Local corporate execs hear the warning constantly: ‘If you don’t have an Asia-Pacific market strategy, you better get one. Fast.’ But what’s lacking are the specifics for scaling the wall – on-the-ground tales from entrepreneurs who have cracked Asia, often after a few missteps, and have the revenues to prove it.
It’s 9 a.m. on January 19; a cluster of B.C.’s business elite shake hands for the first time and exchange business cards before getting comfortable around a boardroom table in downtown Vancouver. But that’s where the unfamiliarity ends. The group of four was handpicked for its collective expertise in what has become almost as much of an obsession for British Columbians as real estate: the business prospects of an increasingly hungry Asia-Pacific market. Local corporate execs hear the warning constantly: ‘If you don’t have an Asia-Pacific strategy, you better get one. Fast.’ But what’s lacking are the specifics – on-the-ground tales from entrepreneurs who have cracked Asia, often after a few missteps, and have the revenues to prove it. To discuss what has worked, what has bombed, the biggest myths about the Asia-Pacific market and tips you won’t hear from your UBC marketing prof, BCBusiness convened its own cast of local experts: Tony Woodruff is the president of Delta-based FPI Fireplace Products International Ltd., which logs annual revenues of $80 million and learned the hard way how not to pick a business partner in China. Ben Iosefa is the director of strategic marketing and planning for Vancouver-based Methanex Corp., the world’s largest producer of methanol – but for all that market domination, it’s a company that has waded into the Asia-Pacific market very gingerly. Noel Lee, director of admissions at Vancouver’s Century College, exposes the hidden risks local learning institutions face when they tap on-the-ground ‘agents’ to woo hoards of students to Lotus Land. And finally, Yuen Pau Woo, president and co-CEO of the Asia Pacific Foundation of Canada, offers up valuable insight into how B.C. can get a piece of the world’s hottest market. Here’s their conversation… BCB: Let’s start by going around the table. Tony, tell us how you started selling fireplaces to the Chinese. Tony Woodruff: We got involved with China about six years ago for a number of reasons. First, as a place to sell our products in a market that will get more important over the next 20 years. Also, as a way to reduce the cost of production in Canada by buying lower-cost components. We met a very interesting man over there who we’re now partnered with, and we’re manufacturing in Shanghai with him. He has two retail stores in Shanghai and is expanding a store in Beijing. He’s selling our products in retail stores and to developers for new construction. China is a small part of our market, about one per cent. But the growth rate is very high, so in five years that might be completely different. Ben Iosefa: We began in Japan and Korea and I have spent time in China setting up some joint venture projects and building terminals. We’ve taken a conservative approach, and over time we’ve aligned ourselves with agents and distributors that have been able to deliver into the marketplace. But over the last few years we’ve tried to get closer and closer to the end users of our products, so we’re moving away from distributors. Right now the China market makes up about 10 per cent of our business. It’s the fastest-growing market in the world and by 2010 will be the single largest market for methanol, so we’ve stepped it up over there. Noel Lee: Obviously what we sell is not a product – it’s a service – but I do see some common features. I have been involved in partnerships with universities in China, Taiwan, Hong Kong and Korea. We see two types of businesses: retail, where we recruit students individually from their home countries and bring them to Canada, and another where we partner with colleges and universities in those countries, and bring our programs to their country. For mature markets like Korea and China, we deal directly with colleges, but for new markets such as Japan, Vietnam and Thailand, we go through agents. BCB: I hear a lot about how important relationships are when dealing with the Chinese. TW: You’ve got to have trust. And you have to take leaps of faith sometimes. That’s the way Western business works as well, but my limited experience in China is that it’s even more important there. Knowing people, having dinners with their families – it’s important. I sense that relationships are taken more seriously there than in the West. BCB: Would you agree, Ben? BI: Absolutely. I find it’s very transactional here, and everything is to the letter of the contract. In setting up a joint venture there, we had a number of different agreements and spent a lot of time just negotiating the terms of those agreements, getting everything exactly right. At the end of the day, after they were signed, the people that we were doing business with