Skip to comments.Making It In China
Posted on 08/11/2005 8:33:01 AM PDT by Paul Ross
Making It in China
American entrepreneurs are overcoming cultural, regulatory, and other barriers to build fortunes in one of the greatest booms in history. Here's how they've done it, and how you can do it too.
Seeing Barrett Comiskey lounging in the rooftop beer garden of Shanghai's fabled Peace Hotel at twilight, sipping his cool Tsingtao and gazing down at the hurly-burly street scene below, you may be tempted to call out, "Hey, buddy. You're dreaming." A year ago, Comiskey, 29, came to China to seek his fortune. He brought with him a Stanford MBA and not much else. He speaks some Mandarin, and he has a Taiwanese wife, Jojo Tsai, who is fluent. But for much of the time he's been here, he's hardly had 2 yuan to rub together, and he owes $100,000 on his school loans. His business partner, Andy Mulkerin, seems at first even more out of his depth; he arrived four days ago with a freshly minted Harvard MBA, but he's also deep in grad-school debt and speaks not a word of Mandarin. Weirder still, he just turned down a job at McKinsey that would have paid him more than $100,000 a year. Why? So he could come to China -- the new land of opportunity.
The idea they've come up with as their ticket to riches sounds like a serious stretch, and might even strike some folks back home as vaguely distasteful. They've formed a company that seeks to persuade small U.S. manufacturers -- the kind that may not have thought that outsourcing was right for them -- that they too can shift production jobs to China, just like the big multinationals. "People think everything is made in China already, but many things are still made in America," Comiskey explains. He and Mulkerin plan to profit by brokering deals with Chinese factory operators for American manufacturers of offbeat things like, say, vending machines and hearing aids.
It's quite the scheme, and given Comiskey and Mulkerin's resources and inexperience, it would be tough to pull off anywhere. But in China?
True, the Middle Kingdom has become the global epicenter of wild-and-woolly capitalism. We've all read the stories about how China's exploding economy is now the world's second-largest, behind that of the United States. China is growing so fast, it's expected to be in a league of its own well before midcentury. Yet the place is commonly regarded as a mausoleum for the broken dreams of fresh-faced foreign entrepreneurs like Comiskey and Mulkerin -- people who caught China fever only to be laid low by the country's impenetrable business culture, its barbed-wire bureaucracy, its endemic corruption. Many of America's savviest corporate giants have struggled to cash in on the China boom too. Pepsi () has never made a profit in China despite 20 years of trying. A big Kraft cheese venture melted down. Even titans of the new economy have been humbled here: Amazon.com () bought a Chinese online bookseller last year but recently warned that success is "many years" away. With household names flailing in China, what chance could entrepreneurial greenhorns possibly have?
Quite a good chance, actually. As unlikely as it might seem, Comiskey and Mulkerin now have a modest stable of paying clients, including sizable manufacturers of, yes, vending machines and hearing aids. Their progress bespeaks a little-noticed aspect of China today: The hard-luck stories of failed fortune seekers have done nothing to slow the stream of American entrepreneurs into China, and each wave of new arrivals learns from the mistakes of predecessors. Today there are thousands of Americans who, through pluck, ingenuity, and perseverance, have managed to decode the mysteries of Chinese capitalism. They are creating their own businesses at a furious pace, and some aren't simply surviving: They're getting rich.
How? Their stratagems are numerous, varied, and as full of contradictions as Lao-tzu's Tao Te Ching: Some of the entrepreneurs immerse themselves deeply in Chinese culture and language, while others learn most of what they know from reading Lonely Planet books on the flight over. Some are transplanting American consumer culture, from coffee to hip-hop clubs, while others are inventing entirely new products, like the perfect clothing hanger. Some are getting rich quick, while others have 10-year plans. Taken together, the experiences of today's American entrepreneurs in China provide a sort of guidebook for anyone who dreams of getting in on the phenomenal wealth and opportunity being generated by an epic boom. "To come to a new land, with a new language and a new focus -- that may seem aggressive for an American," Comiskey says. "But this is a buyer's market for what we're after."
