What will be the role for international entrepreneurs in China’s emerging 2-track economy?

China’s economic development is being pulled in two diverging directions as Beijing struggles to steer a course through this global recession. On one hand, collapsing international demand for Chinese exports has led policy-makers to stimulate the domestic economy with a massive state-directed infrastructure and employment-oriented spending programs. On the other hand, rational leaders know that they can’t simply write off the external economy that has underpinned China’s stunning success over the last decade.

The result is that China will transition to a new 2-track solution that attempts to chart a middle course – a carefully orchestrated set of domestic policies existing in harmony with a vibrant international, market-driven economy.

The question for international managers in China is – where does your business fit in, and how should you guide your company’s development to take advantage of the new economic reality?

2 big trends are shaping China’s future economic development:

State-driven domestic economy. Infrastructure, development of China’s interior and employment-oriented regulations are the hallmarks of Beijing’s new economic policies. The Big Stim is just the beginning of a long term effort by policy-makers to take new control over China’s wild economy. State planning is in (again); anything-goes free market entrepreneurialism is out. While this doesn’t necessarily exclude international businesses, it definitely means that we will all be playing by new – and not particularly level – set of rules and regs. Even private businesses will be expected to play a policy role.

Privatized, internationalized international economy. The external economy has played a huge role in China’s development – especially over the last decade – and no one is ready to close the door on global trade and foreign investment just yet. There will be plenty of room in the new China for internationally-minded managers who can facilitate the movement of investment inward – or help ambitious Chinese corporates set up new facilities abroad. Beijing will always be enthusiastic about keeping Chinese factories busy with overseas manufacturing orders, but the prognosis for international demand picking up to 2007 levels is not good.

What should international managers in China do to survive and prosper from the next phase in China’s economic development?

1) Make your choice and place your bets. There was a time you could stake out a position by just finding bits of the market that were underserved. International marketers hung up a shingle and waited for clients and customers to show up. International managers in China used to describe their business models with phrases like “organic development” and “localizing overseas models”. No more. There’s simply too much competition and too little demand to try to be all things to all people. Chinese domestic markets and multinational markets have diverged, and you try to serve both at your own peril.

2) No more 1st mover advantage. Chinese partners and clients have a deeper appreciation of ‘new and improved’ than other actors. Chinese deal-makers operate under the assumption that there was always a new and potentially better opportunity just beyond the horizon. When YOU were that new player things were just dandy. Now, however, the new guy is a revitalized Chinese entity (very possibly a State owned one) or an innovative foreign invested company that is just entering the market. Brand loyalty has to be earned everywhere, but in China it is a daily affair. Businesses that rely on last year’s models are going to find themselves out-dated in a hurry.

3) Make trends your friends. China has a new position in the global economy, and you want to position yourself for maximum benefit. The new Chinese mega-trends are the middle-class domestic markets, Chinese firms expanding internationally and new foreign direct investment by Western firms searching for fresh markets. Manufacturing models are out, service industries are in.

Further reading:

Efficiency’s Urgent Cry for Attention by Andy Xie. (Caijing.com.cn)
China’s economy has squeezed a lot of growth out of liquidity, exports and new infrastructure. It’s time to embrace efficiency.
http://english.caijing.com.cn/2009-05-25/110170757.html

Asia needs to ditch its growth model By Michael Pettis (FT.com)
The recent upturn in Asian economies is creating a dangerous optimism that almost willfully ignores the difficulties ahead. Future historians will mark 2008 as the year that the development model that has driven much of Asia’s rapid growth for the past two decades went bankrupt.
http://www.ft.com/cms/s/0/91f4357e-44ab-11de-82d6-00144feabdc0.html

Oil and vinegar. Mixed properly, they turn a simple salad into something special. But unless they are properly stirred up then all you’ve got is a layer of bitterness floating over bland & lifeless oil. If something doesn’t energize the ingredients to keep everything active and moving, then you are left with the worst of both worlds.

For the last few years the brisk back & forth of ideas, personnel and trade between China and the US have been stirring things up enough to keep the mix vital and exciting. But now there are signs that the energy needed to keep international exchanges of ideas and high-level trade active is dissipating.

