With our new partner reselling our products in China, we had found a ripe new market that developed very rapidly. In the third year of that partnership, however, I received an e-mail from one of the principals in that representative's company that the other principal was working with a friend of his to copy our products! That, of course, is the greatest fear one has when selling in the free-for-all that is China.
Entrepreneurship is rampant. I likened it to the wild west. But we were not about to abandon this market to a copy. We immediately cancelled our contract with the company, but I didn’t really think that would stop the theft. However, this led directly to the next phase of our operations in China – our own direct-sales office.
Having worked for a couple of years with the partner who disclosed the theft, and as a result of his honesty, I explored the possibility of him becoming our employee as manager of our own sales office. But I needed a business plan, something that was totally foreign to him. To put together the plan for presentation to our management team, I had to get the basics of what it cost to do business in China directly. From him I got the cost of employees for office staff, the cost of a couple of engineers for service and application, office costs in the city of Nanjing, travel costs and other vital general and administrative expenses. I also needed the current price our products were being sold for in the Chinese market.
The latter was the shocker. Our selling price in China was 30 to 40% higher than our selling price in the U.S. market. After discounting the freight and duty costs that he provided, I realized from the base market we already had in China that we could put a product cost on our China sales office that covered our U.S. manufacturing costs, most of our U.S. prorated G&A expenses, have enough margin left to cover the projected G&A expenses of the China office (including sales commissions) and have a very nice profit left over! This was a “no brainer” as we say.
Management easily approved my next step, which was “where do we go from here?” What exactly did we need to do to make this a reality? Next week we’ll look at how this worked out.