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China's new VAT export refund policy





China's new value-added tax refund rate policy was announced on June 19th. In essence, the new policy will reduce the amount of VAT refund currently enjoyed by exporters in China. The scope of impact will depend on both the exporter's structure as well as the type of product it exports (a product's classification determines the level of export rebate available).

It is clear that this policy change will have a direct impact on the competitiveness of Chinese exports (from both foreign and Chinese firms) as well as the strategies of western firms using China as an export source for foreign market consumption.

We're conducting a brief survey to gauge the potential impact of this new policy on foreign firms sourcing from China as well as the intended response to mitigate the negative consequences. Please share your thoughts with us.

Steve Ganster presents opening speech for Shanghai American Chamber Annual China Trends Conference





The Shanghai American Chamber conducted its annual China Trends conference in Shanghai earlier this month, aiming to update the business community on key trends in China's economic, regulatory, political and business areas that will affect the operations of American and other foreign businesses in China.

Steven Ganster, managing director of China strategy consulting firm Technomic Asia and co-author (with Kent Kedl, the regular host of this podcast) of the business strategy book "The China Ready Company," kicked off the event by outlining some key trends that will affect company strategy and business case development in China.

In today's podcast, Ganster references his slides from that presentation. Those slides are available to view or download at
www.technomicasia.com/AmChamShanghai2007.pdf.

"The pace of change in China is so rapid that we view business years in China like 'dog years,' " Ganster said. "One year in China's economy is like seven years in the West in terms of change."

In his opening presentation, Ganster covered:
-- Determining a company's addressable market – "where you can make money"
-- Changes in competitive structure in China
-- Developments in strategy alternatives, including acquisition
-- Movement to strategic sourcing

In addition to Ganster, presentations were made by other premier China advisors and practitioners such as AC Nielsen, ChinaVest, Baker & McKenzie, Mercer Consulting, the deputy director of Shanghai World Expo, and a panelist of award winning journalists from the Wall Street Journal and the BBC.

"The need to develop a sound and dynamic business case has never been greater," Ganster said. "China's markets are slowly maturing and becoming increasingly competitive. If your value proposition is not accurately aligned with your market target, you just can't make money."

Ganster also spoke about the emergence of acquisition as a strategy to accelerate growth.

"The early to mid '90s was the era of the 50-50 joint venture," Ganster said. "After many failed ventures and a loosening in foreign ownership restrictions, companies quickly shifted to wholly-owned investment strategies. But limitations in this approach are leading to acquisition as a way to achieve the best of both strategies."

China strategy in Six Steps: Part 2 of 2





This is second of two parts of my presentation from a recent event hosted by the Minnesota Trade Office. The first part, which you can find here, covers an introduction to China strategy and a discussion of the first step –- analyzing your "China readiness."

As we continue today with "The Six Steps to Building a China Strategy," we start with Step 2: finding your addressable market. In China, as with any other market, focus is a key to success. Step 3 involves doing competitive intelligence, identifying your competition. Always keep in mind that your markets and competitors at home are not the same markets competitors you'll find in China.

Step 4 is to identify where you will fit in the value chain. Your China strategy will be determined by where in the value chain you will play. In Step 5 we look at which assets to localize. There are a broad range of options for how deeply a company can participate in China. The key lesson is, don't do more than you have to! A company's participation mode is determined by best "match" of external requirements, internal resources and a risk profile. How "local" do you need to be? Identify the key assets you will need on the ground in China.

Step 6 covers entry structure: Build it or buy it? Based on what assets you will need to localize, you can begin thinking about how to localize them, either by building them yourself or "buy" them by partnering. These decisions determine your "build it" strategy or form the selection criteria to find appropriate China partners.

In China, understanding and managing relationships is fundamental to supporting a successful business. Everything flows from an opportunity within a relationship.

More on these topics at www.chinareadycompany.com. Also, be sure to enter the drawing for an iPod nano by filling out our survey.

China strategy in Six Steps: Part 1 of 2






Today's podcast is from a presentation I gave recently at an event for the Minnesota Trade Office, its 2007 China Practicum. I spoke at the first China Practicum, too, ten years ago. As you might have guessed, things have changed a bit since then.

In this seminar, I laid out the basic principles to guide China strategy development, especially helping business leaders analyze their organizational preparedness to do business in or with China.

