Getting Hold of the Consumers in China: Education and Networking

This was meant to be a longer post titled “Starting Up a Wine Business in China” based on Ruby Red Fine Wine experience. I even wrote the draft but realized, while reading it yesterday, that the one thing that really impressed me about them was getting lost in the middle of all the information… So I’ve decided to cut it short and focus on why I decided to write about them: their absolute obsession with educating and networking with the consumer.

It works for them. 40% of their business comes from private customers. There are two reasons why this number is impressive:

1) their entire retail infrastructure is their cellar in Shanghai and their website…

2) their business is not small, as they also cover more than 40 cities around China through distributors.

So, let me quote one of the founding partners, Kylie Bisman, on the story of how they started up their adventure selling wine to the Chinese consumer:

“Before we even had a wine cellar, before we even had stock, Simon [Simon Zhou- co-founder] was running tastings. We were buying wine from other wine importers and running tastings. Simon was out every night, networking… We found a little café close to where our cellar is now, and we were running tastings out of this café… Simon was always on the phone ringing people and organizing more tastings….”

And they have kept the education & networking obsession alive:

“We’ve run thousands of tasting events since we started. Some of those run publicly and are announced in our website, but we also run a lot of corporate events for Chinese companies (banks, technology companies, companies that see wine tastings as a nice team building exercise with a fun and educational twist for their staff). Afterwards, we keep in touch with these people. We email our offers and news updates to them”

Who has a similar experience?

The Entrepreneur’s Dilemma (II) : How do I navigate through a funding shortfall in China while I increase my capital?

In my last post we discussed what I called the “Entrepreneur’s Dilemma”: determining the optimal capital for the business in China and the debt limit implications (you can read the article here).

German Torrado, from Orienta7, explained to us some of the tools he could be using to navigate through a potential funding shortfall while his company increases capital to the right level for a new business situation.

These are his suggestions (which may or may not work for you depending on your business structure and your relationship with your stakeholders):

1.- Use your SUPPLIERS as a FINANCE TOOL: negotiating with your suppliers can be a good source of extra cash flow:

  • negotiate extended payment terms
  • get credit- guarantee this credit through HK

2.- Use your CUSTOMERS as a FINANCE TOOL:

  • promote exports of some product or service; the cash will arrive to China as an income so it won’t affect your debt limit…

3.- “OPTIMIZE” Salary Structure: if your business has a big number of expat employees this may make sense…:

  • can you organize part of the payments from HK or your home country?

“These ideas may entail some adjustments and a lot of paperwork, but they may help you during a cash flow shortfall….” Mr Torrado explains

I’m sure there are lots of other ideas out there… what are your tips for entrepreneurs in this same situation?

The Entrepreneur’s Dilemma: How much Money do I Invest in my China Business? Will my Debt Capacity be Enough?

This conversation came up during my interview with German Torrado and David Caro, who are about to launch Real Madrid branded products in retail in China (you can read that post titled “Selling a Hot License to the Chinese Retail: a Door-Opening Strategy” here) . Their project sounds exciting and there was only one thing they were concerned about: shall it turn out to be too successful?

But before I get into the thoughts they shared, and just to provide a bit of a background to those less familiar with a WFOE set up process, I will give a very simple explanation of three concepts that WFOEs have to decide upon when they start their operations in China: Registered Capital (the equity they will pledge), Total Investment (amount necessary to realize the company’s operations) and Debt Quota (debt limit allowed-which is the difference between the previous two).
There are rules that establish what the ratio R.C. and T.I. must be given every level of investment.  So for a simple example, if your registered capital is 70.000RMB, your maximum total investment will be 100.000 RMB and your debt limit will be 30.000RMB (as the ratio of R.C. to T.I. for investments bellow 3 million US$ is “at least 7:10”).[1]

And now, going back to the points of an entrepreneur’s dilemma, here you will find some of their thoughts and considerations:

#1. How much money do I invest? I do not want to get more money locked in China than required, as I cannot easily take it back if needed….
“ We have always tried to approach our business in China in a relatively “conservative” way. We have seen too many businesses going wrong and we did not want to get trapped in an oversized business with difficulties repatriating our own money… “.