just went off and did what they thought was best, despite everything we had agreed. Eventually we got things worked out, but we didn’t fully understand the people that we were doing business with and their approach to doing business. I think it’s very important to have those relationships in place, first of all, to build that trust – and it’s probably not going to happen over a period of a few months. BCB: Is that why Methanex has taken a more conservative approach? BI: Yes. And we have backed away a number of times where we have had doubts about things, and there may have been the odd opportunity that’s been missed here or there. But in retrospect, I think they’ve been good choices. Typically we’ve found that when we’ve aligned with a distributor or agent or customer with whom we’ve built up that trust, things have worked out in the end, even if the contract hasn’t been followed exactly. It seems like a subtle difference, but it’s a major difference. NL: I would add that the relationship is also built upon cultural understanding. Even though I’m Chinese – Chinese in China, Chinese in Taiwan, Chinese in Hong Kong and Chinese in Singapore are totally different human beings. Even within China, people in Shanghai can be quite different from people in Beijing. We have to do the homework and open our eyes to see whether what we perceive is right or wrong. When we go into the negotiations we can tap into exactly what their intention is. I think face-to-face contact is important, and that’s the source of building trust. It’s critical to actually go there. There’s a certain time and expenditure required to build up the trust. Don’t feel it’s a waste of time or money – once you have that trust, the return is much higher. TW: The precursor to that is choosing the right partner. If you invest a lot of time, money, relationships and banquets in the wrong person, you’ve wasted it. Picking the right partner is crucial. YPW: How did you find your partner? TW: Originally, it was through our export manager and the Canadian consulate in Shanghai. He’s a very interesting man because his kids have been educated in Canada, he owns a home in Vancouver and his wife lived here for many years. He still owns a house here. He’s a patron of the arts and several years ago sponsored an art exhibit in Ottawa for a dozen famous Chinese artists to travel across Canada and paint Canadian icon scenes in Chinese styles. YPW: This is part of the hidden advantage in dealing with China – the human connection that exists between Canada and China through immigration, education and tourism. This individual, we could think of him as part of the ‘Canadian diaspora’ in China. Increasingly, we are seeing the emergence of recent immigrants from China going back home to set up businesses, possibly with their families remaining in Vancouver or Toronto, and continuing that very organic linkage between Canada and China. It’s helpful for us to think of that community not simply as a Chinese group living in China, but part of the Canadian community living over there. TW: When our partner in China is selling retail, between a third and a half of his end-user customers are returned Chinese who have seen products like ours in Europe or in North America and want to reproduce that back home. That’s quite important – and they’re the people with the money, too. BI: We’ve employed a similar strategy in China, where we’re aligning with large industry leaders that are moving from North America into China. We target those companies for a constant base of growth, and then use that as a platform. With some of the more international companies, it’s a good starting point to get your logistics costs down, establish your position and then really start to grow locally within China. BCB: What are the main pitfalls or false assumptions about the market? TW: The biggest myth is that Chinese manufacturing is going to take over the world, which is ridiculous. Should we be bringing product made in Shanghai back to North America? When you really look at the cost structures, the key issue is how much labour content there is in this product. If the labour content is relatively small, it doesn’t matter where you make it. If you’ve got 90 per cent material, those are going to be world prices, so you would want to move production close to the customer. Some industries will naturally gravitate to low-labour jurisdictions like China or Malaysia or Vietnam, but those are probably in the minority. They get lots of play in the press, but if you’ve got an industry where capital is very important, you want somebody with a degree, at least, operating a $10-million piece of equipment. You don’t want somebody wrecking your machine, so there are some businesses that will probably never migrate to those jurisdictions because there’s not the intellectual capital there. The reason we’re here – and you’re talking about China – is that it’s going to be the biggest economy in the world in 25 years. I want