Podcast Transcript - China: Putting risk in perspective

Host: Michael Mancini

If you've been thinking about doing business abroad, chances are you've also been thinking of risk. The risks are real and they can make or break your export venture. But while doing business abroad is inherently more risky than operating in Canada, the rewards can also be great. Today we'll focus on China, a key market for Canadian entrepreneurs. I'm Michael Mancini, editor of CanadExport, the government of Canada’s magazine for entrepreneurs who want to trade, invest and prosper in the global marketplace. Look for our magazine at canadexport.gc.ca.

In this podcast, we'll put risk in perspective. I'll speak to one Canadian executive whose company went into China and had one setback that forced them to take immediate and decisive action. Hear what happened, and how they've continued to thrive in the Chinese market. I'll also speak to two experts who will tell us what the risks are, and how to minimize and manage them in China. But first I have Gary Johnson on the line; he's Vice President of Sales and Marketing at Bayly Communications in Ajax, Ontario. Thanks for speaking with me today, Mr. Johnson.

Gary Johnson: Hello Michael. Thank you very much for having me on the call.

Michael Mancini: Why did your company look to China?

Gary Johnson: We had decided we wanted to be there, we wanted to be there for the opportunity and also for the experience of competing in what was shaping up to be one of the first truly globally competitive market places. The number of our competitors that were there, we saw so many setting up businesses and competing.

Michael Mancini: What were the challenges you face in China?

Gary Johnson: At the time, Bayly was selling into 25 countries. We had a strong presence in Latin America, and we had begun selling into other countries in Asia, like Thailand, Indonesia, and the Philippines. So the only challenge we initially perceived going into China was the presence of strong language and cultural barriers. We continued what we had done in Latin America; we'd worked with the Canadian government missions. We joined the one in China; we also hired a pre-sales engineer here in Canada who is originally from China. He was able to help guide us in the market, help prepare in advance of the missions; there's quite a bit of homework you can do to make the most of both the trips and the most of the visibility that the mission provides.

Michael Mancini: What other challenges did you face?

Gary Johnson: The main thing in China is the feature set that their products can offer and the price points that they meet. So you're going into a market that represents tremendous potential on a volume basis, but local expertise that's superb; quality may be an issue mind you. So, for us, it attracts global competition; it makes it a very different selling proposition. When price is the main factor, but they want the functionality and when you get into our space of critical infrastructure, they want bullet-proof reliability that we offer as well.

Michael Mancini: So, was it worth it?

Gary Johnson: Oh, absolutely yes. When we went into China, we were selling in 25 countries. Bayly Equipment is now installed in telecom networks in over 67, and China is key to us today, and it was key in our experience in expanding globally. It really helped us, and is a constant reminder in the need to be properly prepared and to do our due-diligence going into these markets.

Michael Mancini: Now, why the need for due-diligence? Tell us about your early experiences in that market.

Gary Johnson: We received a module back for repair. We don't often get them back and when we got this one back and took a very close look at it, and it just blew us away. It was identical in every respect, from a look and feel, it had the same brand, same colors, it was complete with our quality manager’s signature, and all the stamps were on it. But when we took a closer look, we were able to identify at least 17 differences, and the quality of the materials that went into it, everything else was quite different once you got right down into what it was.

Michael Mancini: What was your initial reaction? How did you respond to this?

Gary Johnson: We were shocked. We didn't think it could happen to us. We were already in 25 countries where it never happened before, and really we just wanted to know two things: who was doing it, and how do we make them stop?

Michael Mancini: So how did you solve the problem?

Gary Johnson: Our product is comprised of a chassis and a number of modules, and the modules are selected based on the application. So, it seemed to us that it would be easy to copy the chassis and some of the core modules, but to copy all 15 or 18 versions of the modules that we have might not be all that attractive. So one of the ways we thought that we could address the issue was to not just respond when they only wanted select modules. We were very conscious that a chassis went with everything, and felt that in that way we were minimizing the amount of copy product that was being inserted. In the end, we adapted our selling practices to minimize the situation. We weren’t sure they could copy ever module we had, so we were very conscious of requests for us to close for orders for just individual modules not complete solutions. That was probably the main thing. We also contacted our partners, our customers, just to make sure that they understood that this had happened, and because our product was being bought for its quality, they recognized that buying copies wouldn't give them what they were looking for.

