The good news? China is going to weather this thing in better shape than Western economies. The bad news? You may not be in the part of the Chinese economy that will do well. Most expat-run businesses in China focus on private Chinese enterprises or other multinationals. But all of the Chinese bailouts & assistance are focused on State Owned Enterprises.

How does this affect international managers doing business in China?

If you are part of the B2B service chain in places like Shanghai or Shenzhen, then you are operating much closer to the epicenter of the global financial crisis than your position on the map would suggest. In fact, some of you minus well be in NY or London considering all the exposure you have to toxic economic trends. We’re already seeing the number of full-fledged expat packages dwindle. As MNC budgets get cut and headcount capped (or reduced), there will be less spending on other business services…and yes, that definitely includes F&B.

The part of the Chinese economy that will suffer the least and receive the most support is the state sector - particularly in the rough & tumble interior.

A study being run by www.ChineseNegotiation.com indicates that Westerner involvement with the Chinese economy is almost always through privately run Chinese firms. In other words, we might be barking up the wrong tree here.

Should you rewrite your business model to start accommodating CCP leaders and provincial governments in a frantic back-track to try landing SOE contracts? Only if it makes sense - and for many of you it doesn’t. But you might want to find out who you are already dealing with that makes money off of SOEs or state banks — because they’ll be the ones with the money next year. First secure THEIR business and good will, and then see if there is any way for you to move up the food chain.

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.

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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Survey: Negotiation with Mainland Chinese and Westerners

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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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.

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?

Yesterday we talked about the importance for expat bosses in China to do everything possible to hold on to key managers. Now let’s take a look at what the recruiting and hiring process will look like in a post-boom China.

Isn’t the China HR market on sale now? Can’t you hire from the ranks of the battered MNCs with hiring freezes and orders to slash headcount? Yeah, but remember — your cash flow is low, your profit sharing plan is underwater and commission levels are depressed. Your ability to make big hires is going to be as restrained as any other major prospective expense. Expat entrepreneurs with a help-wanted sign in the window (or on 51Job) are going to be getting the best CVs they have ever seen in China. But that doesn’t mean you’ll be hiring experienced Wharton MBAs for rmb 5,000 per month.

Just because they decided to hold a global recession doesn’t mean your China HR challenges are any easier.

China HR market will get looser and less rational in a recession

Most Chinese still see the global slowdown as someone else’s problem. It’s possible that migrant factory workers in Shunde and Dong Guan are stressing out about their prospects — but the Starbucks set in Shanghai is still gliding along with their head in the clouds. They like feeling like they hold all the cards at the HR table, and they show no sign of moderating that view. The recession is an unfortunate event happening to someone else, somewhere far away — and it’s probably their own fault or the result of a character (or cultural) deficiency. Sad, but not a China problem. Nothing to worry about — and certainly no cause to change expectations about salary, title or perks.

Don’t be surprised if that optimism persists even as MNCs start reducing headcount and medium sized businesses start declaring bankruptcy. The new “China HR Thing” that those damned bloggers talk about just may be the disconnect between the dismal economy and the outrageous demands for gold-plated compensation packages from unemployed managers with 8 months of experience.

Who is selling whom?
Lots of owners and HR managers will walk out of job interviews feeling very confused. Your attitude is that you control the last seat in the last life-boat on the Titanic. The guy sitting across from you is acting like you are damaged goods. China was already feeling more confident and self-assured BEFORE the Dow started spelunking - but now Chinese yuppies will start regarding westerners like the Ancient Greeks. Very sophisticated in their day — but that day is now long past.

So where does that put the expat owner who wants to make a strategic hire?
Chinese still prefer large, famous, international companies that pay well, promote fast, train often, and look impressive on the business card. Small and medium sized firms are even more suspect now than they were before the economy went to hell. It may seem like they are interviewing you. What can you do to make sure that your post-boom recruiting is the silver lining in this crisis and not another drain on your finances, resources and mental health?

Don’t oversell. Just because the Chinese interviewee doesn’t think that the recession is his problem doesn’t mean he thinks its not YOUR problem. This is no time for bravado. Remember, unless you are a Fortune 500 household name the kid across the table is 99% certain you will go bankrupt in a week. If you are expecting him to beg and plead for a spot on your team, you may be very mistaken.

