When you first came to China, you usually think the major challenge you will have is the language. But you realize after a while that language is something that can be overcome, whether you have a team with you that can interpret or you learn the language yourself. Likewise, different ways of business thinking, etiquette, and negotiation style are an initial challenge, but after a while you learn what the rules of the game are and you learn to navigate according to them. The toughest challenge, however, is the importance of relationships in Chinese business and society. Although many foreign companies understand that relationships are important, they usually don’t emphasize them nearly as much as their Chinese counterparts: in China, a lot of the thought that is put into business is put into how to manage relationships. Unlike the West, in China ‘win-win’ is not enough to business partnership; nothing gets done without good personal relationships. Building these from scratch is extremely difficult for foreign firms, and one of the biggest values we offer to our clients is enabling them to leverage our own network of relationships.

It is important that when you come to China, you don’t try to do anything yourself unless you have someone on your team who is already deeply imbedded in China. If you don’t have this internal capability, it is essential that you focus your energy on finding a business partner that you trust and can work with who can advise you in negotiations, help you build and manage relationships and navigate regulations. You have to understand that Chinese companies are not only pragmatic and want to get things done, but are also aggressively learning global business practices to improve their negotiating positions with foreign firms. There are many more Chinese who have studied abroad and can communicate in English than there are foreigners who can communicate in Chinese. If you want to negotiate on an even footing and do business together effectively, you need to make the same investment in understanding China.

SmithStreetSolutions focuses on unlocking the value of China for foreign companies. To foreign companies, China is essentially a black box, and we are a flashlight. We focus on helping our clients understand China’s business environment, the market conditions, what competitors are doing, and where the government wants to push the market. Providing our clients with the right context is extremely important: many things that are common sense in China often come across as completely alien to an American boardroom and require explanation. We help our clients understand the full value chain for their business in China, from manufacturing to distribution and finally consumption so they can understand the levers they can apply to make their business successful. The Chinese business environment is unique and extremely dynamic, and we provide value to our clients by allowing them to stay one step ahead of the market. We don’t tell them what or what not to do, but we do provide them with the market insights they need to make the best decision for their business.

The real opportunities in China are in creating value-added products and services for both export and domestic consumption.

Obviously, lower labor costs and the current exchange rate enables foreign firms to save money by outsourcing to China. However, while Chinese companies have been remarkably effective in competing against one another to offer goods at the lowest price, this competition is reaching its limits and most companies are now operating on razor thin margins. As the RMB appreciates and wages continue to rise, margins on exports are going to disappear from foreign distributors, not from Chinese producers. Cost savings is not a viable strategy beyond the short term. The real opportunities in China are in creating value-added products and services for both export and domestic consumption. Rather than allowing our clients to simply save costs, we help them understand how they can unlock the value of China’s large and increasing talent base, rapidly developing infrastructure, and growing domestic consumption to grow their China business around higher value added products and services.

The first major pitfall is trying too hard in applying Western business practices to the China market. Companies need to treat China as a unique market and need to tailor their business and value propositions to this reality. Taking the time at the beginning of the market entry process to understand the China market and learn how to best adapt your business model is very important. A second major pitfall that foreign companies encounter is the desire for immediate and short-term profits. Most of the successful foreign companies in China have been here for a long time. They have had a chance to build relationships, and nearly all have empowered their local teams to make decisions on the ground. Both of these elements form an essential foundation for the success of foreign businesses in China.

Talent is everything. The most important things is to build the right team for a China operation, and this team may look different than a similar team in the US or Europe. Just as important is working to build relationships between the firm and its local employees, who need to share in the company’s overall goals and vision and be trusted and empowered to make local business decisions. Most company headquarters lack the context and understanding of market complexities to make the right decisions for the Chinese market, and without an empowered local team they are unable to respond quickly to market changes and be successful.

As the RMB appreciates China will lose its cost advantage, and Chinese companies will need to increasingly produce higher value added goods and services that are not only made in China, but created in China as well. More and more, these will be targeted towards the Chinese domestic market- China is rapidly turning into a consumer economy, making it an attractive market for higher value products and services. This development will be furthered by an appreciating RMB, as cheaper imported products will drive demand for value added items and force Chinese companies to innovate and move up the value chain. China’s future will be driven by creation and its consumers, areas in which we are focusing on unlocking value for our clients. Another big change from an appreciating RMB will be increased oversees acquisition activity by Chinese firms, who will take advantage of a more valuable RMB to fund acquisitions of foreign technology, distribution networks, and global brands. In the past, foreign companies could decide whether or not they wanted to do business with China. This is no longer an option: China will be coming to you whether you like it or not.

In the past, foreign companies could decide whether or not they wanted to do business with China. This is no longer an option: China will be coming to you whether you like it or not.

Rather than being a foreign company or a Chinese company that isembedded in either China or the West, SmithStreet has its feet firmly placed in both worlds. Our team is a mix of local and expatriate staff, and we have managed to draw in the best talent from around the world. We have former Wall Street bankers advising foreign companies on how to enter China, as well as advising Chinese firms on their acquisition strategy abroad. We have a team of strategic research experts from around the world who fully understand and get insight what is happening in China and where the market is headed, and help clients to understand the key strategic levers they need to apply to successfully adapt their business model to China. Our team’s deep knowledge of the Chinese market and global backgrounds allow us to provide unique value for our clients by helping them navigate the gap between the Chinese and Western business worlds.