If that happens, it is going to leave us all with a very unpalatable mess.

China and the US are both fairly insular, inward-looking societies when left to their own devices. We like one another well enough when given half a chance and a very good reason for interacting – but our default-mode is to not pay much attention. For much of the last 10 years, mutual engagement seemed to have been a win-win proposition. Since the recession hit, however, both nations have been focusing inward on separate solutions to our individual problems. Whether you feel that is right or wrong, it’s important for managers to know which way the trend is heading.

Moods are solidifying on both sides of the water. The newness is over. Average Americans have come to see China as cheap factory that cranks out low-quality goods and destroys jobs. Chinese have been taught that this American Recession was engineered to undermine China’s economic progress. If the global economy doesn’t improve soon, economic tension will continue to drive a wedge deeper and deeper between Main street views in both countries.

Entropy is replacing energy. The ideas are less big, the ambitions more modest, and the lies are the same old lies. We used to dream bigger. There used to be talk about big initiatives and expansion. Now we’re back to tired bickering about 8% growth targets and exchange rates. The biggest new idea of the last year has been about the renmenbi becoming an international currency (which is unlikely in the next 10 years).

Firewall is working. Don’t underestimate this one. China and the rest of the world have a completely different way of using online tools and communication networks. It’s not about translation – it’s about insularity. Chinese internet users are getting a filtered, localized view of the outside world – and they like it that way. A few years ago, there was talk about the democratizing, leveling effect of the internet. Now it has become a tool for establishing and reinforcing the status quo.

Numbers are falling. Fewer and fewer bright young Chinese grads are getting jobs with multinationals in China. Those companies are sending fewer expats over. In a way, it’s a great sign that localization and efficiency are taking hold. But it’s also keeping a lid on cultural exchanges. Working for an MNC and maybe accepting an overseas posting used to be a pretty standard middle-class aspiration – at least in Shanghai. Now the hot jobs are stable, reliable civil service posts.

Propaganda is working. In the days when a Chinese kid could go to a good local college and have a reasonable expectation of finding a good job with an international firm, we were all able to laugh off the lifeless Chicken-little rhetoric coming out of Xinhua and People’s Daily op-ed section. Not anymore. The young generation, obsessed with the unemployment situation, is far more cynical than the graduating class of 1999. Their resentment and disappointment is being channeled outward – and it is working.

Last night I attended a presentation about the future of business education in China and the US – conducted by a group of very impressive business undergrads. Two teams of students – the Chinese represented by Jiao Tong University’s Antai College of Economics and the Americans from NYU’s Stern School of Business – spoke about the issues and challenges facing the undergraduate business school graduating class of 2019 (i.e.: 10 years from now). While not a debate, each team represented the distinct point of view from their respective institution.

I was struck by two things. First – both groups of undergrads are very much ‘with the program’. Neither side recommended sweeping changes or tearing down of walls. Each side wanted to see administrators execute stated policy more consistently and thoroughly. They critiqued – they didn’t propose and they didn’t rant.

Second – where there were differences between the Chinese and American views, each side defended their system’s approach and methodology. The NYU speakers admired their own school’s commitment to CSR (corporate social responsibility) and international education. The Jiao Tong students would like to get more international exposure and in-class discussion, but saw the Chinese emphasis on lectures and testing as justified and appropriate. Both groups called for adjustments – but also acknowledged that progress was being made.

Anyone who believes that modern Chinese students represent a voice of populist discontent with their system or leadership is very much mistaken. These young people support and reinforce the status quo in China – and they are extremely conscious of it.

Who is calling for change?
The loudest voices for radical reform of the Chinese education system seem to be coming from the New York Times op-ed section and McKinsey & Company. The Jiao Tong sophomores and juniors I heard from acknowledged that the Chinese system emphasizes texts and tests a bit too much – but they didn’t seem overly impressed with the American system of education either. Their view was that universities are about knowledge – and texts are the best source of that knowledge. The Chinese students spoke about refinements and improvements they would like to see, but they seem to feel that their system is functional and effective.

