Smart London companies are looking to emerging economies for growth – but to succeed you need to be aware of these considerations…
Matt Lewis is head of national markets for London at KPMG.
I was in Hong Kong over New Year, the first time I have been back there since just after it was handed over to China in 1997. It’s changed a lot since then – the development, the buildings, the obvious investment in infrastructure like the metro.
The pace at which they get things done there is astonishing, whether that’s a tailored suit made in 24 hours or the rate at which buildings go up. I saw construction work going on almost 24/7, and throughout two bank holidays. My friends tell me mainland China is just the same.
So it’s no surprise that UK companies are looking at emerging economies like China, India and elsewhere in the Far East to find opportunities for growth. After all, forecasts show world economic growth will be driven largely by Asia. Businesses which aren’t trading there yet are looking at how they could, and whether they should be there.
Let’s take China as an example.
If you’re looking at starting to trade there, you’ll be using China as a source of products, or as a market. Let’s take them one by one.
China as a source for products
First of all, bear in mind that some people argue China, following its rapid development, is now more expensive than it was, and some companies are looking towards places like Vietnam instead.
Secondly, if you’re looking to source product from China it requires a different way of operating. The supply chain is different – it can take many weeks for a sourced product to arrive in Europe by container ship, for example. How do you manage those greater lead times?
Recourse through the Chinese courts can be expensive and difficult – you have to be aware of how you manage that. Can you afford to spend years and large sums of money trying to legally resolve a breach of your intellectual property, for example?
You could air freight, but that’s hugely expensive and will have an impact on the carbon footprint of a product. (This is in part why some retailers are coming back to manufacturing in Eastern Europe, so they can turn around products quicker. This is particularly the case in the fashion industry where speed to market can be vital.)
Then you have to think about managing the quality of the products being made in China. There can also be, on occasion, the ethical issue.
You might also encounter problems with intellectual property (IP). One of my clients, for example, used to make sophisticated manufacturing equipment. They set up an operation in China to make spare parts. Within a few months, imitations of the same spare parts (though not quite the same quality) were appearing in the local marketplace about 50 per cent cheaper. Another local manufacturer had basically taken the parts, worked out how to make them, and gone and made them cheaper.
Protecting IP is obviously not just an issue for companies expanding into emerging markets, but we have well established laws in the UK around the issue, where the new economies springing up have not had the time to put such stringent rules in place. Recourse through the Chinese courts can be expensive and difficult – you have to be aware of how you manage that. Can you afford to spend years and large sums of money trying to legally resolve the breach of your IP? And is it worth doing that?
Managing at a distance is also an issue. I knew a company who’d been in China for years. It was looking to recruit, and was pleased to find six or seven eligible candidates, all English speaking. Except, after flying over to interview the shortlist, the manager realised none of the candidates spoke English – they just all happened to know good recruitment agencies who were fluent.
These are the kind of things you don’t anticipate will happen, but they do.
China as a consumer market
So let’s think about looking to China for a market, perhaps if you’re a consumer products company. The urban population in China had tipped past 50 per cent for the first time recently, so the opportunity there is huge.
But you need to think about the competition.
The Chinese business culture is based very much on trust rather than formality and contracts
And how are you going to distribute? Typically people go in with a joint venture (JV) partner – but how do you find that person?
The Chinese business culture is based very much on trust rather than formality and contracts. You’re getting into bed with someone you have to trust. If your JV partner breaches the terms of your contract, remember that it can take years to have a chance of resolving things through the courts.
When it comes to selling your product, can you go in with the same approach as you would in the West? Although Chinese consumers are getting more affluent, most are not at the same levels of disposable income as here. So do you need to change your brand or modify it, to make a “light” version more suitable to mass markets over there?
And another thing – a certain fashion retailer who broke into China did exhaustive research into sourcing, distribution, partners, even the style of the clothes. The one thing they got wrong was a real basic: that Chinese women are a different shape and size from the Western women they were used to dressing. The brand got their got sizing horribly wrong for their first season. And that was after doings things quite methodically.
The key point here is that you can’t afford not to have some sort of strategy around developing markets. But the real rule is that you have to plan, and be very meticulous in your planning. Decide how you’re going to manage the risk. Would just trying things out on a very small scale – so if anything goes wrong you don’t lose too much – be sensible?
And always, always, expect the unexpected.
Matt Lewis is head of national markets for London at KPMG.
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