COURT POWERFUL PARTNERS, BUT GET OUT OF THEIR WAY
Five years ago, as the dotcom boom was peaking in the United States, a platoon of American Internet pioneers descended on China, assuming that with its massive population (1.3 billion at last count), the country would become fertile ground for cutting-edge digital businesses, especially those based on the Web and wireless communications. Those predictions of China's growth came true: Today 350 million people spend an average of $10 a month on cell-phone service. The Web has evolved more slowly, with about 100 million people using it regularly, partly because of China's political restrictions on Internet content.
But many of the early China trailblazers lost their shirts. Derek Sulger didn't -- and how he avoided that fate holds crucial lessons. Sulger started his business in 1999, on his first day in China. He was on the verge of quitting a high-paying job as a Goldman Sachs investment banker in London to pursue his belief that China was about to be swept up in the cell-phone revolution. "Everyone at Goldman thought I'd lost my marbles," he recalls. But Sulger and his American business partner, also a former Goldman banker, did have all their marbles -- and more.
|The China Checklist
A cheat sheet for American entrepreneurs.
|VISIT BEFOREHAND Do you really want to live in China? Cities are crowded (traffic cops die at about age 40 on average, thanks to bad air), and real estate in Shanghai is as pricey as in some U.S. cities.|
|LEARN THE LANGUAGE English may be the language of commerce everywhere else, but not in China. You can survive without Mandarin, but negotiating through translators is a major disadvantage.|
|PARTNER WITH LOCALS Join up with native Chinese who possess the skills you lack. Local partners should serve not as window dressing but as real contributors to your enterprise and its public face.|
|FOLLOW THE RULES The Chinese government is swift and effective when offended. State officials won't hesitate to shut down a foreign-owned business, especially one owned by an individual, for infractions.|
|DON'T BRING THE FAMILY AT FIRST Starting a business in China is all-consuming; don't expect to see much of your spouse and children. School-age kids can be especially costly: A top-drawer private elementary school in Shanghai costs more than $20,000 a year.|
|BE PREPARED FOR A LONG HAUL Most successful American entrepreneurs in China spend years building their businesses. View China as a three- to five-year investment, giving yourself time to deal with setbacks.|
The local team then set its sights on the real power players. Sulger's first target was China Mobile, the country's largest telecom, but his managers persuaded him that he had to win over the company's regional divisions to have any hope of a broad alliance. Deals with Zhejiang Mobile and Shanghai Mobile opened the door, and soon Sulger was hooking up not just with China Mobile's national operations but with dozens of other carriers, content providers, and cell-phone makers, including Nokia. The big players' access to customers assured Linktone an immediate and steady source of revenue. And the startup's growth was meteoric: Sales rose from $1 million in 2001 to $50 million last year. In March 2004 the company became the only American-spawned Chinese high-tech firm to float a public offering, listing its shares on Nasdaq. The IPO brought in $86 million; Sulger's stake was worth about $30 million.
The score, by all accounts, makes Sulger the biggest equity-market winner to date among American entrepreneurs in China. But he's not cashing in his chips. Even before Linktone went public, Sulger founded Smartpay, which enables bill payments over cellular networks. Smartpay already has 175 employees and eight offices, and Sulger, now the company's CFO, says it will thrive if it grabs even a tiny share of the mushrooming number of mobile-phone payment transactions in China. He expects to eventually take Smartpay public too.
Sulger's initial insight -- putting a local face on the company as soon as possible -- also helped counter a problem that undid many other American wireless and Web entrepreneurs. The Chinese are masters at rapidly mimicking almost any newly established service or product and using guanxi -- connections and cronyism -- to basically steal away customers. That problem confronts almost every American in China at some point, regardless of industry or niche. By rapidly converting a foreign startup into a Chinese company, with mostly Chinese managers and employees, Sulger in effect created his own guanxi. He's taking the same approach at Smartpay; Sulger is its only American employee. He feels pretty good about his future in China. "Not a lot of Americans have made it big here," he says. "I did it once, and I can do it again."
GO NATIVE, BUT THINK DIFFERENT
One man has single-handedly produced the three top-grossing native-language films of all time in China. His name is Peter Loehr. He's a New Yorker.
Loehr, 37, has become the unlikely king of China's film industry by essentially turning Chinese. Like a growing number of outsiders, he has mastered the language and absorbed the culture to gain a deep knowledge of the idiosyncratic ways of Chinese business -- and to reduce or eliminate altogether his dependence on local partners.
