Later this month, I will be traveling to Hong Kong to present at Startup Launchpad, part of the Mobile Electronics Show. To make sure I’m giving the young entrepreneurs in attendance the most cutting edge advice, I contacted David Willard, the founder and CEO of 52 Capital Partners, a strategic M&A advisory firm headquartered in Silicon Valley. Given Willard’s extensive M&A deal-making experience, his advice for approaching the Asia market has value well beyond the tech world.
Jay Sullivan: What’s unique about Asia, or China in particular, that’s important for any business to know?
David Willard: The sheer dynamism of the Asia market is singularly unique. Asia is marked by extraordinarily high levels of new innovation, entrepreneurship, investment and economic growth across vast parts of the continent. No market in Asia better exemplifies this than China.
Take a walk through the streets of Shanghai, Beijing or Shenzhen; the vitality of innovation and entrepreneurship is palpable, even unbelievable at times.
On my first trip across China nearly two decades ago, the country’s nascent dynamism was self-evident. However, at that time, China remained out of the WTO. Chinese enterprises lagged behind other multi-national companies and weren’t as interconnected with other major economies. Five years later, while working in Beijing, I was stunned at how quickly China had advanced its economy within a relatively short time.
During the subsequent twelve years, including my years at Goldman Sachs and practicing law at Cravath, Swaine & Moore LLP, I observed that China’s economy had evolved into—and would continue to be—a powerful, dynamic and deeply interconnected force in the global economy.
It’s important to acknowledge that, with China’s dynamism (or perhaps even because of it), China’s economy presents extraordinary challenges and pitfalls for businesses. Chief among them is that China’s legal, judicial and regulatory systems are in need of further reforms and development to give businesses greater confidence that their assets—operations, intellectual property, capital, contracts—will be protected. That will require duly enacted, enforceable laws and independent courts in China. The rule of law remains a work in progress in China. China’s dynamism yields an extra layer of complexity when deal-making and launching products in China. Any business should appreciate that unique tension when navigating the China market.
Sullivan: What factors should a small company consider before trying to launch in China?
Willard: That’s a great question, Jay. A lot depends on the company’s industry and the stage of the company’s life cycle. Important questions for a small company include, in no particular order: What is the current and prospective demand among Chinese consumers for your product or service? What is the size of the addressable market in China for your product or service? Who would be your competitors in China, and how do their products and services differ from yours? To what extent is your company able and willing to hire trusted local partners, counsel and advisors to ensure that your company’s assets are protected in China? It’s important for any small company to ask these questions before attempting to launch in China.
Sullivan: How do those factors differ for a large company?
Willard: A large company faces similar questions but will likely face greater complexity and a longer lead-time to launch. One big factor for a large company to consider is the concern of intellectual property risk in China. I’m on the phone daily with CEOs and Boards, strategizing about how to manage this risk. Think of it this way: Chinese consumers’ awareness of a major international brand often precedes the formal launch of that brand in China. For example, Michael Jordan was well-known in China before Nike started to sell Air Jordan sneakers in the country. Big brands and large companies need to conduct significant front-end due diligence to determine if any domestic Chinese entities have launched comparable, smaller-scale products in the China market. More importantly, has that domestic Chinese entity already secured the protection of China’s intellectual property agencies? Failure to perform serious due diligence can precipitate an unfortunate outcome: the large company pours extraordinary capital and resources into launching a new product in China, only to become subject to major infringement lawsuits levied by virtually unknown Chinese entities. This occurs with great frequency in China, and it remains a lingering challenge for large multi-national companies. It’s important for large companies to exercise patience and caution on the front-end. China is a big consumer market that presents great opportunity for large companies with established brands. But rushing into the China market without methodically ascertaining the intellectual property risk in advance can cause tremendous problems down the line.
Sullivan: Although I’ll be working with tech companies, I’m curious about whether those same issues should be of concern to a services-based company.
Willard: The same issues apply.
Sullivan: How have you seen the China market evolve in the last five years? What are the trends you see now?
Willard: It’s been a fascinating journey in the last five years. The China market has rapidly increased in scale and complexity. Compared to five years ago, the large Chinese technology companies and other major Chinese conglomerates—Alibaba, Tencent, Xiaomi, Baidu, Fosun, Huawei—feature even more prominently in global commerce. Think about this for a second: China today has 9 of the world’s top 20 technology companies; the U.S. has the other 11. That’s a major shift from five years ago, and it underscores the rapid growth of the China market. But greater scale begets greater complexity. Deal-making in China today requires a heightened level of caution and patience. Especially with respect to technology companies, serious concerns around intellectual property protection, cyber-security and data privacy in China are more salient than ever. And many observers in China acknowledge that those risks have increased in complexity in the last five years.
This isn’t to say that companies should avoid the China market. Quite the contrary. The launch of new innovations, technologies, products and services in China is fostering greater awareness of the challenges and risks inherent in the China market. With that awareness, both policymakers and industry executives increasingly recognize the hurdles. China will need to accelerate reforms across its financial system, capital markets and legal and regulatory frameworks in order to continue to grow as a major economy in the 21st century.
Heightened U.S.-China trade tensions and bi-lateral tariffs are more recent trends affecting the China market. Time will tell if those trends are purely episodic reflections of current political dynamics in Washington and Beijing or more lasting features of U.S.-China relations. But in any event, my advice to CEOs and Boards continues to be: Get smart on China; it’s here for the long haul.
Sullivan: What do you think the China market will look like in 2023?
Willard: I believe there is a high probability that the China market in 2023 will be even more relevant for early-stage ventures and large multi-national companies. China’s burgeoning middle class will only continue to consume greater volumes of products and services. I believe that China’s existing “national champion” enterprises will be playing an even more prominent role in global commerce. By 2023, we will likely see the emergence of new Chinese technology companies whose innovations will disrupt or otherwise challenge the existing products and services of major technology enterprises in China and internationally.
Beijing will host the Winter Olympics in 2022. That will afford China’s leaders and the country’s major multi-national companies a powerful platform to showcase China’s continued economic growth and development to a global audience. 2023 therefore could yield a renewed influx of foreign capital and investment into China’s economy. Notwithstanding this, it’s important to acknowledge that the probability of a fairly significant economic slowdown in China between now and 2023 is not inconceivable. China’s growing accumulation of public and private debt is reaching levels of unsustainability with no historical precedent. A major dislocation in China’s financial and capital markets—exacerbated by the nation’s large debt burden—could emerge as a significant impediment to China’s current economic trajectory. This is not a negligible risk.
Sullivan: Is the issue for startups getting funding, keeping funding, developing their product line, or figuring out the supply chain, and if you tell me “All of the above” tell me how to prioritize?
Willard: It’s a fantastic question—and it’s hotly debated in tech circles from Silicon Valley to Shenzhen. The short answer is: all of the above. In advising the management teams and founders of early-stage ventures across North America, I typically find that initial funding is the biggest priority. From there, developing the product line and optimizing the supply chain are critical. As a start-up continues to scale, securing additional funding often becomes a necessity. But a start-up’s ability to raise new capital typically requires “getting it right” with product development and supply chain optimization on the front-end. While the prioritization depends on a wide spectrum of variables for any given start-up, this sequence is most common.
Sullivan: Thanks for sharing your perspectives.
Willard: My pleasure. Best of luck at Startup Launchpad.
Originally published on Forbes.com.