TEN QUESTIONS ANSWERED BY W. JOHN HOFFMANN – CO-FOUNDER & PRINCIPAL, XRG

Q1. Tell us about your company. Who are your clients, what is your mission, what problem do you resolve?

I am a Co-Founder and Principal of the Exceptional Resources Group (XRG), a China-based strategy and transactional consultancy firm, and a Co-Founder and Founding Core Associate of the China Dialogues Network (CDN), a network of leading China analysts, consultants, scholars and businesspeople that provides information and bespoke advice on China.

Since 1990, as a Co-Founder and Principal of Exceptional Resources Group (“XRG”), I have continued to apply my unique China experience to deliver singular, competitive advantage to XRG clients. While much of my more recent work must remain confidential, several of the first-mover projects that I have been involved in are: working as part of the Kodak-XRG China team that developed the strategy to consolidate the entire PRC photographic industry (1992); creating, developing and then executing the first China Summit for the International Herald Tribune (IHT) and SCRES (1994); working as part of the Ericsson-XRG China teams that established the fourth public switch manufacturing joint venture in China (1993) and one of China’s first GSM joint ventures (1995); developing a leap-frog, China market entry strategy for Liberty Mutual and working as part of the Liberty-XRG team that established the first international insurance representative office for Liberty in the Municipality of Chongqing (1998) and creating, developing and then staging the first annual series of Liberty China SafeWork Forums (1997-2001); working in support of the Reuters-XRG China team that established China’s first wholly foreign-owned Internet enterprise (2000); and leading the XRG teams that designed and executed both the multi-client China Fifth Generation Leadership Project (2006-2008) as well as the XRG Rural Transformation Project (2007-date). Together with XRG-CDN Founding Core Associate, Professor Michael J. Enright, I am also the co-editor of China Into The Future: Making Sense of the World’s Most Dynamic Economy (Wiley 2008).

I do bespoke research, strategy consulting and transaction support work for large multinational companies, financial institutions and governments when an inside-out understanding of China can help them to improve their strategies and to achieve their strategic objectives via proactive support for their new China projects / businesses (60% of my work) or via workout / exit support from their exiting China distressed / problematic projects / businesses (40% of my work).  I work with clients in several ways — all of which involves the same process expertise: vision, strategy and execution — including:

• China market entry and expansion focused on increasing market share and profitability in mainland / Greater China;
• China complex competition with internationalizing Chinese enterprises in mainland China and in outside global markets; and
• China dispute resolution, workout and exit.

Many prospective clients take comfort knowing that I have not only worked to get clients into China projects / businesses, but I have also helped clients to get out of trouble and exit China successfully.
Q2. Why does the business partnership with China interest you (your company)? Is this interest to work with the Chinese business potential or real?

My initial interest in China truly began at Harvard University in the 1970’s from which I graduated with a degree in East Asian Studies. My studies were focused on modern Chinese politics and archaic Chinese bronze and jade.  My academic interest shifted to a business interest with my first job working for a NM Rothschild & Sons, an English merchant bank; first as a clerk in London and then as the Asian generalist / corporate finance manager in Hong Kong from 1980.  In 1984, the Bank successfully took a significant amount of one Chinese state-owned enterprise’s foreign currency funds away from Bank of China and started to manage and invest their money globally.  This said, when a China deal comes to any bank for financial support services it is already a done deal; and, most bankers do not get involved in putting the initial deal together.  To get more involved in the early stage deal-making aspects of China business, I left the Bank in1986 and began consulting.

The third generation of my family to live and work in China, with over 30 unbroken years China-specific work experience, my interest to work with the China business potential is real.
Q3. How special, according to your point of view, is the business with China (shipment of goods, logistics, quality control of the production etc)?

