's has been crucial.

"Building effective partnerships is critical for Australian businesses looking to expand abroad.

"In dairy, the quality of your cold chain distribution system is paramount, as this underpins product quality and consumer confidence in your brands."


Fairfax Media Management Pty Limited

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#22
I guess this is also applicable to high corruption countries.

http://www.chinalawblog.com/2014/11/chin...ve-it.html

China Guanxi: You Don’t Have It.
China Law Blog by Dan Harris / 13h // keep unread // hide // preview

Five days ago, I wrote a post on Linkedin, entitled, China Guanxi: You Don’t Have It. That post essentially counsels to be skeptical of any foreigner who claims to have guanxi and goes on to discuss why this is so and why guanxi is overrated in any event. The post lists out the following reasons for why guanxi is not as valuable as touted:

No foreigner can create a Chinese-style guanxi network. Guanxi refers to a vast network of connections arising from party, family, and work connections that may go back several generations. No guanxi network relies on a single individual. The elimination of one member of the network is therefore not fatal. Foreigners almost always rely on only one or two individuals for their supposed connection. This kind of network is too fragile to be of enduring value. Foreign investors who think they have created a guanxi network in China are usually deluding themselves.

Connections with local government officials are short-term and can be abruptly terminated. Government officials in China are regularly moved from office to office and from region to region. As a result, any connection you build with a local government official is unlikely to be long-term.

It is common to negotiate a project for several years and then learn that the official in charge has been transferred to a new post. If the project is not in compliance with the law, the replacement government officials often will refuse to sign the documents that have already been negotiated. Even worse, we have seen replacement government officials shut down previously approved and already started projects. If your project depends on the protection of a single individual, you need to be asking what will happen if that person dies, is demoted, or prosecuted for corruption.

A project based on guanxi gives too much power to the Chinese side of the deal. In many cases, the provider of guanxi will use the fact that the project is not in compliance with the law to ask for additional benefits. If the foreign investor seeks help from a lawyer, the lawyer can do little since the project itself is either illegal or poorly documented.

This post has already drawn nearly 100 likes and, more importantly, 46 comments, most of which agree (many vehemently) with the post’s thesis. I urge everyone to go read that post and provide your coments either here or there. Guanxi is a controversial topic and I am of the view that we all benefit by talking about it openly. I urge all of you to go read it.

If you like my guanxi post or if you like this blog, or even if you just have an interest in China (which I am guessing that you do simply because you are here) please join our China Law Blog Group on Linkedin while you are there. We are nearing 10,000 members and I really want to hit that magical number by the end of the year! What separates our China Law Blog Group from the other Linkedin Groups are the following:

Great members. Of course.
Great discussions. Of course.
No spam. This is key. We moderate everything and we do so to prevent wasting your time!
We’ll see you there.
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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#23
Since we are at Guanxi thought this would be appropriate:
http://www.scmp.com/news/china/article/1...corruption

I'm impressed with Xi's determination and ability to execute his anti-corruption drive within so much vested interest stakeholders circling him.... but to prosecute former leaders does open up the pandora's box which I hope he knows how to contain...
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#24
(24-11-2014, 12:12 PM)specuvestor Wrote: Since we are at Guanxi thought this would be appropriate:
http://www.scmp.com/news/china/article/1...corruption

I'm impressed with Xi's determination and ability to execute his anti-corruption drive within so much vested interest stakeholders circling him.... but to prosecute former leaders does open up the pandora's box which I hope he knows how to contain...

new officials 3 torches of fire... fire will be smothered over time...
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#25
Succeeding in China takes patience, common sense, and a dose of realism
ALISTAIR NICHOLAS THE AUSTRALIAN NOVEMBER 29, 2014 12:00AM

The keys to succeeding in China

The Chinese market is very different from Australia’s. Source: AFP
FOR Australian businesses — especially small and medium enterprises — eyeing China following the conclusion of the long-awaited free-trade agreement, the real work is about to begin.

The FTA in no way guarantees success or an easy road in what must be the world’s most challenging market to do business. We may have brought down China’s ‘‘Great Wall of Protectionism’’, but you’ve now got to fight your way through some hostile territory.

Thirteen years in China — seven of them running my own business — taught me to take nothing for granted in the Middle Kingdom. Here are some lessons drawn from my experience helping western companies, big and small, out of difficult situations, often after the proverbial mierda had hit the fan.

Hire the right local partners

From the outset it is vital to identify and engage the right business partners. I saw too many businesses go awry when foreign entrepreneurs partnered with the wrong people in China.

In one case a foreign business decided to fire its local partner for embezzling funds, but the local partner turned the tables and claimed the money had been used to pay bribes to government officials, promptly producing “receipts” for the bribes at a national press conference.

He said the foreign company had instructed him to bribe the officials to obtain various concessions.

Be wary of local advice

Some of your Chinese business partners and employees may tell you “when in Rome do as the Romans do”.

This usually happens when they are trying to convince you to do something unethical or illegal. You should ignore their advice, because once you go down this path, you will find yourself on a very slippery slope.

It is important to understand that when Chinese business partners or your local employees advise you to do something against your instincts, they do not see themselves as acting unethically.

Commerce, business ethics and commercial law are relatively underdeveloped in China compared with the West. Consequently many Chinese view emerging laws as “guidelines” more than hard legal precepts.

At one stage my own local accountant was advising me to do something I instinctively felt was wrong.

When I asked her whether her suggestion was illegal, she responded: “Only if you get caught.”

