Little trouble in big China? Take another look

Given the panic around SARS it would hardly be surprising if New Zealand firms reassessed their commitment to Asia, be it in the form of export or outsourcing development work. But it would be a mistake to dismiss a potential customer base of 1.3 billion.

Given the panic around SARS it would hardly be surprising if New Zealand firms reassessed their commitment to Asia, be it in the form of export or outsourcing development work. The lack of forthcoming information about the epidemic in some Chinese provinces was hardly encouraging.

But it would be a mistake to dismiss a potential customer base of 1.3 billion and an economy (quadrupling since 1978) moving steadily toward being market-driven, despite obvious hurdles in the form of language, culture and political bureaucracy, not to mention logistics and a relatively casual attitude to matters like intellectual property.

Likewise, there’s a burgeoning pool of skilled developers who can turn around a coding job for a fraction of the price. China will be one of the key reasons the Asia-Pacific will overtake North America in 2005 in terms of the number of professional developers worldwide, says research firm IDC. By 2006 the world will have 13.3m developers compared to 7.8m in 2001, it says.

Incubator first got involved in China for the development of its same-name customer information package when the principals met some recent arrivals from Guangzhou. One of the Chinese stayed while another returned to China. Both became partners in the business.

The Penrose-based company emerged out of the customer information needs of Snell Packaging and Stationery. The web-based Incubator EIP (enterprise information portal) provides a single view of a company and its customer information including financial, sales, customer project and people data. The product, which was created using SQL Server and tools such as Visual Basic, is also being used by advertising recruitment firm Marsden Inch.

Chinese contractors do 50% of the company’s development work.

Incubator marketing head Michael Robertson says the arrangement works well.

“One of the things that works best for us is having very close Chinese friends working together in each location.”

While he wouldn’t be specific on just how cheap software work is in China, Roberston accepts that it “works in our favour”. The work ethic is good, he says, and the time difference means the company gains five hours, effectively extending the working day to 13 hours. The opportunity to tap into a large and flexible workforce is useful, he says, but these reasons are almost secondary.

“We got involved really because of the partnership and the friendships that had formed. I think this is key as trust is such an important part of doing business with the Chinese.”

The difference in culture is major, Robertson says.

“We have very different ways of solving problems and approaching issues. The Kiwi boots-and-all approach often falls flat.”

He says language was an issue in the past, but English skills have increased dramatically among his key contacts and is no longer an issue.

When talking to those with long business experience of the region, it’s easy to fall into the trap of generalising the differences they cite into near-insults along the lines of “inscrutable Asians”. The reality is that there are differences in business practices among any group of countries and it’s simply a case of getting to know them and dealing with them appropriately.

Old China hands suggest taking your own independent translators for the first few meetings, or at least once serious business is to be negotiated. Despite the country’s incredible uptake rate of English and high levels of adult literacy (80%-plus, say international estimates), missed nuances and misinterpretations are likely to count dearly. The widely noted desire to “save face” means local translators could be tempted to interpret diplomatically rather than literally. Several observers have noted how price-driven the Chinese market is, some even suggesting companies will talk to rivals after a deal has apparently been indicated, to further haggle on the sticker price. (A recent report in Harvard Business Review says Chinese firms will sometimes change the terms of an agreement even after it’s been signed.) Trade NZ’s Jonathan Watt, who was trade commissioner in Beijing and now handles north Asia from New Zealand, doesn’t go that far, but suggests the need “to go in with a bit of fat”. The tendency to barter, a sometimes wearying process, goes all the way up the business market, says Watt.

Watt suggests price may sometimes even drive out quality as the most important virtue to a product, but a complaint he has heard more than once is that Kiwi firms are bad at brand support. Build promotional and logistical support costs into the price, if need be, he suggests.

As for guanxi, a catch-all term for the “business oil” that eases basic relationship building in China all the way up to possibly corrupt practices, Watt says more important is doing your homework on those you’re dealing with. He accepts, though, that knowing something about how guanxi works (there are books on the subject) will help you deal with officials and local and central government rules.

Watt advises against going into a joint venture with a Chinese firm. Wholly owned enterprises are preferable, he says, though they aren’t permitted in every area. It’s relatively simple to set up a representative office, he says.

Local taxes, company and product certification requirements and government encouragement in using domestic over imported software are other factors to take into consideration.

What are the opportunities?

IDC says China’s packaged software market grew 19.5% to approach $US2 billion in 2002, though this rate is already the lowest in history. IDC expects the market will grow at a compound annual rate of 25.8% from 2002 to 2007, topping $6 billion by the end of that time.

IT investments account for less than 5% of the country’s fixed asset investment, IDC says, and software-related investments take up less than 10% of total IT investment, compared to the worldwide average of over 20%. To improve the situation and achieve a better return on investment, enterprises across all industries are planning to put more effort into software solutions adoption in the next few years.

In systems software, such as operating systems, foreign brands have about a 90% market share. With software tools (database management, antivirus software and the like) foreign companies account for about 70% of the market while in application software (word processing, games, education software) foreign companies have about 60% of the market.

Watt says the major opportunities in IT are logistics and distribution applications, as China upgrades its infrastructure, plus retailing, banking and insurance, and training.

The country’s financial industry is in the process of restructuring to compete more aggressively with the rest of the world. IT may not need to be state of the art, he says, as long as it’s fit for the purpose or wholly practical, such as agricultural IT.

Opportunities also exist in translating software to the local character set and niche personalised applications. Because China is so export-focused, New Zealand firms may be able to help in its domestic economy. This could include telecomms, which is booming but still several years away from being fully liberalised; big-city Chinese have one of the highest rates of mobile take-up in the world.

Trade NZ research suggests Beijing is speeding up projects for the 2008 Olympic Games. Information and telecommunications construction is expected to focus on infrastructure, information service providers and IT research and development sectors.

China’s challenges

Trade NZ cites Chinese software industry associations in saying that the high-end market is dominated by foreign software.

There are estimated to be 335,000 employees in China’s software industry — of whom 186,000 are software engineers. However, China lacks the layer of lower-level software workers in India and Ireland. But the main problems facing China’s software sector were seen as:

  • Many products are low-end, have a small market share and are narrowly focused.

  • Chinese companies are small-scale and competitively weak.

  • IP protection remains an issue and forces companies into sectors where it’s not economic to copy.

  • Chinese companies are poor at innovation (a recurring topic of new books).
The government is starting to consider various incentives (tax concessions, access to capital) to allow software companies to grow and overseas Chinese to return.

The government is also encouraging the use of a local version of Linux called Red Flag as the standard operating system within government offices, though other Linux systems (Red Hat and TurboLinux) are also used.

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