Let’s go to China – after all, everyone else is doing it

Fail in foreign trade 9

Everyone dreams of this: profit from the China boom, preferably with your own factory there, produce fast and a lot. Professor Peter Anterist, CEO of the global trust company InterGest, knows that this is sometimes quite risky. In his series, he describes a classic China disaster that led to the insolvency of the entire company.

Altmeier makes windows. He makes good windows – the kind that really save energy and also look great. Altmeier also supports the local soccer club for the large city of Stemmelfeld, and he is a model entrepreneur for the entire region. He is innovative, environ- mentally friendly, a supporter of local business, creates jobs, and a great guy all around.
In late 2005, it happened that an ambitious politician from the Stemmelfeld district was able to attract a few potential investors for his district during a trip to China. He quickly found a group of Chinese people who were interested in acting as a delegation to Germany, in order to see for themselves what kinds of investments could be made in China or Germany as part of a cooperation.

When it came time to get ready for the visitors from China, Alt- meier was contacted. He would be introduced to the Chinese dele- gation, present his factory and his products, and represent German entrepreneurs as a whole. No one else seemed better suited, and no one could do it better.

In the days before the delegation’s visit, Altmeier polished his factory to a high shine and made everything look nice, even going so far as to display three Chinese flags. The delegation could come any time now.

When they finally arrived, everything went very fast. The Chi- nese visitors came, were in fact impressed by Altmeier’s factory, and immediately took over. Altmeier followed along behind the dele- gates, was asked to sit next to the head of the Chinese delegation, and a few “ganbei”s later Altmeier was inevitably invited to visit China. He simply needed to see for himself, they said, what amazing opportunities there were in China for his company. Investing in China would be the ideal approach for him.

Just three months later, Altmeier was in China, welcomed heartily by the members of the last delegation. He was taken everywhere, was shown the fast-growing industrial zones and was extremely impressed by the growth figures, which people could only dream of back in “good old Germany.”

And they talked and talked, and argued and argued. After three days, it was clear to Altmeier that he would need to invest here in China and build a factory in order to sell his fantastic windows on the Chinese market. This was the long-awaited breakthrough, the necessary step to create “Altmeier International,” the quantum leap into globalization. China, here we come.

Over the next few months, everything was planned down to the last detail. Altmeier tried to take out loans, spent a lot of time tal- king with banks and even more time talking with his new Chinese partners. He went to China once a month, found a piece of pro- perty to develop, hired a construction company and finally ordered the machines that would be needed to manufacture the windows in China. All of this was amazingly expensive; thousands of euros flew out the window, and the travel alone ate up easily 30,000 euros – but that was peanuts compared to the other bills for building the factory, etc.

After a year, it was finally finished. The factory was built, the machines were hooked up, and the ceremonial company opening was celebrated with great emotion and hopes. The Mayor of Stem- melfeld even came especially for the occasion; by now, Altmeier had been named an honorary citizen of the city, and he was a sort of ambas- sador for the German community.

The investments Mr. Altmeier had made up to that point to- talled an impressive 3.5 million euros, and he needed to earn that amount back right away in order to at least achieve his ROI as quickly as possible.

Unfortunately there was a fairly wide gap between the desire and the reality, because window sales were markedly slow. Somehow the sales were having trouble getting off the ground, and the theore- tically unbeatable arguments in favour of buying windows with super energy savings and German technology didn’t seem to be working very well. Many times, the salespeople at Altmeier China had to watch as construction site managers deemed their products innovative, but went ahead and bought the competitor’s cheaper windows anyway. The main argument of energy savings up to 40% simply did not seem crucial for the decision-makers’ purchases.

A year after the grand opening, Altmeier had to draw the sad conclusion that he had been fundamentally mistaken, caught up in the storm of enthusiasm for China without questioning his in- volvement critically enough. He had done a market study, but since he really only wanted support for his already-formed opinion, the results were naturally interpreted to suit the investment decision. In other words: “I’ve made up my mind – don’t confuse me with facts.”
But that wasn’t all. On the same day when Altmeier was forced to admit that his Chinese investment was essentially a failure and that damage control was the only option, the tax authorities at home in Stemmelfeld also turned up for an audit. All of the expenditures for the investment in China had been made through the German company, and the tax authorities did not agree that these investments and the subsequent initial losses could be borne by the parent company in Stemmelfeld. The back taxes finally broke Altmeier, leading to the company’s bankruptcy. The model entrepreneur was a failure…

Conclusion: It is probably not a wonderful idea to let your foreign involvement be guided by outside influences and motivations. But the reasons for investment decisions in foreign companies, especially China, are often somewhat unclear. Mr. Altmeier was by no means the only one who fell prey to a gold-mining attitude in China, and who de- cided to invest there just because “that’s what everyone else is doing now.”The decision to go to a country like China therefore requires plenty of consideration; in particular, the costs need to be analysed carefully. The air travel and accommodations alone can start to pose problems for medium-sized companies.