There was no irony in her response. She honestly saw no difference between legally avoiding taxes and tax evasion, because the legal system was in a state of flux.

It is vital to stand your ground on such matters in China. If you “go with the flow”, as you will be told to do, and something goes wrong, no one who advised you to subvert the law will rush to your defence.

Protect your intellectual property

It is important to realise that everything that can be copied in China will be copied.

During my 13 years there, I worked for a number of clients who were involved in often-­protracted legal actions against counterfeiters who had stolen their brands and/or technology.

One leading fast-moving consumer goods company that I worked with estimated that one-third of the products with its name that were on supermarket shelves were fake.

An automotive client was shocked to see a commercial vehicle it had designed available in China before it had introduced the vehicle to China. It had been reverse engineered from photographs taken at a car show in Europe. Many Chinese justify IP theft on the grounds that China is still developing, and that foreign companies trying to protect IP are involved in a conspiracy to hold China back.

It is important to get legal and business advice on how to protect your IP in China. One company I know has two factories in different cities of China making two different components for a highly sophisticated manufacturing product, with final assembly completed in a third country — not even in China.

It does this to avoid the risks of losing control of its IP.

Neither factory in China knows what the final product is, nor do the Chinese factories have links to the end market. The company has perfected compartmentalising IP to protect it. In some cases, business silos do work best.

Don’t be afraid to get help

I had 13 years in China to learn some important lessons.

Australian businesses hoping to profit from the removal of trade barriers as the FTA kicks in over the next two years won’t have the benefit of that hindsight. They should seek help from China-based consultants.

For small and medium businesses, Austrade might be a good starting point as it has lists of consultants and agents that can help companies entering the market.

Alistair Nicholas is a senior adviser in the government relations and public affairs practice of Weber Shandwick Australia. He has also served as an Austrade Trade Commissioner and was a trade policy adviser to the Coalition.
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#26
In Rome do what the Romans do... when it comes to China, they will also find a way to reinforce their rules and regulations

Bitter pill for Blackmores

Victoria Thieberger
[Image: victoria_thieberger.png]
Business Spectator


[b]While burgeoning demand has propelled the share prices of Blackmores and Bellamy’s to stratospheric heights, both companies and others that have benefited from the grey market in China are facing unexpected headwinds.[/b]
With little fanfare, the Chinese government recently introduced draft legislation that will restrict cross-border e-commerce sales.
According to the legislation, the changes are designed to make sure all imported foods brought in via so-called bonded internet channels meet Chinese standards for safety and labelling, and must include Chinese labels printed directly on the packaging.
Until now, goods sold on online malls like Alibaba’s Tmall have not had to comply with Chinese national standards and benefited from reduced inspection requirements by the quarantine service.
The Australian makers of vitamins, honey, infant formula and other popular supplements and health products already meet these criteria through their direct online sales into China.
However, the large numbers of Chinese nationals who are buying these items in Australian stores and then selling them online in China at big mark-ups will be directly affected.
“A large portion of the growth those companies have experienced has come from foreign nationals coming into Australia, clearing out the shelves of supermarkets, putting together pallets and selling them online to individuals,” says Roger Montgomery, chief investment officer and founder of Montgomery Investment Management.
“These regulations could knock out a whole section of sales,” he says.
Blackmores’ shares have soared 425 per cent over the past year to $167.20 at Thursday’s close, a2’s New Zealand-listed shares are up 27 per cent, and Bellamy’s is up 540 per cent to $9.66.
The Australian media has been awash with stories about parents unable to buy their preferred brands of organic baby formula because supermarket shelves are empty and the brands can’t restock fast enough. One mother’s photo of people clearing out a Woolworths’ pallet of formula went viral.
The problem was exacerbated ahead of China’s ‘Singles Day’ online shopping extravaganza on Wednesday, though presumably it was parents rather than singles buying the baby formula.
While Blackmores, a2 Milk, Vitaco and others benefited from a big spike in sales through their online Chinese outlets, entrepreneurs were also buying up in advance of the shopping day that generated one-day sales of $US14bn for Alibaba alone.
Blackmores estimates the ‘grey market’ to China accounted for $70 million of its sales last financial year, not far behind the company’s direct sales to Asia of $84m.
The head of Swisse Vitamins has said the company has been approached by individuals with links to China offering to buy “millions of dollars’ worth” of stock every month with a plan to onsell in China.
In a note about trade issues by the US Department of Agriculture, US officials described cross-border e-commerce as the “hotpot” of the industry, benefiting from reduced duties, without Chinese-language labels, and reduced inspection requirements.
They said the new legislation would have a big impact on this segment of the market, which had grown by 30 per cent in 2014 and by a larger amount this year.
“These draft regulations would add inspection and labelling requirements on imported products, thus negating much of the benefit of this market channel,” the USDA said.
Among other requirements, food importers will have to gain an operating licence, develop complaints handling systems, guarantee food safety and use “appropriate” warehousing and transport. Clearly, a lot of the current operators don’t meet the stricter requirements.
For now, investors are playing cautious until the impact of the regulations becomes clearer.
Goldman Sachs warned in a recent note on Blackmores that although it was challenging to determine what proportion of trade would be affected, “our sense at this stage is that it could be significant”.
A New York-based hedge fund analyst, who asked not to be named, told me via email his fund has a small long position in Blackmores, but is relying on channel checks and other primary research to determine its position after the proposed changes.
“The regulatory wildcard is a tough one to play,” he said.
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