Does your China business specialize, or are you a generalist?

The answer to that shouldn’t be a story or a long, vague discussion. If there is a difference between your target market and your actual buyers, then you have a problem on your hands. During boom markets the specialist-generalist dichotomy doesn’t matter a great deal. When markets are growing, many businesses find themselves with more clients than they can handle, so the idea of market segments and targeting seems academic and unimportant.

But now your situation has changed. Suddenly, you have lots of inventory (or in the case of service providers, idle staff) and few buyers. Making sales is no longer as simple as answering the phone when it rings. Now you need to actively convince clients and customers that A) they need some product or service, and B) you are the best choice.

This is a great time to figure out if you should be a specialist or a generalist.

Marketing in Times of Shortage vs. Surplus
If you have goods for sale during times of shortage, then you are in a very powerful position. You can do business with whomever you want to, and you have latitude to set prices (to some degree).

Marketing during times of surplus and oversupply, on the other hand, puts in a weaker position. Often called a Buyer’s Market, there are more sellers than the market needs to maintain a stable, ‘equilibrium’ price, and sellers have to drop prices or raise service in order to clear their inventory.

We can think of recessionary markets as one big surplus. The number of shops and businesses remains the same (or drops over time) — but the number of MOTIVATED buyers plummets. This is particularly true in China, where locals have a strong tradition of saving and are less disposed towards credit.

This is exactly the point where many expat business owners realize that they don’t have a clear picture of who their market really is. I know of one business that has been doing well selling expensive, sophisticated financial services in Shanghai. Who are their clients? They have no idea. I asked them once – the owners told me that they would sell to anyone who has money. Well, during a raging boom that is one really cute answer. But now they are scrambling around desperate to come up with a strategy that will keep their doors open through Chinese New Year. After that, they are simply flying blind.

If you are just now coming to grips with the idea that you have no idea who your clients are or what they want – and yes, this may mean you or someone you work for – then a good place to start your investigation is to determine if you are a specialist or a generalist.

Specialists are very good at a few things
You can specialize in a client type or a product/service type. Specialists have answers and solutions. You are expected to know more about one aspect of your client’s business or challenges than he does. You may sell a product – but specialists always offer value-added knowledge and information as well. If you change, expand or redefine your specialty each time a new prospect appears, then you are NOT really specializing.

In boom-times, specialist can charge more. In recessionary markets, specialists will attract more buyers – though they will still feel pressure to cut prices.

Generalists add value by being all things to all people.
Think of generalists as shopping centers or department stores. They offer a wide range of goods and/or services, and their main value-added is convenience and variety. If you tout yourself as a “one stop shop” or the place to solve a wide range of problems then you are a generalist. Generalists can be very successful, but only if they understand their real value to the customer. Convenience, low price, and high service. Generalists often use a loss-leader approach, where they attract customers with one high-value, low-price product, but then sell the client more goods or services.

What about Service?
Both specialists and generalists need to offer service, but they are different.

Specialists need to be expert in some aspect of their client’s business. They are the doctors of the business world. Specialists fix problems, offer alternatives, provide solutions and are a resource for the client’s business or life. Specialists who can actually solve problems have a great deal of leverage with prospective buyers, and their advice is an important competitive advantage. Beware of building a “specialty” business around one or two anonymous experts but staffed by low-paid clerks and salesmen who don’t have sufficient experience or knowledge to provide value.

Generalists have to be good at process-oriented service. Deep inventory, wide variety, new products, sufficient staff, convenience, ease of transaction and acceptable after-sales service. If you think of yourself as a generalist but hear your staff saying things like, “we don’t have that here, we don’t do that, you’ll have to talk to the manager and I don’t know when he’ll be back, etc”, then you are dropping the ball. Generalists are about convenience. Once a customer has to go somewhere else to solve a problem then you may never see them again.

Deciding if you are a specialist or a generalist is a great first step towards overhauling your business model and creating a more competitive business.

Maybe this is a good time to re-activate your OLD network. I mean the one back home. It’s holiday time and you’ll be talking to lots of old friends. Try looking through your old books of business cards or Outlook address books and reconnecting with former associates. Right now, managers are being defensive and thinking about ways to cut costs. In a little while, however, businesses will start looking for ways to grow the top line.