Create a compensation plan that makes sense. If you think you can get away with the same salary that you offered last year — but effectively no commission, profit share, bonus or other variable compensation plan, then think again. One of the hardest thing for owners to understand is that workers who used to get bonus and profit share worth 25% of their base salary now feel that they are suffering from a pay cut. This is probably a great time to revisit your compensation plan for the entire team — because if your new hires get better treatment then you are going to have an enormous morale problem.

Don’t bad-mouth anyone. Chinese are much more team-oriented than westerners. You may be stressed, panicked and bitter about your shattered plans, but your interviewee isn’t. Keep the conversation professional, focused and upbeat. Entrepreneurs tend to get defensive about their business — but explaining why there is a vacancy in your shop shouldn’t be about character assassination. If you had to let someone go — or if they moved on because of falling real compensation (or falling real confidence), then explain it quickly, clearly, and move on. Remember — in slow times, team morale is critical

Focus on long-term The next couple of years are likely to be pretty dismal. Don’t hide from that, but don’t make that the central theme of your company description. Focus on your long-term prospects, and talk about where you expect to be in 3 - 5 years. If your guy finds a 3 year planning horizon unrealistic, then maybe you don’t have an appropriate candidate in front of you.

Use delegation, visibility and titles to make up for constrained funds. You may not be able to pay out big salary and bonuses, but you can make up for that with impressive job titles, highly visible projects and other signs of power and status. Don’t count on this erasing the salary issue completely — but it will help.

The young crop of China-based entrepreneurs is starting to stress out. Whether local or expatrapreneur, owners of new China businesses are hitting a wall right now. It’s happened in China before — real estate goes through it every time the government passes a new law and manufacturers have been living it for a while. But a business slow-down is just now hitting the Starbucks set in Shanghai. Those Bull Boyz who rode the boom and transformed themselves from waiters and English teachers into international business cover stories — many of last year’s success stories are now struggling to keep things afloat. They were better at expanding than at building & holding, but now they’re suddenly facing a market that is both more competitive and tighter on spending.

Be on the lookout for 30 year-old dinosaurs so locked in the glory months of the boom that they can’t acknowledge that the ground has shifted. They may not have time to get it together.

What entrepreneurs in Shanghai should be thinking about to prepare for a bear market.

1) Race to the bottom in services
When I first came to Shanghai, lunch sets in decent places were 20 - 25. Then they shot up to 80 - 120. Look for lower-priced options and specials to start making a come-back. That doesn’t necessarily mean a drop in service quality - just more options at the low end. This will be a big challenge to the Bull Boyz who are used to ratcheting up sales terms and going for more, better, now. Businesses that can maintain strong relationships with old customers do the best at surviving the downturn — and capitalizing from the recovery.

2) Panic is bad
Bull market bosses shout and curse and rail, and they sound like captains of industry. In a bear market the yellers and quick-draw decision makers tend to come off whiny and scared. The difference is money. Yelling when you spend is ‘decisive’. Yelling when you don’t spend is ’stressing-out’.

3) Leader or Boss
This will be a killer for the Bull Boyz. Bosses fix problems by spending and buying. Leaders plan and build. You’ll want to hold on to good people and build relationships with former clients and partners. Stomping around and barking only works when there’s money around.

4) Check the model
Starting a business servicing 3 different high-end markets with a product you only barely understand was hilarious in 2006 — and made great headlines when it hit big. It’s suicide now. This is a great time to re-examine your value proposition — what are you really offering your clients and customers. What should you be selling to people who are worried about a recession and their economic futures?

5) This could last a while
If you are waiting for the market to shake off the doldrums and start spending again, then you could be in for a long dry-spell. If we are in a full-blown global down-turn, it could last 12 - 18 months (easily), with some regions and economic sectors feeling the effects for a decade.

The National Day Holiday is ending, marking the start of the final big rush of 2008 on the Chinese business calendar. 4th quarter. 10 weeks until Christmas, 15 until CNY. Some of us are already in New Year mode - may it be a happy and a healthy one for all. A lot of managers and owners who powered through the go-go expansion of the last 5 years are going to come back to a Shanghai that feels a little more subdued. It’s the beginning of a global bear market, and it won’t pass China by.

China probably won’t experience the same cataclysmic dislocations that the US and Europe are going through. For managers in China, it will probably feel like more of a prolonged slowdown. It isn’t necessarily the end of the world, but a lot of businesses will shut down — and almost everyone will feel leaner times ahead.

What can managers do to give themselves a better shot at surviving and prospering during a slowdown in China?

So This Is Your First Bear Market

We’ll have lots of time to talk about specific techniques and strategies for managing China-teams in a bear market. That’s the point. We’ll have time — meaning two things.

