# Transcript

Haider Ali
With me today is Adrian Lindridge who is a Director of the TSI Group, an international, privately owned organisation that manufactures in China. It competes in the international health food supplement and pharmaceutical markets, producing specialist raw materials, and tablets and capsules. The TSI Group operates several production facilities located throughout the wider Shanghai area. Its head office is in Shanghai, with sales offices located in the major Western and Eastern markets. Sales are business to business, with the customer base ranging from world leading pharmaceutical companies to specialist patent holders and local brand owners. Hello Adrian and thanks for joining me.
Adrian Lindridge
Hello there Haider.
Haider Ali
What do you think are the opportunities facing Western organisations in trading with Chinese businesses?
Adrian Lindridge
Well, trading with China can obviously be in two directions. You could be trading Chinese manufactured goods in the West, or you could be a Western organisation looking to sell to China. Although my current experience and comments will probably relate more to the former route, I believe they are applicable to both.
Regarding opportunities, basing or sourcing manufacturing in China obviously offers advantages. China has a huge manufacturing base and experience to draw on and a well publicised cost advantage to offer. In fact, China’s growth has been widely built on its ability to find ways of reducing cost and one of the advantages of our business base is that – the cost.
I have travelled to both India and China, and in my view, China has the benefit of a much more highly developed infrastructure (everything from roads to power to accommodation), which is built to fuel further growth. This is obviously deliberate and its part of the Chinese Government planning; manufacturing is actively supported. And as one Chinese businessman said to me, China should be viewed as being managed like one very large manufacturing company which brings advantages to a company looking to move there.
From a logistics perspective, China can offer an additional benefit for European companies – as a shorter stepping stone to the still growing (non-indebted) markets of the Southern hemisphere. We hold, as a business, significant sales in Japan and Australia, and supplying from China warehouses obviously makes a lot of sense. And it could offer similar benefits for European companies.
Haider Ali
And what problems do you think Western organisations face in trading with Chinese businesses?
Adrian Lindridge
Well, I think problems could arise from a number of areas. In no particular order, because they will probably depend on the business area you are in or looking to investigate. From a sourcing viewpoint, the sheer size and number of potential options available can be daunting. You really need inside information to help identify the best partner for you – say the partner with the most appropriate experience and the best-quality fit – the one who best understands your requirements. Obviously that can take some work.
Logistical issues can arise from European companies relating to the manufacturing lead times and the shipping times. Although high-value items can be air freighted, which cuts time, for sea freight you are looking at around six plus weeks from shipping to importation to arrival in your own warehouse, which can have implications. Financially it can have a significant implication. For cash rich companies it might be no issue, but it can mean that you are turning over your cash only one to two times a year.
If you are sourcing from China, you need to ensure that you carefully define and control your technical and quality requirements. Your specifications must be absolutely clear and not open to interpretation. If it is ambiguous or there is any room for a misunderstanding or interpretation, don’t be surprised if your Chinese supplier takes the lowest cost option – that is one of the reasons you have gone to him in the first place!
If I’m thinking of problems, I’d just say be prepared for bureaucracy, specifically procedures, certification and permissions. The Chinese follow rules and your local partner here will be invaluable in understanding what is required. And then finally, of course, you’ve got the cultural differences.
Haider Ali
Could you actually expand on some of the cultural differences that pose challenges to Western companies?
Adrian Lindridge
You certainly need to be aware of the cultural differences. It’s something I’ve come across several times. Management styles can be very, very different and driven by respect and ‘face’. Chinese senior staff will not challenge management comments or decisions in the same way that Western employees do or feel able to do. It’s quite often I’ve seen it that senior staff don’t want to raise a comment because they might embarrass the manager and make him look bad – it’s losing face in front of other staff. And that can be a no-go area in some companies.
Chinese managers are expected to make decisions that the reports will implement based on the information they’ve been given which to a Western business style can appear autocratic. So that’s just something you need to be aware of. In a Western environment you might be used to tearing into a member of staff but in China it’s not done. It won’t go down well so expect your meetings to be very different over there.
Face. Face can also be a problem because problems are not openly discussed as they are in the West. The Western style of bringing problems out in to the open, analysing them, reaching consensus decisions and then taking corrective action can be felt embarrassing by some Chinese. So you may find that your partner has a preference to sort out problems internally, rather than discussing them with you. So it’s just something to be aware of so that you can question closely.