As a teenager in Brooklyn, Loehr was fascinated by Asia and filmmaking -- particularly the work of the Japanese master Akira Kurosawa. Loehr moved to Japan after college and caught the attention of Japanese media execs impressed with his artistic bent. By the time he arrived in Beijing in 1996, Loehr had already produced television programs in both Japan and Taiwan. He'd also studied Mandarin intensely, ultimately reading entire film scripts in the language. Initially bankrolled by a Taiwanese media company, Loehr formed indie studio Imar Film with the goal of nurturing local talent. He plucked out of obscurity a novice director named Zhang Yang; their first movie, Spicy Love Soup, was made for $362,000 and grossed 10 times that, making it the top domestic release at the box office in 1998. Loehr later broke with his Taiwanese backers and set up his own company, Ming Productions, which has produced two films so far and has three more in the pipeline.
Loehr's success, while inspired by art, is built on a keen grasp of how Chinese business really works. He is widely considered to have been the first of a new generation of moviemakers in China to recognize the importance of distribution in a country where provincial exhibitors tend to run their turf like personal fiefdoms. When China's few national distributors declined to handle Spicy Love Soup, Loehr toured 28 cities by train, lugging along two steel boxes containing his film. He wooed local distributors in all-night drinking and karaoke sessions. "I learned to hold my liquor," he says. He also came away with 40 deals.
Loehr understands Chinese traditions, but he also breaks new ground. In 1997 he became the first to advertise a film on television -- and on radio and bus billboards. Recently he formed a new joint venture, Dragon Studios, to handle the needs of foreign filmmakers who want to use China as a shooting location. In a shrewd move, he's offering Hollywood (with which he has links through dealmaker CAA, where he's a consultant) a turnkey solution: He provides not only technical talent but also local actors. His company has deals to assist on four foreign films this year. Loehr says he regularly turns down seven-figure offers, mostly from Asian investors, for a piece of his empire. "I'd rather go it alone," he says.
TRY TO GET RICH QUICK, BUT PREPARE TO PUT IN THE TIME
The business education of Chris Barclay took 11 years. It started inauspiciously, shortly after Barclay arrived in Beijing in 1994. China wasn't as alien to him as it is to some Americans -- he spoke good Mandarin and had lived in Taiwan. But he didn't have much of a clue about Chinese business, and the stories he heard about it curled his toes. One of his first local acquaintances was an American who wanted to make a speedy killing by becoming the hot dog king of China. The guy got a license from Beijing officials to sell wieners from street carts. He bought 1,000 carts and one morning unleashed an army of hot dog peddlers. Within a few hours, the police had impounded his carts. "I have a permit," the American protested. The police laughed. "You have one permit," a police official told him. "You need one for each cart." The would-be hot dog king was 999 permits short, and the dream died then and there.
Barclay took many lessons from the episode, but one stood out: Don't try to get rich quick in China. Sure, it happens. "But longevity is key," he says. "You've got to survive your failures."
He endured several himself, including an ill-fated attempt to sell basketballs, before arriving at an insight that has proven valuable for many American entrepreneurs. The easiest way to make money in China today, Barclay says, is to serve the thousands of large American and European corporations flooding into the country. In 1995, with $10,000 in cash, Barclay started a company that offers management training for local Chinese employees of Adidas, Coca-Cola, ConocoPhillips, Sun Microsystems, and other multinationals. To enhance his training business, he opened a hotel on a mountainside near the southern city of Guangzhou, where he supplements workshops with outdoor activities like rock climbing and hiking. Together, the ventures bring in about $2 million a year and earned about $400,000 in profit in 2004. Barclay has 30 full-time employees. He's the lone foreigner. He recently received a seven-figure offer from a U.S. consulting firm for his training business alone, and he's considering selling that branch of his business.
But Barclay wants to expand his resort company, which is why on a recent afternoon he stands beneath a leaky umbrella near the famed Simatai section of the Great Wall. He has come to negotiate with a group of farmers over the lease of five acres of idle land on which he hopes to build a 25-room hotel for Wall tourists. "The farmers might not be interested," he says. "They might not even show up."
