The Expat Checklist

Five Common Mistakes of Companies Entering Asia through Reseller Channels
(Whitepaper)

- Richard Balderrama © 2007

(The following is the copyrighted property of its author, Richard Balderrama, and cannot be reproduced or reprinted in whole or in part in any way without the express written consent of the author.)

Five Common Mistakes of Companies Entering Asia through Reseller Channels

 The problem for most companies is a lack of understanding of what it takes to succeed in Asia, and common mistakes are made.

 The following whitepaper provides Five Common Mistakes of Companies Entering Asia through Reseller or Distributor Channels.  These are common mistakes for all companies regardless of geography, but I’ll also point out specific issues for American companies.

Mistake #1 - Asia Isn’t Really “Asia”

The most common mistake companies make in entering the Asian market is viewing it as a homogenous region.  The concept of Asia is an ‘outside-in’ perspective based upon geography – and is not based upon markets or business cultures.

The reality is that Asia is comprised of incredibly different markets with different languages, business cultures, end-customer needs, market maturity and potential growth rates.

Additionally, the history of the region is filled with intra-Asian hostility.  This must be taken into account when thinking through a company’s strategy, and specifically the structure of the sales force.  To understand the strength of these hostile feelings one simply needs to watch the news each year when the Japanese Prime Minister visits Yasukuni-jinja in Japan (the national war cemetery), and the resulting mass demonstrations in Korea and China.  This historical animosity can also flow into business relationships, and should be considered when choosing your regional management team structure.

So, companies need to view Asia as distinctive countries or regions with their own opportunities and challenges – and then implement a strategy to best succeed in these individual markets.  Some quick examples: 

-         China has the largest long-term growth potential and is thus receiving the majority of current press coverage.  Chinese customers are exceptionally price focused but require a high service level, which puts pressure on revenue growth and margin.  Therefore, a China strategy has to be a long-term strategy based upon projected scale and growth, with an expectation of a long-term ROI.

-         Japan is the largest current market, and Japanese customers will pay a value premium for products with a strong brand and service strategy.  Therefore, Japan has to play a central role in an Asia strategy.

-         Technology purchase decisions by end users in Korea are most often directed by the Reseller community.  Additionally, many of the largest end users are part of Korean Chaebols – large business conglomerates like Samsung or LG.  Many of these Chaebols have Reseller divisions, which sell into the other business divisions.  So, picking the right Resellers and providing them strong training and incentives is very important in Korea.

-         Australia is a mature market, with a slower growth rate than the rest of the region.  Therefore, growth forecasts should be tempered appropriately. The Australian market is important in that it’s viewed by many end users in the region as an early adopter of new technologies, and as such success in Australia can often be leveraged in other parts of Asia.

-         The ASEAN/India market is growing fast, but from a relatively small base.  ASEAN is a political organization and stands for the Association of South East Asian Nations.  It is generally used in business to describe South Each Asian markets and includes nations not formally part of the political ASEAN organization.  Given its a diverse group of countries, each may have its own market entry requirements.  India can be particularly difficult due to various customs and tax laws pertaining to sales of products and services.  Therefore, an appropriate amount of due diligence is required to succeed in that market.

Key Take-Away: “Asia” is not really “Asia”, but rather is a geographic grouping of a number of exceptionally different countries and markets, all requiring a specific market-entry strategy.  Companies that succeed in the region implement a specific market-focused strategy reflecting the heterogeneity of Asia, versus a generic “Asian” geographic strategy.

Mistake #2 – a Distributor is not Always a Distributor

The definitions of business models in some mature markets, (especially in the U.S.), often do not translate to the realities of Asia.  Yet, companies tend to organize their global channel strategy based upon these defined business models.  In many markets, there is a clear distinction between the definition of a Distributor and a Reseller, with limited overlap.  (Where there is overlap, most manufacturers manage these through authorizations of specific divisions.)

The channel teams of companies entering Asia often use these clearly delineated definitions to develop their channel support and marketing infrastructure including pricing strategy and price gaps, PRM and web support strategy, contract terms, etc.