to be a part of that. Even today, there’s tons of money in China. Armani opened its biggest store in the world in Shanghai. These aren’t knock-offs – they’re real, very expensive and lots of Chinese people are buying them. YPW: I think the whole debate around the threat to the manufacturing sector in Canada is overplayed, insofar as Canada really doesn’t have a substantial manufacturing sector that competes directly with China. That fear is exploited by the few industries of this country that are under threat. They’re trying to create a climate of oppression and disaster and then request the kind of protection required to keep them going – the bicycle industry, for example, and the barbeque industry. This could be a dangerous trend if we start to close off our borders to Chinese imports. It will create a backlash in China. Trade in the natural resource sector has played out quite well, but that’s a cycle that will probably come to an end fairly soon. The next cycle, as we move into a new phase of Chinese economic development, would be the service sector, where Canada traditionally has lots of expertise. It’s design, it’s servicing, it’s branding – as Chinese consumers become more sophisticated and gain more purchasing power, we’ll see a rise in Canadian participation in these areas within the Chinese economy. [pagebreak] BCB: This brings us back to false assumptions, like the idea that knowledge-based industries need to be wary going over there because of the perception that their intellectual property is not going to be respected. Is there something to that? YPW: There are ways of getting around it. You could preserve the aspect of your production that is the most technologically sensitive in an area in which you are more comfortable say, Canada. Send aspects of the production that are less technologically sensitive to the Chinese. BCB: Noel, how are local colleges positioning themselves to capitalize on the huge wave of Asian students who want a Western education? NL: Canada has always enjoyed a very high reputation in terms of quality. We don’t have a lot of private universities, so the quality of education is on par from one province to another, from one university to another. B.C. is especially well positioned to become a hub for Asia-Pacific citizens to come here for tourism or education. BCB: Do you think we’re doing enough to take advantage of that opportunity? YPW: I think Vancouver is cosmopolitan, but it’s not metropolitan. We have done very well in creating an environment where different cultures – particularly those from Asia – feel comfortable living here. The so-called ‘mainstream’ culture has been very accommodating in dealing with the fusion of very different cultures and traditions. Vancouver is a model, a global model, in that sense, but it hasn’t quite achieved the place in the mental map of Asians that it is an actual hub of activity – of Asia-Pacific commerce, Asia-Pacific research or Asia-Pacific financing. BCB: We’re not there yet. YPW: We have not achieved that. I think we can, because the raw materials are in place now: the cosmopolitanism, the human capital and the energy is here, but we haven’t quite brought it together yet. That will take time, but it will also take a certain amount of branding on the part of the business community and various levels of government. I like to think of Vancouver as North America’s Asian capital. If there is a city in all of North America that has the credentials to be the premier place where things Asia-Pacific happen – in culture, finance, business, deal-making and intellectual activity – we have the credentials to be that city. But it will take a concerted effort to create that. TW: Are the Olympic Games a possible way to leverage that? YPW: What an opportunity to create an image for Vancouver that is a lasting one and that has unique Asia-Pacific characteristics. We already have talent and knowledge and skills that are just mind-boggling in this city, but we haven’t been able to mobilize it in such a way that the whole is greater than the sum of the parts. BCB: But how? People talk in general terms about this huge opportunity in the Asia-Pacific region and growing demand in China, but there’s no clear strategy. Any thoughts on that? TW: I resent politicians telling Canadian businesses what to do. We’ve had a former prime minister berate the business community for not being pioneering when frankly, they don’t know what they’re talking about. I don’t think it’s a matter of politicians running a flag out and taking charge, because I think the business community is likely to be extremely skeptical. From my experience, when you go and ask politicians for something practical, they’re out. They don’t listen. YPW: Politicians’ ‘rah, rah, rah’ is just that, ‘rah, rah, rah.’ There are regulatory and policy issues that we have to look at that can really make a difference. One area is infrastructure – capacity constraints at the port and to a lesser extent at the airport, and the ability to facilitate the flow of goods not only arriving at the port, but going across Canada and into the U.S. TW: And treaties. China has significant input treaties and taxes. It’s not free trade both ways. YPW: This is where the business community has to articulate to the government its trade policy priorities. Some people are talking about a free trade agreement with China. I don’t think that’s quite realistic at this time, but there are specific impediments we can get our own bureaucrats working on – the issue of visas, for example. We need to have a smoother visa-approval process that allows the flow of business people. TW: Why do you say we couldn’t negotiate a free trade agreement with China? YPW: It takes two to tango. China has a long list of higher-priority partners. BCB: Before we wrap up, what do you see as the challenges going forward for your companies and the province? TW: The micro-challenge for us in China is that there is no tradition whatsoever of fireplaces in Chinese homes. We have to create a demand, and that is a slow process. On a larger level, something we haven’t talked about is that China has to face some kind of political transition over the next 15 years. They’ve got a fairly good economic society today and they have a fairly fixed political society, and those two clash. The party’s desperate to maintain power. How does it do that and allow China to manage a peaceful, political evolution? If it’s a violent transition, everybody’s in trouble. YPW: While there will be continued incidents of social protest across China around bread-and-butter issues, conventional wisdom is that these protests will not be strung together in such a way that they will constitute a national movement that threatens the power of the communist party in Beijing. This is looking out five to 10 years. Beyond that, obviously, all bets are off. But the central challenge in China today is one of performance, and the ruling party understands that there’s a huge pent-up demand on the part of the Chinese for material goods. They are trying to satisfy or suppress the desire for political freedom by delivering on the material side. This worked in Singapore for many years. BCB: It’s not sustainable. YPW: Obviously not. People have higher aspirations, but let’s not underestimate the ability of the party to engineer a transition to a regime that may strip them of some of their all-encompassing powers, but that could stave off something more catastrophic, like social collapse and civil war. BI: What I’ve found is that as long as your company’s core strategy is maintained with some cultural fluency when going into China, you can achieve success. NL: For us, getting a visa is of utmost importance. Everybody in the industry knows it’s hard for a Chinese student to get a visa and come to Canada. The success rate is about 55 per cent, whereas for Korea, Japan, it’s over 90 per cent. We will maintain the Korean and Japanese and Thailand markets, and slowly move our strategy to China in terms of bringing programs over there. There’s a huge demand in China for acquiring information, credentials and knowledge. But the more demand there is, the more foul play you see inside the country. There are a lot of agents representing schools in Canada or America, but Chinese students come here and find: ‘Uh oh, it’s just a floor with two rooms, how can I get a degree?’ So I don’t blame the students for not trusting us in delivering the services. Because of this, I don’t blame the immigration officer for not authorizing it. BCB: That could be a major hurdle if Vancouver is going to brand itself as this international learning hub. YPW: The officials have to be creative in dealing with this problem. I can think about pilot projects that accelerate the processing of visas for particular classes of students and particular classes of business people, for example. Or sub-contracting the private sector to do some of the screening so the bureaucrats don’t have to deal with the first layer of applications. But unless we are willing to experiment, we will forever be stuck in this bind where the private sector, the schools, the tourist agencies are saying, ‘You’re being too tight with the visas.’ And the bureaucrats are saying, ‘We just have to be careful because there’s so much fraud and misrepresentation out there.’ If it’s a priority, we can do it. TW: Because they will be our future trading partners. BCB: It all fits together, then. It’s about creating future customers. TW: It’s future economic integration. YPW: Yes. There is already tremendous diversity and imagination in the private sector about how China fits into companies’ strategies. We need a way to learn more about this diversity of activity, this creative burst that’s out there. By disseminating information about the ways Canadian companies – and B.C. companies in particular – are doing business in China, they will be a model for the rest of the private sector.