He is unfazed by the prospect, but the farmers do show eventually. One man steps forward and names his price: $1,200 a year. Five minutes later another farmer arrives and explains that the first farmer is not authorized to negotiate. Barclay rolls with it, and soon a deal is struck: He'll pay $833 a year for five lush acres. But another snag later develops: The farmer doesn't have the government clearance required to take farmland out of circulation. Shades of the hot dog king. Barclay says he'll keep the resort expansion project on low boil until the paperwork comes through. "I won't make any big plans until I can see the documentation," he says.
The Fung brothers likewise believe in patience as a business strategy. Micky Fung, a Chinese American whose home base is Brooklyn, N.Y., has been doing business in China since the 1980s, moving from one niche to another. These days he's leading a pioneering effort to supply every taxicab in the country with a flat-panel TV screen that, controlled by a computer under the front seat, will broadcast advertisements (and potentially other content) to its captive audience of passengers. Shanghai has been chosen for a large-scale trial of the technology. Fung has signed up 10,000 Shanghai taxis and will roll out the system later this year. Heineken, Nokia, and Virgin are already on board as advertisers. Fung's brother has bought an entire fleet of taxis to help exploit the opportunity. "It's a landgrab, pure and simple," says Adam Bornstein, an American financier in China and one of Fung's backers.
Fung says he's never seen as many foreigners looking to get rich quick as there are in China today. But that's the wrong play, he says; he's looking for lasting relationships. "A common mistake made by outsiders is to avoid long-term deals," Fung explains from his Shanghai office. "Then they have a hit product or service that they can't capitalize on because they are vulnerable to simply being replaced." Long-term deals offer a way around this problem. Fung, for instance, is signing 10-year deals with his taxi owners.
"In 10 years, a whole lot can change," including the basic technology behind his company, he says. "But by then I'll have made my money, and I'll have a position worth defending."
FEEL FREE TO CHANGE THE WORLD, BUT DON'T THINK YOU CAN CHANGE CHINA
One tried-and-true way to hit the ground running in China is to enter the country as an employee of a big multinational and then strike out on your own. But it's wise to check your idealism at the door. Terry Rhoads, an Oregon native, was sent to China in 1994 by Nike and ran marketing for the shoe giant before starting his own company, Zou Marketing, with a fellow Nike alum. Today, Zou is the nation's leading sports marketing company, with 33 employees and annual revenue of $5 million. The company advises China's fledgling pro basketball league and runs the National Football League's ambitious program to export the all-American sport to China.
Rhoads says pragmatism is a must to do business in China. For example, the government remains a huge presence in professional sports, which are only now developing, and Rhoads privately questions some of its policies. Top basketball players, for instance, are forced to play meaningless games for the country's Olympic and national teams, often leaving them exhausted. (Houston Rockets center Yao Ming is widely considered a victim of this practice.) But Rhoads isn't about to campaign for better treatment of athletes. That's because he needs the cooperation of China's official sports agencies to land deals. A Chinese star who plays for the NBA's Miami Heat refused to play for the national team at last year's Olympics and is now persona non grata not only to the Chinese government but also to the entire sports marketing establishment. Rhoads empathizes with the player but won't have anything to do with him, fearful of provoking retaliation from the government. "We retain our credibility, our influence, so we can work behind the scenes for the right things," he says.
Simeon Schnapper also had to lose some illusions on the road to entrepreneurial success in China. A 32-year-old American convert to Buddhism who visited the country in 2003 to help a nonprofit that's rebuilding Tibetan monasteries damaged by Chinese attacks in the 1960s, Schnapper eventually decided to relocate permanently to Shanghai. He joined a team of Germans who were trying to build the tallest skyscraper on the planet as the centerpiece of Shanghai's 2010 World's Fair. Despite a year of cultivating guanxi, the Germans didn't get the deal. Schnapper was crushed. "I was wallowing in my own ash heap of disillusion and remorse," he says. But by then he had a spacious high-rise apartment full of Tibetan art, and he didn't want to leave China for good. So he flew to New York and met a friend who now works at the Home Shopping Network. Over a drink they concocted an unlikely mission: figuring out how to supply one of HSN's star housewares brands, Joy Mangano, with a new line of branded hangers. It turns out that every year, consumers buy Joy Mangano Huggable Hangers from HSN by the millions.
