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Franklin Yao's China Connection

I was recently interviewed by Anne Fisher of Crains New York about the challenges smaller US companies face when they enter the Chinese market. This article appeared on on October 15th.

Here's a statistic that may surprise you: 25% of U.S. businesses with annual revenue between $5 million and $25 million are either doing business in China or plan to do so in the next five years. (Among firms in the mid-Atlantic region, including New York, the figure is 19.8%.) That's according to a recent survey of 1,617 small-company chief executives by business-development firm Vistage

Franklin Yao thinks that's just the beginning.

"Most smaller companies' connection to China right now is because they outsource some or all of their manufacturing there," he notes. "But in the past couple of years, we've also been seeing a much larger number of smaller U.S. companies trying to enter the Chinese market by selling consumer products there."

Mr. Yao, a Yale grad who grew up speaking Mandarin at home in Toronto and Hong Kong, is head of SmithStreetSolutions, named after the Brooklyn street where he and partner Robin Kerawala lived when they launched the business in 2007. The firm, which has 60 employees at its dual headquarters on Fifth Avenue and in Shanghai, advises American businesses--most of them Fortune 500 companies--on how to succeed in China. Although he won't divulge numbers, Mr. Yao says revenues have tripled in each of the past two years, "and we expect sales to double in 2010. There is a lot of demand for what we do right now."

No wonder. When analysts at consulting giant McKinsey & Co. did their annual study of Chinese consumers a few months ago, they discovered that after a flirtation with frugality in 2008, shoppers there are on a spree. A barrage of government incentives boosted Chinese retail spending by 40% in 2009, and the trend shows no signs of slowing. As a result, the McKinsey study says, "the Chinese consumer segment is now arguably the healthiest of any major economy in the world."

Just one problem: "Most U.S. companies do not understand China," says Mr. Yao. "We started SmithStreetSolutions to shine a flashlight on it."

For starters, China isn't one market. Its more than 1.3 billion citizens live in 33 distinct markets, with many different cultures and languages. Even in relatively westernized Shanghai, with its 20 million people, "you have a plethora of different demographics," observes Mr. Yao. "So you can't just bring your U.S. business model there. You need to pick your spots and adapt your marketing to very specific groups. We advise companies to spend the first year collecting data and building relationships, and then develop a strategy and a sales team--not the other way around."

SmithStreetSolutions has gotten much of its business thanks to American companies' penchant for launching massive marketing campaigns without first laying that groundwork.

"Then they have to dismantle the whole thing after a year or two," Mr. Yao says. "They come to us and say, 'OK, now how do we fix this?'"

The time and manpower required to figure out how to sell in China, he adds, "is a significant barrier to entry for small companies that just don't have the resources."

If your company fits that description, you may think you can safely ignore what's happening on the other side of the world. But small companies are as vulnerable as big ones to Chinese competition.

"China is so big, there's no avoiding it," says Mr. Yao. "Even if you don't go to China, China will eventually come to you."

Disclosure: No Disclosure