Many Americans who hadn’t seriously considered building a presence in China before may be much more open to the idea in 2009. These people are going to make excellent partners for someone. Consider now whether or not you can benefit from a cross-border tie-up - and then use the holiday season to get the ball rolling.

Don’t be too surprised if there is a lot more interest in expanding to China than there has been for quite a few years. I remember heading back to NY after my first year in Shanghai back in 2002 – everyone was fascinated by what I had to say. Each year after that the response grew more and more jaded, and it seemed that China was old news.

Well, people are interested again. And while in 2002 China was a manufacturing story, today it is a market story. And your old colleagues and classmates are going to be desperate for new markets in 2009.

This could be a great opportunity for you to find new partners and tie-ups with US B2B service firms who need access to the China market. US firms who are new to China actually make great natural partners for expat entrepreneurs who already know the ropes about business set-up and marketing.

Put out a few feelers over the holiday season and see what kind of response you get. Don’t be surprised if you get a lot of interest – just make sure that you have interest in them.
___________

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We’re getting a little more visibility into the nature of this crisis, and the good news is that we are starting to understand the bad news. China isn’t going to be a safe haven – though it may not be battered as badly as the US and Europe.

But just because China will be less damaged, it doesn’t mean that all you have to do is wait for things to become ‘normal’ again after Chinese New Year. Your business model is going to change over the next few quarters. The only choice you have is about what will drive those changes – you, or the market.

This is one of those times when not deciding is a decision – and a poor one.

Not everyone will be equal
In a recession, not all companies are created equal. Trusted brands tend to outperform commodity sellers. Low cost operations survive while companies with high burn-rates tend to get washed away. Low debt, high cash flow is good – negative cash is bad. Strong teams with good morale stick together – staffs that hate their boss and the company tend to fall apart.

But surviving a global downturn goes beyond hygiene issues. Now is the time to take a long, hard look at your business model and operating procedures and decide how they will change under a number of scenarios. Just in case you’re wondering, the near-term environment will probably see the Chinese economy go sub-7% growth for at least a couple of months in Q1-09. Business demand for goods and services will continue to drop, and consumers are going to lock-down their spending. It’s a buyers market – and you’re a seller.

Who benefits?
When the killing fields are strewn with bodies then scavengers get fat. Don’t fall into the trap of “waiting this thing out”. Plenty of expat managers I know are hunkering down and crossing days off the calendar, waiting for this economic illness to pass. Unfortunately only surgery will cure this set of ailments – and when the global economy starts cutting it uses a very sharp, very wide blade. But it won’t cut all businesses. Big competitors with cash in the bank, low debt and good operating procedures will be expanding and acquiring. As soon as the Western economies hit bottom and show signs of a recovery, look for the big multinationals to start pouring more resources into their China marketing plans, since this will be one of the stronger markets left in the world. You only THINK that you’re in a holding pattern – in fact, you may be losing ground by inches every day.

Cost cutting / Price cutting
Every time you want to cut your costs it means that someone else is lowering their price. (Suppliers are giving you a better price when you buy, but also have to lower prices to attract other buyers to replace you when you don’t buy.) When your customers try to cut costs, they are demanding that YOU lower prices. That means that simply reducing your operating expenses is not going to get you clear of this thing. You need to change the basic way your business operates.

Any good news?
You now have a rare opportunity to adjust your business model – so long as you don’t alienate your market. I know of plenty of expat businesses in China that grew ‘organically’ – which usually means no plan or structure. They stumbled upon a niche and started coasting on the success of one or two offerings. Well, now is a great time to take what you have learned and reinvent your business. Now is the time to do a little market research, talk to your core customers, brainstorm with your top managers, take a walk on a warm beach – do whatever you have to do in order to come up with an answer to 2 simple questions:

1) Who will our customers/clients be in 18 months?
2) What kind of organization should we become to add the most value to those buyers?

Once you know the answers to those questions, then you can start planning your immediate survival strategy. Until then, you are just running up the down escalator – with no idea where it goes.

I don’t want to be the bearer of any more bad news, so I’ll let two other guys do it. Thomas Friedman, recent recipient of the Nobel Prize for Economics, and Oliver Blanchard, the IMF’s chief economist both coming out with the same message over the weekend: this global recession will likely be with us for 2 years.

