20 Dec 2016
Often, it’s not until things go belly-up that the importance of personal trust and flexibility in China finally hit home.
"Often, it’s not until things go belly-up that the importance of personal trust and flexibility in China finally hit home."
Nick Henderson, Director Asialink Business’ China Practice
This is one of the most valuable lessons I learned during the 17 years I spent helping businesses negotiate their way into the massive and – potentially - highly lucrative Chinese market.
Take the example of a European software company I was advising on how to set up a strategic partnership with one of China’s largest technology companies, which had several profitable niches in China’s growing IT sector.
The Chinese company had a huge customer base and its founder was able to leverage this into multiple cross revenue streams through online gaming and online advertising. The European client, an anti-virus software company, had world-leading technology and was keen to get a slice of the action in China, a massive and growing market.
After much research my client sought a multi-faceted partnership that would cover long-term technology licensing of an anti-virus engine to the potential Chinese partner.
We would develop a “freemium” model with the partner’s antivirus consumer software whereby consumers could upgrade to my client’s paid and premium product.
This would enable three things: multiple revenue streams, a close relationship with the Chinese partner and a very effective sales channel to millions of customers.
Everything proceeded smoothly until the Chinese CEO travelled to Europe and requested a meeting with the CEO of my client’s company to discuss the strategic partnership.
My client’s CEO was too busy to meet him and sent along one of his sales managers instead. Although the Chinese CEO and his travelling party were wined and dined, it nonetheless created the impression my client’s CEO had been uninterested or unwilling to meet him.
Interestingly - and perhaps mistakenly - my client appeared upbeat about the possibilities of a partnership with the Chinese company and I came under pressure to ‘make it happen’.
While I was certainly up for the challenge I was privately concerned a top-level meeting between the two CEOs had not taken place.
Soon after, cracks started to appear. My client’s lawyer became focussed on aspects of the agreement: risk mitigation, intellectual property, payment, exclusivity, governing law and arbitration - all critical to managing the potential risk of doing business in China, of course, but frustrating for the Chinese company.
As a result of my client’s risk-averse position, inability to compromise or seek a mutually acceptable outcome, a stalemate developed.
It’s natural for companies dealing with new markets to become more risk averse and my client’s conservative approach was understandable. But such an approach can also stifle positive commercial outcomes.
A less risk-averse approach by my client might have shown greater appreciation of the Chinese operating environment.
I came under pressure to bring the Chinese company to reason and to accept my client’s position. This was not easy. Having spent much time in Beijing with their CTO and CFO, I had nurtured a strong relationship. We had shared many a working dinner - even enjoyed foot massages together!
Trust and communication barriers had been broken down and we spoke freely but objectively about the partnership and how to make it work. I discovered through them their company was preparing to walk away from the partnership; the CEO couldn’t understand my client’s risk-averse approach.
Why the focus on the risk mitigation elements of the agreement? He was frustrated my client could not see China was different. The pace of change in markets (in particular in the internet space) is so fast in China if you are not flexible and dynamic, you can easily lose the opportunity.
I was acutely aware if my client didn’t work with this strong partner, there would be no chance of building an organic business in China. Without a little give and take over the contract, discussions would drag on and we would lose the moment in China’s fast-changing internet and software landscape.
The Chinese company was even considering approaching my client’s competitor to scope the possibility of entering into a similar agreement.
But my client would not budge and the whole deal was teetering. I was left trying to balance competing demands: a European company trying to mitigate risks and a Chinese company at a loss to understand what the fuss was all about.
I impressed upon my client the way of thinking and approaching China market opportunities is not always as black and white as it is in more mature European markets.
Finally, through many discussions with my client over the next few months (which often felt like last ditch efforts), the management team agreed it would commit to building a China market. We were back at first base. But at least it was progress.
My client’s CEO then made some important moves: he finally met the Chinese CEO and through mutual understanding and rapport they developed a common understanding of what each wanted to achieve.
If only they had done this at an earlier stage in the negotiations. My client then hired an experienced China general manager and set up an office in Beijing.
Soon discussions were back on track and within a few months everything fell into place, both reached a compromise and, to this day, some years down the track, the relationship between the two companies is going strong.
The Chinese company now has close to half a billion active users of its online products and my client has built a successful China business.
It was a long journey (more than a year) but we all learned a lot along the way:
• to create successful business outcomes with strategic Chinese partners, never underestimate the importance of creating a common vision and a relationship between the people at the top of both organisations. Once there is a clear organisational mandate in place, the mechanics of the partnership become so much easier.
• a trusted third party with knowledge and experience of Chinese culture can be a valuable asset for foreign companies trying to navigate partnerships because they can provide insights and guidance to enable better business outcomes.
• while there might be benefits to going it alone in China, joining forces with the right strategic partner can be a far more effective way to make the most of China’s mass market opportunities.
Nick Henderson is the Director of Asialink Business’ China Practice, a leading Australian centre of excellence for practical business engagement with China.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
20 Dec 2016
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