Posted by Elena Luk'yanenko
Elena Luk'yanenko
Elena has more than five years of experience in international marketing providing services for the foreign com...
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on Friday, 07 August 2009
in Business in China

The Art of Turning Around Distressed Entities in China

PTL Group: What brings you nowadays to China?

Jan Molenkamp: Many international companies have ventured into China without taking into account the necessary preparation and analysis steps. Consequently they inevitably run into trouble some way or another. During the time that the domestic markets of these companies were on a “high”, underperformance or even loss making of their Chinese entities was accepted as a “part of the business development process.”

Now the domestic markets are less than favorable due to the global economic crisis. Due to this, more focus is put on the individual contribution of the various international ventures. After all, these were set up over the past couple of years to contribute to the enterprise’s overall bottom line. The attention to these contribution factors quickly (and in some cases finally) exposes to some unlucky international enterprises that the Chinese venture is underperforming at best.

Due to enormous pressures on profitability and cost saving a culture of decision making emerges in corporations, which previously was deemed unnecessary. Quickly the companies scramble their own analysts, reorganization- or liquidation experts, who are immediately sent to China to see what can be saved, improved or shut down.

Often, the efficiency of these in-house available corporate specialists in China is very low. This is due to the lack of their specific “China expertise”. The risks of sending non-China specialists include faulty analysis and sub-optimal results. To top it off, these are achieved in periods far beyond what the corporation can still afford in its predicament.

Over the past number of years my local Chinese business partners and I have specialized in Chinese turnaround projects and / or Chinese entity’s liquidations. Which choice it will be fully depends on what is feasible and most in line with the strategic objectives of the client. Feasibility and objectives are discussed with the client during the presentation of our analysis of their Chinese entity.

Presently it is an incredibly busy period for ABC Turnaround and its business partners in China. Many companies only now realize that China is not the same as their home market and that specific professional business approach is needed to be successful in China.

PTL Group: How does the global financial crisis affect foreign companies in China? What are the main challenges European companies faces in the Chinese market?

JM: As stated during the first question, it is not necessarily the global financial crisis which affects foreign companies that ventured into China. It is much more the fact that the international companies did not enter the high potential Chinese market correctly in the first place.

The main contribution of the global financial crisis is that it exposes these facts. It stimulates the corporate attitude towards finally dealing with the issues at hand. These issues were apparent for quite some time already to the managers willing to acknowledge them.

The main challenges any foreign company which enters the Chinese market faces are the following: understanding of the specific differences between the foreign company’s local and Chinese business cultures in the first place and the necessity to team up with the right local partners in the second place. Keeping these challenges on the radar screen will keep them out of trouble whilst successfully and thoroughly growing their business.

PTL Group: What are the common symptoms of troubled companies?

JM: Good question. Let’s split this question in two parts. First: the symptoms of the Chinese entity towards the mother company. Second: the symptoms we tend to find inside the mother company once we finally get the distress call.

The most common tell tale signs of the Chinese entity towards the mother company are amongst many others the following:

  • a “wild growth” of head count inside the local Chinese structure,
  • a “wild growth” of the local Chinese structure itself including randomly opened offices without consent of the mother company,
  • extraordinary commissions paid out on sales,
  • questionable distributor deals,
  • amazingly complex logistic “solutions”,
  • low profits (or even negative profit margins),
  • non-transparency of reporting,
  • incapability of local Chinese entity to do budgeting and forecasting,
  • asymmetry of information regarding business contacts / client database,
  • below par profit growth with inexplicable turnover fluctuations.

The most common tell tale signs we tend to find inside the mother company, once we finally get the distress call, are amongst many others the following:

  • lack of understanding of the specific differences between the domestic market and the Chinese market,
  • internal political feuds between various departments whose results are depending on the China entity. This results in nobody having or taking the full decision power, due to which necessary decisions are not made,
  • reluctance to take necessary decisions and thoroughly implement these locally so as so to correct the situation in China,
  • lack of understanding how important the right local partners in China are, and
  • belief in the utopia of “remote control”. With this last point I mean that some companies believe that they can control the Chinese entity without “senior expert feet on the ground” in China, from behind a desk in corporate headquarters, steering purely on monthly reports.

This is just a selection of tell tale signs and the list is by far complete. Each turnaround or liquidation project brings its own specifics to the equation. The advantage for us is that this is why this work is never boring.

PTL Group: Some companies decide to downsize or liquidate their China operations. Is it the only option when companies find themselves in trouble?

JM: These are the most commonly used “repair strategies” and are certainly not the only available remedies. I’m tempted to say that these are not even the correct approaches when taken as standalone measures. Sure it is important to bring headcount in line with the turnover (or the lack thereof). When no other measures of getting the company structure in line with what the local Chinese situation and market demand, or when no professional procedures with control systems are added to the mix, these single trajectory efforts might prove to be a waste. More complex issues demand more complex and often even multichannel solutions. A large part of the solution to the problems encountered is knowledge of the way business is conducted in China and where this differs from the way business is conducted in the domestic market.

PTL Group: Which formula do you go through to get these businesses back on track?

JM: First after receiving a distress call, our team of specialists enters the Chinese entity of the company. Our team consists of the various functionalities such as finance, HR, logistics, purchasing as well as general management specialists.

Second the findings are analyzed and put into a report to the international client’s senior management.