Leaders – not profiteers
I asked each side to rank the goals of undergrad business programs in order of importance – career preparation, developing leadership skills, or prepping students for graduate studies. BOTH sides ended up with the same priorities: Leadership first and career second. Although about 40% of the student audience had plans for go on to grad school, no one seemed to think that preparing students for further study was a priority.

Status quo is ok.
Students from both sides called for incremental changes and refinements to their existing systems. If Chinese students are yearning for increased intellectual freedom and new avenues of expression, then they are keeping that desire quiet. While the NYU students emphasized the benefits of group collaboration, creativity and presentation skills, the Jiao Tong students seemed to be unwilling to sacrifice lecture or study time for soft-skills development. The Chinese representatives were satisfied with their school’s ambitious curriculum and didn’t seem to see any alternative to their existing lecture/exam format.

We are where we are going to end up.
Westerners expecting China’s educated middle class to spearhead tremendous social change aren’t wrong – but they are late. They’ve had the changes. The present status quo in China’s major urban centers seems to be a pretty good indication of where China is going to end up. China’s middle class is emerging into a conservative group that has no intention of discarding or altering basic Chinese cultural characteristics and societal norms. Under their leadership, China will change incrementally and execute on traditional Chinese ideals more consistently and effectively. This is where we are going to end up in China.

I recently has a very interesting talk with a Chinese college student. She exemplifies the new up & coming middle-class Chinese consumer that so many international businesses are pinning their hopes on. She is a grad student majoring in teaching Chinese – but her goal is to work in a Chinese public school and not an international corporation.

Her priorities in life:

She is worried about finding a good job after she graduates - with the government.
She is not considering working for an international company – they are too demanding, unstable, and don’t pay well.
She is consuming more – on make-up, clothes & travel
She is saving less – charging more (and no – she is not paying off her full balance each month)
Her aspirations include foreign travel and a cute BMW.

Back to the New Basics
Gregg Bissky got to heart of an important trend in a recent post on www.ChineseSuccessStories.com when he wrote:

‘Has China changed? Companies bet millions on the answer, but it’s the wrong question. You should ask if Chinese have changed. China has changed; the Chinese haven’t.”

In the 60s the aspiration of the average Chinese consumer was a bicycle, a sewing machine and a wristwatch. Now it’s a credit card, a convertible and international travel. The Chinese haven’t really changed – it’s just their spending habits and aspirations that have adjusted to their hard-won prosperity.

I’m still hearing about the mythical upwardly Chinese with no knowledge of brands and a high savings rate. International businesses are still operating under the assumption that an army of unsophisticated Chinese wage-earnings don’t know how to spend their piles of cash. I think that there was a 2 month period back in 2002 when about 30 Chinese with good jobs didn’t know quite as much about major brands as young Americans or Europeans did. For most of my time in China, I’ve found the under-40 Chinese to be not only knowledgeable about brands – but highly sophisticated and opinionated. They are already spending - and have their own notions of value.

Will Chinese spend the world out of the recession – and put your China-based company back n the black? Maybe the rural population still has room to consume more and save less, but the young urban types are already spending to the max – and running up credit card balances. They aren’t choosing between spending and saving – their choices are between which products or services they will spend on.

One of the prevailing myths about China’s economic development is that China’s middle class would steadily integrate and come to share values with its peers around the world. Newcomers to China often convince themselves that they can move ahead of the curve by offering a product or service that is accepted by global middle class customers and simply wait for Chinese consumers to catch up.

It’s an easy mistake to make since a superficial analysis of China’s commercial centers make them seem westernized enough. Popular brands are thriving and familiar consumer goods and fashions are mainstream.

But just because a few of the names are familiar doesn’t mean that China’s consumers are globalizing. Far from it. There is a clear and growing divide between the new generation of Chinese middle class and that of the West. And if international marketers in China don’t mind the gap, they are going to find themselves taking a very nasty fall.

Digital Divide
The NYTimes has just confirmed a trend I’ve been noticing for a while when it wrote that western media companies were abandoning the China market in favor for India after years of failing to gain a foothold in the PRC. The future of China and the West may be linked, but as the Ministry of Information Industry and the Great Fire_wall of China demonstrate — linked and integrated are two very different things. There exists, between China and the world, a digital divide that is growing and crystallizing. This is a good-news/bad-news scenario for international managers in China.

