Chinese Firms: Taking a Gamble on Finding Customers Abroad

Eight years ago, a manufacturing company from northern China set up shop in the Maryland suburbs near Washington, D.C., but ran into trouble getting visas for some of its technicians. The firm appealed to the state governor for help; after a year of promises, someone finally advised the company to get a lawyer instead of a politician. While the company eventually did bring in skilled workers, the facility was ultimately shuttered due to personnel problems.

“In China, the government runs everything, so the company appealed to the state governor for assistance with the visa problem,” said Neng Liang, a management professor with the China Europe International Business School in Shanghai (CEIBS), who accompanied 30 Chinese executives to the U.S. last week to meet with Wharton faculty and nine companies. “Learning about the way things run in the U.S. is one of the reasons this group is here.”

The firm, Wangzi (Prince) Cashmere, manufactures and markets cashmere apparel in the U.S., according to Liang. “Although it was more cost-effective to manufacture in China and export to the U.S., Wangzi used its $5 million manufacturing facility in a Maryland business park as a marketing tool.” The front half of the facility was an exhibition hall and office, and the back half was used for manufacturing. “The firm ultimately folded this particular operation,” Liang said. “In addition to the visa challenges, a manager left the firm, taking client information, and started his own business. Unfortunately, Wangzi knew little about how to do business in the U.S.”

Liang related this story on the program’s last day during a trip to Atlantic City, N.J. The visit followed a week in which the executives strategized with Wharton marketing professors David J. Reibstein and Z. John Zhang, and also met with executives from nine companies, including Goldman Sachs, The Vanguard Group, Johnson & Johnson, Merck, American Express, ABC News, Saks Fifth Avenue, Harrah’s Entertainment and Campbell’s.

In recent years, U.S-based companies have flocked to China to set up manufacturing and other operations, taking advantage of favorable labor rates that are often a fraction of those in America. Now, however, Chinese companies that previously only served their domestic market are beginning to expand to the U.S. and other countries. Perhaps the most visible example occurred in 2004, when the Beijing-based Lenovo computer company acquired IBM’s personal computing division.

Indeed, a report last week in USA Today said Chinese acquisitions in the U.S. rose to $3 billion last year, “more than in the previous four years combined.” That investment flow, which reflects in part the Lenovo purchase, “runs counter to the huge trade surplus China enjoys at U.S. expense,” the paper noted, adding that by spending domestic profits abroad, “China is able to accelerate its emergence as a global trading partner while tamping domestic inflation pressures.”

Yet despite deals like Lenovo’s, many China-based companies have a long way to go when it comes to understanding foreign markets, said Liang, pointing out, for example, that pricing and marketing strategies are still in an early stage at many companies. “When we visited Vanguard, we explored the concept of unified, company-wide branding. Ideas like that haven’t penetrated many firms [in China]. The use of consultants is another concept that has yet to gain acceptance, since many Chinese companies find it odd to pay a person for intangibles like connections.”

One student in the program, an executive with Nanchang-based Jiangling Motors, noted that expanding Chinese firms face a variety of internal and external challenges. “For a long time we operated in a protected environment, so our companies were not very concerned about things like customer service,” said Clark Cheng, who heads the overseas expansion of Jiangling’s farm and automobile sales. “But as we expand into the European, and now American, markets, we’re finding that customers expect a higher level of service.”

Lengthy supply chains are another obstacle that can hold back performance. “The combination of the sheer size of China, and an infrastructure that is still being developed, meant that our supply chains evolved with multiple levels between the manufacturer and the retailer,” he added. “A factory will sell to a sub-wholesaler in its region, who will then deliver product to other sub-wholesalers before the merchandise even reaches local distributors. Of course each participant in the supply chain looks to slice off some profit, so the goods can be fairly expensive by the time they reach the consumer. But we can’t operate this way when we’re competing in the global market.”

Lacking Long-term Vision

Other emerging business concepts in China include best practices in addition to field marketing research that has already been accepted in America and Europe, noted Wang Xulu, another participant and the manager of business development with Unisono, a Shanghai-based marketing and merchandising firm. “Best practices and retail customer contact are still relatively new in China,” she said, adding that they are already present “in global companies like PepsiCo and Unilever. Now we are working to bring them to local Chinese companies.”

As part of the educational process, the last stop of the Wharton-CEIBS program involved a stop at Harrah’s Atlantic City casino hotel. Harrah’s Reggie Fullwood, vice president of service strategies for Atlantic City operations, and Jenny Holaday, vice president, marketing, for Harrah’s, Bally and Showboat properties, spoke with the executives about the challenges of integrating corporate cultures, customer relationship management and expanding to new domestic and global markets in a highly regulated industry. The casino’s parent company, Harrah’s Entertainment, recently acquired Caesars Entertainment in a $9 billion deal involving cash, stock and the assumption of Caesars’ debt.

Near the end of the visit Reibstein summarized the week’s experience, noting that the group had seen a range of different business models across a variety of industries. Each one, he said, developed in response to the unique circumstances of the industry environment.

The group’s observations shared some underlying themes. One executive noted that effective data management and mining is crucial to a successful business, adding that the merger of R&D, technology and customer relationship management (CRM) yields an important competitive advantage. “An effective CRM initiative can help build a positive business reputation,” observed another. “In turn, that reputation will lift customers’ comfort levels and drive revenue.”

Recalling the group’s visit to pharmaceutical firms, one of the Chinese executives pointed out that instilling a focus on corporate vision and values in the workforce is an ongoing, long-term process. “The effort must be embraced by top management and must be a very visible part of a firm’s activities,” he said. “Innovation should be a highly prized part of a company’s policy.”

Likewise, another manager pointed out that many China-based companies do not have a long-term vision. “Often, they don’t look beyond turning a profit from a current deal,” she said. “In the U.S., a market economy drives corporate behavior. But China’s two-track system — driven by the market and by a command-oriented government — hinders the development of a best-practices mentality. Also, American companies tend to be less structured and more innovative then their Chinese counterparts.”

“American Express may be the ultimate example of ingenuity,” said Reibstein. “It’s built on a simple product — a card — but it constantly reinvents itself. Strategy is important in a company, but you also have to consider execution.”