The China syndrome

By Matt Cooney, July 20, 2006 @ midnight

It’s a daunting prospect: taking a punt on the chaotic Chinese market. Are you prepared to lose your shirt? Can you really afford not to take the risk? Here’s how creative Kiwis are thriving in China … and a cautionary tale or two

Idealog July/August 2006, page 60. Picture by Tony Brownjohn

Last year Peter Chin, second-generation New Zealander and Mayor of Dunedin, found himself seated at the head of a grand banquet table beside Han Zheng, the Mayor of mighty Shanghai. Around the table sat the members of Chin’s delegation and their sister-city Shanghai hosts.

“It was just magnificent,” says Chin. “It was gold service and gold chopsticks. We each had one person who served us. We were served course by course, very delicately placed before us. Everybody said the food was wonderful—I didn’t eat anything because the only people who spoke were the Mayor and I.”

Chin had prepared a speech. “My father came over from China in the 1920s and my mother in the 1940s. They had nothing, no language skills, nothing, and here I am coming back as mayor of the city where they lived. Going back to the land of my parents.

“I thought I should be able to cover that as long as I practised it. But the emotion of the moment overcame me and I think that they understood that kind of feeling.”

It’s easy to see China as too big, too crazy, too strange for New Zealanders to do business. But, like anywhere else, successful business in China depends on good relationships and a good proposition. Dunedin’s relationship with Shanghai isn’t some historical accident—it was only signed in 1994.

“Meeting with the Mayor of Shanghai is probably like trying to meet the Queen,” says Chin. “He commands a city of 20 million and we’ve got about 125,000 people here. But people say the doors of the mayor’s office are open only to two New Zealanders: the Prime Minister and the Mayor of Dunedin, because of our sister-city relationship.”

New Zealanders are forging relationships all over China. Some are selling services and products in the world’s fastest-growing economy. Some are using China’s modern manufacturing factories to build quality products as efficiently as possible. Others are licensing their ideas to China’s new capitalists.

China is the perfect complement to New Zealand’s emerging creative economy. The Chinese like Kiwis and they’re keen to do business with us. Together, we could be the linchpins of the Pacific Century. Yet some worry that we’re already missing out on the biggest business opportunity of our lifetime.

But where do you start? With careful research.

Rob McClune laughs when asked if he likes China. “I love it!” he says. He’s lost count of the number of times he’s visited the country—“a couple of hundred”—since his first visit 25 years ago.

But today he’s sitting in the offices of his company, Macvad, just off Auckland’s K Road. The shelves behind him are stocked with samples of cleaning powders, soft toys and cheap electronics. Macvad has been visiting China since 1961 to find products and manufacturers for New Zealand companies. Business is brisk: each year Macvad sources goods worth about US$100 million.

“We could be buying off the shelf, things like these, where there’s no innovation required,” he says, waving at a Hello Kitty radio and a Frogz fluffy toy. Other products are commissioned and built specifically to order. Chinese manufacturers can build anything, says McClune—they have the newest, most advanced equipment, “the most dextrous workforce”, and the price will be right (but don’t forget to shop around).

“They’re enthusiastic, they’re honest—well, most of them are honest, although there’s corruption that goes on in the background,” he says. “But generally the traders are pretty honest. It’s easy in China, it’s not like Pakistan where what’s delivered is not quite what you ordered. They try to do it correctly. They don’t always succeed. But if they cock it up the first time, if you’re brave enough to go back for a second bite of the cherry, they’ll generally get it right the second time. If you’re not too tough on them, you’ve got a good mate.”

McClune’s relationship with his Chinese suppliers is clearly better than many other companies have managed. So what has Macvad done differently?

McClune points out that he hasn’t tried to move money or staff into China. “A lot of people have opened offices up in China without really understanding what they were going to do. The old joint ventures in the early days were like a funnel for money. It’s a bottomless pit. I’ve never had any money invested in China and I don’t intend to have now.”

