Nearly a decade before Best Buy unveiled its Shanghai store plans, Wal-Mart launched its first Chinese supercenter in Shenzhen, the gritty industrial boomtown near Hong Kong in the nation's southern reaches. Since then, the world's largest retailer has opened 57 other Wal-Mart and Sam's Club outlets in 28 cities across the nation. Plans call for the retailer, which grossed a reported $916 million in Chinese sales in 2004, to add up to 20 more retail stores by the end of this year.

Just like Best Buy, Wal-Mart has also stepped up its purchases of Chinese-made products through its large procurement centers in such major cities as Shenzhen. In 2004 alone, the company spent a whopping $18 billion on merchandise from China-based suppliers, up from $15 billion in 2003 and accounting for a full three percent of the country's total exports.

In other words, if Wal-Mart were a country, it would conduct enough trade with China to rank as the nation's sixth largest export market. Wal-Mart executives reportedly aim to raise that export total to as high as $36 billion by the end of the decade.

"We expect our procurement stock from China to continue to grow at a similar rate in line with Wal-Mart's growth worldwide, if not faster," Wal-Mart President and CEO Lee Scott told China Business Weekly. This means that Wal-Mart is shooting to increase its merchandise purchases from China by at least 20 percent a year. 

THE MANUFACTURING ANGLE

Similar to the big U.S. retail chains, American CE manufacturers also are taking the China plunge, setting up production plants in large industrial zones throughout the country. In doing so, the electronics products manufacturers are following in the footsteps of Motorola, which opened its first Chinese office in Beijing nearly two decades ago and has since become China's largest overseas-funded corporation.

IF WAL-MART WERE A COUNTRY, IT WOULD CONDUCT ENOUGH TRADE WITH CHINA TO RANK AS THE NATION'S SIXTH LARGEST EXPORT MARKET. WAL-MART EXECUTIVES REPORTEDLY AIM TO RAISE THAT EXPORT TOTAL TO AS HIGH AS $36 BILLION BY THE END OF THE DECADE.

Thanks to the company's head start and its strong cell phone business, Motorola now runs a wholly owned company, a holding company, eight joint ventures and 24 subsidiaries in China and has more than 10,000 employees scattered throughout the country. After investing billions of dollars in its Chinese facilities, operations and staffing, Motorola saw its China sales climb to nearly $9 billion last year, or almost one-quarter of the company's total sales. 

Inspired by this example and encouraged by various government inducements, including the development of scores of special economic zones throughout the country, other U.S. manufacturers now are following Motorola's pioneering lead.

In early February, for example, Plantronics planted its foot firmly on Chinese soil by opening a spanking new manufacturing and design center in Suzhou, another major industrial city two hours west of Shanghai. The large manufacturing facility, a "green" plant built to meet state-of-the-art environmental and energy conservation standards, is only the company's second plant outside the U.S.

"The time is just right for us," Walters says. "We want to build a market. If you're not manufacturing products in China, if you're not developing products that the market requires, you're probably not going to have a business in China."

FIERCE COMPETITION

But, while many American CE retailers and manufacturers are rushing into a more capitalist-friendly China now, many major hurdles to success remain.

On the retail side, such U.S. companies as Wal-Mart and Best Buy face cutthroat competition from several rapidly growing Chinese chains in a shopping culture notorious for its bargaining and haggling. The list of major local CE players is headed by GOME Electrical Appliances Holding Ltd., the country's largest electronics retailer with 296 stores. The list also includes Suning Appliance, China's second largest CE chain with 224 outlets, and China Paradise Electronics Retail Ltd.

IN 2005 CHINA ACCOUNTED FOR AN IMPRESSIVE 31.2 PERCENT OF ALL CE IMPORTS FROM THE U.S.  

U.S. CE retailers seeking a Chinese foothold also face strong competition from rival retail powerhouses from other nations. A glaring example is France's Carrefour SA, a Paris-based chain that has more outlets than any other foreign retailer in China, including Wal-Mart. Carrefour, which ended last year with 78 Chinese stores, now is battling Wal-Mart for the right to buy Trust Mart, a local hypermarket.

Despite the country's huge expanse, competition for prime real estate also is quite intense. Best Buy officials found that out late last year when they sought to rent retail space in a Beijing commercial building that Swedish furniture giant Ikea was vacating for even larger quarters. Although Best Buy reportedly offered about $10 million in annual rent for the space, the company lost out to Pengrun Electronics, a GOME subsidiary, in a bidding war that featured more than 30 retailers.

In an interesting twist, Pengrun won the hotly desired lease even though it offered only $2.5 million a year for the space. China Business News reported that the Chinese high-end electronics seller triumphed because the building's owner preferred the terms of its proposed contract, its terms of payment and the good credit and financial strength of its parent firm. Best Buy instead set its sights on Shanghai for its first Chinese store.

CHANGES PROLIFERATE

Although the Chinese government has worked to ease the developing nation's chronic shortage of good roads, water and sewage systems, and electrical power and telecommunications networks by setting up more than 50 economic zones around the country, local infrastructure still can be a nagging problem too. Plantronics executives ran into this headache while their new plant was under still construction. To their chagrin, they realized that they couldn't deliver four pile drivers needed for the building's foundation because the underpass of a new highway was too low and the overpass didn't have a connecting road yet. 

"These things just come up," Walters recalls. "We had to fly out there and ask the local officials for a temporary road. We were cordial and nice but we had to get the road built."

Navigating the local government bureaucracy can still be a challenge as well. Although the Chinese government sets the rules nationally, regional government officials still hold plenty of sway in the sprawling, decentralized nation, especially further away from the big coastal cities of the East.

Partly for this reason, Wal-Mart, Plantronics and other U.S. companies working in China have hired their plant managers and many other top personnel locally. "You really want local expertise, someone who understands the subtleties," Walter says. He and his Chinese managers have also adopted a policy of checking each new rule, regulation or other key piece of information with at least two independent sources to make sure they've gotten things right.

The Chinese negotiating style also tends to be very different than the Western command model. Walters noted that local Chinese officials have "more of a collaborative style," making decisions on a collective basis.

"They need to take time to understand what you're doing and how you're doing it or else they will jam things," he says. "If you try to force decisions on people, you run into trouble. It's hard to make them stick."

Not surprisingly, the Chinese language itself, whether Mandarin or Cantonese, can be a big obstacle for U.S. companies to clear, particularly when it comes to contracts and other legal documents. To steer around this problem, companies like Plantronics have turned to international law firms with large Chinese offices to handle their legal work.
"Translating legal documents is not trivial when you're looking at a stream of Chinese characters," Walters says. "We used to get different answers from different people because the characters were translated differently... It's important stuff and it's often difficult to get it done right or do it quickly."

Finally, it's incumbent upon American CE companies to learn the local market because what sells in the U.S. doesn't necessarily sell in China, as well as vice versa. Wal-Mart officials have certainly discovered that. Taking their cue from China's ubiquitous open-air markets, they have stocked their Chinese supercenters with plenty of fresh food to attract droves of pedestrian shoppers with smaller apartments and refrigerators than their American counterparts. Wal-Mart executives have also set aside space in their stores for regular performances by school groups to lure shoppers. 

It is apparent that China is a lucrative market but not one to be entered in to without sufficient resources and knowledge. V

By Alan Breznick

July/August 2006