Third, these findings are presented in a face to face meeting at the client’s offices. During this meeting, the client’s strategic visions are combined with feasible goals for either turnaround or liquidation. A timing plan for turnaround or liquidation is put together and key performance indicators as well as priorities are agreed upon.

Fourth, turnaround agreement is signed and as soon as possible interim manager most suitable for the task at hand is sent in.

Fifth is the actual turnaround or liquidation project. Our style is to keep the client in the loop of all activities and developments through weekly video conferences. During these, weekly reports on all functionalities in the company under turnaround or liquidation are reviewed.

Sixth is the handover period to the permanent management in case of a turnaround. In case of liquidation it will be the handover of the documentation related to the closure of the accounts and business registrations.

What sets ABC Turnaround project approach apart from the generic “interim manager” offerings in the market is that it is a “one stop shop”. We describe it on our web site as our “turnaround platinum” service. We have the capability with our business partners to take over complete business functionalities in the company under turnaround. Think of transplanting an entire HR department or an entire Finance department. In a way we are capable of, let’s say, putting a company on “life support machines” until it has been regenerated enough to pull its own weight again in all functional areas. People who’ve been in predicaments in China will probably acknowledge that it is an art to manage or balance accounts payable and accounts receivable. Not to speak of the art of collecting accounts receivable.

A large part of what we do for our clients at ABC Turnaround is bridging the cultures and synchronizing the strategic direction of clients with the feasibilities of their Chinese entities.

We also normally keep in touch with the client over a certain period of time after the handover so that we are sure the project we accomplished does not fall back to the original situation in case of a turnaround. What we generally agree with the clients is that for a certain retainer fee we will keep auditing the company on a monthly basis. In high demand in this respect is the “financial fire wall” in our “turnaround platinum” package.

Explained in a simple way this means that anything being done by the finance department of the client’s Chinese entity is monitored by our finance team. Before any month closing report or weekly finance report is sent to the mother company of the client, our experts X-ray the reports. Also we keep taps on debtors and creditors so as to have an early warning system to avoid a renewed derailment.

Also in case of a liquidation project we keep in touch with the client for a certain time after execution. This is to ensure that any unforeseen issues turning up can be dealt with by the same people that did the project.

PTL Group: What pattern do you see in the way international companies in China get into unfavorable situations?

JM: There is a clear pattern which I touched upon already in the other answers. The pattern might be described as the “domino effect”. A company gets enticed by the “1.3 billion inhabitants market potential” and wants to tap into the high potential market as soon as possible. Strangely enough when wanting to venture into China many of the due diligence steps which the same company would undertake when wanting to venture into other international markets are “forgotten” or simply skipped. This may be because the entry timeline is too ambitious. This may be because perhaps the international company feels “overconfident” since they may come from a “mature market”. This might make them feel that they know all the tricks of the trade and thus have nothing to worry about when moving into China.

The next thing that happens in the hurry is that the wrong entity form is set up in an incorrect (quick and dirty) way. Then, since the momentum seems to overtake caution, the wrong business partners promising unbelievable results are chosen to partner with. From there on it seems to be the beginning of the end. One derailment needs to be covered up or “repaired” with an even bigger mistake. This chain of events eventually reaches the limits of what the company can handle.

At that moment the first mistake domino tips over. It pushes the next base block of the Chinese entity to topple over. This one in turn takes out the next building block of the dream that once was the international company’s money maker in China.

When the domino’s start to tumble, only rigorous or draconic measures can “save” the entity. Think of things such as pulling out of China completely. Think of enormous cash injections to get the entity back on track. These are seen to the international companies as the most popular ways out of the predicament they find themselves in.

Often this is the moment we are approached by clients, mostly by referral through references in our network.

PTL Group: What are the main obstacles to success in the rebuilding of a troubled company?

JM: Here the answer is quite clear: if the client company is not truly committed to turnaround and does not give full support, the whole project will take incomparable amount of extra time and effort with the extra cost connected to it. By truly committed I also mean unified behind the common goal of getting the Chinese entity back on track.

Sometimes internal politics in the client company may slow down the pace of turnaround. For this reason we need to get agreement at the highest level of a company before we will commit to turnaround. In case we are unable to get a good feel about the true commitment of a client we politely thank for the honor. This is because we don’t want to waste the client’s money or our resources. To this end the third point of the formula we use to get Chinese entities back on track is essential.

PTL Group: What is your advice to the Management Team of under achieving companies in China?

JM: This question depends on whether the management team of the underachieving company in China consists of local employees or of “expats”. Let me answer this question to the top management of the mother company.

In the case of local employees our advice would be to attract one international China expert to lead the local Chinese team at the head of the Chinese organization. This expert needs to know the intricacies of doing business in China and of managing Chinese local employees. Preferably this expert speaks Chinese.

In case of a certain amount of expats in the Chinese company, we advise to minimize the amount of expats and to assign crystal clear hierarchy and responsibilities amongst the remaining expats. Any expat or employee from the international company’s payroll should be a true China expert, not merely someone that is available or “likes to go and work in China for a couple of years to gain some experience”.

The latter is likely to cost the mother company dearly. No matter how attractive the short term cost saving of filling the spot with a lower cost employee might seem compared to a true China expert with various years of China expertise under his or her belt.

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