Western businesses face many challenges in China, and understanding and balancing risks and opportunities is critical. A solid China strategy is built on a deep understanding of the market conditions in which you will work and the range of responses you can have to those conditions.

In this presentation, we cover the six steps to establishing a solid, effective China strategy. Step one is to identify your "China readiness." China is a high-risk place to do business, and companies must be sure they are ready to face the inevitable challenges. China readiness is measured in two key dimensions: motivations to go to China and the level of organizational preparedness to go to China.

Today's podcast is part one of my presentation, which covers an introduction to China strategy and this important first step, evaluation China readiness. In a few days, I'll post part two, which covers the remaining five steps to developing an effective China strategy.

For more on China readiness, check out www.chinareadycompany.com.

China strategy: Crossing the rocky river

The only way to cross a river with no bridges, that's full of stones and has a rapid current is with a good strategy. A former premier of China once said that you cross a rocky river by feeling for stones. Feeling for those stones and crossing the river is the business strategy. You must look ahead and identify those strategic stones in your China "river crossing." Strategy leads structure.

What are the risks and rewards of crossing over? Remember that 1.3 billion people is a large population but not necessarily a large market. There are two ways into the market: Either you buy it or you build it. Having a clear vision of where you are going in the market will save you from dismantling what you have built. A clear vision will sustain you.

Relationships are the essence of Chinese culture. Historically -- and in the present day -- the majority of conversations take place face to face, not over telephone. You will need to meet people at least once -- and often more than once -- to gain their trust. Favors come from relationships and history.

Three steps for International investors:

• Carefully determine a solid set of motivations for your China journey
• Suspend decisions on the structure of your business until you determine what your strategy should be
• Validate your plan with deep due diligence before you begin

And always remember "the 6 Ds": due diligence, due diligence, due diligence.

Identifying your strategic stones in the China-business River is just the beginning of this journey. You'll need expertise and flexibility to adapt: Some of these stones will prove secure, but others will be quite slippery. When you find your footing, that's when we start to read about your successful strategies in the China Business News.

Real-world case study in China strategy:

Steve Ganster and Kent Kedl, authors of the business strategy book “The China Ready Company,” have posted an audio recording of a chapter of their book online, as a special installment of their China Business Podcast series. The chapter discusses a real-world case study of ABC Company’s planning for China. ABC Company is an anonymous representation of an actual client of Technomic Asia, the strategy consulting firm headed by Ganster and Kedl.

“The China Ready Company” book helps business leaders analyze their strategic and organizational preparedness to do business in or with China. The case study featured in the podcast looks closely at ABC Company’s experience with the China Readiness Assessment, a tool Technomic Asia has developed to help guide strategy development for its clients and that also provides the foundation for the book.

“The China Readiness Assessment is a way to scratch the surface and evaluate whether a company is ready to make the move to China,” said Ganster, Technomic Asia’s managing director. “We explore a company’s strengths and weaknesses, and then dig deeper into the next steps that company should take with regard to a China strategy.”

Relevant charts and images from “The China Ready Company” are posted along with the audio file at www.technomicasia.com/casestudy. The China Business Podcast series can be found at http://technomicasia.blogspot.com. Visitors can download each podcast individually or subscribe to automatically receive each new podcast as they are posted. More information about the book and the China Readiness Assessment is at www.chinareadycompany.com.

Interview with Geoff Holdsworth, managing director, Asia Pacific for WD-40: Part 2

Kent Kedl of Technomic Asia brings you part 2 of his interview with Geoff. Geoff and Kent discuss finding and hiring the right people for your China operation and how to train them.

Geoff says hiring is not all that different than in other markets: Ask around with trusted partners and see who they might know and recommend. Training is a different issue, though – more complicated because national and corporate cultures are much harder to translate than language.

Geoff stresses the importance of visiting China and really getting to know the market. Walk the backstreets, he says, and dig beneath the surface. And when asked to offer one word to describe life in China, Geoff says: enlightening.

Kent Kedl interviews Geoff Holdsworth, managing director, Asia Pacific for WD-40. This is part 1 of a two-part interview. We'll post part about a week or two from now. Geoff talks about the beginnings of the WD-40 brand and distribution in China, how they entered the market, and how they “leaked in” for some time before formally entering the China market.