#2. Financing through debt has a lot more limitations than back home.
“Back home we can easily get loans to finance our business growth. Here we have the limits imposed by our registered capital… and additionally, corporate banking is in a very primitive stage here. The range of financial products that we can enjoy back home is much broader.
I may be exaggerating, but in the case of a foreign business in China, your company is worth whatever your available “cash” is…. They limit too much your ability to use debt to finance your growth”

#3. Is it not easy to get a loan in China.
“It is not easy for a foreign company to get a loan in China… We have been able to get loans here, but we had to use a Spanish bank that guarantees the payment to the Chinese bank”

#4. So, if the business turns out to be very successful, we risk not being able to quickly react to the increased market demand.
“Right now, our biggest concern is that, if this project goes extremely well, we may have a bit of a difficulty re-dimensioning our business due to the limitations imposed by the foreign debt quota and the time required to increase capital. We will need further financing to increase product procurement to be able to serve clients’ orders. And we will probably need to invest on more fees too.

Having said this, we still feel more comfortable with the “step by step” approach we are taking, rather than trying to start too big and get our money locked in here”

So what can we do? In my next post, we will read a few tips from German Torrado on how to navigate through this funding shortfall while you manage to increase your capital.

Did you face the same dilemma when you started your business in China?


[1] There are plenty of sources providing information on these ratios, you can check this link for a reference.

Researching the Market before you Start your China Business: A Photography Gallery Story

Is there a market opportunity for my business idea? Is now the right moment? Do I have all the required market insights to go ahead? What is the best location?

These are some of the questions that entrepreneurs have to answer before they set up their businesses in China. Steven Harris ticked all the boxes before he opened m97 Gallery in Shanghai, one of the best contemporary photography galleries in town. His background as a photographer and journalist, and his China knowledge where he studied and worked in a number of projects during several years, gave him the right grounding for what has become a successful venture.

Today we will go through the steps he followed in his market research before he finally opened m97 Gallery.

#1. Researching the Photographic Art Scene in Beijing: “Assessment: Risky Business. Wait & See”
“The original idea back in 2003 was to open a photography gallery in Beijing. We were considering Dashanzi Art District (798 Art Zone) as the perfect location for our business. The area is great, architecturally unique with its fifty year old military factory buildings, and the location the contemporary artist community migrated to in the late 90’s.
The main reason why we did not go ahead at that time: the possibility (and constant fact-based rumors) of that area being shut down by the government, as its value and location had transformed it into prime real estate with potential better used for them. We decided it was too risky to invest our savings there and face an eviction a few months later, wasting all our work and efforts and losing our money”

#2. Expanding Horizons: “Shanghai “Comes into the Picture””
While all this thought process was going on, Steven was commissioned several photographic works in Shanghai. Steven had lived in Beijing in the past but was less familiar with Shanghai. Shanghai was a nice discovery, a city where it would be really nice to settle…a fact that opened new possibilities for the project.

#3. Researching the Photographic Art Scene in Shanghai:”A Market Gap to Fill In”
The next nice surprise came when researching the photography art scene in Shanghai. The market here seemed to be less developed than in Beijing… and that was good news from a “competition” perspective. The project was still at an idea stage, but Steven and wife Mercedes moved to China to get one step closer to their dream.

#4. Polishing the Skills: “Acquiring More Experience in the Field”
Once settled in Shanghai, Steven landed a job as a Photography Director for a small Art Gallery. He started organizing photographic exhibitions. Those months of work at the gallery gave him the confidence that he could definitely make his project work…They also provided him with some good initial contacts, like internationally acclaimed artist Michael Wolf, whom they still represent in China.
So after a few months Steven and Mercedes decided it was time to make the dream come true.

#5. Setting Up a Contemporary Photography Gallery: “Finding the Right Location”
Shanghai was at that time the clear winner for the gallery location, but they still needed to find the right location. They considered both downtown and Moganshan area. Setting up in what is often described as the “Shanghai arts district” finally seemed like a good idea. It still took some time as some of the available space in Moganshan is quite run down, but they eventually came across their current location, in Moganshan Lu but outside the galleries cluster… so the Gallery finally happened.