I would not describe China business as “special.” I prefer using words like “challenge” and “change” because China has been a great challenge for foreign companies, largely because of the pace of change:

• Even more rapid development than expected;
• Even more foreign investment than expected;
• Economic growth has meant profits for some, not all;
• Changes in economy and leadership have made it more difficult for MNCs in some dimensions; and
• Policy and economic shifts at the industry and regional levels have been the main reasons for disappointment.

Very few foreign companies have known what they need to know in order to maximize their China market upside potential. They have benefited because China has grown, or have bemoaned the “difficulties of doing business” in China.  Many foreign companies have gotten their China “macro” and medium-term industry forecasts correct, but still failed to meet their China market share/profits targets.

And the challenge is getting greater because China is continuing to change:

• Getting richer, older, more urbanized, better connected
• Getting more powerful and more assertive economically and geopolitically
• Getting less enamored of foreign investors
• Getting more focused on building Chinese champions
• Getting more internationalized
• Getting more environmentally and socially conscious
• Getting more complex politically (within the Chinese Communist Party)

Foreign companies need a way to understand these challenges and changes, what they mean for China’s future, and what they mean for their specific China businesses.

China is big. So to win big in China, you must think big – big profits mean big challenges. To begin, foreign companies must understand the truly continental scale and complexity of doing business in and with China. Whatever China business aspirations foreign companies may have there are no short cuts and competition is fierce. A foreign company’s China vision must be clear, its China strategy must be durable and execution must be perfect.  In China, you must get it all right the first time or your business will not survive. Although the challenges of China business have humbled some of the world’s biggest multinational companies, there are many successful, very profitable foreign companies doing business in and with China today – all of which have overcome the challenges they have faced. If they have done this, so can any foreign company provided it is willing to invest the time, money and effort required.

As one Chinese state-owned enterprise CEO once said, “Business is business and charity is charity.” Every foreign company doing business in and with China which takes their business seriously from the start has the same chance to make profits. Those foreign companies which do not take their China business seriously should not be in the market, because they are actually giving their time and money away.
Q4. What prospects of the business with China do you see in whole for your company?
I am cautiously optimistic about the future prospects of my own China business.

Q5. How do you assess the current state of being in the know-how and the level of knowledge according to the different aspects of vision of business with China? How important and necessary is it for your and for your company? What do you think would your customers say on this question? What do your customers think about the “made-in-China” goods?
Because China is so big and so complex, it is always dangerous to generalize about what is happening in “China”.  In fact, there is no single “China.” Rather there are many “China’s” that co-exist and in many cases overlap each other.

Indeed, China’s urban culture is built in large part on the countless everyday objects that surround its citizens.  These objects are the carriers of their personal identity and in many ways communicate the social environment they are a part of.  China is the world’s largest manufacturer of many products including but not limited to domestic appliances, toys, consumer electronics, fashion and accessories.

At present, much of what was traditionally “made-in-China” was either a foreign designed or branded product or a Chinese copy of one.  We are already seeing a strong movement within China towards shifting away from “made-in-China” products to “created-in-China” products and brands.  Recently, there has been a surge of Chinese products and brands that have been “created-in-China” aimed at capturing a larger share of the vast China domestic urban and rural markets as well as other international markets.  One such “created-in-China” product is GE Healthcare’s Brivo CT 325/315 – “a county hospital can afford to run the equipment (Brivo) with a few as five patients a day.” [GE targets community healthcare, China Daily 2010-04-19]

In some product/service categories, “created-in-China” products/services and Chinese enterprises are competing and winning in both domestic China markets as well as in select international markets. Since the Open-Door policy encouraging foreign direct investment in China began, the know-how and knowledge of foreign companies doing business in China has increased exponentially, but so too has the know-how and knowledge of Chinese enterprises.  There are about 20-30 industry/market battleground sectors in which the “created-in-China” products/services of Chinese enterprises are a serious competitive threat to the China and international market shares and profitability of the dominant large foreign multinational companies. As these “created-in-China” products/services and Chinese brands mature and grow stronger through China-specific adaptation, they will in some cases adapt in ways that are completely new and different.