The bad news is that if you were banking on importing media into China, you can expect to be frozen out of the market — well, forever. The good news? It is very easy to figure out exactly what the Party line is in China. Just go to the People’s Daily online http://english.peopledaily.com.cn/ — the good folks at Xinhua have already done your market research for you. Their op-ed section publishes Chinese popular opinion in advance. If you are not taking advantage of it, then you are squandering a potentially invaluable resource.

Lies, Damned Lies, and Harmony
Do Chinese people believe the CPP party line propaganda? Sure. Just like advertising and press conferences in the West – selling a message is no different from selling any other product or service. Propaganda and advertising are effective – even when you know they’re there. Are Chinese middle class consumers unsophisticated for believing that they should “Cherish the Chinese Dream”?

“Even if challenge is looming ahead for the grads to reach high-flying jobs in their dreams at the time of global crunch, they will still be able to achieve a better living standard than their parents by adjusting their expectations accordingly. As for youngsters, there is always a splendid future ahead of them.”

Maybe it is unsophisticated – but probably no more than believing that Crest toothpaste makes you more attractive or that Fidel Castro wants to undermine your community.

The point is that when developing products and services for the Chinese middle class, the trend is your friend. And if the Chinese Communist Party has put together an effective machine for manufacturing that trend, then you would be crazy not to take advantage of it. Stop waiting for China to change to meet your ideals and acknowledge that middle class buyers in the top 50 – 97 percentile are almost certain to think, feel and react the way they are supposed to.

International marketers in China often fall victim to two grave errors. The first is trying to reinvent the wheel by spending a fortune on market research and hiring expensive personnel to divine the thoughts and aspirations of “real China”. The second is to try to buck those very same trends just because we consider them unsuitable or distasteful. The only trends you really need to get out in front of in China are the ones that officialdom engineer – and they publish those every day. Use them.

International managers in China have to acknowledge some unpleasant facts. The global economy has ratcheted down. We’re not likely to see overseas demand return to 2007 levels for a very long time – if ever. The hottest markets in China are no longer in the glittering showrooms of super-luxury international brands. The real action will be in the boring suburbs and 3rd tier cities – and the buyers will be the REAL Chinese middle class who probably don’t care much if Tiger Woods and Pierce Bronson are sporting the same watch or driving the same car. They will be spending their limited disposable income on their kids’ education, their parents’ health care and their family vacations.

For international managers the challenges are significant – and not everyone will survive. We have to shake off the fantasy that once the economy recovers everything will ‘get back to normal’. In 2010, normal will be new - and potentially difficult.

This week I rode Shanghai’s Line 1 subway to the terminal stop – a non-descript suburban area called XinZhuang. There is not much there to excite most international managers – just mile after mile of apartment complexes and retail shops. It’s 30 minutes from the flashy towers of central Shanghai that Time and CNN represent as the old ‘New China’ – and it represents the REAL future for international marketers. My Chinese friend told me that in her housing development alone, there were 2 kindergartens – and they were both very expensive because demand was so high. The place is packed with genuine middle-class Chinese earning in the neighborhood of rmb 10,000 – 30,000 per month. These folks aren’t buying Porches or Rolexes, but they aren’t stuffing money under the mattress, either. They are real spenders – but only when they see real value.

Our challenge is to find new methods and models for accessing these long-overlooked communities of ‘normal’ Chinese consumers. Their numbers are huge, but their income is modest. If international marketers can’t find ways to access China’s mass market, then they will become irrelevant. That means forming new types of partnerships with local retailers and focusing on value. Family-oriented services are in – prestige brands are out.

Middle class Chinese consumers are indeed aspirational – but their aspirations aren’t the same as YOUR aspirations. They want to be admired for taking care of their families, educating their kids and being part of their local community. Now take a look at your product or service and ask yourself some tough question – Would a regular Chinese family know what to do with your product? Is your customer service department set up to handle real Chinese buyers? Are regular Chinese consumers comfortable walking into your business or meeting with your sales people?

