Local Market Knowledge

I'm running into a lot of companies lately that are infatuated with the prospect of doing business in Asia China. I approach this notion with a lot of trepidation, for one thing my wife's business is all about manufacturing stuff in China and having been the traveling spouse with her on many occasions, so I feel pretty comfortable saying that doing biz'ness in China ain't nuttin like anywhere else.

Local knowledge matters, I can't think of a better example of this than the automotive industry. Ever notice how the most popular cars in Europe are nowhere to be seen on American roads, and pickup trucks are pretty uncommon on European roads? Ford sells 750,000 pickup trucks a year, almost all of them in North America... by comparison, I think Honda's TOTAL worldwide sales were around 1.5 million. Ever drive around Japan and notice that Accords and Camrys aren't on every street corner like they are in the U.S.?

There's a great article in Forbes that explores the popularity of pickup trucks, among other things:

America's three best-selling vehicles are pickups, which may be due to the fact that American automakers best understand their country's love of size and cargo utility. When Toyota Motor (nyse: TM - news - people ) drove engineers around the parking lot at a Dallas Cowboys football game in order to study the vehicular preferences of average Americans, the Japanese--who live in a country where things are small, especially the roads--were stunned at how large the pickups in the lot were, and how many of them they saw.

"These are for private use?" they asked in awe.

Doing business in Asia is tricky to say the least, not only are there localization issues to deal with in the software itself, but the sales channels are much different than in the Americas or Europe. Highly dependent on trusted middlemen, Asian sales channels are likely to be dominated by resellers of many flavors. This poses the greatest challenge to U.S. companies who have grown up believing that you have to "own" the sales channel and the customer relationship. The other thing that I have noticed in sales opportunities in China, in particular, is that the hierarchical relationships within the company you are selling to can be fluid, in other words it may be represented to you that so-and-so has the authority to do the deal only to find out 3/4 of the way through the deal that the guy you are dealing with isn't. Sure, it's sales 101 stuff, but it's also cultural in that there are some heavy nuances to how people represent themselves and it really takes local knowledge to understand what those nuances are.

The rituals around negotiating for price and payment terms are also problematic for U.S. and European companies. Typically, negotiations here tend to be a give-and-take with you give me a number and I'll give you a number and then we'll end up somewhere in betweee, or I'm going to use payment terms as a form of discount to make it attractive for you. In many parts of Asia, the process of negotiation involves a lot of emotion and western companies can quickly get themselves into trouble. For example, in Korea the art of negotiations involves pushing the other side so hard that they get pissed off at you, but the tricky thing is that if you don't push it to that point the other side figures you aren't trying hard enough and then they are insulted because you have disrespected them. So do you get that... you have to piss them off in order to show that you are respecting them.

If you want to do business in China, more power to you. But don't think that you are going to show up and be closing deals a couple of quarters later. It takes commitment and time to build our your partner channel, localize your product, and demonstrate the dedication that is necessary for you to be taken seriously. Large companies that are now showing success in China, M$oft and SAP as examples, have been there for years and are operating R&D facilities there as well. Like every market, local knowledge goes a long way, lack of it shows immediately.

Comments

[Nick Gray]

Great post.... it's like FUN distance learning (I'm supposed to be studying for my boring and outdated b-school classes for a big test tomorrow, but this post got the best of me). I think there's enough talk on VC blogs about Do's and Don'ts as an entrepreneur. I like reading your site for the meta-funding news and anecdotes like this.

[jeff]

What really fascinates me about China is the entrepreneurial spirit of the Chinese people, I've never seen a culture outside of the U.S. where this is baked into the DNA so strongly that even 70+ years of communism could not burn it out. Combine that with the massive amount of infrastructure the Chinese government is orchestrating and I really think that China is poised to become the economic superpower that so many hope it will.

[Nick Gray]

My two (random) cents-- (1) In my last few years attending the Consumer Electronics Show, the fun and exciting stuff is always tucked among the hundreds of tiny China/Taiwan/Hong Kong booths in the Hilton. http://www.wfu.edu/~graynt0/vidblogs/6_Nick_311.wmv
(2) I read somewhere that Today's Wal-Marts are nothing more than showcases for Chinese manufacturers. Agreed.

[Andrew Batchelor]

Jeff your comments are on the mark. Doing business in China remains problematic unless you are prepared to modify your approach and adapt to the local ways of doing things. Invariably a mix of outside thinking and local talent are key ingredients. On a wider theme you will often see people refer to doing business 'in Asia' as if its a single marketplace. This couldn't be further from the truth. Divergent culture, law, langauge, currency etc etc. Nevertheless there is opportunity here. Ive lived in Hong Kong 11 years and am focussing more and more on China.. see my blog http://privateequitychina.typepad.com/privateequitychina/
for ongoing news on PE / VC in the China.