Most businesses I know of in Shanghai are taking a ‘wait it out’ approach. We’ll trim variable costs where we can, lower prices when possible and hope that this is over by the time we get back from Chinese New Year in February.

Reactive strategies make sense when the future is unclear and the situation is not very stable. But unfortunately, right now we have a fairly stable situation and there is an uncommon degree of consensus as to where we are headed. We are going to touch bottom by the second quarter of 2009 – and stay there for a very long time.

Your China business plan is about to change. You can rewrite – or you can let the recession do it for you.

What’s the plan, Expat Man?
So, where does this leave YOU? After the initial panic and doom saying, most managers got back to some kind of business as usually. You may have trimmed costs here and there, but you probably haven’t rewritten you business plan – yet. Well, do that now. Because the ‘batten down the hatches, point the bow into the wave and wait out the storm’ isn’t going to work this time.

We are not living through normal times. ‘Business as usual’ doesn’t exist anymore. If you don’t face this thing head on and make a drastic new plan for this long-term global crisis, then you are simply going to be swept away.

Some light reading for a gloomy Monday morning:

We Found the W.M.D.
http://www.nytimes.com/2008/11/23/opinion/23friedman.html?em
THOMAS L. FRIEDMAN
Published: November 22, 2008
So, I have a confession and a suggestion. The confession: I go into restaurants these days, look around at the tables often still crowded with young people, and I have this urge to go from table to table and say: “You don’t know me, but I have to tell you that you shouldn’t be here. You should be saving your money. You should be home eating tuna fish. This financial crisis is so far from over. We are just at the end of the beginning. Please, wrap up that steak in a doggy bag and go home.”

Worst of financial crisis yet to come: IMF chief economist
http://www.breitbart.com/article.php?id=081122230427.xqkurulg&show_article=1

The IMF’s chief economist has warned that the global financial crisis is set to worsen and that the situation will not improve until 2010, a report said Saturday.

Olivier Blanchard also warned that the institution does not have the funds to solve every economic problem. “The worst is yet to come,” Blanchard said in an interview with the Finanz und Wirtschaft newspaper, adding that “a lot of time is needed before the situation becomes normal.”

‘Race to the Bottom’. Just a few months ago it referred to the competition to offer western brands and B2B buyers the lowest possible price on manufactured goods. Now when people say ‘race to the bottom’ they’re probably talking about reaching the bottom of this economic spiral. NY and Washington keep supplying us with a steady stream of bad news — the stock market is finding new lows while unemployment is climbing to highs unseen in 25 years.

But it’s not about numbers or statistics anymore — now it’s about sentiment and attitude. As leaders and managers, you have to control your emotions and maintain a hopeful, optimistic demeanor. If your Chinese team sees you lose faith in your own company, they are going to stop trying. (That’s assuming that they really ARE trying now — but that’s for another day.)

For more on looking brave…

Stiff Upper Lip - But No BS

When you can’t alter reality, you should try your best to manage perception. Don’t lie — but don’t unburden yourself to your team. You will still need some of these people to show up for work a year from now - when things may be much worse.

It’s all about how you spin things. If you go around saying, “no problem” - then you’re going to look nuts. But if you are running around like Chicken Little talking about the sky falling, then your team is going to listen to you and go catatonic right along with you.

The key thing for young managers to realize is that this could last for quite a while. Whatever your strategy for survival, good morale and confident workers are going to help. If you start staring off into space and muttering ‘there’s no hope. we’re all doomed’, then your people are going to believe you.
You want to be setting a course that you can live by for the next 18 months if you have to.

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It’s time for some of you to start considering partnerships. The bad news is that you are facing an existential crisis – if you don’t find new sources of cash-flow, investment and markets, then this isn’t going to work much longer. The worse news is that Chinese partners are difficult to work with, hard to get value out of and China JVs are money pits.

Think different. Think about those established but shell-shocked service businesses back in the US. Old companies – with assets and retained earnings – are suddenly feeling very vulnerable and open to new ideas. They need long term growth options, they need markets, they need a big idea. They need China - or at least think they do.

Sure – the big guys are all here already, and so are a lot of the medium sized US service companies with solid track records and healthy balance sheets. But the one’s who aren’t here yet are sure thinking about it a lot these days.