1) A prolonged bear market is prolonged. 18 - 24 months of slow business, tight credit, sticky prices. The effects can last a decade. We can see stock markets move sideways on low volume, unemployment rise, sales demand flatten or fall gradually for months — even with lower pricing, healthy companies unable to get credit to expand — or even maintain the infrastructure they’ve got. These blockages can last for years, and there’s nothing anyone can do about it. (Well, war seems to do the trick. yikes.)

2) Bear markets are boring. There’s nothing to do. First you cut costs. Then you cut staff. Then you rework your business model to sell more of something cheaper. Then you cut more staff. But what do you do in the SECOND month?

Slow-downs are a waiting game. Economists have an expression: “pushing on a string” to describe the effects of stimulus packages when there is no market demand. That’s what every marketing and sales manager in the world may be doing for the next 18 months — and that includes China.
Chasing customers that aren’t there.

The point is that bear markets require a completely different set of management skills than bull markets. You have to lower your cost base, survive the downturn and live to fight another day.

There are still people saying that hard times will pass China by — but more Chinese people over the age of 40 seem to think that we’re already here. Don’t forget — prices have doubled and the stock exchange is 40% lower than it was a year ago. The Olympics were pretty, but buried deep within the newspapers the economic and financial numbers are still rotten.

If a global recession does include China, it’s going to put new stresses on managers here. A bear market can be seen as a shortage — of credit and markets. The local Chinese have a long history of thriving in times of shortage. They love it. Shortage brings out the creativity and group problem-solving that the Chinese excel at. No one cares about funky ways of cutting costs in a bull market, but if you can figure out how to re-use staples in a long recession then you are a hero.

A recession in China is going to test all expat managers, but young entrepreneurs who have never managed through slow times are going to have a very tough time. Swagger and bold promises don’t work unless there’s lots of cash sloshing around. When things slow down, it’s the planners and the savers who win.

continuing….

It turns out that he’s always been really interested in China – and you’re really interested in his big, hot resume. His bank/brokerage/business has recently been laying off/going under/no longer exists , so he is ready to shake things up and try something new – like moving to China. Sounds like a perfect match! Let’s hook up and be togetha 4-eva! It’ll be totally awesome.

And if it goes badly? Well, that’ll be his problem. It’s not like you made any promises or gave him any guarantees. Or did you?

There’s a lot of misery in NY and London. Every clever senior manager in Shanghai is bouncing around the same clever idea – ‘now is the time to hire me one of them big-city western pros with lots of experience and no job at low-low pay’. After all, EVERYONE wants to come to China…

It may work out great. But first, consider 5 questions you have to ask yourself before you start what could actually be a pretty big effort.

1) Are you training your own competition (or at least his new hot sales pro)? If you are bringing a guy over and introducing him to China biz, then you’re facing the same bad math that you go through with the inexperienced Chinese: In 6 months he will be worth 150% - 500% more than you are willing to pay him. (Makes sense for 100% commission salesmen who will ramp up to full production and pay in 3-6 months. Tends to be disastrous for everyone else.

2) Are you looking for a guy who is smart enough to revitalize your operation but dumb enough to move half-way around the world for free with no guarantees? If this guy is expensive, then how do you know he’ll be worth it? If he’s relatively cheap, then why do you want him? Either he’s not the sharpest pencil in the cup or he’s got his own agenda. Setting up his own shop is a real possibility. So is going down the street. Or he may head back home when the dust settles. It’s going to be expensive to find out.

3) His cheap and your cheap are completely different. Before you promise a western salary, make sure you can deliver the goods. You may look at rmb 50k / month as lavish pay – and someday he may as well. But for now he’s looking at the US$ equivalent and can’t believe you expect him to live on less than the head of the mailroom at his old bank.

4) He knows nothing about china and is likely to be the high-maintenance cry-baby in your shop for at least a year. You are going to have to hold his hand, and maybe find him an assistant.

5) What makes you sure he’ll be able to function in China? This ain’t Wall Street – but it’s not Uncle Bob’s Cultural Adventure Rodeo, either. The last thing you want to do is finance a resume-building 6 month journey of intercultural exploration so that IBank boy can go back to Wall Street and parlay it into another $250k after the recovery starts. You need to make money off this guy. If you are looking to hire a sales or marketing person from the US, then they’re main job skill involves BS-ing for money. Make sure that you aren’t the one being sold to.