Shanghai got noticeably colder last week. It wasn’t just the mercury that dropped sharply for us after an overly long autumn threw us off-guard. Suddenly all the woe and hardship on Wall Street suddenly jumped the barricades and invaded our real life. Unemployment and collapsing demand finally showed up in the US numbers – and China’s own headlines were littered with scandals, warnings and new government bailouts.

It didn’t seem to be business as usual for China, 2008. More like 1998, with China and Western leaders trading barbs and recriminations. China has been turning up the accusatory rhetoric and dialing down the value of the RMB. The weather ain’t the only thing getting chillier.

In every recession, there comes a moment when the average, baseline view of business prospects suddenly re-sets to a lower, bleaker level of expectations. For some of us in Shanghai, last week was that time.

The problem with taking a bearish view on the economy during a recession is that you aren’t right or wrong – you’re either ahead of the curve or behind it. The gap that matters isn’t between supply and demand – it’s between reality and expectation. As the reality of statistics and lackluster demand sets in, business owners start to lower their own expectations and build in a gloomier, less optimistic outlook into their operating budgets. This sets of a vicious cycle of lower expectations leading to less real demand. It doesn’t happen overnight, but China-based businesses are now starting to feel like they are standing at the bottom of the mountainside waiting for the avalanche.

The doom & gloom prophets are no longer talking about ‘what happens if China gets pulled into the global recession’. We’re there. The new debate is what happens if China and the US can’t cooperate and develop an integrated plan of action. US policy is going to be in limbo for the next month, and China is unlikely to wait around to see how the new administration does things. Beijing has already declined a summit (Europe), criticized an ally (Sarkozy – for meeting with the Dalai Lama) and DEVALUED the RMB.

Owners and senior managers in China need to stop worrying about whether or not China will get dragged into the global downturn. We’re there. The question is how bad it will be – and how long it will last. What you need is do now is take the latest bad-case scenario for your business and translate it into an effective operating model for your business. Hoping that demand picks up in 2009 has just gone from ‘optimistic’ to ‘lying to yourself and to your team’. Make sure you stay ahead of the curve on the way down – or you won’t be around for the recovery.

I know of more than a few Shanghai-based expat businesses that are suddenly discovering that they are in China. This startling revelation took place almost immediately the herd of cash-rich expat-packaged Americans and Europeans started thinning out. When your big spending Western clientele disappears it’s natural to you start looking to crack the illusive Chinese middle class – or as I like to call them, the MWMs (Mainlanders With Money).

It’s not necessarily a bad plan – if it is a plan. Localizing your market offering may make a great deal of sense – but it’s no quick fix. And it has to be one of the worst desperation Hail Mary plays in the history of commerce. You’ve got to plan carefully to get this right.

The economic numbers stink and your business is looking suddenly vulnerable. Now that we’re approaching the “Dead Zone” (2 weeks before Christmas until 2 weeks after Chinese New Year), the global recession is becoming a lot less abstract and a lot more annoying.

When a few big-spending westerners outweighed a whole lot of Chinese looky-loos, it was a pretty easy decision to go high-service, high price and distinguish yourself as a luxe brand. But now that the westerners are much scarcer and tighter than they were last year you may be thinking about changing directions and focusing more on the local Chinese market.

5 quick tips for the China-market novice

Feasibility study / Market research
Sure, selling to 20 million new customers in your city seems like a great idea to you. But do they agree? Marketing to local MWMs could make sense, or it could be hopeless. Find out BEFORE you redirect the last of your marketing budget. Whether you are looking at Chinese B2B, retail or consumers, you have to test and plan. Step 1 – is this even feasible? I remember working with one group that tried to sell no-money-down luxury property schemes in the Caribbean to Chinese locals. Very few Chinese are familiar with the Caribbean and couldn’t understand what country it was part of. The few that got past the geography tutorial couldn’t grasp the fundamentals of highly leveraged property transactions (lucky bastards). Needless to say, the sales effort as a flop. Step 2 – If you determine that your product or service does have traction with a local market, do a SWOT and competitive analysis to find out how you should approach the market.

All In , Half & Half, or All Things to All People
Depending on your industry and product offering, you may have to retool at least part of your business to accommodate local buyers. That raises a challenge for many expat businesses in China – should you focus on Westerners, Chinese, or both. HINT – If your business is mostly service-driven sales, like real estate, then you can shift between the two demographics pretty easily and accommodate both. If you are working with long lead times, technology or fairly involved manufacturing then you will probably have to make a choice. A few China businesses have managed to serve both locals and international buyers simultaneously, but it is not appropriate for all companies, industries or products.

Manpower planning
The assistant to the western manager you just fired may make a great saleswoman – or she might not. Getting into the China business because you have idle hands around the office is a terrible idea. If you are going for local MWM business, you have to field a new team. If you can assemble a highly skilled staff from the people who already work for you, then that’s great. But if you can’t then you’ll have to spend. Don’t be cheap here – Chinese get as frustrated by bad service as you do.

Localizing vs. Translating
There’s more to localizing than having your product description translated into Mandarin. You are basically creating a new product – and a new promotional strategy. That’s why testing is so important. Localizing a product offering is something you probably can’t do on your own. Again – this is a bad place to try to save money. You’ll probably want to bring in professionals before you are ready to take your act to the MWMs.