Maybe this is something worth investigating – while you still have time.

China interest is rising again – as the market of last resort.
You have a bullet-proof opening line that will get you connected with any counterparty you want – and they will be interested, engaged and eager to hear what you have to say. The catch is that only works once, and you have to do it now (or soon):

“I’m an expat-managed / foreign-invested business in Shanghai, and I’m looking for a strategic partner who wants to help me grow markets in China and the US”. Then you shut up.

This is one of those great times when China accesses seems like the Holy Grail, and for all they know you are really capable and talented. You don’t have to tell them about your own struggles and headaches – not yet anyway. You are a much more appropriate partner for a newbie Westerner than 99.9% of local businesses or consultants – because you actually know what their problems will be and how to solve them! What you need to do is get the other guy talking about his goals — and then bookmarking spots where you can add value. Before you know it, you’ll understand HIS China wish-list better than he does. Then you can start discussing whether or not you have the beginnings of a deal.

If you are a Westerner in China, your value is shifting. You used to be valuable because you could make thinks work in Shanghai and Beijing. Now your value may be that you can make things work in NY and San Francisco.

—————–

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When I talk to people in New York about the economy, I know exactly how they feel. I’ve lived through recessions and long bouts of high unemployment. I know how it feels, how it looks, how it smells. I don’t know exactly how Shanghai feels right now – but the mood doesn’t seem all that gloomy. Shanghai wants to just keep plugging along like nothing is wrong. China has confounded doomsayers before, and we may be seeing it again.

How bad can the recession in Shanghai be? A little bit of slow business, a little bit of price-cutting… Soon enough we’ll have our new boom or recovery or value chain climb. Speculative bubbles, inflation, stock market crash, drop in global demand – we’ve been there, seen that, and were not impressed. No one is going around like this is the end of the world. People are still pretty relaxed and upbeat.

Maybe Shanghai is just that tough. Like New York, but on Prozac.

Inflation: GOOD, Deflation: BAD

Yeah, Shanghai could probably slow-dance through this whole global downturn without even noticing it much – if it stays like this. As long as the big global companies keep their Shanghai offices 75% staffed - the general level of activity on the Bund and in XinTianDi should be lively and fun. A few places will close and fewer will open, but it’ll still be hard to find a cab on Friday nights.

No, a standard NY-style recession isn’t going to throw the China train off the rails – it probably won’t even slow it down much. The only real danger is a deflationary spiral of price-cuts leading to bankruptcy leading to unemployment leading to lower demand leading to more price cuts… etc. Then people clear out. The problem with deflationary spirals is: A) they’re not really all that common in fact (though economists love talking about them because they’re about the sexiest thing in the dismal science of economics) B) you almost never see them coming because they look like something else. They look like business is lousy – which is nothing all that new to retailers and sales managers.

Deflationary cycles come from desperation and fear. You are a business owner who buys from a supplier and sells to a customer. When customers buy less, your inventory piles up – then you cut orders to your supplier. Now there are 3 people who don’t want to buy anything new – you, client and supplier. So what happens? You start lowering your prices to get your inventory out the door while it still has some value to someone. This not only devalues the rest of your inventory – but also your client’s and supplier’s inventory. The value of your entire supply chain sinks – all the way back to the processor of raw materials.

China is particularly vulnerable to deflationary cycles, because so much of its economy is tied to manufacturing – which is particularly vulnerable to deflation. Think of 3 guys – one sells coal, one sells computers and one sells vegetables. The vegetable guy has a couple of days before his inventory loses most of its value. The computer guy is next – he has a couple of weeks or months, but once a new model comes out his inventory loses value as well. The only one that can possibly benefit is the guy with coal – or other natural resources. Coal and oil can stay in the ground and wait for better days. China’s economy is heavily weighted towards deflation-prone manufacturing. That’s why people keep talking about how damaging deflation could be in China.

The last place you want to be is on the tail end of a deflationary spiral. They’re bad enough if you know what’s going on – but if one sneaks up on you then you’re dead. If you do have idle workers sitting around with time on their hands, have them do a detailed competitive analysis of people targeting your demographic. Are they cutting price gradually, or aggressively? Are they cutting back on product lines, or introducing new services? Make sure you understand what’s really happening in your sector of the market. If the ground is melting under you feet, you’ll have to step quickly or get sucked down.

