China’s RF and Microwave Opportunity: Building a Strong Commercial Presence
The market for RF, microwave and wireless components, materials, subassemblies and test equipment in Greater China (defined as Hong Kong, the People’s Republic of China, Singapore and Taiwan) has grown dramatically during the past five years. The market, once dominated by small domestic military programs and low technology/low margin commercial programs such as police radar detectors and C-band LNBs transferred to contract assembly houses, has evolved into the most dynamic market in the world. There is a substantial and growing demand for power amplifiers, large format antennas, last mile broadband components, cellular base station infrastructure and digital radios.
The fastest growing geographic segment is now found in mainland China. The central government provides strong incentives for wireless infrastructure development and China’s technical universities are doing their part by minting electrical engineers specializing in RF technology at a fast clip. China’s large telecom players define a portion of the opportunity; however, the prospects represented by the small and medium size wireless companies are just as attractive.
Developing new sales in the Chinese market is certainly an attractive goal for foreign microwave companies, although the terrain and the rules of good business are somewhat different than in the West. Before jumping into the market, it is necessary to craft a China focused plan.
As you would at home, when considering a new territory or market segment, it is worthwhile to study the terrain to learn if there is a fit between your products and the market needs. Generally speaking, market entry plans follow the continuum: is it feasible; is it desirable; is it practical; and how do we do it?
Is It Feasible?
With dedicated resources and sustained effort, any Western microwave company can develop new sales in China. The question will always be: is it worth the effort in dollars, effort and opportunity cost to craft a new commercial presence? Before committing to this type of program it is necessary to profile the market. There are a number of ways to carry out a market profile study including engaging a consultant that specializes in market research, utilizing profiles produced by Chinese professional societies and academic groups or utilizing statistical indices produced by government entities. These methods are a poor substitute for getting on a plane, flying to China and knocking on doors. In a society that values personal relationships, especially with foreign technology companies, arranging for discussions and interviews with microwave companies is quite possible. While this sounds daunting if you have little or no experience in China, if you are willing to share some information about your products, technology and company, it is quite possible. What you will need is an introduction by someone that knows you, your company and the individuals you would like to visit. Introductions can be arranged through the assistance of your state or provincial government and national government’s trade development offices. Another and often more productive source of introductions are foreign companies operating in China. Companies in allied or related technical sectors to that of your company are a good source of introductions and may be interested in forming a commercial alliance with you in the future.
Is It Desirable?
Once you have determined that there is a market for your products in China, it is necessary to decide if the opportunities you have discovered are attractive enough to launch a commercial effort. When rolling out a new product introduction plan in China, it is a sound strategy to challenge conventions, which are internal to your company in existing markets. Local requirements related to pricing, field support, technical standards, packaging and overall fit and finish may be quite different than what you are accustomed to at home.
One example of this difference can be illustrated by lead-time requirements. The overall pace of business in Greater China and more specifically south China is much faster than that found in the West. Compounding this cultural bias, contract manufacturers and OEMs in China are dealing with compressed lead times from their customers. Extending their supply chain thousands of miles to your shipping dock is an additional challenge for them and you. Accommodations such as signing up a local stocking distributor or training company, agreeing to a consignment program or future extended payment terms soften the blow (and cost) of longer shipping times.
An additional factor to consider is how to settle payments in China. During the period when you are developing a commercial relationship with new customers, it is advisable to start out with cash in advance (CIA) or letter-of-credit (LOC) terms. CIA terms are great for your business, but most customers are resistant to them. LOCs are a virtual guarantee of payment; however, they do have a cost in terms of banking and paperwork fees and administrative burden. One other approach in the case of transplanted customers from the West may be to secure a payment guarantee from their corporate parent.
Before exporting to the RF and microwave market in China, it is critical to implement an export control and compliance plan. Many assemblies and components produced by microwave companies are considered to be “dual use” by the US Department of Commerce (and in some cases the Department of State). That translates to understanding if your goods can be used either for commercial or military end uses. Because you do not want to run afoul of the US government, you are duty bound to determine which end uses in China’s military segment are restricted.
