Doing Business In China

1. Doing Business In China Building value for foreign enterprises in Asia

2. Agenda • Selling to China: Commercial Options • The most difficult business issues according to people working in China • IP and Relationships • The most difficult business issues according to people not working in China • Pitt-falls • Companies struggling to sell in China • a. Case Study I • b. Case Study II

3. Selling to China: Commercial Options Opportunistic / Well Executed Opportunistic Business Stage U.S.A. CHINA #1 Opportunistic Agent Distributor Employee American Company Distributor #2 Well Executed Opportunistic Treating it like you would another region in the US Market Feedback, Targets, etc. Distributor 1 Distributor 2 Distributor 3 Agent Distributor Employee American Company Market Feedback to U.S. Company

4. Selling to China: Commercial Options Opportunistically Invested / Strategically Invested Business Stage U.S.A. CHINA #3 Opportunistically Invested DISTRIBUTORS 12345n Agent Distributor Employee Dedicated Employee(s) on-the-ground American Company Employee works through an “incubator” Most likely still no RMB Invoicing. Market Feedback to U.S. Company #4 Strategically Invested DISTRIBUTORS 12345n Your Business Established. Employees Inventory RMB Invoicing Agent Distributor Employee American Company Market Feedback to U.S. Company

5. Selling to China: Commercial Options Summary No Resource in China Resource in China High High Stage #4 Strategically Invested Stage #3 Opportunistically Invested RETURN and/or MARKET SHARE RISK Stage #2 Opportunistic Well Executed Stage #1 Opportunistic Low Low Low High INVESTMENT

6. Selling to China: Commercial Options Issues: Stages 1 & 2 No Resource in China Resource in China High High Stage #4 Stage #3 RETURN RISK Stage #2 Stage #1 Low Low INVESTMENT High Low Second* most cited business issue: Distribution / Channel Management Why??? 1. Highly Fragmented 2. They cannot take much inventory and/or cannot trade in USD 3. Many, many more distribution points 4. If a distribution in the US requires X amount of time training, the Chinese distribution requires 3x 5. Greater instances of opportunistic behavior: Brand, Pricing, Service (Studies show a correlation between aggressively managed distribution and growth/profits) Third most cited business issue (LKS observes) lack of credibility in the feedback channel impacts adjustments necessary in: Product Development, Service, Brand  Growth * Per American Chamber of Commerce Survey Industrial Distribution Market U.S.A. China Top 10 30% Top 10 1% Smallest of top 50 is about $100M Largest is about $60M

7. Selling to China: Commercial Options Issues: Stages 3 & 4 No Resource in China Resource in China High High Stage #4 Stage #3 RETURN RISK Stage #2 Stage #1 Low Low INVESTMENT High Low #1 most cited* business issue: Employee Retention Salary Growth Employee Turnover Today’s Ceiling  “Ben there done that” – really expensive  People looking for development  Ceiling being noticed – Find the “Builders” * Per American Chamber of Commerce Survey 3 jobs, 28x salary growth 4 jobs, 14x salary growth USD Base Annual Salary USD Base Annual Salary Avg. Annual Employee Turnover

8. IP & Relationships IP Protection (It-is-Not a reason Not-to-Go) 1. China is one of Luis Vuitton’s largest markets for knock-offs and also one of its largest for real products 2. The baby carriers market consisted only of Baby Bjorn Knock offs which actually built the brand. It was known, and desired, when the real product arrived 3. Knock offs are not your competitors, they do not win on quality or service 4. But be smart about drawings, etc. Relationships 1. Relationships matter everywhere 2. As in the U.S. Service, Quality and Value will win out 3. The accessible market is growing Don’t allow Relationships / Culture to be an excuse for losing China Industrial Market 2000 2011 20% Accessible 50% Accessible 50% Non-accessible 80% Non-accessible

9. NYSE listed company selling in China for > 10 years, but yet to achieve scale Company was growing in the low teens Distributors were small and few, highly concentrated near Shanghai Most sales people could not sell enough to cover their costs Employee turnovers was low, but salesperson turnover high Pitt-falls: Case Study I Situation Situation Objective: Improve Sales

10. Pitt-falls: Case Study I Brand Mapping Market Perceptions Brand Perception Our client Co A was not strong anywhere Had poor quality and delivery perception Co X was mentioned most often and owned Brand Awareness Nobody owned after sales service – Negative! User Decision Attributes Why are you asking about quality and delivery, you are supposed to fix Sales!

11. 25% Hit 25% 75% End Users 75% Miss Pitt-falls: Case Study I Sales Effectiveness Sales Function Time at End Users New distributors signed in last 18 months Success Quoting on Business 3 New or Current Distributors Generally a Mature Market characteristic Passive distribution management Should be a $50M Business! Why can’t sales increase reach?

