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START YOUR GAME: China Entrepreneurs are in the Right Place at the Right Time to Play Big Read PDF

China entrepreneurs are in the right place at the right time to play big. Despite the tough odds against startups - only one in five reaches its first birthday - China offers one of the best entrepreneurial environments in the world right now. But CEIBS professors say these ideal conditions won’t last forever.
To prove this point, in this cover story TheLINK profiles four alumni-run companies that started up - and succeeded.

By Laurie Underwood

Back in 1997, an Industrial Design student named Lu Feng, from Xian’s Northwest Light Industry Institute, came up with a simple but clever idea: what if key financial data on China’s markets were formatted onto a handy computer disk, allowing investors to easily assess trends? One decade later, Lu (CEIBS EMBA 2002) operates China’s #1 resource for financial data. In fact, his company, Shanghai Wind Information & Technology Co., is known internationally as “China’s Bloomberg.”

Four years later, in the central Mexican shoe-manufacturing town of Leon, Juan Martínez (MBA 2002) was preparing to follow his childhood dream of visiting China - an ambition that led him to found a trading company handling leather materials, fashion accessories and more. Now in its fourth year, Solhix is bringing together hundreds of suppliers and buyers from both sides of the Pacific.

Meanwhile in Guangdong province, Li Xiong (EMBA 2002) spent 2005 developing a solution to a common problem among his peers: fellow businesspeople were constantly scrambling to find the best restaurant for company meetings or events. In response, Li formed the MYFB Restaurants Guide, offering internet or mobile access to a database of 3,000 Guangzhou-area restaurants. Today, the service reaches a user base of 100,000 clients, and growing.

That same year, Parisian transplant Valerie Touya (EMBA 2002) discovered a growing population of sophisticated urban shoppers willing to pay “European prices” for trend-setting clothing from talented new designers as an alternative to buying big name, global brands or fakes. Touya now operates three bustling Curiosity Concept stores in Shanghai and Suzhou.

What these four CEIBS alumni have in common is their successful pursuit of an entrepreneurial dream in China. While starting a company remains one of the most financially risky and emotionally stressful endeavors a person can undertake - 80 percent of new businesses perish before their first birthday - a growing number of businesspeople are making a go of it. This month, TheLINK takes a close-up look at the life and times of the new generation of entrepreneurs in China. Our cover story features the findings of five CEIBS professors who are researching this topic, and profiles the four successful alumni entrepreneurs introduced above.

Silicon Valley, East

Which is a better environment for an entrepreneur with a hot new business idea: Shanghai or California’s Silicon Valley - home of America’s trendsetting Web 2.0 technology and famous for its creative minds, stylish living, and venture capital?

The answer is “Shanghai,” according to CEIBS Professor of Entrepreneurship Ge Dingkun. Prof. Ge should know: he is a product of California’s famous creativity and entrepreneurial spirit, having spent several years working in San Francisco in the early 2000s.

"In the Silicon Valley, when you just walk down the street or stop for a coffee, you hear people talking about their ideas for startups,” says Ge. But while the atmosphere near San Francisco is crackling with innovative brainwaves, Ge stresses that China now offers other valuable benefits for entrepreneurs. Ironically, the nation’s status as a developing market, and even its past as a planned economy that banned entrepreneurship, has created one of the world’s best environments for launching a startup. The reason: On one hand, Chinese buyers are well informed of international product trends, and are increasingly willing and able to buy. On the other hand, local supply lags far behind in many categories. This “asymmetry” - more demand than supply for superior products and services - presents an ideal scenario for launching a new business.

"The Number One success factor [for a startup] is demand. Finding demand is much easier in a high-growth economy like China,” says Ge. “Entrepreneurs can succeed in China simply by doing something faster and cheaper than the existing suppliers.” In contrast, he says startups in California typically face a tough time attracting spoilt-for-choice consumers.

In the short term, Ge expects this market “asymmetry” to continue in China. He points out that, in transforming from a planned economy to a market economy, China has opened many new market segments, resulting in “huge opportunities.”

Much to gain, little to lose

China’s now flourishing environment for entrepreneurs is especially remarkable considering that entrepreneurship was flatly banned just 30 years ago, points out CEIBS Management Professor Terence Tsai. During the 1970s and 1980s, private enterprise started with the introduction of the township village enterprises, then expanded to include private domestic enterprises and joint ventures, then wholly owned foreign enterprises. Says Tsai: “It is only very recently that you have true entrepreneurial spirit in China.” Despite its newness, the sector is growing at warp speed. Today, 50 percent of China’s GDP comes from the private sector, according to the All-China Federation of Industry & Commerce.

Going forward, China’s double-digit economic growth rate will likely continue to create favorable conditions for startups, adds CEIBS Management Professor Per Jenster. Jenster and fellow Management Professor Juan Antonio Fernandez are co-authoring the book The Dragon on Fire: Lessons From Entrepreneurs in China, to be published in 2008 by the CEIBS Case Study Center. Based on his research, Jenster stresses that the closure or privatization of many state-owned enterprises (SOEs) has also created rich business opportunities. “In many cases now, the work of defunct SOEs is fully or partially being assumed by entrepreneurs,” he says, adding that many of China’s most successful private companies got their start as revamped or replaced SOEs.

