Foster, Swift sponsors presentation-- Opportunities and realities of doing business in China

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By Roberta M. Gubbins

Legal News

"When we started our business in China we didn't want to call our business Lancaster Investment Consulting, but the district in Shanghai where we were incorporating had a quota for investment firms so we were very much encourage to use the word 'investment' in our company name. And that is how Lancaster Consulting became Lancaster Investment Consulting. It is things like this that you have to do in China," Alex Claypool, starting his discussion of doing business in China at Foster, Swift on Sept. 26th.

"We are going to talk about how to be successful once you have decided to go to China." Claypool challenged the misperceptions held about running a business in China.

Perception: I can't afford to open an office in China.

Reality: The minimum capital requirement varies but is about $150k so "you don't have to be a Fortune 500." According to Chinese law it is about $15,000 for a business license but it is never really that amount because it is a market driven phenomenon. It depends on the month, the economy and the kind of business you're bringing."

Perception: I don't need an office to sell in China.

Reality: "You cannot fully understand the market or your China distribution network unless you have a China presence. The deeper you get into a market the more you need "feet on the street."

Perception: "It's more difficult to make money in China."

Reality: Talented commercial people across China generally cost less than in the US. The breakeven point for a Chinese Salesperson is about $70K, Claypool explained, while the breakeven for a US salesperson is about $170k. The issue of language was raised.

"When I was running a Fortune 500 in China," he said "I discovered that they were paying 2 or 3 times market value for employees whose primary value was that they spoke English--they couldn't sell a thing. We replaced about 80% of the employees with those who were talented in what they needed to do, regardless of whether they spoke English or not. Sales increased."

Perception: The only thing that matters in China is price.

Reality: There are many segments that are ideal for US exports without adjusting to the China market. Products with critical applications such as medical or safety items, high luster castings or impact sockets or cutting tools and machinery that can't be manufactured there to specificity are needed. The challenge is finding the premium market segment.

Asked about imitation, he said, "Your IP is not safe in China. There are knockoffs. But this is a great statistic--the number one market in the world for Louis Vitton knockoffs is China and the number one market in the world for Louis Vitton originals is China. You will get knocked off if you're good enough." The point, he noted, is that they don't have the technology to make the original.

Perception: Everyone leaves one job for another to make $10 more.

Reality: They are leaving for career growth opportunities as is done all over the world. The challenge is creating employee growth opportunities.

Perception: China is all about relationships.

Reality: Relationships matter but product positioning, services, delivery, etc. eventually win-out. The markets are growing and the accessible market is growing as well. The bottom line is that "relationships matter, but a good business plan and execution matter more.

The challenge is not to use culture or relationships as an excuse for failure.

"Any consultant or any sales person you hire who tells you it is all about relationships you need to run from those people. Anywhere you do business in the world, isn't it generally about relationships?" he asked.

Perception: I already have a distributor in China.

Reality: If you have 100 US distributors, for the same China market coverage you may need 300. The highest growth and most profitable foreign businesses are those with aggressive channel management. Without "feet on the street" it is hard to manage a large network. The challenge is development and management of a country-wide network.

He gave the following examples of successful companies in China:

* Wood manufacturer: from $0M to $3M in China over 4 years.

* Vaccine: from $0M to $3M in three years

* Industrial tools: from $4M to $20M in over four years.

* Hydraulic tools: from $1M to $7M in revenue over four years.

Claypool sees the ultimate challenge as "getting US companies to want to execute."

Alex Claypool is the founder and Managing Director of the US business Lancaster Holdings International, LLC (LHI) and the Chinese business Lancaster Investment Consulting (Shanghai) Co. Ltd. (LKS) consulting with foreign businesses entering China and those having difficulty achieving profitability in China. He can be reached at aclaypool@lancasterholdings.com.

Claypool attended Rikkyo University (Tokyo), the London School of Economics has a BA from Washington and Lee University and an MBA from the University of Michigan. He is a board member of Xni Consultancy Services Pvt. Ltd, a consulting firm in Delhi, India, and is an active member of the American Chamber of Commerce in Shanghai. He has lived the last ten of twelve years in Asia and Europe and currently resides with his wife and two sons in Shanghai.

Published: Mon, Oct 3, 2011

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