You’re a North American software vendor. You’re considering setting up shop in China.  You know that the risks are formidable, but so are the potential rewards.

Among the risks: intellectual property piracy issues, cultural adaptation challenges, currency restrictions, and governmental censorship (see The cost of doing business in China: Privacy for an excellent post on the Chinese government’s practice of monitoring Skype traffic).

However, the potential rewards are substantial, from a business perspective. A guide to doing business in China, published by Enterprise Ireland, suggests that although it’s “somewhat naïve” to imagine that you’re suddenly going to have a billion-strong market, there are certainly a good 300 million customers who may be in the market for what you’re selling. Also, the Chinese market is generally tech- and software-savvy, which may explain why the software partnership/reseller network is so huge.

We thought we’d take a look at why one western giant is doing so well in China. It may surprise you to learn that smaller software vendors can adopt the same strategy for success.

What’s SAP’s Approach?
Although SAP China was founded in 1995 in Beijing, I was interested in this tidbit from http://www.sap.com/china/company/saplabs/index.epx:

Having started development in 1997, SAP Labs China was officially established in November 2003. It has developed into one of the eight largest SAP Labs, and is one of the fastest growing SAP subsidiaries, with more than 200 employees from all over the world… SAP Labs China will further strengthen its commitment to the regional and local market, and its position of a world class R&D center, while growing to 350 to 400 employees in 2005 with a target of around 1500 in 2009.

Considering the challenges of setting up shop in China, this gives pause for thought.

The vendor seems to have adopted the strategy of arbitrage. Careful: this is not the dictionary definition of arbitrage.

Rather, arbitrage in this case refers to the ability to create additional value by exploiting differences between countries and cultures, according to Pankaj Ghemawat in his book Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter.

And here’s some “additional value” for you: SAP charges more for license fees in China than elsewhere. According to this article (in Chinese), in fact, the vendor charges 6,400 euros—twice as much as in Germany or Japan.

Fascination in the Chinese market for western products is one element in SAP’s favor, but the vendor also seems to have understood that Chinese consumers are powerfully attracted to a company’s character (unlike western consumers, who are generally drawn to the what’s-in-it-for-me factor).

That’s certainly a gross oversimplification, but the website titles for various local SAP About Us pages provide perfect examples:

US:
Our Role in the World’s Largest Business Software Company

Canada:
Committed to Excellence in the Canadian Marketplace

England:
35 Years in the Business of E-Business | 12 Million Users. 60,100 Installations. 1,500 Partners. 23 Industry Solutions

China:

(The Management Guru behind the Fortune 500)

…But Can You Make Arbitrage Work for You?
Yeah, right, you’re thinking. Why don’t I just adopt SAP tactics? Especially with my annual budget that’s less than half of what SAP spends on paperclips?

The fact is, arbitrage is not limited to the big players.

One smaller software vendor, who shall remain nameless here, was able to clinch a deal in China by taking advantage of what might appear at first glance to be a disadvantage.

It had to do with user training for the software. No local trainers? No problem! The vendor offered to provide training courses in the US—with travel costs expensed to the buyer organization. Since visas for US travel are still somewhat difficult to obtain for Chinese nationals, the buyer saw this as a unique—and deal-making—opportunity. That’s arbitrage in action.

The moral of the story: setting up shop in China is not without its challenges. But be careful not to assume that these challenges will scuttle all hopes of success. Those very challenges may in fact be the winning differentiation between you and your competitors.