What it takes to succeed in China

BY FIONA ROTHERHAM

What does it take to build a successful business in China? If you summed it up on one sentence you would say the opportunity is around volume, rather than margin, said Andrew Grant of global consultant McKinsey & Co.

The former Kiwi has just shifted to Singapore after a lengthy stint in China which now has a larger middle class than the US, he said.

Speaking at Morgo, an annual event for entrepreneurs, Grant presented a swag of numbers showing the astonishing pace of China’s economic growth and its urbanisation. Here’s just a few:

* By 2015 China’s domestic luxury market will be as big as Japan’s and half the size of the US.
* By 2020 the Chinese will have an higher average income that New Zealanders.
* By 2025 two-thirds of China’s citizens will live in cities – that’s nearly 1 billion people.

Grant says along with massive urbanisation and the rise of the consumer, Chinese manufacturers are starting to dominate the "value" market segments rather than total revenue and are also supplying more than a third of emerging demand.

They’re also starting to increase their innovation, he said, with China’s research and development expenditure as a percentage of GDP having risen 150 per cent from 1995 to 2008. China’s sovereign wealth funds and state asset companies also have substantial assets and are looking for make offshore investments, he said.

"What they really value is raw materials and technology."

McKinsey & Co research last year identified the 100 most successful international firms in China and identified six key steps to success, he says: lifting your aspirations on what can be achieved; understanding the diverse customer needs throughout different regions as you would in Europe; executing everything as well as you would in your domestic market from customer service to distribution to research and development; leveraging local partnerships or acquisitions as the fastest way to grow scale; signing formal memorandum of understandings with the Government; and leveraging China for sourcing and research and development that can help reduce costs.

Here are a couple of examples of local Kiwi companies that are footing it in China successfully.

PUMPKIN PATCH 

Global childrens’ retailer Pumpkin Patch recently dipped its toe in the waters of the Chinese market. The 20-year-old listed company trades through its own stores in New Zealand, Australia, the US and the UK but also wholesales its range through partnerships and franchisees in another 18 countries.

It first looked at China in terms of retail outlets (it has manufactured its clothing there for 20 years) in 1999 but decided it was too early to move.

It had another look-see in 2005 but it wasn’t until 2008 that it decided to start looking seriously for the right distribution partner. From a shortlist of nine candidates it finally selected a family firm that already had 400 of its own stories in China and was already representing other global brands.

Pumpkin Patch opened its first store in China in May, wants to have four stores open by Christmas and 8 stores by the end of the June financial year.

Chief operating officer Neil Cowie says there were three things they realised early on about the Chinese market: getting the right partner was critical; the need to have patience as China is a long game; and to agree to reduce their normal margin in order to get scale.

There have been a couple of hitches, Cowie said. Getting product around different parts of China has proved more complex than they first thought and in fact it can prove easier to send the goods from where they are manufactured to a free trade zone and then import them back into where you want them to go.

Maintaining brand integrity has also been critical and something that is constantly under challenge when the locals want to "localise" it, Cowie says.

Pumpkin Patch has since agreed to change its local marketing to reflect more Chinese faces but the global branding remains consistent in the store. The company doesn’t play up the fact that its range is designed in New Zealand whereas its Chinese partner felt that would be beneficial to sales.

Cowie says when they visited the store there was a large urn holding some flowers to the side of one counter which had the company branding on it. When he asked why it was there, it turned out behind the urn were the discreet words, designed in New Zealand.

Cowie’s key tips are to get to know the market well before you go in, have patience, a strong partnership, and then make a decision to go for it.

LANZATECH

Auckland-based clean tech darling LanzaTech first set foot in China less than a year ago and this week announced a deal with a second Chinese partner to build a plant that will turn waste coal gases into biofuel.

The small Kiwi company was founded in 2005 by Sean Simpson and Richard Forster and has developed a fermentation process that uses the carbon monoxide in waste flue gases and turns it into liquid biofuels.  A pilot plant operating since November 2008 at Bluescope's Glenbrook steel mill south of Auckland has proved the technology works.

The company first signed a deal earlier this year with Baosteel, China's largest steel and iron producer, to produce ethanol from steel mill offgases. Mr Simpson said a pre-commercial plant should be operational by the end of next year producing 20 times more liquid biofuels than the Auckland plant.

If that goes according to plan, a fully-commercial plant will be operational by the end of 2013.  And in the latest memorandum of understanding signed this week, LanzaTech will build another plant with China's second-largest coal company, Henan Coal and Chemical Industrial Corporation.

It will use Henan's coal waste gases to produce bio-fuels and chemicals. Both deals are structured so the money earned from biofuel sales is shared under a joint venture.

Mr Simpson told other entrepreneurs at Morgo that patent protection has been vital in dealing with China. Lanzatech has 50 patents and an in-house patent counsel was the 7th hire of the 40 staff the company now has, spread among its offices in Auckland, Shanghai and Chicago.

The company got seed funding from Auckland biotech company BioDiscovery, angel investors including Stephen Tindall, and a $10 million government grant. In 2007 it attracted US$12 million from clean tech backer Khosla Ventures and then US$18 million in July in an investment round led by China-based Qiming Ventures, reflecting the big push on in China to develop clean technologies. 

"China's a natural home for us because of the market for low-carbon fuels there, it has the lowest cost of capital, and it's important to be building plants with that size of refineries,'' Mr Simpson said.

The fast scale up Lanzatech is planning with its partners would only be possible in China, he said.

It has also signed a deal with the Chinese Academy of Sciences to set up a bio energy research centre in Henan that will look at a complementary processes to LanzaTech’s technology.

"The next step for us is chemical production so that’s the research and development side of the shop," Simpson said.

The two founders bought the original microbe that could eat carbon monoxide gases off the internet from Germany for just $1,000. But it then took years and some smart thinking to get "the strain of that microbe that can jump through the hoops we want it to do'', Simpson said.

He describes it as having bought a microbe that could walk when they wanted it to run. Having trained it to run, they now want to teach it to jump and juggle at the same time to produce more high value products.

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