Beware the China Syndromes
To enhance their chances for success in China, supply chain managers need to avoid certain all-too-common patterns of thinking.
by John Kerr -- Supply Chain Management Review, 10/1/2004
General Motors set to lift China spending. FedEx to expand China operations. Even a cursory glance at the headlines gives Western managers clues to the breathtaking pace of business investments in China.
For the moment, China is indeed the new El Dorado. Foreign businesses, many from the United States and Europe, continue to pour into the country. The Beijing government continues to ease restrictions on foreign ownership. In fact, the People’s Republic of China (PRC) has become the most preferred location for foreign direct investment, with distribution and logistics services among the operations most likely to be moved there, according to consultancy A.T. Kearney.
Outsiders tend to think of China as a homogeneous marketplace. But the country is vast, with numerous regions and different business climates in each region. Says Shoshanah Cohen, a director with consultancy PRTM: “Supply chain managers need to think in terms of microclimates-they are going to a particular plant in a specific city, not ‘going to China.’ They need to understand the specifics of that microclimate.” A related point is the inclination of Western managers to focus too much on China’s low labor costs. Companies will commonly calculate the savings they expect from cheaper labor and won’t spend enough time evaluating all the other elements that affect their total cost. Most companies dramatically underestimate the cost of managing relationships with Chinese manufacturing partners-travel back and forth, training, resolution of snags, and so forth. The “It’s A Small World” Syndrome
Yes, the People’s Republic is wired to the Web, but most shipments still come by barge, truck, or ocean. The added complexities of longer supply chains often catch U.S. and European businesses by surprise. Managers accustomed to cross-border transit times of a less than a week-now must think more in terms of a month. Demand patterns become much more volatile, too. “Your demand forecasting has to be much more robust,” says Rick Moradian, president of international logistics services for APL Logistics. Moradian urges a closer look at the number of hand-offs at ports, customs brokers, and elsewhere. And he cautions supply chain managers about the perils of sourcing too much from one region in a bid to exploit low costs or reduce complexity. The “But They’ve Got McDonald’s!” Syndrome
Managers visiting from Dallas or London will see plenty of familiar franchises on the way from Beijing airport. But, they mustn’t take that to mean that China is now Westernized. “A lot of relationship problems arise when the cultural differences aren’t understood in advance,” warns PRTM’s Cohen. U.S. and European companies tend to provide a lot more decision-making authority farther down in the supply chain organization, notes Cohen. By contrast, a Chinese company is likely to expect interaction at the most senior levels, which may come across as being hung up on titles or reluctance to deal with anyone who is not at an executive level. Similarly, Chinese concepts of saving face and avoiding confrontation can be very real barriers to the adoption of best practices. Whereas Western cultures see value in acknowledging problems so they can be addressed, it’s difficult to get a Chinese supply chain manager to admit to problems or to having made a mistake. It’s especially problematic for the concept of transparency—that next-generation supply chain capability that gives partners a common view of data and product flow. And that makes collaboration with Chinese partners almost impossible. At the same time, the Chinese premise of guanxi -relationships between people and their reciprocal obligations to one another-can be enormously frustrating to Westerners accustomed to processes that are well-documented, optimized, and repeatable. But it’s a way of life in China. “Guanxi is essential to succeed; a strong local team will give you a tremendous lift in this area,” notes Francisco Ordoñez, a vice president of automotive supplier Delphi Corp. “During our 10 years in China, we’ve learned the importance of establishing a solid relationship with the Chinese government, our joint venture partners, and customers.” The “We’ll Just Use e-Commerce” Syndrome
Many new players attempt to manage China from outside China. “This probably ranks as the number-one underlying reason for failure there,” observes PRTM’s Cohen. Multinationals with offices in Hong Kong or Singapore have often stumbled by believing they can work with China from “next door.” Their reasoning: Expatriates are more willing to relocate to those Westernized locations, and it’s easier to recruit local candidates who speak better English and better understand Western business practices compared to mainland Chinese hires. The trouble is, expats and non-mainland Chinese are disconnected from the PRC business culture, lack contacts, and are not trusted by PRC business partners and employees. “The biggest surprise is the extent to which Western businesses must be physically present at their suppliers,” notes Jim Hexter, a partner in McKinsey & Co.’s Greater Beijing office. At best, an imported Western mindset leads to frustration; at worst, to costly mistakes. When U.S. and European supply chain professionals assume they can delegate control as they would at home, they leave themselves vulnerable—particularly in negotiating joint ventures. Too often, they settle for shallow capability assessment and due diligence. Or they hand off key functions to a local partner based on assumed expertise. “Chinese business people are boastful and sophisticated negotiators. They will expound on capabilities that a Western-especially an earnest American-investor will find impressive,” cautions A.T. Kearney’s Bouchet. The consultant explains that the Chinese side’s claims are prompted less by an intent to mislead than by “face factor” - the desire to impress their own management team and the ever-present Communist Party official. The claims can also be because the Chinese party isn’t quite clear what the Western business expects, or they may genuinely believe they can succeed because they will commit to do so once a contract is signed. The disconnect then is about how long it will take the Chinese firm to deliver; time is a more flexible concept in Chinese minds, say veteran observers. The “They’ll Respect Our Technology” Syndrome
Unfortunately, too many U.S. and European business people underestimate the intellectual capabilities of Chinese manufacturers. An unwitting consequence of sharing proprietary knowledge too freely is that future competitors are getting a boost. Companies as sophisticated as Cisco Systems have recently sued Chinese companies for copying key features of their products. PRTM notes that Western managers are starting to recognize the risks associated with sharing intellectual property and are keeping a much tighter rein on which technologies are shared. That will probably mean changing the global sourcing mix to source only the less critical components from China.
Those five factors are merely the most obvious hurdles in beginning to do business in China today. How will things look five years from now? Business leaders on both sides are learning very fast. Americans and Europeans are realizing that the unilateral imposition of Western business standards on Chinese partners will likely be met with incomprehension and attempts to please that lead to misinterpretations of data and of capabilities. And many multinationals are relocating their regional headquarters to China, prompted by lower costs, improving living standards, and access to better-qualified PRC recruits. For their part, Chinese companies are getting better at embracing Western business practices. Although guanxi isn’t likely to go away, Chinese managers will more easily accept guidance and training from their supply chain partners, and many are willing to report requested metrics—even if they highlight problems. By 2010, market forces will have shaken out the least adaptable Chinese companies. And Westerners will be much savvier about what it takes to succeed in the PRC. By then, the question won’t be so much about the cost savings of a move to China. “In five years, everybody’s going to be looking for the supply-chain approach that’ll give the most sustainable advantage,” says McKinsey’s Hexter.
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