In Asia, the business models are not as clean-cut and defined as in other more mature markets.  Many of the largest business partners sell to both resellers and end-users, or even to the local subsidiaries of large multi-national technology manufacturers.  And so companies entering Asia often find that the channel support infrastructure they’ve build will not adequately support their Asian business.  Therefore, these companies often have to reinvent their pricing strategies, the web support infrastructure and contract terms to best fit Asian business markets.  Starts and stops in implementing a channel strategy due to these infrastructure and support issues can mean missed market opportunities.

Key Take-Away:  Different reseller and distributor business models often succeed in Asia, and the ability to understand these different business models is key to developing an effective Asian channel infrastructure.  Designing flexibility into a channel infrastructure is a key to success and speed to market.

Mistake #3 – An Un-Coordinated Sales/Service Strategy for the Region

A common mistake companies make in entering Asia, especially those companies selling enterprise-level products, is a lack of coordination between sales and post-sales services strategies.  When initially entering the Asian market, service organizations often will implement a centralized hubbing strategy for warranty support in order to limit expenses, without considering the transit time through customs for the products.  In addition, companies will often leverage the current support resources for telephone support – which are often in English.  This is due to a lack of scale when first implementing a service strategy in the region.

Companies often don't take a holistic view to a market including sales and service, and the strategies are designed and implemented differently.  The result is that a poorly executed service strategy quickly becomes a drag on sales opportunities.  In many Asian markets, poor initial execution can negatively impact a company's brand, and it can take years to successfully a positive brand image with resellers, distributors and end-users.

A potential strategy is to implement a staged structure leveraging a manufacturer’s channel partner’s infrastructure.  The first phase is to enabling a local partner to provide post-sales support in a specific region (managing the spares inventory and local-language customer-facing call center).  This is followed by a phase where a company implements its own post-sales program when a meaningful scale is reached. 

If this strategy is implemented, the channel strategy needs to also tie into the services strategy.  It's best to limit the number of partners authorized to sell in a target geography if those partners are also going to provide support.  This decreases a company's cost of managing the support infrastructure, and alsoallows the partners to enjoy some level of scale, thus lowering the cost basis upon which to provide a competitive warranty service in the region.

Key Take-Away:  Companies selling enterprise-level products which require quick warranty turn-around times and immediate telephone support need to coordinate closely between the sales division and services division.  This will enable those companies to implement a shared strategy that fits the needs of the end-customers within the context of the various markets, and will allow for unhindered revenue growth.

Mistake #4 – A Contract Does Not a Relationship Make

In Asia, the contract is more often viewed as the starting point for the relationship, and terms are often negotiated on a case-by-case basis.  Other business cultures, especially American society, are more legalistic, and the approach to business relationships tends to be contractually driven. 

Additionally, even when contracts are win/win, Asian resellers will still often negotiate terms which may have already been agreed in the contract on a deal-by-deal basis.  The most usual terms that are negotiated tend to do with price.  For example, resellers (especially Korean and Chinese) tend to begin asking for discounts for specific end user opportunities – and if a manufacturer does not manage this carefully, those discounts quickly set a new price level in that market for all end user opportunities.

Terms such as returns or warranty terms are also often negotiated; and can be especially problematic for U.S.-based public companies due to internal controls requirements associated with Sarbanes-Oxley.  Therefore, a balanced approach is important.

Key Take-Away:  when negotiating a contract with an Asian Reseller it's important to ensure a win-win approach.  Anything that is too one-sided will inevitably result of further negotiations on a deal-level-basis later.  In order to maintain a channel’s focus on sales and marketing versus operational issues, it’s important to ensure a fair and balanced contractual relationship.  Additionally, every negotiation at the deal-level sets a precedent for the next deal – and so decisions should be managed carefully.

Mistake #5 – Culture Really Does Matter

Individual Culture

Culture is often one of the last elements considered when implementing a market-entry strategy.  Business issues such as growth potential, target customers, required investment, and ROI analysis often take precedent.  But, an understanding of culture allows a company to take a market entry strategy off the page, and execute it successful in the market.