Geoff and Kent discuss changes in the Chinese marketplace, including the areas of strength for WD-40, including the Guangdong province and the coastal areas. They also discuss product distribution, relationships with distributors, and how, if at all, the WD-40 brand is positioned differently in China.

Geoff also says that one of WD-40's biggest problems in China is counterfeiting. People buy a product they think is original WD-40 and come back asking, "Why doesn't this work?"

Part two of this interview, which we'll post soon, includes more from Geoff Holdsworth, including discussion about finding and hiring good people and how to train them.

How can companies avoid trouble in the complicated and exotic China business landscape? Simple. The rule is this: Success in China is like a game of dodge ball: The winner is the last one standing.

There are no secrets that you have to uncover, no foggy path you must walk down, no secret incantation to utter at the proper moments. Just “avoid trouble.” Don’t get hit by anything. Wherever you see danger, go the other way! Be careful! Don’t step in anything! Duck at the right time!

Yeah. If only it were that easy, huh? Sure, on the surface it sounds like good advice, and in its simplistic way, it’s pretty helpful. The best way to avoid trouble is, well…to avoid it! Going beyond that beautiful simplicity, in today’s podcast I’ll talk about three balls businesses must dodge if they want to avoid trouble in China: ignorance, not looking for alternatives, and not paying attention to local competition.

By the way, in preparing for this podcast, I mentioned the dodge ball metaphor to a friend of mine working here, and he liked it a lot. However, he had a twist on it. He said that doing business here is like playing dodge ball in a cow pasture: You have to keep your head up to avoid getting hit by something and, at the same time, look down to avoid stepping in something. Here’s to wishing you 20-20 peripheral vision and a good pair of rubber boots!

And we're back! Sorry for being out of touch for so long. We've been busy with speaking engagements and moving across the globe. I moved full-time to Shanghai - saves the insane amount of travel I was doing before. My partner Steve Ganster and I have been speaking at China-focused events in Minneapolis, Vancouver, Chicago and Shanghai, but now that we've settled down a bit, we'll get back into more regular posts.

Today's episode of the China Business Podcast covers:

• All the coffee in China: Starbucks' recent strategy in China and it's position as a "destination" more than "product"
• New cities for U.S. businesses to consider as they evaluate China
• Changes in the Shanghai government system and its impact on business
• And an invitation to tell us the topics that interest you

As always, you can e-mail me at kkedl@technomicasia.com with comments or questions, or leave a post on the blog at http://technomicasia.blogspot.com.

The retail/consumer goods market in China is dramatically different than in the U.S. or anywhere else. The China Business Podcast's own Kent Kedl and 13-year China vet Matt Cooper discuss some of the specifics of hitting this much sought-after market. Kent is co-author of "The China Ready Company," and Matt been in China for years and has worked with companies such as Black & Decker, Sherwin Williams, Graco on China strategies.

China's automotive aftermarket is a growing, complicated market. A new research report from Technomic Asia offers some insight and statistics on the Chinese auto aftermarket. Steve Ganster, CEO of Technomic Asia and author of "The China Ready Company," discusses some highlights and lessons from this new report. Steve discusses trends in the industry and some of the risks and challenges businesses face in China. Of interest for auto-related companies and others with an interest in China.

Learn more about the report at www.technomicasia.com/auto or e-mail Steve at sganster@technomicasia.com.

Wait! You're not ready for China!

Is your company a Type D? If so, you had better wait: You're not ready for China.

In this edition of the China Business Podcast, Kent Kedl discusses the China Readiness Assessment - and the significance of its results - with Jim Pentecost of Dickinson Press.

Dickinson Press recently completed Technomic Asia's China Readiness Assessment, a tool that helps Western companies determine their organizational preparedness and motivations for entering the Chinese marketplace. In a rare turn of events, Dickinson came out as a Type D company, meaning low motivation and low preparedness for the Chinese market. Kedl and Pentecost discuss the subject in greater detail in today's podcast. Enjoy.

The global trade imbalance - which is somewhere around $200 billion between the U.S. and China right now - is something that we can change. There's no need to wait for politicians and economists to work their bureaucratic magic (or lack thereof). Proactive business tactics are the solution to any business problem - including "the China question."