Michael Mancini: Now, what do you do to prepare for a new market today?

Gary Johnson: When we're planning to go into a country, we contact the telecom desk at the Trade Commission. We work with EDC, and we get their feedback on possible customers, possible partners. We also work hard to get to know our end user customers, so we have a link to what’s really going on in the market.

Michael Mancini: Well, obviously you've developed a winning strategy in China. Now 8% of your sales are made in China. What did you learn from this experience? Or setback, rather?

Gary Johnson: In the research we did subsequent to finding out that our product was copied, I found a report that showed that China wasn't number one of the Asian countries that copy. And as we got into counterfeit issues, it's not unique to Asia by any stretch. It's in Canada, it's in the U.S., it's in Latin America, it's everywhere. The extent to which it was there was quite something, but the fact that China wasn't the number one of the IP [intellectual property] theft countries, as rated by the article I read was quite interesting as well. We thought we were too small and too niche to be copied; I think China is probably overstated as a market where this could possibly happen. I think it can happen anywhere you go, and that's where the due-diligence is key. And there's been no evidence of copied product outside of China, and in fact it was only that one instance where we received that one back. They seemed to have been able to control what they were doing.

Michael Mancini: Gary thanks for being with us.

Gary Johnson: And Michael thank you very much. It's been a pleasure talking with you.

Michael Mancini: I was speaking with Gary Johnson, Vice President of Sales and Marketing at Bayly Communications. He was in Ajax, Ontario.

With me on the line now is Pierre Pyun, Senior Trade Commissioner at the Canadian Embassy in Beijing. Thanks for joining me, Pierre.

Pierre Pyun: It's a pleasure to be with you.

Michael Mancini: Now, there are some risks involved in doing business in China. Why should Canadian companies still be interested in that market?

Pierre Pyun: Well, China is a very attractive market because of the sheer size of this country and the emergence of the middle class, and the emergence of China as the science and technology force, as well. Indicators are showing that, and as a major exporter and investors abroad. So on all strengths, China is becoming a very substantial player in the world economy. So in that context a lot of clients are interested in this market, but you have to be mindful that it's not a monolithic market, it's actually a collection. We can see a collection of many, many different markets. They are differing provincial regulations; sometimes conflicting provincial regulations as well, versus the central regulations. The regulatory framework is lacking in some sectors.

Michael Mancini: You've touched on some of the challenges of investing in China. What are some of the other risks?

Pierre Pyun: This is a very competitive market. There are significant cultural, business cultural differences. The companies have to be well prepared to tackle the Chinese market. And there are certainly difficulties in getting a timely and actionable market intelligence. There's the risk, of course, of non-performance of contracts, non-payment, and delays in payment from your customers in the Chinese market. Infringement of intellectual property rights, I think, is a very present risk, and something that many of our clients are concerned and have heard about in Canada. The reliability of your local partners, I think, could be an issue. You have to make sure that you do an extensive due-diligence on your partners. There are human resources risks as well, to be mindful. Competition is very strong for a staff with managerial skills, with experience, and there's a dearth, really, at the level of investment in the Chinese market is going very fast. There's a dearth of skilled labor, and especially in coastal provinces. And skilled managers as well. So staff retention, and recruitment and retention, is a risk as well. And also another point that I wanted to flag is the logistics cost. It's still under development in the Chinese market, and the logistics cost to move goods are usually higher in China than in developed markets.

Michael Mancini: What are some risks Chinese entrepreneurs might perceive in Canadian firms?

Pierre Pyun: Many of our clients are small and medium sized enterprises. From a Chinese company perspective, when they have a vast range of choice, they want to know how reliable the Canadian supplier is. And sometimes that's where the Embassy comes into play here. And we play more of a goal to give confidence to the Chinese customers or clients. The company that has a proposal to supply a service or goods to the Chinese customer, it can be a Canadian firm that we've dealt with in the past, and their well established. So that's certainly a perceived risk by Chinese companies.

Michael Mancini: It was a pleasure speaking with you, Pierre.

Pierre Pyun: Thanks for the opportunity.

