Coatings World - October 2011

• License and Franchise – A formal permission or right offered to a firm or agent located inside China to use your company’s proprietary technology or other knowledge resources in return for payment. This method offers very little in the way of control over the entry model.

• Alliance – Agreement and collaboration between your company and a firm located inside China to share activities in the China market (i.e., manufacturing, distribution, marketing, sales, etc.). Usually this agreement reflects a narrow range of activities and provides your company with a greater degree of control compared to those models described earlier. A great deal of effort and time needs to be focused on developing an exit strategy from this mode of entry.

• Joint Venture – Shared ownership of an entity located inside China between your company and a company located inside China. This is much more involved and broader in scope than an Alliance and usually involves shared ownership of assets and resources. This structure requires a great deal more management focus by both parties. Similar to the Alliance entry mode care and consideration should be given to developing an exit strategy. This entry model provides your company with a bit more control but it also increases the risk level.

• Wholly Owned Subsidiary – Complete ownership of an entity located inside China by your company to manufacture or perform value addition or sell goods/services inside China. As you can imagine, this entry model offers your company the greatest degree of control but also the maximum risk associated with your entry strategy.

Unfortunately, there is no valid rule of thumb as to which chosen entry method results in the greatest degree of success. This is due in part to reluctance on the part of most companies to fully divulge the result of their chosen entry strategy. Suffice it to say that whatever entry strategy you choose it should be one that fits your past performance (i.e., not be totally new to your company).

China is not the place for most companies to learn a new entry model. Careful and deliberate study of risk/reward relationships should be undertaken with the eventual chosen entry mode pursued with well-defined expectations and metrics. China isn’t for everyone but like most market potentials it does offer the allure of potential success.

I am certain that the 100,000 prospectors who flocked to the Alaska Gold Rush did so because they were pursuing a rich return for their effort. Unfortunately, lack of training, resources and enormous hardship and competition resulted in the majority of them ending up with nothing to show for their effort. There are a couple of old expressions that sort of sum up what you need to do before choosing to pursue a China strategy: “All that glitters is not gold”; and “Look before you leap.” China does in fact offer tremendous potential for success but just as equally for failure.

The bottom line with the above suggestions

• Know why you are including China as part of your business strategy;

• Understand and know the limits of your risk taking;

• Define what constitutes success;

• Understand what the various entry models are and which one fits you best;

• Understand the associated risk/rewards associated with the pursuit of a China strategy;

• Test your critical assumptions before you commit to the pursuit of a China strategy;

• Allocate time and resources to visit China and to conduct an onsite, thorough investigation of the perceived potential and obstacles;

• Understand the true cost of pursuing a China strategy (not just
allocated cost against the strategy but the cost to other objec-
tives that your company may be pursuing that will be impacted
by choosing a China strategy); and
• Provide adequate training for your personnel. Don’t assume that
your brightest and best employees are the right pick for working
in a multi cultural environment. China is a foreign country, pick
your expats to be assigned based on their ability to work in that en-
vironment as well as their knowledge of the company’s activities.

Whatever entry model you choose understand that success will not happen overnight. Most companies have discovered that achievement of success in China takes much more time and resources than expected and that the perceived rewards are often lower than projected. CW