Forthwith, Schnapper became a hanger expert. He found several factories outside Shanghai that could produce a strong, cheap plastic hanger with a special felt covering to keep clothes properly situated. Schnapper also learned that the current generation of hangers carry "Made in China" stickers that get caught on clothes, irking customers. Schnapper asked factories to stamp the country of origin into the plastic, eliminating the tag. That innovation clinched the deal: HSN ordered millions of hangers from Schnapper's company. If he meets his production targets this year, he will earn millions of dollars from hangers. Pondering the possibility, Schnapper shakes his head. "Only in China," he observes.
FOCUS NOT ON AMERICA'S CULTURAL VALUES, BUT ON THE VALUE OF ITS CULTURE
As in much of the world, Americans and American culture are often viewed in China with a mixture of repulsion and fascination. Andrew Ballen has ridden the second part of that equation to improbable heights.
Ballen arrived in China four years ago "on a whim," he says. A native of New York, Ballen, now 32, had dropped out of Duke University's law school, angering his father, a high-achieving Jamaican immigrant who is a physician in North Carolina. Ballen wanted to get far away from the scene of his failure, and China seemed about as far away as he could go. He didn't know a soul in China. He didn't speak a word of Chinese.
To cushion his landing, he took a job at one of China's leading for-profit language schools. After a month, he realized two things. First, he'd never earn enough money as an English teacher to live well in China. Second, Chinese youth were mesmerized by hip-hop. "As an American black kid, I knew something about hip-hop," Ballen says.
He'd never done serious performing in America, but Ballen quickly started his own weekly Thursday night hip-hop show in Shanghai, renting out a club, paying a flat fee to the Chinese owner, and keeping the $4 entrance fee and a slice of the bar take. He canvassed top universities, distributing fliers to students to announce his opening night. He did the same in expat neighborhoods, concentrating on women. "Get the hot women, and the hot men follow," Ballen says, summarizing his marketing strategy.
Three hundred people turned out to hear Ballen rap and DJ on opening night, and kids keep coming back, in increasingly large numbers. On a recent Thursday night, Ballen takes in $3,200 from the gate, and the bar soaks up more than $10,000. In the four-year history of the show, Ballen has grossed nearly $2 million.
The rap gig launched a burgeoning multimedia empire. A few months after his debut in the club, Ballen started an English-language radio talk show where he spoke frankly about romance and the anxieties of youth. The talk show led to a deal with Motorola; Ballen became "the voice" for some cell-phone services. Next he started a popular TV travel program, striking an innovative deal with one of Shanghai's leading stations that allowed him to sell advertising and keep the lion's share of the take.
Andrew Ballen is now a star in China. He moves around the country with two Chinese assistants, one of them on hand simply to answer his mobile phone. The endorsement deals keep coming; even his old employer, the language school, pays him more than $1,000 a month to be a pitchman. He is frequently stopped on the street by Chinese who want to shake his hand or buy him a beer.
On a recent Friday, after staying up all night at the hip-hop club, Ballen snatches a few hours of sleep, then goes into a studio to do a radio commercial. Next he grabs a late breakfast and gulps down two cups of coffee before locking himself away to write a script for his next TV episode. Between paragraphs, he ponders how someone who never ran a business in the United States could launch so many, so quickly, in a country he still barely comprehends. "I have nothing," he says, "but my imagination."
A lot of people thought Stuart Eunson had too much imagination when he arrived in China in 1993. Craving his java, he decided to try to trigger an American-style coffee craze. "Don't you know they drink tea in China?" asked one doubter -- his mom. After getting off the ground in 1994, for five years Eunson's company, Arabica Coffee Roasters, barely stayed afloat. "I almost starved," he says. But around 2000, as China became increasingly intrigued by all things Western, the American custom of chugging lattes began to catch on. Now Eunson supplies high-end restaurants and hotels with premium roasted coffees and adds value by teaching clients how to make a good cup of cappuccino.
China's economic transformation may ultimately rank as one of the greatest producers of business opportunity ever. But the process won't last forever. Indeed, some experts think that within a decade, many niches will have been filled, industries will have dominant players, infrastructure will have been built. There will be much less room then for foreign entrepreneurs -- which is another reason young guns like Comiskey and Mulkerin are taking their shot in China now.