Recorded in the days before China President Hu Jintao's recent trip to the United States, today's China Business Podcast moves away from discussing things like merger and acquisition strategies to tackle some of the nitty-gritty economic issues surrounding China, its trade imbalance with the United States, the draconian Schumer-Graham bill, China's currency valuation...all the fun stuff.

The moral of Kent's story: Be proactive. Be innovative. Don't think cheaper - think better.

Today's installment of the China Business Podcast features Steven Ganster and Kent Kedl, directors of Technomic Asia, offering their insights on the upcoming visit to the United States by Chinese President Hu Jintao.

Ganster comments on the U.S. perspective and offers advice for U.S. businesses, who he says will benefit from "direct engagement" and a proactive approach toward the China market.

Kedl's comments, which begin at 2:16 in the audio, focus on the Chinese perspective and the importance of understanding China's goals to help further our own.

Here are some highlights:

- Currency issues are merely a representation of the United States’ current frustration with China, masking deeper economic problems

- The idea that China allowing its currency to float will stop the job emigration toward China is narrow and unrealistic

- Uncompetitive business models and a skewed view of the global marketplace have the greatest negative impact on U.S. businesses, especially manufacturers

- Just like Bush does in the States, President Hu has his own political struggles and needs back home

- In the back-and-forth over whether this trip is an official state visit, the United States sees a “state visit” as a reward for certain actions, whereas China views it as an incentive for action; the difference is a source of tension between the two countries

Today's installment of the China Business Podcast comes to us courtesy of the National Association of Manufacturers. Steve Ganster, the managing director of international strategy firm Technomic Asia, appeared on NAM's radio show to discuss his new book, "The China Ready Company," which he co-authored with Kent Kedl, Technomic Asia's executive director and the regular host of the China Business Podcast.

In this interview, Ganster discusses the origins of "The China Ready Company" and a tool he calls the China Readiness Assessment, which Technomic Asia has used as a starting point in developing China strategies for dozens of companies large and small.

For more information on the book or to try out the China Readiness Assessment, you can visit www.chinareadycompany.com or e-mail Kent at kkedl@technomicasia.com.

We have been talking in the past few podcasts about doing a China acquisition & alliance deal - what we call A&A. I have used a number of analogies - from boat captains to dating relationships - to describe the process and outcomes of China A&A. Today, I would like to add another analogy: gardening.

Imagine putting a seed in the ground and never watering it, weeding it, fertilizing it or making sure it got plenty of sunshine. What do you think would happen? Well, to be honest, I am not really sure because I possess not an OUNCE of a green thumb, so I wouldn’t know. But from what I have seen on TV and read about in books, if you treated a seed with such a cavalier attitude, the chances are it would not do very well. It would die before ever sprouting.

Unfortunately, partnership deals in China are often treated with the same distain. Planting a seed is like a foreign company making the first visit to a potential China partner. It is often exciting and it seems a good start. But then, to extend the analogy, instead of providing what the seed needs to grow, foreign firms will instead send it notes of encouragement, photos of what other successful plants look like when coming to maturity, a legal agreement that states - in no uncertain terms - just how much they are willing to reimburse the plant for the fruit it is sure to grow.

In today’s podcast, I will address the first area of cultivation: due diligence. In our market strategy consulting practice, we talk about doing the 6 D’s in China: “due diligence, due diligence, due diligence.” In the West, we think of “due diligence” primarily in the financial and legal sense: checking out a company to make sure that their financial books are in order and that they have not committed (or are not in the process of committing) an egregious legal infraction. In China, these two things certainly need to be done, and there are very competent legal and financial professionals there to assist you. But just doing this type of due diligence is not enough. In fact, it can often mask deep-seated problems and make you feel OK when, in reality, you should be very nervous.

In our last podcast, we talked about a really, really bad idea I heard about during a conversation with a guy on airplane. To review, he was hell-bent on totally destroying his company by entering the China market by doing a really stupid deal with a Chinese company that he knew NOTHING about. So I told him so.

At Technomic Asia, we do a lot of China alliance and acquistion, or "a & a," work. We use a rigorous but flexible three-step process for helping companies determine and capitalize on their opportunities.

