SXSW China panel shares market-entry advice to Western businesses

This year’s South By Southwest Interactive conference in Austin, Texas, included a panel on Business in China.  The panel was composed primarily of non-Chinese business people (and one academic/writer) providing a foreigner’s perspective on China business and the China market.

Introduction to the panelists

Kris Krug (@kk, Raincity Studios) moderated the panel.  His partner, Robert Scales (@scales, Rainwater Studios) shared his experience opening a Shanghai development center of Raincity Studios to do Open Source and Drupal development.  Also on the panel was Shanghai-based Sage Brennan (@sagebrennan) who was a market analyst for the well-regarded market research firm Pacific Epoch and later serve as Research director for Pacific Sun, a small China-focused hedge fund.  Beijing-based Andrew Lih (@fuzheado), author of the Wikipedia Revolution and previously professor at Columbia University and Hong Kong University, shared his insights on the Internet in China.  Christine Lu (@christinelu), co-founder of The China Business Network, also shared her insights derived from interviewing over 100 business professionals involved in China.

Serving as an unofficial panelist–and thus free to sling the F-bomb, insert the term “schtupping” into the conversation, and even rain scorn on unsuspecting Shanghai civic boosters–Kaiser Kuo (@kaiserkuo, formerly Red Herring, Ogilvy Digital China) added an extra dimension of depth and entertainment to the discussion!

Advice to potential China entrants

The panelists made several simple but powerful points that, for some reason, often go unheeded by Western individuals or companies when going to China.

1.  Take your time to understand China.
One of the most profound and simple points made was by Sage Brennan:  China is complex.  It is different.  It is even more different than it first appears.  Therefore, take your time to understand China.

Elliott’s thoughts: This seems like such a simple point, and yet many Western companies and individuals rush into China in a mad dash to stay competitive with a fast moving local market.  There is a growing recognition that no global company can ignore China if it seeks to be a global leader.  This recognition may compel companies to enter the market with too much money, too many expensive foreign executives, and unrealistic expectations for immediate success.  But market insight–and a localized leadership team that can operationalize that insight–takes time to develop.  “Taking your time” doesn’t mean commissioning market research studies and sitting on the sidelines.  It may mean aggressive experimentation–on a small scale or a local scale–to build up your operational abilities and to learn in the marketplace.

2.  You simply cannot succeed without a trusted and capable local Chinese partner.
Robert Scales repeated a mantra that may be obvious to most.  You cannot succeed without a trusted and capable local Chinese partner.

The heart of the problem is related to point #1: impatience.  For virtually all business opportunities, there is usually some intense sense of urgency because of the speed of the market and the high level of competition in China.  But in the heat of the moment, a company may enter into a business relationship with a partner that they really don’t know very well.

Elliott’s thoughts: It may be a fallacy to say that there is no legal system in China to enforce contracts and to award damages.  But you can assume that regulations change quickly; can be enforced inconsistently from place to place, from time to time, and from regulator to regulator; and that greater market and business uncertainty will more likely result in situations not fully contemplated by your contractual relationship.  Therefore, contracts are necessary but not sufficient.  A baseline of trust is needed to provide a more supple foundation in an uncertain environment.  To get a feel for these issues, subscribe to China Law Blog and read it religiously!

3.  Question your assumptions about how things work in China.  Always.
Foreigners (and returnees) bring with them a set of assumptions about how the world works based on their Western experience.  While Western management techniques and functional expertise can no doubt provide advantage to foreigners (and returnees), these advantages can be offset by a slew of Western assumptions that can create blind spots on how the Chinese market actually works.  According to Kaiser Kuo, “No American company has charged into China using their current business model [without modification], and been successful.”

Andrew Lih provided a series of examples (mostly familiar to our readers in China, but not to Americans with limited exposure to China):

• No one uses voicemail.  When some one calls you on your mobile phone, you generally pick it up.  Mobile calls take precedence over face-to-face conversation, which is generally interrupted by a call.
• China uses SMS more intensively.  SMS may have become entrenched because of the low cost of sending text messages.  The first thing Chinese do in the morning is check their IM first, not their email.
• Instant messaging, combined with SMS, is a hugely popular means of communication.  China’s leading IM platform, QQ (Company: Tencent (HK:0700)), has 350 mm users–over 50 times the audience of Twitter!
• Only 56% of all Chinese internet users have email addresses.
• Ownership of PCs is much lower, especially in 2nd and 3rd tier cities, where heavy PC usage is at Internet cafes
• Unlike the West, where e-commerce was Web 1.0 and social media is Web 2.0,  China’s internet usage started as a social phenomenon first and is just now moving to more utilitarian purposes.

4.  Learn to handle more nuance and complexity than you are used to in the West.  Evaluate China on its own terms.

Its easy to look at China and evaluate it based on a Western point of view.  Often, that point of view can be very “black and white.”

Christine Lu made an insightful comment:  “Don’t come to China trying to change China.  Instead, China will change you.”  This does not mean you should compromise your core values or abandon useful Western techniques.  It does mean that you need to first seek to understand China, and then expect to localize your approach.

Andrew Lih gave the example of censorship of China.  The most simplistic Western perceptions on China media control focus on the “Great Firewall” that prevent Chinese netizens from accessing unbiased external sites.  A more sophisticated view refocuses on the filtering of “sensitive” content on domestic Websites that is enforced not by government regulators directly but by the private companies that operate these sites under license.  An even more nuanced view might considers the increasing freedom of speech and press that is happening on the Internet over time, and government efforts to “shape popular opinion” as a command-and-control bureaucracy struggles to handle social media.

To understand this issue of censorship, one needs to dig a lot deeper than just the “Great Firewall.”  Andrew gave the example of “human flesh search engines,” where bands of netizens form online vigilantes to bring justice to bear.  Andrew talked about the example of Chinese “kitten snuff films” where netizens successfully hunted down the woman responsible for the films.  Another famous incident from 2008 was the Weng’An Mass Incident.  This example shows the complex interplay between netizens and the government that gets lost when Westerners bring their own simplistic views of “censorship” to the study of China.

Kaiser also brought up the issue of intellectual property rights.  Copyright infringement has actually been a growth enabler for many products.  An example was open source software and Microsoft software.  Piracy of Microsoft software has actually reinforced its dominance in China and provided Microsoft with ways to make money on companies that do have to comply with copyright laws.  Music piracy is another example of how popular adoption can be a nice side benefit of piracy.  Of course that means you still need to find a way to make money on your music!

5.  If you want to truly change China, you must also localize your approach – dramatic laser light shows may gain international acclaim but no real effect on Chinese popular opinion.

In reference to the laser light protest during the Olympics by performance artist James Powderly, Christine Lu argued emphatically that such dramatic protests from Westerners really have no effect at all.  If you sincerely want to change China’s policies on press and speech freedom, human rights, the environment, Tibet, religious freedom, etc…then start with points 1 through 4 above!  Make a long-term commitment to understand China, to find a trusted and capable local partner, and to localize your perspective and solutions.  Of course, that may not be the fastest way to a comic-book deal, wealth, fame, and Western acclaim.

Kris Krug: That’s It!

In short, a great panel!