When I talk to people in New York, I know exactly how they feel. I’ve lived through recessions and long bouts of high unemployment. I know how it feels, how it looks, how it smells. I don’t know exactly how Shanghai feels right now – but the mood doesn’t seem all that gloomy. Shanghai wants to just keep plugging along like nothing is wrong. China has confounded doomsayers before, and we may be seeing it again.

How bad can the recession in Shanghai be? A little bit of slow business, a little bit of price-cutting… Soon enough we’ll have our new boom or recovery or value chain climb. Speculative bubbles, inflation, stock market crash, drop in global demand – we’ve been there, seen that, and were not impressed. No one is going around like this is the end of the world. People are still pretty relaxed and upbeat.

Maybe Shanghai is just that tough. Like New York, but on Prozac.

Inflation: GOOD, Deflation: BAD

Yeah, Shanghai could probably slow-dance through this whole global downturn without even noticing it much – if it stays like this. As long as the big global companies keep their Shanghai offices 75% staffed - the general level of activity on the Bund and in XinTianDi should be lively and fun. A few places will close and fewer will open, but it’ll still be hard to find a cab on Friday nights.

No, a standard NY-style recession isn’t going to throw the China train off the rails – it probably won’t even slow it down much. The only real danger is a deflationary spiral of price-cuts leading to bankruptcy leading to unemployment leading to lower demand leading to more price cuts… etc. Then people clear out. The problem with deflationary spirals is: A) they’re not really all that common in fact (though economists love talking about them because they’re about the sexiest thing in the dismal science of economics) B) you almost never see them coming because they look like something else. They look like business is lousy – which is nothing all that new to retailers and sales managers.

Deflationary cycles come from desperation and fear. You are a business owner who buys from a supplier and sells to a customer. When customers buy less, your inventory piles up – then you cut orders to your supplier. Now there are 3 people who don’t want to buy anything new – you, client and supplier. So what happens? You start lowering your prices to get your inventory out the door while it still has some value to someone. This not only devalues the rest of your inventory – but also your client’s and supplier’s inventory. The value of your entire supply chain sinks – all the way back to the processor of raw materials.

China is particularly vulnerable to deflationary cycles, because so much of its economy is tied to manufacturing – which is particularly vulnerable to deflation. Think of 3 guys – one sells coal, one sells computers and one sells vegetables. The vegetable guy has a couple of days before his inventory loses most of its value. The computer guy is next – he has a couple of weeks or months, but once a new model comes out his inventory loses value as well. The only one that can possibly benefit is the guy with coal – or other natural resources. Coal and oil can stay in the ground and wait for better days. China’s economy is heavily weighted towards deflation-prone manufacturing. That’s why people keep talking about how damaging deflation could be in China.

The last place you want to be is on the tail end of a deflationary spiral. They’re bad enough if you know what’s going on – but if one sneaks up on you then you’re dead. If you do have idle workers sitting around with time on their hands, have them do a detailed competitive analysis of people targeting your demographic. Are they cutting price gradually, or aggressively? Are they cutting back on product lines, or introducing new services? Make sure you understand what’s really happening in your sector of the market.

There will soon come a time when courageous China entrepreneurs huddle around a map with blue pins that represent new openings and red pins showing planned new opening. But not today. Today we are thinking about staying the same size – or about getting smaller. Lots of people should be thinking about the most orderly way to get smaller – maybe 25 – 50% smaller for the few quarters.

Let’s talk about 3 ways for managing the size and scope of your China business when it’s not expanding.

Let’s say you run a business in Shanghai and you are considering ways to cut back on operating expenses. You’ve done the easy stuff, but your sales are collapsing even faster and you need to perform some surgery. What are your options?

1. The tie-up. An informal agreement with a related business to work share costs, swap services or cooperate in some other way. Marketing tie-ups are common – two non-competing businesses share fees to advertise to the same target market. Some firms split costs on materials or expenses, others swap services. The idea here is that it is a NON-BINDING, informal arrangement. Don’t make things unnecessarily complex by exploring another joint venture. The good news is that the right tie-ups can really stretch your expenses and help maintain a marketing presence. The downside is that building and maintaining this kind of network is easier for some people than others. If you’ve been in town forever and lots of other businesses like & trust you, this is a no brainer. Just make it systematic and know when to walk away. If, however, you’ve burned lots of people in the past than this is no time to try to gain their trust. Not worth the effort.