We start by assessing the company's market opportunity and developing an ideal entry strategy. Step 2, which we'll cover in this podcast, involves identifying potential partner targets and qualifying them by passing them through a series of filters based on the company's needs and desires. The final step involves cultivating the business relationship with potential partner and, of course, closing the deal.

Nothing beats the value of objective, systematic research before jumping head-first into China. We call it - creatively - strategy before structure. Listen here to learn more.

I fell into conversation with a guy on an airplane recently. You know, that kind of easy, open talking that two people do when they know they are only going to be knowing each other for the next 90 minutes. After the usual "What do you do? Oh, that's interesting," "What do you do? Oh, that's interesting, too," we knew a bit more about each other.

He knew that I worked with foreign companies to find the right market opportunities and appropriate entry strategy to succeed in China. And I knew that he was hell-bent on totally destroying his company by entering the China market by doing a really stupid deal with a Chinese company that he knew NOTHING about. So I told him so. Hey, I had nothing to lose, and people have disliked me much more for even less reason in the space of 90 minutes. But it was something that HAD to be done.

OK, you might call me judgmental here. How did I know enough to determine that he was like a boat captain conning his company into the rocky shores of the China market without a clue as to how to avoid disaster, or without a lifeboat to save the straggling survivors, if there were to be any? Good question.

When Captain Kangaroo told me that he was in the process of signing a deal with a Chinese company to represent them in China, I asked him what anyone would ask someone about to get married: How did you meet your intended, and how long have you been dating?

He answered the questions this way: “At a trade show” and “one week.” Did you get that? They met each other at a trade show and, after one week of e-mails and phone calls, he felt he knew enough about the Chinese company to sign up for a significant relationship with them. Not necessarily “till death do you part,” but certainly “till bankruptcy kills one of you.”

“Outsourcing” is a buzzword that was originally used along with "Management By Objective" and "Core Competencies" as something that added value to a company or a business. In this case, a company figured out what they were best at, management set clear objectives and their performance was measured by those objectives. Outsourcing was a way for companies to become less vertically integrated and more efficient, moving manufacturing or other processes to companies who could do it better, cheaper and smarter. When those “others” were companies down the street or across state, that was OK. Everyone thought that the pie was big enough to share and if you could help build a national economy while doing so, so much the better.

But times have changed and those “other companies” are often no longer down the road; rather, they are several flights and many time zones away. When that has happened, it seems the discussion migrates from one primarily about objects and core competencies and becomes one of national survival. The last presidential election cycle in the United States was particularly notable for the rhetorical battles waged along these fronts, particularly identifying China as a prime source of outsourcing and, oftentimes, nearly an enemy of the health of the U.S. economy.

In this week’s podcast, I would like to address, head on, some of the issues we are seeing around outsourcing and highlight some ways we see companies are using outsourcing to China to grow their entire operations.

There are three stages to sourcing that Western companies often go through: Step 1 is Opportunistic; Step 2 is Direct; and Step 3 is Strategic.

I hope you can see that simply using the word “outsourcing” does not begin to describe the range of options open to companies in China these days. When you think of your outsourcing, try to consider your broader options in light of a bigger strategy.

The other day I was sitting with the general manager and the VP of manufacturing from a company and we were talking about their China strategy. They are currently sourcing a couple of products from a China supplier there but two executives were thinking that they could do something more. We talked about a couple of their options and they were getting kind of excited about it. At one point I said that they needed to look at designing a sourcing strategy that (and here I switched to a poor approximation of a British accent) “goes to eleven...it needs to be one more...” The GM gave me a look like I was one Pringle short of a full can, but the VP nearly fell over laughing. “What?” he said to his GM. “You have never seen the movie?”

Maybe some of you are in the same position...some are laughing at the “it goes to eleven” line and others are ready to stop the download of this podcast and clear your hard drive. Have you ever seen the movie, "This is Spinal Tap"? Well, if you haven’t, this is going to take some explaining because this line from that movie is the basis for a great China strategy...so stick with me for a bit, if you can...

...There were louder rumblings of agreement, and another man stood up and told the story of how his horse and cart had fallen down the side of a steep hill and his horse was injured.

"Now I have no way to make money. We must do something about this gravity!"

This was too much for the assembled villagers; now someone had lost his economic livelihood because of gravity. Something had to be done - but what?

