Extending the service business in China: experience of Swiss companies.

Abstract

Few Chinese subsidiaries of Swiss manufacturing companies are reported as making profits. Our analysis indicates five main difficulties: strong competition, cultural differences, establishing a profitable service business, availability and education of Chinese workers and managers, and differing goals among collaborating partners. The existing literature is very profuse when it comes to explaining the rising competition in the Chinese market, the cultural problems between western and Chinese managers, and the availability and education of Chinese workers and managers. However, there seems to be a lack of discussion on the challenges and guidelines for extending the service business in China are concerned. Swiss companies generate a major share of total revenue through the service business. In Europe they earn 23.2 per cent of total revenue through services, while their Chinese subsidiaries achieve only 10.3 per cent. The main reason stems from problems associated with managing the service business in the context of Chinese culture. We analyse these effects and offer some guidance on increasing service profitability.

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The priority of the Chinese market for the Swiss machine and equipment industry is increasing dramatically. The Chinese market in 2006 is among the top five markets for only 18 per cent of Swiss machine and equipment manufacturers. Around 60 per cent of these companies generate between 2 per cent and 10 per cent of their total revenue in China. Within the next five years, the Chinese market will be among the top five markets for 57 per cent of Swiss companies. Consequently, Swiss direct foreign investments are achieving a new high with approximately three billion Swiss francs (Julius Baer, 2005). However, doing business in China is not easy.

In 2005, we conducted a representative survey to identify the main difficulties faced by the Swiss machinery and equipment industry in China. As illustrated in Figure 1, analysis of the 143 respondents indicates five main difficulties: (1) strong competition, (2) cultural differences, (3) establishing a profitable service business, (4) availability and education of Chinese workers and managers, and (5) differing goals among collaborating partners. Less difficulties arose from (6) intellectual property rights, (7) quality of local suppliers, and (8) overestimation of the market potential.

The existing literature is very profuse in its articulation of the rising competition in the Chinese market, the cultural problems between western and Chinese managers and the availability and education of Chinese workers and managers. But discussion on the challenges and guidelines for extending the service business in China are seriously lacking. The difficulties involved in extending the service business in China are also reflected in the share of total revenue attributable to service. When comparing 23 Chinese with 32 European subsidiaries of Swiss machine and equipment manufacturing companies, we found a significant difference between them. On average, the 32 European subsidiaries achieve 23.2 per cent of their total revenue through services. However, only 10.3 per cent of revenue is created through services in the Chinese subsidiaries.

Over the past few years, we have worked with Swiss and Chinese service managers and workers in more than 20 Swiss machine and equipment manufacturing companies including ABB, Bystronic, Mettler-Toledo, Rieter, Saurer, SIG (Swiss Industrial Group), Starrag-Heckert and Unaxis. Our objective has been to understand why Swiss machine and equipment manufacturing companies often fail to extend their service business in China. In this paper, we examine managerial implications and provide guidance for managers seeking to successfully extend the service side of Chinese subsidiaries.

Process Model for Extending the Service Business

The extension of the service business can be interpreted as a process model (for example, Oliva and Kallenberg, 2003, Gronroos, 1990) as illustrated below:

1. Offering superior customer service to achieve a price premium for the product

2. Providing product-related services for the installed base

3. Extending product-related services for the installed base towards customer support services 

Offering Superior Customer Service to Achieve a Price Premium for the Product

Extending the service business starts with offering typical customer service. Customer service represents a key element in how the machine and equipment manufacturing companies serve the customer (information, billing, etc). It augments the product offering and is generally considered essential in any product communication as it affects the pricing of the product. Machine and equipment manufacturing companies do not charge separately for customer service. They integrate it into the product price. However, companies offering clearly superior customer service can often charge a premium for the product (Lovelock, 1994). Offering superior customer service requires only basic service skills such as performing the routine tasks of informing customers about the technical specification of the product, defining legal sales contracts and providing information on the terms of payment. The traditional product units are responsible for developing these basic service skills.

