China and Korea are particularly difficult markets to work in, because of language and cultural barriers. Every culture has its quirks. But doing business in Asia can be extremely different. Take the lessons outlined below, for example. Even the best-intentioned moves can go awry.
A Local Manager in China
Fifteen years ago, a large U.S. medical device company chose to hire a local Chinese to run its small but growing business in China. At that point, it was unusual to put a local in charge of a foreign company’s China business. While local Chinese general managers (GMs) are more common today, expatriates almost exclusively were used back then to run a foreign device company’s operations in China. The U.S. head executive worked very closely with the local Chinese GM, and sales grew from $2 million in 1995 to $25 million in 2005.
The U.S. executive realized the importance of relationships in China. He tried very hard to support his local Chinese GM by seeing him often (at quarterly and ad hoc meetings) and supporting him as he attained a master’s degree in business administration. When the Chinese GM visited the United States, they also spent a lot of time socializing outside the office. During this 10-year period, the Chinese executive’s pay rose from about $30,000 to $200,000 a year.
By 2005, the Chinese GM had worked so long at the U.S. device company that he knew most of the buyers for the company’s products. He saw which products had the best margins and least competition, and he decided to go it alone.
During 2005, the company learned that its star GM in China had quit and had embezzled several hundred thousand dollars. He also had set up his own competing manufacturing factory an hour west of the device company’s sales and marketing operation. The foreign multinational tried to go after its ex-employee in China’s court system. Proceedings were so delayed that the company finally determined it could not win the case.
Needless to say, the ex-GM now makes several very similar competing products that are sold to his previous employer’s former buyers. The new product was 80 percent as good as the American company’s product, but at 50 percent the price. This kind of problem is very common in China today.
A Key Component Manufacturer in Korea
Several years ago, a division president of a large medical device multinational company called and said he needed help. During a visit to his office, the president explained that he was having trouble with his subsidiary in Korea and that the GM of the Korean subsidiary was not following his directions. In fact, the Korean-based GM often did not respond to his phone calls and emails. This led our team of consultants to ask a few key questions.
When asked how the Korean subsidiary had started, the medical device company president explained that his company had purchased the company for $20 million in cash and given the former owner a two-year contract at $400,000 per year. After the deal was completed, the former owner deposited the $20 million into his bank account and was “not going to listen to a bunch of Americans in Minnesota.”
When we asked the U.S. executive why he’d purchased the company, he explained that the factory was one of only two facilities in the world that could make a particular kind of medical device component. The component was a key piece in his company’s final device product. In fact, both factories were located in Korea.
When we asked how the Korean executive had started his company, we learned that he initially worked at the other Korean factory that made the device component. One evening, he unbolted some of the key equipment from the factory floor, loaded up a flatbed truck and drove the equipment 100 miles south of Seoul to set up his own factory. We then asked why he would consider buying the factory, given this executive’s history and his knowledge of the situation. After a few more questions, we were asked to leave. The U.S. company’s president did not want his superiors to know that he had made such a big mistake.
Eyes Wide Open
While the medical device markets in Asia present many opportunities, it is crucial for Western business executives to fully understand the dynamics of the Asian marketplace. Hiring in Asia is a very tricky issue, and lots of companies make the wrong hire. Just hiring a general manager that speaks English, for example, isn’t enough. Medical device companies making acquisitions in Korea or other Asian markets must conduct exhaustive due diligence before they pull the trigger. Due diligence must go way beyond hiring local lawyers or consulting firms in the country of interest. For example, factors such as how employees like working at the company, whether they think the management is fair, how the company purchased or obtained expensive device equipment to make the products, etc., also must be investigated prior to any acquisition in Asia countries.
Ames Gross is president and founder of Pacific Bridge Medical, a Bethesda, Md.-based consulting firm that helps medical companies doing business in the Asian market (www.pacificbridgemedical.com). A recognized national and international leader in the Asian medical markets, he founded Pacific Bridge Medical in 1988, which has helped hundreds of medical companies with business development and regulatory issues in Asia. Catherine Matacic is a senior associate at Pacific Bridge Medical.