February 04, 2005

Prepaid and CHina

How Did VendTek Hit it Big in China?


Intele-CardNews | printable pages

ISSUE: 2/1/2005

Golden opportunity
By: Bridget Mintz Testa

How did VendTek Systems Inc., a small prepaid distribution software company from Port Coquitlam, near Vancouver in British Columbia, hit the big time in China's huge market? And how did they do it without running into problems that much larger companies, such as Cisco, did? Paul Brock, president of the company, shares his story with Intele-CardNews.

Prepaid without plastic

VendTek's parent company was founded in 1988 as an electronic vending machine firm. After going public in 1999, the company changed business models in 2002. It left the vending machine trade to become a provider of an all-new type of software for the prepaid market.

Named e-Fresh, the software operates in a variety of POS and self-serve terminals, enabling consumers to purchase telecommunications and financial services electronically. Purchasers who use VendTek to buy services receive a printed receipt with their PIN and usage instructions. What's missing? The plastic!

By removing the card from the equation, VendTek lets convenience stores eliminate their $10,000 inventories of plastic cards. This, in turn, removes the cost and "shrinkage" risk of maintaining that inventory. "In an industry based on high volume and low margins, saving 3 percent on inventory or theft is a lot," Brock says. Because any type of prepaid product or service can be downloaded, including ring tones or games, Brock adds, "Stores get more inventory for their customers to choose from."

Last October, VendTek announced that e-Fresh had reached a milestone. Now Prepay, the company's domestic subsidiary, had installed the software in 5,000 Canadian POS terminals. But an even bigger milestone was reached earlier in August, when VendTek signed a licensing agreement with Beijing-based ChinaPay e-Payment Services.

Doing business in China

Why China? According to the agreement, ChinaPay can use e-Fresh in its POS terminals in exchange for paying VendTek transaction fees based on POS system revenues. As a financial institution backed by some 80 shareholding Chinese banks, ChinaPay and its cross-country POS network provide VendTek access to China's 1.2 billion consumers the largest market on Earth.

As if those 1.2 billion consumers weren't enough, China is especially promising for prepaid. "The Chinese population is so large that it is impractical for companies to provide credit, especially considering the developing financial infrastructure," Brock says. "Virtually everything is prepaid." Besides the usual telecom services, that also includes apartment rent, cable service, hot water and even cold water.

If it sounds like an enormous opportunity, it is. But Brock cautions that doing business in China isn't easy. "Business in China is entirely relationship-managed," he says. "It's not about the best product or the lowest price. The No. 1 challenge for me has been building relationships and trust with people." Without such relationships and trust, you can't even get started. With them, you can find opportunities and flourish.

VendTek first started doing business in China in 2001 with a small Beijing company. Through that company, Brock was later introduced to ChinaPay. Though the ChinaPay agreement happened within a couple of months of the first meeting last May, the meeting would never have happened if Brock hadn't first spent three years in China getting to know the people, establishing business relationships, learning the language and eating some very unusual foods such as a snake and its freshly drained blood to show he accepted the culture. "The Chinese view their foods as important, and I believe we need to embrace that as much as we embrace all aspects of their culture," he says.

VendTek started earning licensing fee revenue in China within six months of entering the market through system deployment in Beijing. Conditions changed, however, and Brock said that revenue has since declined. Now that the company has an agreement with ChinaPay, which will involve a much larger-scale rollout of VendTek's software, Brock expects to see revenue within the first half of 2005 and profits by the end of the year assuming things go well.

Is it necessary for foreigners to have a Chinese partner to do business in the country? Not absolutely, according to Kevin G. Rivette, executive advisor for the Boston Consulting Group. "It's probable, though, mostly due to government requirements. [Foreigners] can own a majority of a joint venture, but most companies still have some sort of Chinese involvement," he says.

Intellectual property

Though Chinese regulations can be as frustrating as anywhere else, the greatest challenge for a technology firm that wants to do business in China is the country's approach to intellectual property (IP). With no heritage of competitive research and development in the technology arena, "[the Chinese] have much more of a technology is free' approach," Rivette says. "The more high-tech the company, the greater the chances that they'll end up competing against their own technology."

China has no trade-secret law. So if a Chinese employee learns how a foreign company's technology works, there's no law preventing him or her from opening up shop down the street, selling or using the same technology at a cut-rate price. For this reason, Cisco sued Chinese manufacturer Huawei, claiming the Chinese company copied its products and manuals. Some of Rivette's customers consulted him after similar setbacks.

To manage the theft risk, Rivette says, "You must develop a strategic IP plan. Don't just let the lawyers do it. This is something that must be dealt with at the highest strategic level." One suggestion Rivette offers to technology companies is to be prepared to patent processes or products at a much more "granular" level. For example, in the United States, a company might patent a product once it's completed. However, in China, it might be necessary to patent bits and pieces of the product along the way.

Regarding IP in China, Brock says that software is one of the worst industries to be in. But VendTek had a strategy. "We initially protected ourselves by making our customer one of our largest shareholders," he says. "[Thus, he] would only damage his own investment if he stole our property." Brock says VendTek also works hard to deliver real value to customers for the licensing fees, including software customization and some special proprietary incentives.
Six tips on doing business in China
1. Do lots of research and preparation.
2. Spend time there. It's almost impossible to do business in China remotely.
3. Paticipate in the culture, including the food, drink and language. If you can't do that you'll be seen as a foreigner intent on exploitation.
4. Before you go, contact the business community, such as expatriate groups or businesses similar to yours, to help you network. Start with your embassy.
5. Try to find a potential Chinese partner before you go. They can show you around and provide introductions.
6. If you have valuable intellectual property, develop a comprehensive protection strategy before you go.

Rapid change

With staggering speed, China is emerging as a global economic force. Brock says, "By far the most interesting thing [about China] from my perspective is the rate of change. In a country with thousands of years of traditions and history, it is amazing to see how fast things are changing and how well the people are accepting the change."

As an example, Brock explains how he and his companions had to walk on timbers across a "gaping void" when entering a Beijing restaurant one night for dinner. The restaurant was an island in a sea of dirt extending as far as Brock could see. "A few hours later," he says, "when we exited the restaurant, the wooden beams ... were gone. A new road was in place for as far as the eye could see. The road was finished, and people and cars were on it. There was no sign of the work crew who were probably gone to build another road somewhere nearby."


Posted by Craig at February 4, 2005 03:17 AM