In another expat bar on another Shanghai evening, Comiskey and Tsai are raving about the possibilities unfolding all around them. "He's mad for China," says Tsai, who is a third partner in the outsourcing enterprise. She worries that her husband may be overoptimistic, and that the windows of opportunity might snap shut, leaving American entrepreneurs scrambling. But Comiskey seems to thrive on scrambling. And if things fall apart? Comiskey's been traveling around the region a bit lately, scoping things out. If China doesn't work out for him, well, there's always India.
"American entrepreneurs are overcoming cultural, regulatory, and other barriers to build fortunes"
Overcoming pesky human rights issues as well.
Note the business model of these featured young "entrepreneurs":
I.e., they hope to change even that residual U.S. manufacturing situation. They intend to finish the job...and do all they can to facilitate China.
We need to revoke their citizenship.
This hype has been going on for centuries.
This same rag has written about this ephemeral huge market before and how it has never ever panned out. "None of us ever prosper to the extent we think our work justifies, but we have compensations. The work is always interesting, and, in spite of our years of disillusionment, all of us secretly cherish the thought that a reasonable number of the 400 million [Chinese] may buy our goods next year."
That's from book called 400 million customers published around 70 years ago.
Same snake oil.
These guys in the article and most business now, though, are simply using cheap cheap cheap labor and are not trying to really breach the 1.3 billion customer market.
What these guys are doing is a sort of modern equivalent to the slave trade -- trying to match the absolute cheapest labor to business that needs cheap labor.
Quislings. Traitors. Scum.
It depends on which region you are in.
Quote: They've formed a company that seeks to persuade small U.S. manufacturers -- the kind that may not have thought that outsourcing was right for them -- that they too can shift production jobs to China, just like the big multinationals. "People think everything is made in China already, but many things are still made in America," Comiskey explains.
Here is what cominsky should have added to his last line:
"but many things are still made in America, that we can still exploit to china- it's not too late"
Reminds me of the saying about saving capitalism from itself.
Indeed. Imagine, for a moment, starting with a completely clean slate. Let's say, for the sake of argument, that my value proposition was "outsourcing for the little guy." I would start with a cost model. I would not start with any specific geographic constraint. To that, I might overlay a SWOT analysis and an FTA tailored to geopolitical risks. After that culling, I would of course do a highly detailed analysis of TCOO (including logistics costs, cost of quality, cost of theft, etc). I seriously doubt that given all of this, my conclusion would end up being "and therefore, China." Perhaps Mexico or the Dominican Republic, but certainly not China. What has happened is that these folks who apparently learned nothing in business school have started out with the rookie mistake of putting a geographical preference (and a rather odd one at that, all things considered) ahead of business success, per se. How many upper managers in major corporations suffer from the same fault?
Any intellectual property sent over there....is GONE poof! Look at GMC. Still wrangling unsuccessfully over the theft of the entire production line and product design.
The PRC is bent on systemmatically destroying the U.S. intellectual property rights by brazen disregard combined with pseudo-accommodation by giving lip-service.
So intense is their non-cooperation...that the USTR has abdicated his congressional-mandated requirement to "fix" this, and just told aggrieved parties to "sue them out in Chinese court". THERE's a winner....!
Their business model is probably more akin to: broker contacts between gullible U.S. manufacturers and Chinese sweat shop controllers ====> Profit!
Or perhaps "I've got a thing about Asian babes and love to be wined and dined by princelings" ... :-)
Speaking of the majors .... between 1995 and 2000 I personally drove outsourcing of over $US 10 Billion in production spend. The lion's share of it went to places like the US, Mexico and Thailand. A smaller amount went to the Czech Republic and Hungary. Only the smallest share went to the PRC.
I almost missed the last, best part of the article - leave it to this guy's wife to have common sense!
RE: "He's mad for China," says Tsai, who is a third partner in the outsourcing enterprise. She worries that her husband may be overoptimistic, and that the windows of opportunity might snap shut, leaving American entrepreneurs scrambling.
Yeah. That was rich... especially last line: "There's always India."
Checking for flight reservations...
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