Some of foreign companies have grown to love “made-in-China” products/services, while others either fear or under estimate them. Changing fear of and complacency towards “created-in-China” products/services into love is one of my firm’s special practice areas: we specialize in helping foreign companies develop and execute China complex competition visions and strategies to deal with increasing Chinese competition in and outside of China.

In addition, while much of the world has awoken to China’s capabilities as a manufacturing powerhouse and its dominance as a consumer of everything from natural resources to advanced technology. Some analysts and authors are beginning a new field of study focusing on “Funded-in-China” which is all about understanding what is fueling China’s growth, especially the high-risk venture capital and private equity finance that feeds the entrepreneurship and innovation that is positioning China at the forefront of tomorrow’s industries. For one good example of this new work, please see Funded in China: How China Outperforms the West in Financing the Future, by Rob Koepp.
Q6. Business education, variable seminars, courses and trainings are extremely popular nowadays. To what extent the specificity of doing business with China should be studied by the managers?
Business education, seminars, courses and training are all part of building the in-house knowledge base that is required to succeed in China, but too little knowledge can be a dangerous thing.

In the first chapter of China Into the Future, I set out a list of essential truths about China which everyone doing China would be well advised to keep in mind:

• China’s future will be profoundly different from its past.
• China has been more resilient than many expected.
• China’s leaders have a different world view than leaders in the West.
• China will not simply follow the path suggested by others.
• China is not a monolith, but is comprised of numerous actors and groups with their own agendas.
• Despite greater market-orientation, government will continue to play an important role in China’s economy.
• For business in China, rapid economic development need not necessarily correspond with profits.
• Success in China requires a deep and broad understanding of a multifaceted economy and society.
• China’s future is best understood as being the result of a confluence of forces rather than a single master plan.

There is no substitute for actual, hands-on China-specific experience.  If a foreign company needs additional China expertise or advice, there are now plenty of China savvy executives, professional business service firms and specialist bespoke advisors that can be hired to assist them.

Q7. Is the staff / people factor inside the company important when building relations with China? Is it enough to manage with only representative or intermediary which specialization is making business with China?

“People” are critical in China business whether they work for your business or with your business.

Most large foreign companies active in China see having the right people with the right skills in the right place at the right time is one of their biggest challenges.  Finding and keeping good people in China is a very difficult task.

Many foreign small and medium-sized companies (SMEs) are too small or too far way from the China market to enter the China market directly in the first instance.  SMEs doing business with China have in the past and still today rely on third party representatives or intermediaries in places like Hong Kong or via the Internet to assist them.
Q8. What do you think will help to minimize the various risks arising when doing business with the Chinese companies?
Homework – Homework – Homework. Do your China market research diligently and do not expect it will be easy or cheap.  Avoid shortcuts, third party generic research reports and simple solutions.

Take your time when crafting your China vision and formulating your China strategy.  Always remember, everything is negotiable in China before you invest your money.
Q9. The CEO of the company and the majority of the managers do not possess the required amount of the special knowledge on this problem. How can they solve the problem of communication with the Chinese business?

As I said above, any foreign company which needs additional China expertise or advice in relation to communications or any other aspect of their China business, there are now plenty of China savvy executives, professional business service firms and specialist bespoke advisors that can be hired to assist them.
Q10. What would you like to tell to our audience?

“The China story is not preordained. The plot will have twists and turns, many of which may not be currently part of the consensus view. Success in dealing with China will be determined by an ability to anticipate these twists and turns, and to understand their potential implications. When it comes to China, fortune favors the prepared.”

W. John Hoffmann and Michael Enright

China Into The Future: Making Sense of the World’s Most Dynamic Economy (Wiley 2008)

For further information and China business insights, please see:  China into the Future:

http://eu.wiley.com/WileyCDA/WileyTitle/productCd-0470822449.html

A must read for people interested in tracking China’s future development!  Available on Amazon.com and any major bookstore near you!