If you have built a brand that intimidates or confuses the sub-rmb30,000/month set, then you may be positioning yourself right out of the most important market of 2010 and beyond.

I call them Accidental Expats. They are the American business owners and senior managers who had never really considered setting up shop in China – not while the US market was big & active enough to support their growth strategies.

They’ve got nothing against China per se. They just used to consider it an unnecessary risk and huge inconvenience. But now, of course, times are changing. I’m already starting to hear from lots of Americans I haven’t spoken with in a while. When I first moved to Shanghai they had no idea why I was doing it. Now they want to know how they can do it.

What do you tell your American friends and colleagues when they put out feelers about setting up shop in China?

Remember – these are the guys who never really wanted to be here before – even during China’s previous booms. These are the head-down, show-me-the-numbers business owners and managers who aren’t easily impressed by big numbers and pie-in-the-sky stories of 1.3 billion customers. On the other hand, if you start out by telling them your funny stories about bureaucracy, corruption and HR travails, you’ll scare them off in a hurry. So what’s the middle-path for helping potential partners, investors or clients find their way into China?

They want to hear about process, safety, QC and regulations. These Accidental Expats want the facts about set-up and operation. It’s important to take a balanced approach – don’t scare them away, but don’t talk about how easy it is. Your value is in being able to provide solutions to problems that they don’t know they have yet.

There are two main guidelines when talking to newcomers to China

1) Be honest about what you want/need/expect. If it’s just a couple of old high-school friends shooting the breeze about life & business in China, then great. Have fun. But if you expect this conversation to turn into business or investment down the line – then you are advised to make this part of the discussion EARLY and OFTEN. New consultants and entrepreneurs often drop the ball here. One potential problem is being too subtle and clever – assuming that your value will be obvious and of course they eventually get around to talking about how much money they want to pay you or invest in your company. The reality is that this is not an organic conversation that will inevitably take place. In fact, it may not even occur to your hometown contact – until you plant the seed. Being TOO aggressive and sales-y is also bad – but it’s still better. Overseas inquiries start off friendly and simple, but can quickly escalate into full-blown research projects.

2) Goal-setting is their No.1 challenge – and your main value to them. US business owners are probably going to try to get very granular and specific way too early in the conversation. If you want to avoid difficulties later in the process, you are strongly advised to start the China conversation by making them come up with realistic goals – and a budget – for their China entry. Westerners will talk your ear off about profit splits and market plans – but if they don’t know how much money they have to invest in China or what they expect to get out their investment, then someone has a problem. Make sure it’s not yours. If your home-town connection is still in the ‘big-picture’ stages of his China plans, then the best thing you can do is persuade him to invest in 10 day trip over here. Don’t try to plan a China business for someone who has never set foot in Mainland China.

Remember – most inquiries will NOT result in business, so qualify early and don’t pin your hopes on a single email or phone call. Your first conversation should be 30 minutes or less. If you don’t plan on working for free, make sure you discuss your expectations at the end of the first conversation.

Recessions end with boredom. When people finally say, “oh, hell. I guess it’s time to do something” then spending and hiring start again. Even if the recent stock market rally turns out to be nothing, there are still enough signs we’ve bottomed out to start plotting out our next steps. It may not be good, but it looks stable. The economics report isn’t thrilling any more. That means that people are planning again - and our old friends, colleagues and distant relatives are waking up to the fact that, like it or not, they are going to have to look to China for markets.

If you are a China-based expat looking for an injection of capital or an unwilling consultant trying to make your way in Shanghai, you can expect the frequency of the “business entry inquiry” calls. To new consultants they seem like real clients and to business owners they may sound like competitors. In the world of consulting, these first-time inquirers occupy a strange space somewhere between potential gold-strike and competitive blood-sucker.

How do you handle the ‘general inquiry’ from a western business looking at China for the first time? First, know the answer to these three questions:

Now people are starting to plan.
It’s great that people in the US and Europe are taking a new interest in setting up operations in China. But if you’ve never had serious negotiations with a potential business-entry client, you have to be careful. You can end up doing far too much work for far too little compensation OR recognition. But even worse, you can end up being led around by the nose and end up signing agreements that are harmful to your long-term financial health.

