By Chris Anklin & Dan Voellm
February 2013

Compelling growth stories firmly position Asia, especially China, as the market to be in for the foreseeable future. As a result, many Western companies are making or planning their entry. While we live in a globalized world, Beijing is not Berlin, Tianjin is not Toronto, and Shanghai is not San Francisco. In a rush to catch up with more experienced players, some companies are entering the market headlong and ill-prepared. The greatest potential pitfall for these new entrants stems from a lack of understanding, not only of the cultural nuances at play, but of the way of doing business. Using the Western mindset and business framework to assess situations and options can leave these companies blind to the realities on the ground.

How to Enter?

In order to tap into local expertise and gain near instant access to the local market, many new entrants are considering a joint venture (JV) with a local company. Alternatively, they ‘go it alone’ and face similar challenges but in a different context. First and foremost these companies need to understand that, as opposed to their country of origin, they are unlikely to be in a dominant position. Foreign companies might perceive their products, people, access to markets, or financial backing to be their strong points. A local partner’s objectives however might be very different - solely the affiliation with a foreign company is already a boost to the local firm’s standing. The local partner can also gain political leverage when they help to secure foreign investment into a community. Knowledge-transfer in a JV is a widely publicized phenomenon but not always the main challenge. Understanding the internal structure of partner companies and knowing the decision makers is critical, since they might be different from those on the organization chart.

Things are not always what they seem and should therefore not be taken at face value. New entrants should be sure that they fully understand the local company’s motivation to enter into a partnership. Looser regulatory environments and home-player advantage can result in sudden and drastic changes for doing business as a foreign entity.

Negotiation

The Western procedure for negotiations assumes that both parties discuss terms until a mutually acceptable position has been achieved. This is followed by a shake of hands and the drawing up and signing of a contract. This dictates the terms of the relationship and can be referred back to whenever there is a disagreement, as well as serve as a basis for future contracts.

In China, personal relationships between key individuals, spending time with each other and their families, are more important than any contract terms. Unofficial communication on the sidelines of negotiations is more efficient than what is discussed in an official meeting. A contract is a first step in developing a long-tem relationship.

Managing Relationships

Getting to know the local party doesn’t happen overnight. Relations in China develop slowly yet evolve continuously. This requires the type of long-term thinking which the country’s political leadership is known for, yet which does not easily reconcile with the short-term shareholder and management thinking among foreign listed companies. Buddhism and Confucianism have also influenced the way of doing business – harmony and relationships (guanxi) are paramount; silence and politeness are the basics; and trust and tolerance, the working pieces.

Some Western companies have been known to face ongoing issues with their business partners, such as sluggishness to react, perceived uncooperative attitudes and a sense of being struck down whenever a request is made. This may stem from something “done wrong” in the view of their partners. This is rarely communicated by their counterparts for the loss of face. Unofficial channels of communication thus become important, and intermediaries are used to break impasses and repair the relationship.

An executive whose habit is to be personally dominant and assert the company’s power is likely to struggle, failing to pick up the more subtle cues.

In light of all these considerations, great prudence is recommended before making bold moves into China. Companies are advised to make sure that they know who they are dealing with and what the nature of that deal is, and to carefully evaluate the character of the executives they assign to the region

---

About Chris Anklin
After graduating from Ecole hôtelière de Lausanne, Chris joined HVS Executive Search in London where he spent four years recruiting senior executives for hotel management companies such as Hilton Worldwide, Marriott and Rezidor, adding to their stable of hotel developers, architects, project managers and operations executives. Chris transferred to HVS Executive Search Hong Kong in 2009 to apply his skills and expertise in the Asia-Pacific region.




About Dan Voellm
Also a Lausanne graduate, Dan Voellm is Managing Director of HVS Hong Kong’s Consulting and Valuation operation. Dan joined HVS in New York in 2005 becoming familiar with the US market through numerous appraisals before relocating to Hong Kong in 2008. Dan conducts market and economic feasibility studies, appraisals and consulting work in China and throughout Asia-Pacific


About HVS
HVS is the world’s leading consulting and services organization focused on the hotel, restaurant, shared ownership, gaming, and leisure industries. Established in 1980, the company performs more than 2,000 assignments per year for virtually every major industry participant. HVS principals are regarded as the leading professionals in their respective regions of the globe. Through a worldwide network of 30 offices staffed by 400 seasoned industry professionals, HVS provides an unparalleled range of complementary services for the hospitality industry. For further information regarding our expertise and specifics about our services, please visit www.hvs.com.