After some furtive glances were exchanged between the village elders, the lead elder then stood up and said, "Obviously this gravity is wreaking havoc in our village and is causing widespread destruction. No one is safe when gravity is allowed to do whatever it wants among us. I have an idea: We will ban gravity from our village. Let’s put a petition together and begin right away!"

You can probably see where I am going with this. The complaining citizens are the select gaggle of global media pundits and talking-heads, while the part of "gravity" is being played by China. Now I am not complaining about the complainers here - standing up and voicing one's opinion about such an important topic is good.

But I want to ask a simple question: How helpful is such ranting? To the small- to mid-sized U.S. or European manufacturer who is facing increasing competition in its domestic markets, only to find cheaper product coming from China, how is complaining about China helping them?

And is it fair to equate educated, respected journalists with illogical villagers protesting gravity? Lest you think I am over-exaggerating, let me direct you to one of the leaders in this media Gang of the Sore, a well-known journalist on the world’s largest 24-hour cable television news channel, who, to avoid the unwanted attention from libel-loving lawyers, I will simply call "Mr. X."

The talking-head circuit in the global media has never had a feeding frenzy quite like the topic of China in the global economy. Learned scholars, business people and pointy-headed pundits yammer on and on about the opportunity that China represents or the threat of disaster that is sure to follow its global dominance. Even by launching these podcasts into the ether, we are participating in this same maelstrom.

But what is China? Is it a threat to the heretofore stable economies of the West? An opportunity of riches beyond belief? Both? Neither?

Westerners often fail to understand - or more accurately, misunderstand - the business environment in China. It's possible that the rapid pace of change in China is exciting enough that even talking about surface-level information can make for great copy.

Only with an eye to the past are we able to do some crystal-ball gazing of the business environment in China in 2006 and beyond. Like the California gold rush, early foreign investment and prospecting in China faced tremendous challenges and limited success. What do today's businesses need to know to avoid the gold-rush risks?

Many foreigners on their first visit to China learn some Chinese and try to use it whenever they can: xiexie (thank you), pijiu (beer) and xishou jian zai naili (where is the bathroom?) are just a few of the most important. But probably the most used – yet most confusing – Chinese word is guanxi, broadly translated as “relationships.” First off the plane we are told that China is a society built on guanxi, that it is important to have good guanxi, and that, if you are to do business in China, guanxi is the thing that may either make or break your venture.

The foundation of guanxi in China is human relationships. Why is this? Well, let’s try a social experiment: Put a bunch of people on a land mass with arable land too small to support them effectively; send them storms and floods, wars, pestilence and famine; let simmer for five thousand years. Now open the cover and pick out the key ingredient of that society, the unifying theme that seems to run throughout their history. Most likely, it will be “relationships.” How do you get food when there isn’t enough? You know someone with better access to food than you have. How do you protect your family from strong enemies? Band together with others to form a stronger group. Guanxi is the very basic phenomenon of human beings getting access to scare resources and understanding that they are stronger together than they are alone.

The dilemma many suppliers face is how to meet the demands of their customers who have operations in China. It is becoming a common occurrence and one that can be handled proactively with a bit of forethought.

In this episode of the China Business Podcast, Kent Kedl, executive director of Technomic Asia, tells the real-life story of one supplier in such a situation and how other suppliers can get a jump on their own customer supply chain.

In this first installment of the China Business podcast, Kent Kedl explains how developing a successful strategy for conducting business in China is like - as former Chinese Premier Deng Xiao-ping said - "crossing a river by feeling for stones."

Picture yourself standing on the bank of a river - not a lazily flowing creek, but a rushing monster, filled with melted spring snows from the mountains many miles upstream - and you need to get across. The water is cold and loud and you would give nearly anything for a bridge; but you don’t have one. You can barely see, among the rapids, the tops of rocks peeking out of the froth. Many look slippery with water and accumulated algae, but some look pretty solid, too, having withstood the water pressure for many years.

You look out ahead of you and begin to map a strategy to cross the river: “I can step on that black one with my right foot and then on that beige one with my left...” you mutter to yourself. And so you begin to cross, reaching your foot out and gingerly placing it atop the first stone. You apply slight pressure, moving your foot around to test stability. If it passes the test, you step out on it — and then you are committed to finding other stones to get you across.

Deng was explicitly telling us that it would not be easy, that there is no bridge, only stones.