All but four of the company’s 60 staff are based in New Zealand (the rest are in Sydney). Macvad employees make up to 60 trips a year to China so there’s usually someone on the ground. But by avoiding buying infrastructure or shareholdings in China, Macvad neatly avoids two potential problems: it pays only for what it receives and suppliers know they’ll do repeat business if the delivered product is up to spec; and by not having an investment in China it’s not vulnerable to the common scenario of joint venture-gone-wrong.

“The prevailing mentality in China is that of the ‘zerosum’ game,” writes James McGregor in his book One Billion Customers: Lessons from the Front Lines of Doing Business in China. “China is all about ‘I live, you die’, ‘you win, I lose’, a vicious cycle of conquest and revenge … for somebody to win, somebody [else] has to lose.” It’s a mindset that suggests there can only be one winner in a partnership, and McGregor cautions that even when both sides are working in good faith, Chinese and Western partners often have completely different aims for the joint venture.

So business in China is much easier if you stick to a supplier–customer relationship. Consider Watermaster Technologies, a Wellington business that invented an ingenious water purifying machine that freeze-dries air to extract clean water. Watermaster sold the invention to a consortium which is building a factory in China. Consider Comvita, the Te Puke-based supplier of bee products. Comvita controls its advertising and branding in China, but the 17 Comvita stores are owned and operated by a Chinese distributor.

“The joint ventures in the early days were like a funnel for money. It’s a bottomless pit. ”

But even if you can avoid investing on the ground in China—and it’s not always possible—you’ll still need to show your face. “We do get a lot of companies that come to us and say we’re interested in China and then they say by the way I can’t really afford to go up there at the moment, can you help me,” says Rod MacKenzie, New Zealand Trade and Enterprise group general manager for North Asia. “Well, not only are you going to have to get over there once, you’re going to have to go up there 30 times. So if you can’t afford once, then forget it.”

But even residents are awed by the pace of change.

Ben Shipley is watching Chinese society change in front of his eyes. Confucius Says, the company he co-founded in Shanghai, uses social networking to learn about emerging niches in the Chinese market. Customers like New Zealand Trade and Enterprise use that information to work out who they should be targeting, and how.

Shipley made some trips to China two years ago and decided to stay. “China, and Shanghai in particular, to me are attractive places—the growth and the pace of change that’s going on up here makes it an exciting place to be.”

The niche markets that Confucius Says studies are of particular interest to New Zealand companies. “It’s a billion-consumer market, but not for any of New Zealand’s products,” says Shipley. “If you’re chasing that billion-person market you’re opening yourself up to competition from a hell of a lot of people in China and you’d be much better to aim for that high-value, high-margin emerging market.”

That market is growing rapidly as Shanghai rediscovers its mojo. China’s largest city was once the third largest financial city in the world, after New York and London, and looks set to resume its prominence.

The citizens of Shanghai and Beijing are enjoying their new-found affluence. They have disposable income, leisure interests and a strong interest in the rest of the world. The China Daily recently reported that half of white-collar Chinese workers have their own weblogs.

“If you look at what’s happening in the artistic world, in both those cities in particular, it’s really happening,” says Jude Hooson. “From a creative point of view, there is this vibrancy and energy.”

Hooson, Sandy Callister and Sandy Burgham have written a paper called Cool China for The Providence Report, their high-level market research firm. Western jitters about IP theft by Chinese companies tends to overlook the fresh thinking, heavy research investment and rise of creative industries within China, they say. Homegrown brands like Shanghai Tang and Lenovo threaten to overtake even established names like Gucci and IBM.

“China is all about “I live, you die”, “you win, I lose”, a vicious cycle of conquest and revenge.”

But hang on, it’s time for a reality check here. China may be big news at the moment, but it’s still a smaller market than, say, California. What’s the big deal? Why would New Zealanders want to do business with China when there are established markets in Australia, the US and Europe?

NZTE’s MacKenzie has a ready answer: “You can’t not do it,” he says. The clock is ticking.

“China is already dominating world markets that we deal with, particularly in this part of the world, and is going to become predominant in the foreseeable future. Not only will that have an effect on the way we deal with China itself, but with the markets that we are working with elsewhere.