How to prepare for your first Western partner or client – the Expat edition

Here are the three questions you need to get straight BEFORE you pick up the phone and start talking to high-potential strangers. If you answers are, “it depends”, “it’s impossible to know” or “every situation is different”, then you are missing the point. You are will be involved with what some people consider to be high-stress dialogues – talking about money, selling yourself (or your business – which is pretty much the same thing) and setting commitments. You’ll have more than enough flexibility when your prospect asks you ‘how much?’ out of the blue. The problem is that you won’t know what to say when you have to say it. So have good, solid answers to these questions:

How far are you going on a first date? How much are you gonna give away for free?
Experienced consultants have learned where to draw the line – and it’s remarkably close to where they’re standing. They don’t do work on spec – and they don’t give away too much in the proposal stage. Lots of novice contractors will be tricked into solving the problem they are bidding on in order to prove that they can really solve the problem. The less you say the better.
One good solution to this is a website or blog that clearly demonstrates your ability, expertise and specialties without doing customized problem solving for every inquiry. Many successful consultants write up a boiler-plate summary of services and maybe a case study or two and use that to close on the first appointment. The new consultant conundrum – you will be asked to work for free in order to get paying work.

Are you specialist or generalist?
Right now you may still be broke (or afraid of becoming broke), so you’re thinking that you’ll be anything you need to be. The problem is, the moment you get one job, client or partner then you are too busy too look for new work. That means it’s easy to drift off into directions you never anticipated. Plan early – are you an industry specialist, a client specialist or a generalist?

Generalists work more, but Specialists get paid more. It’s normal for consultants to start of as generalists and let the market determine their specialty for them. If 65% of your business is doing feasibility studies for French-Chinese JVs involved in real estate development in 3rd tier cities – then that’s your specialty. If you want it to be otherwise, you have to pick a target market at work it. There are basically two classes of specialty for business consultants – client specialists and service specialists. Client specialists are valued because of the people they know and industry knowledge they possess. It’s common to see former engineers marketing a range of services to other engineers. On the other hand, some consultants are specialists at solving a specific problem that they perform for a wide range of clients.

Are you looking for a commitment?
Be honest here: Do you want a job from a client? Do you want a partnership (i.e.: cash injection) from a supplier or client? Don’t pussy-foot around your real goals – but don’t look desperate here either. Most new consultants look desperate while existing businesses will grow old waiting for someone to ask them to dance. If you are the one proposing a deal then you are the one who has to come up with a price and terms. If they are proposing the business then they should state their numbers first.

Consultants – unless the other guy brings up a job offer, don’t mention it until after you have settled on a price and signed a contract. Your best approach is to wait for something to go right early and then use hiring as part of an up-sell. If you bring the fact that you want a job with them too early, you’ll never get paid – and might not get hired.

Existing businesses looking for cash or commitment from partners – ask them if they have plans to expand their operation in China. If there’s any hope here, start insinuating yourself into their plans. Start with basic biz entry assist, and keeping a dedicated staffer on just for them (who pays for them is to be negotiated). Hint: Decide EARLY if and when this becomes a competitive issue. Lots of business owners tend to freeze up here – one minute seeing a potential partner and next imagining an insidious foe. If you really can’t decide, then pass before it causes ulcers.

Next: Exploiting your advantages

If you haven’t read the McKinsey paper on China’s Wealthy – take a look. It’s a beautiful publication – and really reinforces the notion of China as the new super-consumer. The paper is full of tasteful shots of young, attractive Chinese people buying wine together and enjoying one another’s company in shopping malls.

But what caught my eye was on page 9 - the size of wealthy population. Less than 1% of urban Chinese households are wealthy – compared to 10% in US, Germany and Japan. But the Chinese are growing their wealthy component fast – around 16% per year. So we can expect China’s wealthy to rise to maybe 2% the population in 5 years. McKinsey says 4 million households by 2015. It’s not a huge number – but China is a developing economy and maybe McK set the bar too high.

How do they define ‘wealthy’ in China? In a footnote on page 8, McKinsey identifies as wealthy the 1.6 million Chinese earning 250,000 rmb per year or more. Unless I get my basic arithmetic wrong (and it’s been known to happen) we’re talking about people earning upwards of 20,800 rmb per month – or just shy of US$40 K a year.