Understanding the prohibitions and requirements of the Export Administration Regulations (EAR) is complicated and will require some homework in order to create an internal knowledge base about the obligations of you the exporter, embargoed destinations, end user/end use profiles, the Denied Parties List, the Entities List, specially designated nationals list and the re-export policy.1
An important adage to help in grasping all of this new jargon is “know your customer.” Implementing an export compliance plan becomes much easier if you have visited your customers in China, toured their facilities and have developed a personal relationship with a senior executive. The key point to remember is that you cannot trade with Chinese customers at arms length. Even if there is an intermediary company such as a distributor or trader, it is your ultimate responsibility to know whom you are selling to and that the goods actually end up in the place they are destined.
Is it Practical?
Once you have developed a profile of the market in China and identified enough opportunities to warrant taking the next step, it is crucial to model how the plan will fit with your overall business goals. The process of setting up a China focused organization is significant and can be distracting. If you are not prepared to support a two- to three-year effort with funding, internal resources, time and emotional energy, you probably should not start at all.
Key predictors of success in China fall into several categories, including: senior management’s commitment to the project; the assignment of the right person in the role of “China Champion”; providing training to your customer service group; and the persistence of your organization taken as a whole. One of your executives needs to be a regular presence (perhaps four times per year in years one and two) in front of customers and trading partners in China. This is a society that places an emphasis on face time. If you want to do business at the highest levels, your company cannot send a junior engineer to fill the shoes of a C-level executive.
Within the organization, it is necessary to stay on point and keep the China effort visible. This is best done by assigning one person to direct all aspects of the development program. It is stiff necked and impractical to expect distributors, representatives and customers new to your company to be able navigate the complexities of your organization. Funneling all correspondence through one person will streamline your response, focus the organization on what is important and significantly shorten the sales cycle.
Even with an active champion in place, your customer service group will likely be challenged with a flurry of demands presented in a form of English that they do not often encounter. Training is key to prepare them for reading and interpreting non-standard English and responding in a simplified style. Customer service specialists will also encounter a sense of urgency on the part of Chinese customers that can be frustrating and at times painful. Remember that China’s mercantile culture is at least five thousand years old Ñ we in the West are newcomers to international trade and cannot impart our norms overnight. Resilience on the part of the customer service group and the broader organization will allow you to overcome this cultural bias.
Taken together, all of these elements are a measure of a company’s readiness to do business in China. While much of this may be new, it is all learnable. Also, if you stumble, you can get up and keep going.
How Do We Do It?
When your company has decided to dedicate resources to the China market, you must decide how to take the first step. Most companies will default to assigning one or more manufacturers’ representatives, shipping off a box of literature, providing an initial sales training and then hoping for the best. While this approach often works in the West, in a market as complex as China’s it may not be the best approach. Broadly stated, new product and line introductions in China are difficult. Representative organizations sell best when the going is easy. You will always be competing for mind share within the rep’s organization and space in his catalog case.
If you choose the rep route, it is best to put your best foot forward with them and their customers. This means re-crafting your web site to include a Chinese language toggle switch and printing bilingual brochures and collateral materials in an aesthetic that is attractive to Chinese technical people. It also means assigning a dedicated resource within your company one person to field all questions related to doing business with you.
If your product is sufficiently complex, using rep organizations alone may not be the most efficient route. Many Western companies find that they can accelerate sales growth by placing their own staff on the ground in China. A tried and true approach is to recruit and hire an experienced “rain maker” in the role of country manager or business development manager. (The knotty problem of employing a Chinese national before you have an official presence in China can be dealt with by using the employment agencies found in most major cities in China). She can provide day-to-day management of a corps of representatives, guide your exhibition and trade show strategy and, most importantly, develop a personal relationship with your customers and their customers. As greater Shanghai is the business capital of China, Shanghai or one of its industrial suburbs is a logical home for your first employee.