Sales materials
Finally, make sure you localize your sales materials. Chinese buyers react completely differently than western buyers. They may see your product completely differently than you do. They certainly approach the buying process differently. Westerners like reading lots of reassuring text with letters, testimonials, lists and tables. Chinese tend to react to different colors & images, and are more oriented towards graphics. Simply slapping together a quick Chinese translation of your standard promotional material is usually disastrous. Think about all those ridiculous Chinglish labels on locally made goods. Funny, right? Well, it’ll be less humorous when you are the one making a mess of Chinese.

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.”

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.

This recession is going to have a strange affect on your local Chinese staffers – and customers. They’re going start aging before you eyes until they turn into their own grandparents. Physically they will appear the same as they ever were – but emotionally and mentally they are going back in time to a time 15 or 20 years ago when Chinese life was characterized by shortage, deprivation and insecurity.

The good news is that suddenly a steady job is one of the most important things in the world to them as they save every mao in anticipation of tough times ahead. The bad news is that Chinese customers and purchasers are going to do pretty much the same thing.

Ostentatious consumption is out. Paranoid saving is in.

I know this script well. My grandfather was an accountant at Western Union when the Great Depression hit. He felt it was his duty to indoctrinate all of us grandkids to be good savers and to beware of the specter of ‘hard times’. I grew up during the optimistic go-go years of the 60s and early 70s, but my parents would often invoke the spirit of Grandpa Sol and the Great Depression to get us to waste less and save more. Even though those particular hard times ended 60 years before I was born, they still made up part of my consciousness and identity.

Local Chinese have the same type of memories – but theirs are stronger and more recent. China has only been open to the West since the late 70s, and wasn’t really prosperous until very recently. Sure, they love to spend and to job-hop so much that it seems like part of their DNA. But that’s a blip on the radar of Chinese history. Deep down, the Chinese consumer is skeptical, conservative – and a cutthroat negotiator.

If your market includes Chinese middle-class buyers, you may want to moderate your approach. Try a tack that is less aspirational and high-status, and more practical and value-oriented. This item is more expensive- but not because it is European or the same one used by movie stars and royalty – it costs 20% more because it will last 75% longer. It is a better value.

Local workers are going to become more dedicated and committed to their jobs – which is both good and bad. Of course it will be great to field a team that really cares about holding on to their positions – and will be a refreshing change from the revolving door HR reality that plagued managers in the past. But you can also forget about voluntary head count reduction or furloughing unneeded staff until business picks up. If you have gotten used to Chinese staffers who don’t even bother to show up to tell you they are quitting, then you’re in for a shock. Any western manager who tries to fire Chinese staffers had better consult with their HR specialist AND a well-informed lawyer before moving forward. There will be trouble.

A recession in China will clear out the underbrush – but the survivors will be tougher and more competitive than ever. You need a new business plan that will do two things: help you survive the downturn – but also position your business for the next growth phase.

Use your down-time constructively. You’re up against two dangerous trends, but you can use both to your advantage. First you have to survive – but you also have to transform to meet the needs of a post-recessionary China market that is more sophisticated, demanding and value-oriented.

A recession in China is going to wipe out a lot of marginal businesses. Your first priority is surviving the downturn. But in China, simply surviving isn’t going to be enough. When this economic meltdown is finally over, the landscape will be different. China will become a more sophisticated, competitive and service-oriented economy. That’s why your second priority should be to re-engineer your business to take advantage of the new Chinese economy.

Look for these trends in a post-recession China.

1.More sophisticated consumers. They’ll pay more – but will demand more. It’s not about low cost – it’s about higher value. In the past, there were 2 Chinese economies – the high end luxury market and the mass low-cost, low-value market. Lux is going to take a hit, but the masses of Chinese consumers are going to be much more conscious of value and service.

2.More competitive SOEs. China’s State Owned Enterprises are not going away. A severe recession in China is going to make them stronger as it wipes out competitors and starves smaller companies of cashflow. Anyone who competes directly with state-owned companies had better plan on seeing them grow their market share and come out with new products and services. Chinese SOEs have been the real engines of growth and transformation, and that trend will intensify.

3.More nimble competition. They rent-collectors are going to get wiped out, but a new breed of fast & furious local competitors will emerge. There is an army of Chinese entrepreneurs who have been crowded out of the service sector by international competitors with deep pockets and international marketing savvy, but in the post-recession Chinese economy these fast, smart, little service companies are going to steal someone’s lunch. Make sure it’s not yours.

4.Networks are not a buzzword – they’re people who are connected by a common need or interest. It’s not enough to build up big lists. You need to interact and to monetize. Social networks are real – but they aren’t an end unto themselves. You can’t just shout your message – you need to monitor and analyze and listen.

5.Trends are friends – or bad ends. Parts of the Chinese economy will come back to double-digit growth – but it will be a different kind of growth. No more advantage for first movers. You won’t get paid for showing up in the new China. Whether your firm services multinational corporations or markets directly to consumers, you are going to find yourself in a more competitive, demanding marketplace after the world economy rights itself. You can use this to your own advantage by positioning your company to meed the demands of the new China market - or you will be playing catch-up with a host of new competitors who focus on delivering value.

Things are slowing down at a lot of international firms here in China. Use the down-time to your advantage. Put your top people in a room and make them imagine that it’s November, 2010. What will your industry look like? Who are your customers and clients? What will THEY consider your value-added services? What does the 2010 Chinese consumer look like, and why will they care about your business?