“So if we’re not thinking about how we’re going to partner with China and Chinese companies, how we’re going to engage with it and how we’re going to protect our IP, then we’re going to get simply swamped and we’ll become little more than a commodity player of whatever China wants—providing we can do it at a price that they’re prepared to pay.”

Ben Shipley’s mother, former Prime Minister Jenny Shipley, made 11 trips to China last year. She says it’s “inevitable” that Shanghai will become the financial capital of Asia. “There is a tectonic shift going on globally and New Zealand is ideally placed, poised on the Pacific Rim.”

Jude Hooson agrees: “For once, New Zealand has the right geographic address. There are massive opportunities in China and New Zealand is very well placed.”

It helps that New Zealand and China have been on friendly terms for years—unlike most of our competitors. The Chinese already recognise New Zealand’s ‘three firsts’—the first developed country to sign an agreement on China’s admission to the World Trade Agreement; the first to recognise China’s market economy; and the first to begin talks for a free trade agreement. If the agreement is signed, it will be a fourth first.

“Oh, they like Kiwis,” says Macvad’s McClune. “In the early stages we were one of the few countries that actually carried on travelling to China. The older Chinese still remember that and they see on our card ‘dealing exclusively in China since 1962’. And it’s still appreciated. The young ones shake their heads, it was before they were born, but they understand it.

“In the 1980s we started getting these delegations out here. There would be one trader, ten or 15 tea-slurpers who would come along, we’d have the bank manager and we’d have someone from the Customs Department. They were all out here for a bloody holiday. But we used to take them to sheep farms and a drive in the country, just real simple things, and they’ve never forgotten them.

“Those people that we traipsed around the country for 20-odd years, a lot of them are in quite senior management positions now. And they absolutely love New Zealand, and absolutely love the way the New Zealand government has embraced China too.”

Their New Zealand-educated children also like the place, reports Ben Shipley. “Last year I went to a New Zealand alumnae event and there would have been four to five hundred people there, 90 percent Chinese, for a dinner. And they were uniformly happy with their experience in New Zealand.”

“Tourism, education, business—it’s all interlinked,” says The Providence Report’s Sandy Burgham.

It’s not just about goodwill, though. Less than 15 percent of Chinese land is arable, and it’s getting less all the time as the country suffers from erosion and pollution. Demand will increase for agricultural products, especially high-value products such as functional foods and Chinese medicines. “If you talk to the Chinese, they will tell you that they will always have a need for our product,” says Hooson. The challenge, she adds, is to add value to raw products through branding and processing.

“The Chinese will tell you that they will always have a need for our product.”

New Zealanders themselves are also in demand. “New Zealanders are valued for their creativity, flexibility, and ability to solve problems and get things done,” says Jenny Shipley. “Those are exactly the characteristics that the Chinese admire.”

Sunday night is open mike night at the Lush Beijing bar and co-owner Jade Gray is preparing for the most raucous night of the week. “It’s going to be chaos,” he says with obvious satisfaction.

Lush Beijing is “slap bang in the middle” of the biggest concentration of foreign students in China. Gray is grateful to the government planners who put his customers all in one spot, but he concedes the bureaucrats probably hadn’t planned for underground-scene clubs like his. “We’re always dodging the authorities in some respects,” he laughs, “but it’s all just part of the whole change, you know. They just go with the flow.”

Gray realised when studying in London in the early 90s that New Zealand’s future wasn’t in Europe. “I decided that I’d missed the boat to Japan and thought I’d give China a crack. It looked more exciting to me anyway. So I did a degree in marketing at Otago and three years of Mandarin on the side.”

Perfect planning? Maybe, but Gray’s business career in China has had its ups and downs. It’s a story of struggle and success, deceit, disease, disappointment and perseverance.

His first effort, managing a joint venture farm in northern China, ended in disaster. The farm brought together American and Singaporean money, Chinese labour and land and New Zealand know-how. A new farm was built and 200 Angus cattle were flown from Canterbury to China. The ingredients were all in place but Gray soon realised each party—and not just the Chinese—was out to rip off the others. The shareholders spent their time lying and fighting with each other (see ‘Devilish details’).

