How Western Companies Can Ease Their Entry into China

When Charles Stevens headed up Microsoft’s new and growing Asia Pacific division in the mid-1990s, word of an upcoming visit from Microsoft founder Bill Gates was always cause for excitement — and for stress: The visits required months of preparation.

“Three or four months a year, I spent my life trying to organize these visits,” Stevens recalled as he gave one of the keynote addresses at the recent Wharton China Business Forum. His reminiscences serve as useful advice for any Western business executives hoping to strike it rich in China without being conversant in the local ways.

One thing Stevens learned from then-CEO Gates’ visits was that every Chinese official, no matter how tangentially involved, needs to be brought into the loop. Local bureaucrats, the police, the military and – in the case of a luminary such as Gates – the premier’s office all had to be informed and given the opportunity to bestow approvals for Gates’ entourage. Said Stevens: “I never figured out why the Air Force needed to know where his train was.”

Ignorance of such local idiosyncrasies, attitudes and culture are among the reasons many foreign business ventures are finding China such a tough nut to crack, Stevens noted, adding that there is something of a success formula — albeit a sophisticated and nuanced one to untrained Western sensibilities – to doing business in China.

“You start at the coast,” he said, motioning to a map of coastal Chinese cities where foreign investment has flourished because of government encouragement: Dalian, Tianjin, Qingdao, Shanghai, Ningbo and Guangzhou, to name a few. But, he said, that’s not enough, in part because every other foreign company is trying to sell there too. “You’ve got to move inland and establish relationships.”

From those relationships come valuable insights into assessing the needs of the market, tapping the most effective distribution channels and gaining a cultural context that leads to business credibility with Chinese consumers.

Portable Generators

Microsoft, one of the pioneers when China opened its markets to foreigners with sweeping economic reforms during the past couple of decades, learned the formula the hard way. Microsoft did at least know that it needed an office in the country, and so Stevens set one up in Beijing. Working conditions underscored the fact that it was an emerging economy. At the time, the only reliable power was by portable generator. When the first generator proved too portable — it went missing after being left outside one night – the office acquired another, making sure to chain it down securely.

Stevens said Microsoft first tried selling a direct translation of its Windows operating system in China. Initial sales were disappointing. The company tried again, this time taking into greater consideration the fundamentally different ways in which Chinese consumers use computers. But the pricing model was still flawed. Piracy blossomed because the value proposition accepted by consumers in the United States simply did not apply in China. “Local product is not enough; you need local content,” Stevens said. “You have to design, particularly for a country that big, for the local culture.”

Despite ongoing troubles with software piracy, Microsoft did crack the code, with Microsoft Far East revenues increasing an average of 70% per year for the three years that Stevens led the division. “You’re competing in that market against a free (pirated) version of yourself…. You have to add service and value. You can’t just offer hardware,” he said.

He also took aim at some Western companies’ expectations of swooping in and reaping instant profits from Chinese consumers whom they assume are just naturally clamoring for their wares. Stevens said that, in reality, building the contacts and local base needed to succeed takes much longer than such a mindset presumes. “You had three-year plans and five-year plans,” Stevens said. Any shorter time horizon, and a company lacked the proper context. “The days where U.S. companies can walk in and be No. 1 are well over.”

Indeed, the financial headlines are littered with the names of Western technology behemoths that just couldn’t seem to make things click in China, or at best are losing ground – Google, Ebay and Dell, to name some of the better-known. Their homegrown Chinese competitors include Baidu (search), Alibaba (auctions) and Lenovo (PCs).

“I don’t think the U.S. companies took time to understand the culture. They went on their own and they didn’t do partnerships,” Stevens said.

Partnerships with Taiwan

Yet lying among all those hazards, Stevens said, are incredible opportunities. One he mentioned repeatedly: The symbiotic business relationship with Taiwan. “Taiwan is the source of a lot of innovation” in the form of “ODMs” or original design manufacturers, he noted. The country has developed an international reputation as a hotbed for designing and engineering complex hardware, such as computers and other electronics, then outsourcing their manufacture to China. “It’s like a turbine driving a huge engine…. Despite the political complexities involved, if I were building a new product, I would try to find an ODM partner in Taiwan and get them to build in China” because of the massive cost savings,” Stevens said.

For China and its people, economic expansion comes at a fortuitous time in the evolution of technology, according to Stevens. While the company may have languished during the time that Western economies were flourishing on advances in transportation, manufacturing and telecommunications, China is leapfrogging those countries in expanding its economy today.

The learning – and spending – curves required decades ago to lay the foundations of today’s technology were largely borne by other countries. For instance, China skipped the age of the massive mainframe computer, Stevens said. Chinese scientists and engineers, in many respects, get to stand on the shoulders of foreign predecessors. “Whole generations of technology have been bypassed, which is why China has been able to catch up so quickly,” he noted. As a result of that catching up, “by 2030, there will be more middle–class consumers in China than in the United States.”

Ultimately, Stevens suggested, succeeding as an outside company in China is about making a serious, long-term commitment to having a respected, local presence. “You’ve got to be there, even if you are losing money. You will never learn these markets without living and working there and speaking the languages.”