After the business development manager has gained ground, many companies begin to hire field application engineers (FAE) to provide technical credibility and enhance service. With employee number one in Shanghai, each new FAE can broaden your footprint. The microwave and RF industry is concentrated in four areas: the Pearl River Delta (southeast corner of China); the Shanghai-Kunshan-Suzhou corridor including Nanjing; greater Beijing; and, recently, Chengdu. It is important to have a coherent strategy to place staff in all of these locales.
A special note regarding employment profiles in China: the culture in your company is likely to be oriented to the West. Even with the best international business culture training as preparation, you and your colleagues may be somewhat rigid when presented with the cultural tableau presented by China. Because of this challenge, it is useful to recruit and hire Chinese nationals that have already had some form of Western cultural exposure. This may include having lived abroad, having attended a college or university in the West, past business travel outside of China or time spent as the employee of a large multinational company or organization.
Another factor to consider is the ability of key employees to travel internationally. It is difficult for some Chinese to obtain visas to travel to the US and some other Western countries. This can be mitigated by hiring employees that have a current US visa, are married or both. It may also be necessary for your staff to support customers in Taiwan. Travel to Taiwan for Chinese nationals, although not impossible, is very difficult and requires many months of advance planning.
A More Tangible Presence
After you have built a market presence and the orders are accumulating, the next step is to consider establishing real and tangible business in China. Everyone likes to trade locally and launching an official entity in China will be a credible step in becoming a local supplier.
There is a hierarchy of commercial tangibility for foreign companies operating in China. The most informal is airlifting in staff from the home office occasionally to support export sales. The next step is having your own employees in China (via an employment service). After this, a more substantive presence can be in the form of a Representative Office. “Rep Offices” as they are known in local parlance can perform commercial management including marketing, product promotion, sales training and technical service. Rep offices cannot enter into contracts, issue invoices or accept remittances from customers. There is no long-term commitment attached to operating a rep office.
A more substantive business can be had in the form of a trading company. Foreign trading companies can import finished goods, markup the price, convert the currency to yuan, issue official tax invoices and collect payment. In some cases, these entities are tax advantaged. Almost all foreign trading companies are located in the Wai Gao Qiao free trade zone section of Shanghai and carry a capitalization requirement of US $200,000. Trading companies are often a good choice for companies that want to serve the Chinese market but plan on keeping manufacturing at home.
The most concrete form of entity available to foreign companies is the Wholly Foreign Owned Entity (WFOE). WFOEs can be resident in any of China’s special economic zones and a variety of attractive tax incentives are available. This type of entity allows foreign companies to manufacture in China and be considered local producers (no import duties are levied). They can sell domestically as well as export to markets outside of China. Officially, there is a very small registered capital requirement, but from a practical perspective, US $200,000 is the minimum entry requirement.
The most important factor in launching a successful sales effort in China is organizational persistence. This process can be enlightening and fun for your company, but it is work. Changing the way that you do business is never easy and will stretch your colleagues and the corporation. International travel, long hours spent on the phone calling across multiple time zones, rapid paced demands and unique technical requirements are ever-present challenges. To keep your company on target, remember that you got to this point because you have a product that is in demand in China and many Western companies have succeeded by following the same route. With dedicated effort, new customer relationships will emerge, orders will become substantial and profits will increase.
EastBridge Partners LLC, headquartered in Boston, MA, with offices in Hong Kong, Shanghai and Suzhou, PRC, is a specialized consulting company formed in 2003 to meet the emerging needs of European- and North American-based companies seeking professional guidance in establishing their businesses in Asia. Clients include both large and small manufacturers of advanced materials, consumer items, industrial goods, electronic components, high technology products and software. Please visit http://www.EastBridgePartners. com for more information.
1. Editor’s Note: More information on EAR may be obtained in “Export Compliance: Understanding ITAR and EAR,” by Shawn Cheadle, Microwave Journal, Vol. 48, No. 10, October 2005, pp. 80-91.