The hopes of the commercial universe are riding on them – this small band of brave uber-consumers.

The Real Chinese Middle Class vs. the Imagined Chinese Middle Class
It may not have been their intent, but the McKinsey report demonstrates just how thin the upscale Chinese market is. If your business model used to be tailored to a ‘middle class expat’ market that is rapidly disappearing, then you’re already finding that the ‘middle class Chinese’ market is both unwilling and unable to fill the void. McKinsey’s “wealthy Chinese” aren’t packing that much of a punch in terms of numbers or spending potential.

Many westerners leaf through McKinsey type reports and conclude that China can support a lot more high-end spending than it really can. China per capita GDP for 2008 was in the neighborhood of US$3,000. They’re doing great – when I first came here it was barely $1800. Kudos to you China. Kudos.

But we’ve got to be careful which myths we allow ourselves to believe. The notion that an army of Chinese super-spenders with piles of disposable income saving are mobilizing to rescue the global economy – and our favorite little Shanghai bistro – is just wishful thinking. If your China business model still includes lots of foot traffic from “middle class Chinese earning 50 or 60,000 rmb / month “, then you’ve got to go back to the drawing board. Those days are over – and they are not likely to come back any time soon.

How to market to the RCMC - the Real Chinese Middle Class

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There was a group of 12 young people in a room. 7 of them some degree of Chinese (from local Mainland to American-Chinese). 5 of them Western.

I asked them whether they agreed or disagreed with the following statement:

“A bad decision is better than no decision.”

100% of the western kids said “better to make a bad decision’.
100% of the ethnic Chinese kids said ‘Better to make no decision’.

Common sense isn’t common (though it can be sensible)

Common sense is different in each culture. If you grew up in an American household, you were probably taught that action and activity were better than indecision and inertia. Chinese people think this is nuts. They understand your intellectual reasoning – that action increases knowledge and forces progress – they just think it’s insane. When confronted with a new and potentially risky situation, Chinese will wait for more information or for the environment to change. Chinese business people don’t mind the risk of loss – but the risk of uncertainty really bothers them. They would rather wait and delay making decisions altogether until the situation clarifies.

Significant Cultural Difference => Significant Commercial Difference

The “bad decision vs. no decision” discussion isn’t a new exercise. It’s based on some old HBR article that’s been kicking around forever, and every International Management instructor uses it at some point. But when markets were jumping, the cultural difference favored western decision-making. The rising tide was lifting all boats, so it didn’t really matter which one you hopped into – as long as you picked one. The losers were the guys who waited too long to make a choice and lost their opportunity.

In choppy or declining markets, the advantage shifts to the conservative decision-maker. Over the last year, the quick and the bold were hammered. People who thrash around in the quicksand of collapsing demand are the first to get sucked under. When the situation is as unclear as it is right now, the downside risk of loss starts outweighs the upside opportunity for gain. Right now we are getting mixed signals – and there is a lot of talk about inflation and a second recession in 2010 or 11. China-based managers may feel that they have enough to worry about, but there’s always more.

One of the strengths of the go-go American can-do attitude is that we always look for the light. We keep moving, keep trying to make progress. But in China that can lead to friction when our Chinese partners, clients and suppliers take exactly the opposite path and hunker down to wait out the bad times.

Still not time to chomp at the bit

We’re moving back to the ‘hurry up and wait’ mode of Chinese business. Everyone wants to see all the numbers and brochures like they’re about to make a decision – but then nothing. Even though this is traditionally busy time in China, business is still pretty dry for lots of us.

China’s international management set is advised to take it slow. Remember – the most dangerous thing about a recession isn’t its severity, but rather its duration. Just because you are ready for big action doesn’t mean your colleagues and clients are. Keep supplying your prospects with data and keep the contacts alive. The last thing you want to say to a potential Chinese client or partner right now is, “it’s now or never”. Under these uncertain market conditions, they will invariably tell you “never” – and mean it.

Read a different perspective on the issue at ChineseNegotiation.com
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