Michael Mancini: I was speaking with Pierre Pyun, Senior Trade Commissioner at the Canadian Embassy in Beijing.

Let's go now to Export Development Canada. EDC is a bank and insurance company under one roof. It is Canada's export credit agency, offering financing, insurance and risk management solutions to help Canadian exporters and investors expand their international business. Joining me now is Robert Forbes, Vice President of International Business Development at EDC. Thanks for speaking with me today, Robert.

Robert Forbes: Well, thank you very much for having us.

Michael Mancini: We've all heard of the potential of China's billion plus market. What should Canadian companies do to prepare themselves financially to do business in China?

Robert Forbes: I think it's pretty important, in an environment where companies are being created overnight, that there's a lot of very fast paced decisions being taken, that companies know who their dealing with, and they get the piece of mind to manage the credit risk associated with those transactions. So taking the time to get to know your buyers that you're selling to, it's the old adage that you need to know who you're selling to. That's a very important part to doing business in China and it takes time and effort. And then we see a lot of small and medium sized businesses doing business in China, and the issue of working capital formation, just keeping enough cash flow going to meet demands of production is a big issue in dealing with China. And China is a market that takes commitment, it takes capital to do business there and you know, if you have lots of great sales but you can't form the working capital you need to complete the sales, then you're going to be in trouble. So, the world over that's a challenge for exporters looking to go to new markets, is just to keep their working capital levels at a sufficient level to do the business.

Michael Mancini: You're stressing the need for access to working capital. Why is that specifically a challenge in China?

Robert Forbes: I think the pace at which companies try to ramp up production is part of the cause. The speed at which business is being done. And the fact that you don't have the same relationships. You need a different set of financial relationships to operate within the market, and you're not going to have the benefit, most likely, of a western bank to deal with when you're dealing within China. So, that’s probably what’s unique about China, is that there’s not a lot of international bank presence, Canadian bank presence, to really draw on. You’re going to probably be dealing with a Chinese financial institution, and that’s a new kettle of fish for a lot of Canadian companies.

Michael Mancini: What are the three key actions Canadian companies should take to prepare for these risks?

Robert Forbes: First and foremost in China, it is a market you need to take the time to understand, you need to do some due-diligence. You need to check, and check, and check again to know your partners before signing a contract. You really need to take advantage of whatever services are on the ground, for example the Canadian Trade Commissioner Service, to get to know the market and what you’re getting yourself into in advance. So preparation and understanding the market is first. Secondly, take the steps to mitigate your financial risk, and working with your commercial bank in Canada and with Export Development Canada, in particular our insurance program, you can do a lot to manage and mitigate the risks of ramping up your sales in China, and I think that’s pretty important, because if you have a bad credit experience, having the insurance already in place to fall back on can help you live to fight another day. And being patient and being flexible. There’s no such thing as a transaction that’s risk free, but having a strategy that takes a medium or long term perspective is pretty important in China as well. So yes, you have to respond to the immediate opportunities as they come up, and you need to be quick to do that, but you probably need to have a longer term strategy that’s sustainable and that does have some contingencies in it to deal with problems as they come up.

Michael Mancini: Thanks for speaking with me Robert.

Robert Forbes: Thank you Michael.

Michael Mancini: I’ve been speaking with Robert Forbes, Vice President of International Business Development at Export Development Canada.

Well, that’s all for this podcast edition of CanadExport. If you’ve found this show interesting and you’re currently preparing to do business abroad, or if you are already, the Canadian Trade Commissioner Service is there for you. As Canada’s most comprehensive network of international trade professional, the Trade Commissioner Service expert advice, problem solving skills and a global network of contacts. So check us out online at tradecommissioner.gc.ca to learn more about the benefits of the Canadian Trade Commissioner Service. While you’re there, don’t forget to subscribe to CanadExport, our free twice monthly magazine. You can also download our other podcasts at iTunes with the search word: CanadExport. We’d like to hear what you think of our podcasts, so write a review on itunes, or drop us a line at canad.export@international.gc.ca; your feedback is appreciated.

I’m Michael Mancini, signing off for now.

To download our other episodes, just go to www.canadexport.gc.ca or go to iTunes and use the searchword “CanadExport.”