The Chinese economy is already starting to look a little more protectionist and inward-looking. If you need proof, take a look at Sunday’s FT article that quotes a directive from China’s Civil Aviation Administration,

‘It also exhorted domestic airlines to unite and develop together “to form a ‘fist’ in the face of international competition” while avoiding competition with each other domestically.’

It’s starting to look like a Red Christmas in China. What can you do to give your China-based company a fighting chance in the new, redder China?

How nationalism-proof is your company? Ask yourself these five basic questions.

1- Is your HR policy going to help you or ruin you in a more sanguine China?
Bamboo ceiling
Are the Chinese in your firm making big decisions, or do you think they are lucky to have even basic authority? If your Chinese employees are limited to clerical staff or building maintenance, then you are probably on the wrong side of the trend on this one.

Western companies that just happen to be in China
Would your company look a little TOO at home in The City or Boston? Is your business’ raison d’etre to service the well-paid European expat? If your org doesn’t even HAVE Chinese on staff who can handle upper managerial functions like hiring, sales or negotiation then you are very vulnerable to the whims of a reddening China. The days of selling to China’s expat community are becoming increasingly numbered.

Double counting
Are you counting that Singaporean salesman as a Chinese when the clients want a Chinese salesman and an expat when they want an expat? A – You’re not fooling anyone, and B – that will be the first guy to turn on you.

2- Phantom leaders
Those of you that HAVE sufficient numbers of middle management local Chinese should be on the lookout for local managers who feel they can your job better than you can. Since that includes just about every local manager in China, you can see how quickly this may get ugly. Try to identify the local hire who feels he’s been unfairly deprived a position or responsibility that an expat or overseas Chinese manager got instead of him. Also try to be aware of who the low level staff and line workers go to when they are upset. These are the people who want to see you dead. Well, some of the people.

The size of the expat community is dropping quickly in Shanghai and other international cities in China, and that’s going to continue as head-count freezes and localization policies do their work. You can’t reverse the trend, but you can stay out of the line of fire for as long as possible.

3- Festering resentment — Did you accidentally cause a trainee in the shipping department to ‘lose face’ sometime in the spring of 2004? Congratulations — you have festering resentment lurking within your organization. Like dry rot or radon, Festering Chinese Resentment (FCR) is a little-understood and largely invisible force that results in expensive, long-term structural damage that is very hard to fix permanently. The good news is that it can only cause serious problems for your organization in the unlikely event that Chinese masses spontaneously turn militantly anti-Western. The bad news is that this is scheduled for late March, 2009.

4- Super luxury / bad for China - Is your product or service considered bad for China? Does it strike the Chinese as decadent and gross (i.e.: too many weird forks)? Do Chinese people consider your business either unnecessary, intrusive or to be in direct competition with local traditional businesses? The funny part is that local Chinese will find nothing at all ironic about planning the boycott or spontaneous anti-western/brand demonstration on Nokia phones while sitting at Starbucks or McDonalds. After that, the humorous aspect of negative brand buzz goes flat in a hurry.

5- Legal gray areas – Are you in a legal business, or a ‘not illegal business’? ‘Not illegal businesses’ are great for bull markets when they help facilitate the flow of funds sloshing around. Unfortunately, they quickly turn into ‘not approved businesses’ when things get leaner. Think hard about your basic business model and make sure it’s bureaucratically bulletproof. In China, bureaucrats are the shock troops of a trade war. They live for this moment.

Raise your top line or lower your expenses? Both? 2/3 of one, half of the other?

The problem with raising the top line is that it’s expensive and risky. Lowering expenses makes sense – for a while — but it’s not a career. Even in Shanghai we now have enough confirmation of the go-slow economy to go straight to the Big Cuts and get it over with. After that, there is a limited return. CEOs shouldn’t be calling a senior staff meeting to discuss ways to save $6.50 a month on paperclips.

Cost cutting will only take you so far. If we were talking about a problem that we knew was ending soon, you could make it work. But it looks like we’ll be in lousy times for at least 6 months. Cost cutting shouldn’t take that long. If you want to still be in the game when this is all over, you have to find ways to reflate your top line.