2. The roll-up. In China’s notoriously fragmented market, recessions are ‘roll-up’ season. The goal of a roll-up is to buy up or burn out all the small players in similar businesses that are serving essentially the same market. Let’s take commercial printers as an example. XYZ Inc. is a medium-sized printing business in Shanghai that decides to adapt a roll-up strategy. XYZ begins buying up competitors and re-branding them. Those it can’t make money on it shuts down, diverting useful resources to other XYZ locations. It’s size and buying power allow it to market and purchase more effectively, driving competitors into danger of failing. It can then buy those weakened competitors at more favorable terms. The roll-up is a time-tested strategy that works if you have capital, good systems and understand your target market.

3. Getting rolled up. Some of us won’t be doing the rolling – we’ll be getting rolled. What do you do if you are in a weak position at the start of a long recession? Scaling down may help – but specializing and seizing on good niches early will help even more. This is especially true if you are a sales-oriented operation in the B2B market. If you are a generalist with a roomful of guys manning phones or over-working tired 3rd party databases, you are not going to have much leverage when negotiating with large, aggressive competitors. But if you have specialized products, services or market channels, you stand a much better chance of getting attractive terms when the Death Star pulls into town. Any business model that gives you access to a key, discrete, measurable demographic is powerful.

Ok, so maybe ‘ashes’ is a bit much. Shanghai is still a mixed picture, and we may all benefit from a ‘wealth effect’ re-rating – our bottom lines were only cut in half during the Millennial Depression (buzzword credit!) – while US and European businesses were slaughtered like hogs in the marketplace. We win.

I think its time for the expat/fie (foreign invested enterprise) to take a look out to the future and see what medium-term business trends we’re going to be working with in a post-recessionary China.

I’ll tell you the end of the story first. There will be a new breed of JVs popping up in Shanghai and other international business centers in China. This time, however, they will be high-functioning service organizations that are able to unlock real value from two sets of counter-parties: On one side are the Chinese entrepreneurs with tested models who have access to parts of the China market but are starved for cash. Their new partners will be established US service businesses that are financially strong enough to survive 2009 – but are looking at a future that will be increasingly bleak if they don’t find a way to boost the size of their potential international market

New Circumstances, Old Biases
US planners hate JVs because of nightmares from the old days. These won’t be the ‘policy JVs’ of previous decades, but rather market oriented combinations that seek true Win-Win outcomes. Most will focus on business entry and marketing for Western firms that can’t expand in the US do to competition, market weakness and the differential in long-term market trends. Chinese partners, on the other hand, will be successful locals or small & medium Sino-Western JVs of the last decade that have survived – and now look to expand to the US or Europe. These new JVs will be focused on B2B services that are higher on the value chain, like design or outsourced back-office services.

In China, B2B service firms already operate with a two-tiered target market. The services provided to MNCs in Shanghai can be offered to SF and NY. But Chinese service companies are going to have to develop growing markets in 3+ (3rd, 4th & 5th Tier) Chinese cities. Some are looking for access to US markets (climbing the value chain from OEM to ODM) and trying out the brands they’ve already built her (or brought in from Singapore or Taiwan). Whatever options they pursue, they are going to require access to credit and marketing savvy to succeed – which means that western JV partners suddenly have a lot more to offer.

US service companies will have to expand to China as a matter of course. This is a ‘market pull’ type of move. We’re about to see MNCs’ global revenue stream go lopsided in favor of China – and as the giant firms revive their cash flow in the coming years, a greater share is likely to be reinvested back into China. Even if smaller service firms don’t want to go international, they’re clients are pulling them there. Meiyou banfa. If you lose the business in Shanghai, that same competitor will soon go after your Chicago or NY business.

Cost cutting will be the new priority on both sides. These new JVs and cooperative arrangements will seek to capitalize on the marketing channels and IP that each side already owns – but will now try to make more profitable through international scale. Look for areas in your own shop where labor and IP blur. Design, print, engineering, IT, research, marketing, and back-office services. New JVs will combine low-cost intellectual labor and market opening on both sides of the Pacific.