Memo
...ve prospered by moving manufacturing into China or, more rarely, by producing goods for the Chinese consumer market. KFC, one of the first fast-food chains to peddle its wares in the Middle Kingdom, now has branches in every province and an outlet in Tiananmen Square, near a massive portrait of Mao Tse-tung. Carrefour, the French supermarket chain, has gained a loyal base of Chinese shoppers. British brewer Bass overestimated the number of Chinese people able to pay big money for its premium lagers and stupefied potential Chinese customers with promotions featuring dancing Scotsmen dressed in kits. Other giants have had their ideas expropriated, with little recourse. Pepsi has sold its drink in China for 20 years but admits it has yet to make a profit; now it’s accusing its Chinese joint-venture partner of infringing on its intellectual property rights. Smaller companies like us will face difficulties in China, but we posses several advantages. Small companies operate below the radar of government officials, certainly below the radar of central officials in Beijing, and they less often go head-to-head with big Chinese companies favored by the state. So, while Disney and Microsoft might have to spend huge amounts handing out favors, smaller companies do not have to do so much wining and dining. Since entrepreneurs usually escape the government’s notice, they are less obligated to locate offices and factories in areas favored by Beijing. When Honda decided to build a new auto plant in China in 2002, it allegedly came under intense pressure to erect the factory in Guangdong, a southern province that the government wanted to develop. The area is far from a port that could handle car shipments, automobile industry experts say, but Honda shouldered the increase cost and set up shop there. Because small firms also have fewer resources and less ability to absorb losses, they tend to focus more on short-term profitability in China. Companies like Anheuser-Busch or GM always talk about how they are losing money now because they want to be heavily invested in China for the long run, so when the market grows they will have established their brand. But that market could be 20 years from now, and by then, local companies might be more powerful, or the shape of the industry might be totally different. Most smaller companies also keep their overhead costs lower by minimizing the number of expatriate staff, who usually require “expat packages” that can include company-provided housing and even a driver so they do not have to navigate China’s chaotic streets themselves. Local talent is cheap, though it can be hard to retain Chinese managers. Wages for local professionals are roughly 20 percent less in China than in India. China’s major competitor for foreign investment. Keeping salaries down allows smaller firms to operate more flexibly, a key to surviving in a place where long-term contracts are rare, deals are sealed with a handshake, and Chinese factories seem open up or close down overnight. You have to have more trust in change plans incredibly quickly. You must become part of the local ecosystem in whatever city you are in. You have to be seen as close to local partners and knowledgeable about local trends, otherwise, you will not get respect, and you’re more likely to have your product copied. In fact, even bigger firms are considering using local staff more and emphasizing flexibility. The multinationals investing in China the right way are using hungry local guys or expatriates who are comfortable in China and can live without some of the special benefits. Using ...