Finally, as far as cultural challenges are concerned, relationships are very important and highly valued. There is no substitute for regular face-to-face meetings, and that includes going out to share a meal and a drink with partners or staff. Obviously it is OK to spend time and it’s expected to spend time and money reaching a suitable contractual agreement, but my recommendation would be to spend an equal amount of time getting to know the person you are dealing with because building that relationship will pay you back many times over.
Haider Ali
So, for companies not currently involved in China, what do you think the growth of Chinese businesses represents – a threat or an opportunity?
Adrian Lindridge
At first glance, Western organisations may seem vulnerable on a number of fronts. Caught up in home recession, facing increasing Chinese competition, and with a reducing amount of resources to defend or create growth with. The truth is, though, in my view, that competition has probably been there for some time. Competition is always there. It will come domestically. It will come internationally. And in a recession we all know survival of the fittest rules.
The likelihood is most companies have already been facing competition from China for many years. I’ll give you an example, our Chinese facilities produce tablets and capsules using raw materials that are purchased from the big European suppliers; our European competitors are also buying from them. But, perhaps unsurprisingly, those European raw materials suppliers are producing in their own facilities in China. So do bear in mind that half of China’s exports are produced by foreign firms which underlines the threat’s probably already been there in some time in one way shape or form.
For me, I think China must represent an opportunity and China business must represent an opportunity. We have already talked about lowering the cost of goods, about servicing the Southern hemisphere. The other significant opportunity to be had is the domestic market of China. With recession working against you in domestic markets, it would be madness not to consider developing your business in those parts of the world that are not burdened with debt and are still growing.
China’s domestic market is becoming increasingly sophisticated, and its middle class is open to Western goods. As an anecdote, six years ago when I was in a Shanghai restaurant I noted there was no wine list. ‘Chinese don’t drink wine’ came the reply. Now, I see wine becoming increasingly popular in the large cities, amongst those with disposable income. So the change is there. And the opportunity is there.
I suppose one final point to note on this is – if you are looking at the China opportunity, don’t get caught up in the numbers game. Yes, China has a huge population and a massive middle class, but there is no substitute for careful marketing. So, do your research, get the best partner possible, plan carefully, and implement it with monitoring and adjustment to feedback. And if you do, you will have a foothold in the market that could just, well, become the world’s biggest economy.
Haider Ali
The European single currency, the Euro is currently facing well publicised problems. How, in your opinion, could this affect EU–China trade?
Adrian Lindridge
According to the basic principle of economics, it should make Europe more competitive. A depreciating Euro versus an appreciating Renminbi should mean European goods are effectively cheaper. I mean, for some goods, this might be the case, but for many goods Europe is so far off, it is difficult to see it competing against any developing market. A large proportion of China’s manufacturing is actually low tech so it is difficult to see the European business being able to compete with higher labour and higher business costs. Basically, it’s difficult to see them becoming competitive without real change.
One way that Europe could respond is via increasing protectionism, such as increasing the duty rates applied to imported goods. However, China would respond to any attempt to increase trade barriers by introducing its own which would be counterproductive, and Europe’s premium brands are, by all accounts, doing very well in China at the moment and any visitor to China will see that with the shops that are opening up over there.
Haider Ali
Given your senior role dealing with Chinese organisations, can you give us some insights into the challenges that Chinese organisations face when competing internationally?
Adrian Lindridge
Well, our organisation is internationally owned but we employ a mix of expatriate Westerners and Chinese locals within the organisation. And so I think we’ve got a good experience, or seen good experience of what happens in a China-based organisation when it is trying to deal internationally.
Looking at China as a whole – significant proportion of their business is foreign owned and it’s manufactured in China, shipped abroad for the Western owning company. There’s an equal proportion of Chinese companies looking to establish themselves internationally and grow and some are proving very successful at it. I think the issues that they will face relate culturally and with experience of dealing internationally.
If you just look at lack of experience of international business, it’s relatively recently that travel from China has opened up for Chinese nationals. So there’s relatively few people who have travelled internationally and have first hand experience to know what interfacing with a Western company means. They’re also highly desirable. So some of the implications to a Chinese company could mean staff retention becomes an issue because there are a lot of companies looking for that experience.
We’ve already discussed the fact that culturally Chinese attitudes to management and company running can be different to Western styles and that’s something they have to adjust to as well – overcoming the embarrassment of potentially causing problems in meetings and realising that they can open up and make their viewpoints very clearly known.
Haider Ali
Thanks very much Adrian, that’s a lot of useful insight into the challenges and rewards of doing business with Chinese organisations. It’s been very useful to see not only the interpersonal side of doing business there, but also at the level of the organisation and in terms of broader strategy.