Also fueling the domestic entrepreneurial flame are the growing population of university graduates unable to find attractive jobs, plus China’s low “opportunity cost” for startups. As Jenster says: “MBAs elsewhere will think twice before giving up their paycheck to start a business.” But given that many of China’s professionals are generally underpaid by international standards, many feel that they have less to lose and more to gain by venturing out.

One piece of good news voiced by the CEIBS professors is that China is generally a relatively easy place in which to seek government approvals to launch a business, especially for Chinese nationals (see related article Resilience Pays, regarding foreign entrepreneurs in China). “For a developing country, the business registration process is unusually smooth in China,” says Prof. Jenster. Outside of a handful of still-restricted "sensitive” industries, the Chinese government is usually quite welcoming to startups. Another plus in China: procedures are often less formal than in developed markets. However, Jenster stresses that China could improve, for example by making more official processes available online.

Michael Dell vs Lei Feng

Despite the benefits for entrepreneurs in China, startups here still only stand a one in five chance of survival to 12 months. In China, CEIBS professors agreed that one of the most serious difficulties is that entrepreneurship is often discouraged - by academia, by financial institutions, and even by the friends and family members of would-be entrepreneurs. Prof. Ge points out that in the United States, SMEs now employ 85 percent of citizens and supply 95 percent of new jobs created. Thus, China has much to gain from creating a welcoming environment for entrepreneurship.

One aspect that Ge hopes to see change in China is the low level of risk tolerance within China’s business culture. “Venture capitalists in the West do check the success or failure rate of a company but they also look at what lessons you have learned. In China, the market is not so well developed. Therefore, people judge a business’ value only by results - and that environment is not good for entrepreneurship. In China, we need a nurturing environment [for startups],” he says.

To create a more conducive environment, he and other CEIBS professors recommend that China develop the public institutions focused on helping startups and SMEs, such as the United States’ Small Business Administration.

In fact, younger Chinese are already showing entrepreneurial spirit, Ge says. “The post-80s generation [of Chinese] are quite different from earlier generations - they are more diverse,” he says. “In the past, the role model was Lei Feng. Now it is Bill Gates and Michael Dell.” He points to Chinese entrepreneurs such as Cai Daibiao (CEIBS EMBA 2006) Founder and CEO of Kungfu Catering - the first company worldwide to achieve mass preparation of traditional Chinese cuisine.

Cowboys and cowgirls

Another hardship for would-be startups is China’s banking system. “The banks in China are generally not very supportive of entrepreneurs and small businesses, particularly in western China,” says Prof. Jenster. Even worse, when cash is not available via established financial systems, business founders often turn to China’s underground money lenders. “There is a well developed gray market for lending where many Chinese go to get financing - but this can be very problematic,” says Jenster. Because the system is not legal, business founders can easily be cheated. He says the problem is particularly serious in the lesser developed regions of China.

In terms of available venture capital, Prof. Ge says lots of VC money is available in China, but not for startups at the beginning phase. “Sufficient money is not available for entrepreneurs in the seed stage, for conducting initial market research. You have to do this on your own [in China]. Only when you don’t need money - when you are up and running - then investors are willing to invest.”

Once a new company is operating, one of the biggest challenges is ensuring ethical business operations. CEIBS Management Professor Terence Tsai describes the scenario in this way: “In some ways, you can draw parallels between China now and Taiwan 30 years ago. Entrepreneurs are behaving like cowboys and cowgirls - they are very adventurous, very risk friendly.” In many cases, because startups tend to be small-scale and vulnerable, they make likely targets for corruption among business partners, suppliers or even employees. Tsai’s research into this issue includes a detailed case study on the Taiwan-based real estate firm Sinyi Realty Inc., chronicling the company’s efforts in Taiwan, and now mainland China, not to tolerate corrupt practices within its operations. Tsai's research on this was presented at the 2007 Academy of Management annual meeting in Philadelphia, and will be published in 2008 as a CEIBS case study.

"You do see quite a lot of seriously unethical behavior where entrepreneurs in China are engaged in IPR crimes or other violations,” agrees Prof. Jenster. He stresses that China’s guanxi system of business relationships also creates the potential for unethical behavior. Particularly devastating for startups is the threat of current or former employees stealing company technology, contacts, or processes and starting a similar and competing business.

Now’s the time

What will the future bring for entrepreneurs in China? CEIBS professors see a rosy future, at least in the short term. “The next five years will still be very exciting for entrepreneurs,” says Per Jenster. “You have the growth; you will have a lot of room for entrepreneurs to step into the market.”

Going one step further, Prof. Ge says, for many sectors, the best time to launch a business in China may be right now. “Ten years from now, competitors will have come in. Many industries [in China] are now consolidating. In the future, the entry barriers will be much higher,” he says. “I tell my students: If you want to start a business, start now.”

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