Budget – Let’s do a little simple reality-based math. You’ve cut advertising; marketing & promotion budgets by 75 – 99%, and you expect sales to stay strong? Either you were doing some really poor marketing before this or you are blundering into a classic bear-market trap – pulling the fire alarm too early. You can ride your guys hard now – but after 6 months of listening to you rant your sales team is going to grow a tough shell that protects them from you.

Marketing – cheap is good, but don’t go crazy about the marketing budget. You need to stay visible — even if now can only afford a candle in the window instead of the spotlights you used to have. Are you devoting the time to Social Networking? Linkedin, Facebook and Xing are all great ways of reaching the people you care about – but doing it right takes a lot of time and the right kind of energy. Don’t start SN marketing unless you are serious about following through – otherwise it just looks like you don’t care.

Sales – Two great ways to demoralize your team are to expect failure or require impossible levels success. Times are tough and your guys need to know that they have your support. Remember – we’re still in the early days of the downturn, and in China we are entering the dreaded Holiday Dead Zone (from around December 15 to Feb 15). You can only threaten a guy’s job 3 times before losing credibility – so use that power wisely. Try a little encouragement – and look at the wide end of the sales pipeline a little more carefully. Your sales guys are probably all sweating the qualified leads that stand a chance of closing – but is your machine still feeding the pipeline with fresh leads? Run a sales contest that encourages your guys to prospect and network more – and let them win a little cash in the process. Especially good if commission and bonuses are going to be weak.

Promotion – Keep traffic high. People are on the lookout for business failures. Lower prices or change your offering enough to generate steady, predictable traffic. Even if it just breaks even, any special deal, informational seminar or give-away is worthwhile as long as it brings in fresh prospects and generates positive buzz.

Be an expert. Your top people have a little more time on their hands than they should? Write an article, a letter, or comment on someone else’s posts. Do you have an interesting take on managing in China? ChinaSolved.com is always looking for guest writers. Drop us a line for details at admin@chinasolved.com, or go to our Facebook group and get in touch that way.

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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.

Welcome to December. 2008 is almost over – but not quite. Still a bit of business to take care of. For some China managers December is the busy holiday season – for others it is time to do the paperwork and collect the bills from the Christmas manufacturing rush.

This is a great time to think about what kind of message you want to send to your business community. You’ll want to send a thank-you to your existing clients and customers, of course. You should also think about what you should say to your team and professional network before people start taking off for holidays.

China has an extended holiday season. Europeans will start taking off in a couple of weeks for their extended winter vacations, while the Chinese staffers are thinking more about Chinese New Year at the end of January. Don’t loose track of the calendar. You want to use each holiday or special event to send a consistent message to everyone that matters to your business.

The only question that remains is what your message should be.

Message to Clients and Customers
You want to communicate two things to buyers. 1) We are in it for the long haul. We will be here next year and for the long term. We’ll get through this together. 2) We are about value, quality and service. Aspirational marketing is out. Look for a quieter, homier Shanghai in 2009. Even if you are selling to a luxe market, you probably want to turn the glamour down just a bit.

Message to Staff
This should be upbeat and reassuring but still realistic. If reassuring and realistic are at odds with one another, you have a problem on your hands – but don’t make it worse by alienating your core staff. Now is the time you want to look appreciative and sincere. Don’t try poor-mouthing to keep a lid on year-end bonus expectations, and don’t treat your people like they’re lucky to have any job at all. Remember that recessions can last for a year or more, and you will need your key people to get through the tough times. In China people aren’t as desperate to hold on to jobs as they are in the US.

Message to Partners
Your partners, service suppliers, professional team and outsourcers should also get a year-end message. Remind them that you are here, that you are strong and will be in building in 2009. Keep an eye out for potential partners, tie-ups and barter deals.

The important thing is to keep visibility high and the lines of communication open. Too many young entrepreneurs adapt a seize mentality when things get rocky. If your staff or customers starts feeling insecure, they might imagine scenarios that are much worse than reality.

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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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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