Cash vs Value – The Secret to Doing Business in China

Before coming to China 7 years ago I read an interesting article by an executive in the U.S. automotive industry who had experience in China. He said the difference between the U.S. automotive industry and its Chinese counterpart is that in the U.S. we will invest $300 million in a new factory and accept a 5-year payback. In China, by contrast, they will invest $50 million and expect a 6-month payback. If it works, they will invest some more.

He is correct. But it has taken me an awful long time to truly understand the implications of that reality.

A business which is not immediately successful will be shut down, no matter what the investment.  "It will take time" is a delusion to the Chinese business person.
A business which is not immediately successful will be shut down, no matter what the investment. “It will take time” is self-delusion to the Chinese business person.

It is not at all uncommon to see someone invest a great deal of money in a new restaurant or retail store and close it down completely 30 days later. Nor is it uncommon to see multi-million dollar construction projects stop in mid-stream, sit for a year, and re-start again.

Companies, even large ones, pivot in and out of completely distinct industries with total abandon. One of my largest distributors has decided the margins in distribution are not attractive enough so he is opening a chain of movie theaters even though he knows nothing about the business.

A hugely successful, multi-billion dollar energy company is rumored to be moving out of energy and into Traditional Chinese Medicine because they fear that as the government deregulates the industry margins will become challenged.

My biggest Chinese competitor, facing increasing competition in the glass industry, recently made a $190 million investment in the online gaming industry with the explanation that the CEO had played the game for over a year and found it very entertaining.

In a country which measures its cultural traditions in millennium, few businesses have existed in their current form for more than a decade or two.
In a country which measures its cultural traditions in millennium, few businesses have existed in their current form for more than a decade or two.

My own company has been making glass for more than 200 years and we are far from alone in our long-term commitment to a single industry. There are exceptions. But most successful companies in the U.S. are doing exactly what they’ve been doing from day one.

Put in its simplest terms, the difference between American companies and Chinese companies is that the former exist to build long-term value and the latter exist to make money.

As simple as it sounds, it’s a profound difference. Each brings a completely different mindset to the task. Which is one of the main reasons, I believe, that Western companies find it so difficult to find the right Chinese business partner when they are so inclined or required to do so by regulation.

Part of the difference flows from the different ways in which the two cultures think about institutions. Americans who build their own businesses often refer to them as a member of the family or the equivalent of a child – a labor of love. To the Chinese, however, who find it impossible to personalize an institution, a business is merely a way to take care of their family or live a better life.

If I sound judgmental, I’m not. Most people work, at the end of the day, to put food on the table. Few are fortunate enough to feel true fulfillment through their work. Some do. And they are the ones who write inspiring ‘how to’ books or put a face on an industry (e.g. Walt Disney, Steve Jobs).

The Chinese legacy is a very different animal. Some achieve it politically (Mao Zedong) while others achieve it through wisdom and philosophy (Confucius). Even successful entrepreneurs such as Jack Ma, the founder of Alibaba, and one of the wealthiest men in China, is seldom talked about in terms of his wealth. The Chinese talk of his charismatic leadership, his perseverance, and his determination to overcome obstacles.

So what does all of this mean for Western companies doing business in China? I believe there are a few key takeaways.

There is a big difference between a good partner and a good partnership.  The alignment of worldview and agenda is critical.
There is a big difference between a good partner and a good partnership. The alignment of worldview and agenda is critical.

1. If you can, go it alone. Many Western companies wishing to minimize their risks believe it is wise to find a Chinese partner to help them navigate the very complex regulatory and commercial waters of the Chinese economy. In theory, it is a sensible argument. In practice, however, your chances of finding a compatible Chinese partner are very low indeed. They may say all of the right things. They, however, are wired quite differently than you. Those differences will become apparent, perhaps insurmountable, over time.

2. Focus on the customer. I have always believed that Western business is too consumed with their competition. (I’ve always felt that we should give our competitors all of our internal cost data, for example, instead of protecting it like the Crown Jewels. It is more likely to cause them to make foolish decisions than insightful ones. After all, in the end, even we don’t really know what it means.) Nonetheless, when you are battling the same foes decade after decade your competitors can become a proxy for your customers in a way. You collectively define the market. Not true in China, however. Your most troublesome competitor has probably not even entered the market yet.

Every company in the world talks about the importance of cash.  Few, however, give it the top billing that the Chinese business person does.
Every company in the world talks about the importance of cash. Few, however, give it the top billing that the Chinese business person does.

3. Accept that cash is the only motivator. If you rely on partners such as distributors or retailers or contractors, accept that they will not be motivated by things like long-term mutual commitment or partnership. They manage for cash, pure and simple. Either find a way to go around them or build your model on that assumption.

This is not a ‘good’ or ‘bad’ distinction. While Western companies excel at creating long-term value, Chinese companies are extremely nimble and blazing quick at reacting to market trends and shifts. Both are advantageous at different times and in different circumstances.

In the short term, however, I think the most notable manifestation of this distinction is that Western companies will continue to fall short of their expectations in China. It is the most competitive market in the world. The idea of selling one widget to every Chinese is a pipe dream.

That is not to say that Western companies cannot be successful here. They can. But they must adapt to the environment and that may mean leaving many of the business processes they hold dear at the border.

Conversely, I believe Chinese companies, for the time being, will find it very difficult to be successful in the West. There are already exceptions. Companies like Lenovo and Alibaba are very sophisticated and very Westernized, but they are not yet the norm.

In the meantime, the Chinese business landscape will continue to be one of the most dynamic in the world. Just reading it will be a challenge. What is really happening? And why?

Government reform, while necessary and in the country’s best interests long term, will only add further froth to the already churning waters of commerce. In the end, however, the Chinese markets will mature and stabilize; entrepreneurs will find a balance between long-term value creation and short-term cash flow.

And China will continue to wow.

It is the extremes of China which foreigners find difficult to reconcile.  For no one is that challenge more difficult than for those who come here to do business.  Westerners manage their businesses; the Chinese DO business.
It is the extremes of China which foreigners find difficult to reconcile. For no one is that challenge more difficult than for those who come here to do business. Westerners manage their businesses; the Chinese DO business.

One last thing. As you head out to begin your holiday shopping I ask that you look at my novel, available in the Amazon Kindle store on all of Amazon’s websites worldwide. My pen name is Avam Hale. Whatever else it is or isn’t, I promise it is thought-provoking. You can read a couple of chapters for free or borrow it from the Kindle library if you’re a member. And if you don’t have a Kindle there is a free Kindle App available for every smart phone or tablet. You can even gift it to others. (And if you liked it, or even if you didn’t, please write a short review. E-publishing takes clicks and you can’t get clicks without reviews – lots of them.)

http://www.amazon.com/dp/B00NXS2WM0

Copyright © 2014 Glassmaker in China

Notice:  The views expressed in this post are strictly those of the writer acting in a personal capacity.  They are not in any way endorsed or sanctioned by his employer or any other individual with which he may be personally or professionally affiliated.