As an example of why culture matters: in the Northern Asian countries of Japan, Korea and Greater China, there are two primary drivers of social interaction which need to be understood:  face and relational hierarchies.  These are both critical to understand when negotiating contracts or engaging in selling relationships.

Face is basically the idea that everyone has a social reputation, and public interaction should build upon that reputation.  This manifests itself in simple behavior such as:  Japanese customers won’t ask a question during a presentation because asking a question means the presenter has not done a proper job of presenting the material.  Face also defines the tone and rhythm of contract negotiations, and can make or break the ability to quickly close a contract.

Relational hierarchies are based upon basic Confusion relationships such as Emperor/Subject, Father/Son, etc.  The idea is that this is a symbiotic relationship whereby the Subject follows the Emperor’s orders, but the Emperor must ensure the needs of the subjects are also met.  Every relationship in North Asia is managed in this context.

The concepts of face and formal relational hierarchies can be inscrutable and frustrating – especially when coming from a culture that is very individualistic and values aggressiveness.

For companies to succeed in entering Asia, they do need to hire staff that understand these concepts and can use them to their advantage in forming relationships with Asian Resellers.

Organizational Culture

Culture also impacts how organizations respond to various issues, and the cultural differences are most dramatic in interactions between Japanese and American companies.

There is a saying in America:  “can’t see the forest for the trees.”  It means don’t get lost in the details, but keep your eye on the larger goals.  The differences between Japanese and American companies often come down to the following basic difference. 

American companies:  Don’t lose the forest for the trees.

Japanese companies: The forest dies if each individual tree isn’t managed carefully. 

This difference comes to light particularly when there is an error – such as a mis-ship, a DOA product is shipped, or someone makes a mistake and sends incorrect information.  Whenever there is an error like this, a Japanese staff person’s first reaction is to quickly determine root cause of this issue, and then put in place corrective action.  For most American staff, the first reaction is to the quickly solve the specific issue, and then move on to the next issue.

This happens consistently between American companies and Japanese companies – and is reflective of the different approaches in both societies to fixing issues.  Japanese employees have been schooled in quality from their beginnings in Japanese companies, and determining root cause and then implementing continuous improvement is part of the DNA of the Japanese corporate world.

Key Take-Away:  companies entering the Asian market must prepare for cultural difference if they are to successfully enter markets.  Preparation at an organizational level would mean ensuring the operational staff is trained on this difference and understand the basics of root cause analysis and the concept of zero defects.  The companies must also ensure they have adequate staff in preparation for the increased operational and communication requirements when dealing with Japanese Resellers and customers.

Summary

The Five Common Mistakes in Entering the Asia Market through Resellers and Distributors are:

#1 – Asia isn’t really Asia.  It’s a group of very diverse markets, and companies that succeed in entering Asia implement individual country-level strategies targeted at the needs of individual markets.

#2 – A Distributor is not always a Distributor.  Companies must understand that the business models in Asia can be different than in other markets, and support of a channel strategy in Asia requires flexibility in the channel support infrastructure.

#3 – An un-coordinated sales/service strategy for the region.  A company must have a holistic view of the customer in Asia, which includes not only the route to market but also how to best provide post-sales support for each individual market.  The support strategy has to take into account the challenges of implementing logistics across national boundarie and different languages.

#4 – A Contract Does Not a Relationship Make.  A company must plan for continued negotiation on price and other terms after a contract is signed, and manage those negotiations with the understanding that precedents for future deals are being set.

#5 – Culture Really Does Matter.  Ultimately, a company must be prepared for personal and organizational differences in order to fully succeed in Asia.

In conclusion, entering Asia through Reseller and Distributor channels can provide immediate access to target customers and allow a manufacturer to benefit from Resellers’ and Distributors’ knowledge of local language and business customs.  It limits also expensive start-up costs of a direct sales force and direct PO infrastructure in Asia.  But, to succeed in driving revenue growth from the Asian region, companies need to understand that Asia is different, and hire the appropriate staff to help them succeed in the region. 

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