By Frank Lavin on 19 April, 2017

How Can You Evolve to Meet the Demands of China?

By Frank Lavin
Mr. Lavin is the CEO and founder of Export Now, a U.S. firm established in 2010 to operate e-commerce stores in China for international companies. Previously he served as lead trade negotiator for both China and India and was the senior policy official in the Department of Commerce responsible for commercial policy, export promotion, and trade negotiations across the globe.
There’s a perception that the international environment is more hostile and unpredictable than  in the past, but the opposite may actually be true. What is your thinking about this?

It’s true President Trump has put some trade issues front and center, and this has created some trade friction. Some of these issues need to be addressed, while others are more symbolic. Regardless of the particular political environment, companies need to consider their international approach, and their appetite and strategy for entering foreign markets.The political environment is always going to ebb and flow, but will rarely rupture because all parties see value in cross-border trade and investment.

Obviously there has been a good deal of doom and gloom playing out in the media, but what do you see when look across Asia?

The bad news is trade friction exists, but it exists because of the sheer volume of trade. If there weren’t rapid trade growth, this friction wouldn’t exist, because said growth is causing displacement. I’m sympathetic to these problems, but they only exist as a byproduct of this boom in international trade. As the degree of difficulty and cost of trade continues to drop, more businesses enter the space, increasing competition.

What do you see as the biggest opportunities going forward in 2017?

It has never been easier for foreign companies to enter the US market, but at the same time it has never been easier for American companies to enter foreign markets and compete there. This dynamic is only bad for very passive companies. A more proactive company will find that great opportunities exist. This might mean going on a trade mission, or going to an overseas trade fair. It makes sense to start in Canada and Mexico because of both cultural familiarity and proximity, so many US consumer brands do this.

Do you feel American companies are thinking about developing an international strategy more effectively than they have in the past?

It is shifting, obviously every company has a different appetite for evolution. You really have to ask “what’s your ability to evolve? What’s your ability to use technology? What’s your ability to sell to different demographic groups that might not have historically been your market?” Some companies are extremely good at it, while others tend to be more conservative. If you’re not keeping up with the market you’re only going to lose ground. In general, American businesses increasingly understand this. It can be as simple as setting up a Spanish language website, which will help your business reach not only Spanish speaking Americans, but foreign markets as well. It can pay to make even small inroads in a place like Canada to familiarize your business with cross-border activities like customs and foreign banks.

With your company Export Now operating in China, what opportunities do you see there and in the region generally?

Every country has benefits and costs in terms of entering its market. China presents fantastic opportunities but also intimidating costs. It’s the second largest retail market and economy in the world, so no one has to be convinced of the opportunities that exist there. At the same time, it’s a very different economy and regulatory system. It’s very far away and there are capital controls in place. What we’ve been able to successfully demonstrate is e-commerce allows you to standardize procedures, lower costs, and generally take unknown elements out of the equation. Because e-commerce is so much more powerful in China than in the United States, you’re still reaching 30 percent of the population. In the US, e-commerce accounts for about 11 percent of retail sales and in China it’s about 20 percent. When you’re talking about e-commerce in China, you’re only talking to the more affluent 50 percent of the country. While it may take time to build out a complete footprint in China, you can reach that 30 percent of the population rather easily so it makes sense to grab low hanging fruit and go from there.

What do you see as the most exciting areas in China? Do you see the market evolving, and if so in what direction?

It’s important to point out the growing consumer sophistication and affluence in China. The number of Chinese consumers who have traveled overseas continues to reach new highs, so their interest in western lifestyle products is also on the rise. Even if they don’t travel, Chinese consumers can follow fashion events in London online, so this consumer connectivity to UK brands is booming. As a result, the ability of western brands to prosper in the Chinese market is huge.

What do you see as temporal risks in China in the near future?

The biggest risk brands face in that market is pure commercial risk. It is always difficult to know whether your brand will meet consumer receptivity in China. Obviously it is challenging to parachute into a new market without familiarity, goodwill or supplier connectivity. This places a premium on your ability to communicate and your ability to engage a foreign consumer.

Do you have any concerns about getting money out of China?

There are capital controls in place, but the process is fairly normalized to move products in and move money out. This isn’t much of a problem for major companies like Ford Motor Company or Procter & Gamble. We will only work with products that are fully legally registered and legally brought into the market. There is plenty of grey market activity going on in China, but we don’t do that. If your product is legally brought into the country it is easy to ship money out. Generally, if you’re playing by the rules in terms of import procedure, you’re not going to run into problems getting your money out.