It has been three years since then, and they have become one of the most reputed contemporary photography galleries in town… We will soon read more posts about what their success secrets have been and their business evolution during this time.

What is your experience researching the market before setting up your business in China?

7 Top Tips for Entrepreneurs Starting Business in China.

Are you considering setting up a business in China? Would you like to hear some top advice from experienced entrepreneurs?

In 2005, Juan Gutierrez and Veronica Menendez set up LinkPoint Europe, a China consulting and sourcing business. Their five years experience has provided them with valuable market insights that they are now willing to share with new comers to the Chinese market.

Tip 1: Start with a lean structure and minimum expenses.
Experience: When we landed here we set up a big office, we decorated it… we incurred in a lot of unnecessary expenditure. This is something we would definitely do different if we had to start all over again.  Fortunately everything worked out well but not having a bunch of bills to pay allows you to make no-pressure non-rush decisions and places you at that stage in a better negotiating platform.

Tip 2: Land here with a client in your portfolio.
Experience: It may sound obvious, but ensuring that you already land here with a project in your portfolio is a really good situation to see yourself in.  So, if your business nature allows it, do a bit of homework back home before you base yourself here. We came here for a three month project. Once in China we realized that there were plenty of opportunities in the market. We felt we could do a much better job than what we were offered locally (as a matter of fact, we had to re-do our local marketing agency’s job), so we decided to settle here and benefit from the existing opportunities.

Tip 3: Be opened to shape your business as the opportunities materialize and your market knowledge expands. The idea you have when you land may not be the best business opportunity after all.
Experience: During our first years here we did lots of consulting work. After 3 or 4 years, the trading part of the business started growing and taking a bigger share of our time, with also more satisfactory results.  It is not what we first foresaw, but it is working really well for us. We are also involved in some very interesting longer term investment projects that we hope will further reshape our business.

Tip 4: Promoting your business: Go for targeted efforts. Quality is better than quantity!
Experience: We have tried a variety of promotion strategies for our business. Our experience is that quality contacts are the best way to go. We have a sales director in Spain that approaches potential clients based on our knowledge of their markets and our conviction that we have value to add. We also get good business volume from our own network and from satisfied clients’ referrals.

We have done press and on-line advertising in the past, but we were not getting the same type of quality contact. We wasted lots of time trying to screen through the requests we received and in general it was difficult to assess which ones deserved our time and efforts.

Tip 5: Do not be afraid to set your own conditions and have a client screening process. Sometimes it is better to lose a potentially uncommitted client than to waste time.
Experience: We started chasing every project that would fall in our hands, and sometimes clients were not really committed to them. Now when a sourcing client requests our services, we charge a fee that gets deducted from their final order. This has several positive outcomes:

1)      Allows to screen clients that were not really serious or committed to looking for sourcing here

2)      Prevents us from wasting our time, so if no order materializes we at least get a remuneration for our work

3)      And, it does not penalize clients that finally place their orders, because it gets deducted from the order.

Tip 6: Be tough with bad suppliers and understanding with the good ones.
When we have a bad experience with a supplier, we stop the relationship. We had a case in which we had to reject an order because of a big mistake in the production. Later on, we realized they had started including small amounts of the rejected product in new orders. After we realized, we never worked with them again. If they are ready to play a trick on you once, they will keep on doing it in the future.

On the other hand, we have some suppliers that are really good and with whom we have developed a good working relationship through the years. It is not easy to find good suppliers, so, when a problem comes up with one of those (and they do come!) we try to work out with them the best possible win-win solution. It is a bit like working “the Chinese way”, building on “trust and relationship” to solve problems together.

Tip 7: Never relax! Even with good suppliers.
Experience: Never relax! Production monitoring and quality control is still critical even when you work with your most trusted suppliers! The underlying issue is that our perception of what “acceptable” means is quite different. Your supplier may candidly approach you questioning why you can’t you take a product which is not meeting your specification if it still serves the purpose…

So, do you have any good tips for entrepreneurs setting up business in China?