“I could see that the project was going to fail. It was pretty tough circumstances and I was the only foreigner up there, so I came back with my tail between my legs. I thought screw China.”

But a year later he was back, working for a company that supplies food to McDonalds. Before long the entrepreneurial urge struck. “I had a friend, a Chinese guy, who had just acquired a fitness centre in Beijing and didn’t know anything about fitness. So I got interested and I bought in as a half shareholder.

“It was pretty much going under. It had about 70 members and we brought it back to about 1,500 and really cranked it up. We opened up a second store. We were looking at doing a rollout of gyms, a gym chain around China.

“And then SARS came.”

Overnight, Gray’s thriving business became a massive debt. “The government closed us down. I turned up to work one day and there’s a padlock around my door and a security guard outside saying I can’t go in.

“I lost about 95% of my target market in three days. All the foreign students just packed up and went—their parents were screaming for them to come home. I had rent to pay, contracts, staff wages, equipment on hire purchase, blah blah blah. And we just totally got stuffed.”

Somehow they battled through. The epidemic eventually passed and cashflow returned. Gray breathed a sigh of relief and sold out to his partner, vowing never to get involved again in a high-cost business.

Which is why he’s preparing for a chaotic night at Lush Beijing when Idealog calls. “There’s a massive lack of well-run café restaurants in China, and Beijing in particular. And I felt that it’s something that New Zealand does well.” Lush is now almost three years old and Gray has also launched Zub, a martini bar. He’s looking for investors to take the concept nationwide.

“I’d say you should be totally paranoid over here. Everything you put into China you’ve got to be willing to lose.”

But his experience has left him cautious about the realities of business in China.

“I’d say you should be totally paranoid over here. Don’t bet your house on China. Everything you put into China you’ve got to be willing to lose, and if you’re not willing to lose it, don’t come here.”

Still, he thinks New Zealanders are failing to realise the opportunity that China presents—and the need to move quickly. On a recent trip here he felt Kiwis are cruising along. “I was kind of disheartened at how slow we are to pick up on this whole China thing … now there’s this looming opportunity, but if you don’t want that opportunity, there’s going to be this looming kind of massive hurdle and competition.”

Gray reckons Fonterra is the only Kiwi company large enough to realistically target all of China. The rest of us need to locate a niche and research it obsessively. “It’s got to be niche and really well packaged, and a high-margin industry market,” he says. “And if you hit the five-star market and it goes off well, even then you’ll be struggling to produce enough.”

If you’re not Fonterra, you’re part of Brand New Zealand—which is good if you’re in an industry that benefits from a green profile. But how does a less-than-Fonterra-sized company approach China?

Help is at hand. NZTE’s MacKenzie says he’s considering adding to the 50-odd staff already in China. TradeNZ runs concept stores in Chinese cities to highlight New Zealand products. Companies like Traffic China in Auckland and Confucius Says in Shanghai can perform market research. Hong Kong-based Asian Demographics is registered in Auckland and run by New Zealander Clint Laurent. Businesses already working with China are usually happy to share their experiences.

But your best Chinese business contact may already be in the country. Jenny Shipley points to the “extraordinarily vibrant” Chinese business community here, and suggests talking to the Chinese consul-general and NZTE. Jude Hooson and Sandy Burgham of Providence Report note that the parents of the 38,000 Chinese students here often have some serious business smarts. Some live here with their children and would welcome the chance to get involved in commerce. If you’re in Dunedin, you’d be nuts not to take advantage of the sister city relationship with Shanghai. Peter Chin is taking another delegation to China later this year.

“China is, from my experience, a relatively easy place to do business,” says Comvita’s general manager of sales and marketing, Scott Coulter. “If you are introduced as a friend of someone, then you go from zero to 100 straight away.”

When McClune first visited China, it was easier to take a taxi across town just to make an appointment for the following day than attempt to use the phone system. These days China is just an email away. Huge volumes of business are done through Alibaba.com, the Chinese business-tobusiness website that rivals Ebay for size. Alibaba.com trades in everything from freighters to fashion to fish.

Just be clear about what you want, says McClune, and make sure you strike a deal that all parties are happy with. “Everyone has to make money out of it.”