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Lessons from China

Monday, August 1, 2011 - 08:17

For companies eyeing off the colossal Chinese marketplace, success is by no means a guarantee.

With seeds sewn by former Prime Minister Gough Whitlam's then-radical 1972 policy of engagement, and China's own subsequent reformations and 'opening up', Australian companies large and small are seeking their fortunes in a vast, mysterious country with a growing middle class of consumers. Some have succeeded, while others have been derailed or defeated.

Partnership principles - HASSELL

Hassell, Australasia's largest fee-earning architectural practice, opened its Hong Kong office in the early 1990s to target and deliver mainland business; a common strategy at the time. With growth in mainland projects, Hassell established the Shanghai office with three staff in 2003. It now boasts 130 staff, and is joined by three further mainland studios.

Early on, Hassell developed its Principals in Partnership (PIP) program, pairing its senior partners Australian Peter Duncan and Hong Kong Chinese Terry Fan. Eventually a formal program applied to all its disciplines, PIP developed the business and allowed presentation of the company's international capability within a local context. "This has been fundamental to our success," says Duncan.

Juan Antonio Fernandez, Professor of Management, China Europe International Business School, and co-author of China CEO, says it's a good but tricky model. "Much depends on the business relationship and the type of partners. Our experience is that, if successful, the partners have usually entered into a personal relationship, building trust before entering into a business partnership."

The second part of Hassell's strategy was to open its mainland business as a wholly owned foreign enterprise (WOFE) to ensure control of its business, standards and practices, resisting offers to form a joint venture, use agents or representatives, or use local business partners.

People's republic - Dash Brands

For Dash Brands's President and founder, David Keir, a telephone call from an ex-colleague wanting someone to manage a Beijing Subway franchise provided his 'calling': "I didn't need to think about it."

However, the initial foray wasn't so smooth. After 18 months, differences with his partner prompted Keir to leave Beijing for Shanghai, where he established Dash Brands. An ex-Associate Director, Corporate Finance, Deloitte Touche Tohmatsu, he raised initial funding to take over the Shanghai Subway franchise - its flagship and most successful brand - in 2007.

Dash Brands subsequently became master franchisee for Gloria Jean's and Boost Juices in 2008, adding a Domino's Pizza franchise in early 2011. The four brands combined boast 75 stores, 800 staff and territory spanning the Yangtze Delta and Beijing.

Keir expounds a three-part strategy: a well-supported global franchise that virtually sells itself; a clear value proposition presented to carefully selected franchisees; and an exceptionally good corporate culture. Employees are treated with respect and provided with good incentives, and core values help guide the way. "Along with selecting the right people and persistent execution, success will follow," he adds.

Fernandez considers this an achievement in a difficult industry. "With China's weak law culture, you need franchisees depending on you beyond the initial stage. It's common they enter into the business, obtain all relevant knowledge and tools, then stop paying."

Derailed - Woodhead International

Architectural practice Woodhead International (WHI) entered China in 1994, and in 1999 hired Liu Li, an Edinburgh University PhD. As director of WHI's Chinese business, Li was made a company shareholder, obtained Australian permanent residency, and became something of a celebrity architect in China.

When seeking to register as a WOFE, however, WHI management discovered that Li had already registered the all-important Chinese trademark and had been operating a 'shadow team' under WHI's Chinese name. Li was sacked and is being sued; Li has filed a counter-suit. WHI still operates in China, continuing on from lost work and a damaged reputation.

An 11-year China veteran, Fernandez is not surprised: "China is a society in which relationships predominate. It's important to know the person as a human being first, not to enter into the partnership just because he has the right connections or credentials. These conflicts are somehow above the law, which is usually the last resort."

Prior to China's World Trade Organisation membership and its recognition of the WOFE as a legal business entity, many foreign enterprises were required to seek a local business partner. Some proved more interested in profiting from their partners' names than in establishing legitimate businesses.

Foster's Group failure

Alongside the entry of Dash Brands into Shanghai, 2006 also marked the defeat and difficult seven-year exit of Foster's Group. Deakin University's Dr Mona Chung, author of Shanghaied: Why Foster's could not survive China, writes that Foster's failed because it did not recognise the importance of relationships and the necessity to employ management comprising of 'bicultural people', particularly at a political level. Such people need to control the strategic plan because this determines the market entry, human resource choices and marketing strategies.

"While it is preferable to have Chinese people in your management team, it is fine to have an all-expatriate team, too," comments Fernandez. "There are many examples of very successful foreign management that neither speak Chinese nor know much about the culture. It is more important to have the right personality and attitude, an open mind, and be adaptable to local culture."

Soft skills and relationships in China

Western media representation of relationships, or guanxi, is often oversimplified as mere networking. Hassell's Peter Duncan indicates that it is misunderstood, and its influence is often misrepresented. "Guanxi that develop in projects are important for fulfilling the project, but are not a critical determinant for getting us the project. If we're desired and have something to offer, this overrides our need for guanxi to get a project."

Dash Brands's Keir indicates that his company had no relationship with a "higher government power" in order to establish his company and continue to operate.

Guanxi are central to a Chinese person's life, and carry a corresponding obligation. An essential part is the need to spend time to develop and establish trust on a personal level. Trust is an important ingredient in the push and pull of expectations concerning mutual assistance and reward.

In human resources lexicon, 'soft skills' have a further dimension within the Chinese context. This is to understand 'Chinese-ness', "the subtleties and ways of communication, the need for humility, and to position yourself as to what you can contribute to the market, and not what you expect or can extract," says Duncan.

"Don't assume that the Western way is best," adds Keir.