“Identifying the special appeal of your product that China cannot match is absolutely crucial.”

What are some of the difficulties in operating in the Chinese market?

New to market brands don’t have any market power in China. You or I might look at a product in the United States and think it has potential, but China generally won’t support an unproven product. You’ve got to be able to show the folks you’re dealing with your product has potential.

What do you see in terms of consumer trends that are warming up?

The key is differentiation. The consumer market in China has everything the US market has, but US products often have strengths that do not currently exist in the market. For example, a Chinese consumer might respect some aspect of an American product that a Chinese equivalent might not have, so identifying the special appeal of your product that China cannot match is absolutely crucial. China tends to have great respect for American manufacturing, and the health and safety protections of American products. The downside of this is that American products in China, while often superior, are not financially competitive.

What do you see in the Trump Administration’s approach to China, which you recently wrote about in Foreign Affairs?

This could be an entirely separate conversation. Companies need international strategies, and said strategies should be developed on a strictly business basis. The politics of the moment almost never become so pronounced that they overwhelm traditional business logic. Clearly, there will be ups and downs, but we’ve never seen a political issue completely cloud over market forces and cause a meltdown in bilateral trade. There is always a prospect of international friction on any trade issue in the world. And when a change in government happens, this necessarily increases. Given President Trump’s emphasis on trade, tension could increase even more, but we’ve never seen conditions reach the point of a meltdown in trade relations. It is best to plan international activity based on business logic.

For example, the biggest shock to international business activity in 2016 was Brexit. If you need to do business in the UK, you still can. Some aspects might be more challenging, but Brexit should not dictate your UK strategy in and of itself.

That’s is an important message for people to hear. There is a voracious appetite for people to hear what Trump means for the international system, and it is important to hear what you have to say.

Trump obviously has a style that lends itself to media traction. It’s also a fact that bad news outpaces good news when it comes to trade. You see things like TPP withdrawal dominating the news, but it doesn’t really hurt an American business’ position in Asia. It does mean there is not an immediate prospect of a reduction tariffs, but that is about it.

A recent AmCham China report found 77% of companies feel less welcome than they did a year ago, with 57% saying top challenges were inconsistent regulatory challenges and murky laws. You seem to be of the mind that these are marginal concerns.

I can agree with what AmCham said. However, I work in consumer goods, and in China, consumer  goods are not an intrinsically regulated industry like financial services or telecommunications or health services. And those industries are certainly under pressure, but if you’re selling cosmetics or running shoes or apparel, the Chinese government probably won’t offer much opposition. If you’re in a regulated space, you'll be subject to regulation. In China, it makes sense to be sensitive to the appetite for your product, in certain situations you may not even be able to compete.  

At CES in Vegas in January China had a larger and more polished presence this year than in the past. What are you seeing in terms of Chinese companies going out into the world and taking on US competitors?

I think electronics will be one of the areas where China will show leadership. The smartphone brand Xiaomi is looking to expand into foreign markets. Chinese electronics, while not the world’s best, are significantly less expensive than many competitors. If you want the best product in the world, you can go for a Samsung or an LG, but you can buy a Chinese competitor product for one-third of the price.

How long do you think it will take Chinese companies to reach premiere status in their categories?

Xiaomi has done it. Haier, the household appliance company is on par with companies like LG and Samsung. Haier started out making college dorm style refrigerators, and now makes upper-end products. This took more than five or ten years, but it was the result of a coherent international plan.

Looking around the world right now, has international business strategy changed in recent years?

The ease of market entry has improved so much there are a lot more players involved, which was once the province of large multinationals. Because of the rise of digital, and the dropping of trade barriers, a $100 million cosmetics brand in the US can compete internationally. This would not have been the case a decade ago.

What would you say are the top areas companies need to hone their skills in order to compete internationally?

We’re in an era where consumers want to be able to communicate with brands directly, and on their own terms. Some brands understand this, while others don’t. With a belief in consumer engagement, and something to share with your consumers, this can be done in any market in the world. As affluence grows globally, consumer behavior converges. If your company is on Facebook and Twitter in the US, you can communicate and sell your product in Britain, Japan, or China as well. Companies also need to think about e-commerce. Lastly, every business needs a culture of controlled experimentation. I realize experimentation makes more conservative companies uncomfortable because of the potential for loss, but it absolutely vital for effective international growth.

Topics: GetGlobal Guide, China, Trump, GetGlobal Experts, Frank Lavin

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