12. 5 4.5 Complaint w/ abuse 4 Complaint w/o abuse 3.5 3 2.5 % 2 1.5 1 0.5 0 Jan Feb Mar Apr May Jun Pitt-falls: Case Study I The Fundamentals Perception vs Reality Delivery Warranty % 1 week VOC Co X 3 days Co A 2 weeks (China) Co A 5 weeks (Imports) Sales training, incentives and structure will not solve this problem!

13. Pitt-falls: Case Study I Summary Summary Leadership: Someone with credibility in the home country Poor sales is usually a symptom of something other than a poor sales team / structure / incentive We see a lot of industries where “Service” is still an open attribute Don’t be distracted by FCPA, Sales Pressure, Retention Issues: Don’t forget the Fundamentals! Don’t let an export driven factory forget to measure domestic performance

14. Selling in China for > 10 years, but was not satisfied with sales performance Sales people focused on finding and signing new distributors Sales were 30% “Standards,” 70% “Specials” <The opposite of the rest of the world> Their share of “Specials” was <0.1% in China Pitt-falls: Case Study II Situation Situation Objective: Improve Sales…Again

15. Pitt-falls: Case Study II Product / Competitor Concentration Market Situation Specials vs Standards Competitor Concentration This client is good at Specials Specials are ignored by the biggest companies Specials sales require time at end users identifying and solving problems Distributors prefer to sell standards Specials 10% Others Major Global Players 40% Standards 75% Miss 60% 90% Specials: Fastest Growing Segment Global Majors had the Majority of the Market Like every other country, the client was focused on Standards

16. Pitt-falls: Case Study II Distribution Model Distribution Situation Standards: “Catalog” Sales Sales team was recruited from the global major competitors that had already been established in China Distribution network was set up just as in the US or as the other major competitors had done in China Nobody in the China organization understood how to build a network, or sales plan, focused on Specials Specials: End User Pull Model Distribution model and salesperson DNA need to fit your positioning

17. Pitt-falls: Case Study II Summary Summary If late to the market, you may grow faster, and more profitably focusing on your niche items If you build the organization around a “niche,” the “bulk” will eventually come – if you want it to! Be open to positioning your brand differently in China Don’t necessarily recruit from the same industry, recruit from the same business model Moving production etc. can ameliorate some of the delivery and cost issues, but not always

18. Shenyang Overview Capital of Liaoning Province and established as a major heavy industrial base 5th largest city in China Large companies in the city include: Brilliance China Auto, Shenyang Aircraft Corporation, Neusoft Group (the biggest software company in China), BMW, Toshiba Elevators, General Electric, Michelin (Tires), Coca-Cola, BASF Typical industries in the city include: Automotive, Aerospace, Software Quick Facts: Area: 13,308 km2 Population: 7.86 million GDP: 501.7 B RMB (81 B USD) GDP Growth: 14.1% Imports: 3.78 B USD Exports: 4.08 B USD Many businessmen have said that the business environment can be challenging and more bureaucratic than East China. This is related to the higher proportion of state-owned enterprises than elsewhere in the country, and the relative lack of experience in international business practices. However, Shenyang is in the process of reforming its 280 SOEs

19. Know your strategy Is this opportunistic or strategic? What is your positioning? Don’t be overwhelmed by culture, FCPA, bureaucracy etc. and remember the fundamentals are the same anywhere. Be flexible when building your positioning Your brand positioning or even product use may be different than in the US. (KFC - menu, MD – dating, Go-Thru, Gas Pumps, Micrometers) Include the China team If you are not going to listen to their feedback, don’t hire them Relationships They matter everywhere – build them – don’t use them as an excuse Doing Business in China Summary

20. Lancaster Consulting Management Team ALEX CLAYPOOL /Managing Director Alex has started-up, turned around and grown businesses in the US, China, Japan, Singapore and Belgium for US Fortune 500 corporations (Danaher Corporation, The Stanley Works) and US private equity firm portfolio companies. Alex attended Rikkyo University (Tokyo), the London School of Economics, has a BA from Washington & Lee University and an MBA from the University of Michigan. He is an advisory board member of XnI Consultancy Services Pvt. Ltd. a consulting firm in Delhi, India, and is an active member of the American Chamber of Commerce and Australian Chamber of Commerce in Shanghai. He has lived eleven of the last thirteen years in Asia and Europe, and currently resides with his wife and two sons in Shanghai. aclaypool@lancasterholdings.com LI XIAO /General Manager Li Xiao has led the establishment of over fifteen foreign businesses in China and has thirteen years of experience working for US, European and Indian multinationals. Prior to joining Lancaster, Li was responsible for the establishment of manufacturing operations and management of commercial operations for WIPRO Hydraulics China. Li has a BA from East China University of Science and Technology and a diploma from the Swedish Institute Management Program with a focus on Corporate Social Responsibility. Li currently resides with his wife and daughter in Shanghai. xil@lancasterholdings.com