New China Entrepreneurs Recession Survival Guide – Part II: Raise, Check or Fold
China Recession Strategies: Raise, Check or Fold
Not everyone loses out in a recession. As a matter of fact, if you were a second-tier or start-up company 6 months ago, the current economic crisis could represent a rare opportunity for you. But of course, you have to play it correctly.
Some companies will find that an economic slowdown is a great chance to make inroads on the competition’s territory. Others will find that the best strategy is to consolidate pre-recession gains and simply stay the course. Some, of course, will have no choice but to shut down branches or product lines and downsize in order to stay in the game.
There are no sure things, except this: If you don’t make a plan, the market will make one for you. Recessions are lousy times to be reactive and play catch up.
3 Strategies for Dealing with Recession in China
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1) The Roll-Up. If you are flush with cash, have your operating systems tuned and are in a fragmented industry, you may find that this is a great opportunity to benefit from your competitors’ misery. You can leapfrog his market position, poach his best people, undercut his price and even lock him out from key suppliers. You can try a vulture approach and wait until he’s already dying – or you can be a little more proactive and hunt down the weakest members of the competitive herd. Whether you are buying a competitor outright or cherry-picking his best people, you have to remember that integration is your key challenge – not acquisition. It’s easy to stuff a salesroom with your dying competitor’s best people during the early stages of a recession – but it’s much harder to make your new additions profitable. This is even truer when you buy a company outright. The danger here is spending lots of money on M&A or a collection of superstar talent and finding out that all you’ve bought is an empty shell. Digesting new acquisitions is one of the toughest challenges for a management team, and a single misstep could end up costing you a lot of money, time, energy and managerial bandwidth. Still, the ‘roll-up’ is a proven winner for small, flush firms in fragmented industries (no one controls more than 30% of the market) – if you’ve got the managerial talent in place. (Note – Those of you who have never been through a merger or acquisition but are saying, “This will be no problem” probably do NOT have the requisite experience. Sorry.)
2) Consolidate. You were tracking well before the moorings came off the ship of commerce, and you think your craft is sound. It’s just a matter of waiting for demand to come back. If this is you, then a Consolidation Strategy might be right. You want to stop the clock and wait for sun to come out again. Your jobs are to cut costs, secure your key staffers, and freeze expansion, marketing and HR expenses as best you can. Consolidation makes sense if 3 conditions exist: 1 – the recession is brief. 2 – you are really able to hold your position in near-hibernation mode. 3 – you markets remain fundamentally the same once the recovery starts. Most China managers will find that these 3 conditions won’t exist for more than 6 months. Still, if you are trying to figure out what to do and how to proceed, then a consolidation approach makes sense in the short term. If the downturn in your key market lasts more than a few months, you will find that this strategy feels a lot like carrying a heavy suitcase up the down escalator. You are exerting an awful lot of energy to get nowhere.
3) Downsize. The expansion plans are dead. The branch office in Beijing or Suzhou will have to be shut down. The product line is being trimmed from 15 items to 5. You will no longer offer certain services to anyone but key accounts. You are aggressively reducing headcount – and may even shut down for a while. Or forever. Either you are being realistic and pragmatic, or the market has made the decision for you. Downsizing works best when you are in control and ahead of the curve. The time to decide on cuts is when you have enough cash to cover all your expenses, have a full team of high-morale key players, and are still in control of your markets. Owners that come back from Chinese New Year to find that they have only 6 weeks of operating funds left tend to do poorly with downsizing strategies.