Providing Product-related Services for the Installed Base

Furthermore, machine and equipment manufacturing companies are entering the market for product-related services. Product-related services conform to the traditional view of a service for the installed base of machines and equipment (typical examples are after-sales services like repair, inspection, maintenance, etc). Product-related services are needed to set the product in operation and can yield an attractive service revenue annuity. These services must be priced, communicated and distributed to customers. Service managers set charges and prices based on a mark-up for labour and parts each time a product-related service is provided. By establishing a price for each product-related service, the service workers charge product-related services separately (Guiltinan, 1987). Thus, compared to customer service, product-related services are not included in the product price. When offering product-related services, it is important to empower the service work so that they can discharge their functions effectively. (Gronroos, 1998, Bowen and Lawler, 1998). This empowerment is the authority to act and refers to the resources that service workers have access to and the decision to allow them to offer product-related services.

Furthermore, charging product-related services separately is expected to present an opportunity for the service managers and workers. However, this requires changes in the authority, expertise, responsibilities or resources of traditional product units. To ensure clear lines of responsibility, the general management should be willing to set up a separate business unit for such services. Service managers must operate this separate service business unit like a professional service company, using such performance measures as customer satisfaction, employee satisfaction and business success (Heskett et al, 1997). Service managers should not only quantify such performance measures, they should also break goals down to the level of individual service workers. Goal achievement is linked to an incentive system. A breakdown of performance measures of this kind demonstrates how different service workers contribute to the active selling of product-related services.

Setting detailed performance measures is only possible if both service managers and workers have the right mindset. This involves changing service workers' perception of product-related services as customer services that are "free" add-ons to the product into a mindset that sees product-related services as creating an added value for customers. Service managers should not only take care of customer complaints and customer service. They also have to professionally manage the service business unit, assume responsibility for profit and loss, and support service workers to achieve the individual goals of selling product-related service skills. Consequently, as illustrated in Figure 2, selling product-related services successfully requires a broad set of intermediate service skills.

[FIGURE 2 OMITTED]

Extending Product-related Services for the Installed Base towards Customer Support Services

Finally, the product-related services for the installed base are extended towards customer support services. They redirect the focus of the value proposition to the customer processes (Vandermerwe and Rada, 1988). Customer Support Services help increase efficiency and effectiveness within different customer processes. They refer, for example, to process optimisation, spare parts management, maintenance contracts and managing customer maintenance functions. Customer support services are a complete package consisting of the product, customer service and product-related services (Davies, 2003). Managing the maintenance function of the customers includes, for example, information on maintenance procedures, exchange of consumables, delivery of spare parts and taking on customer maintenance activities.

To sell the whole package, product and service managers use the bundled pricing approach, leading to a global pricing (Guiltinan, 1987). Service managers often define specific contractual arrangements in order to overcome the main disadvantage of the bundled pricing approach which often lead customers to believe they are receiving services they do not necessarily need. These contractual arrangements are based on machine and equipment availability and/or uptime. In the case of the complete package referred to as process optimisation, the price depends on the improvement of equipment availability. The customer only pays a certain sum (of 100,000 Swiss francs) if the improvement in equipment availability attributable to process optimisation is greater than 5 per cent. If it is less than 5 per cent, the customer pays less. Customers benefit from improved operations and greater equipment availability; thus, customer aversion to receiving services they do not consider necessary is avoided. Furthermore, because customers often use the identity and reputation of manufacturing companies as a proxy when evaluating the contractual arrangement of customer support services, personal relationships play an important role in reducing the perceived risk by customers when they consider the purchase of customer support services. For

this reason, account managers emphasise the importance of personal relationships. Personnel recruitment and development has to focus on low attrition of account managers to build long-term relationships. The account managers lay the initial foundation for positive customer expectations. Long-term personal relationships between account managers and customers would lead to changing customer perception from one of selling product-related services to one providing excellent customer support services. As illustrated in Figure 2, successfully extending product-related services for the installed base to include customer support services requires a set of advanced service skills.

Cultural Characteristics Limiting Development of Necessary Service Skills

From the cross-cultural perspective, development of the necessary service skills for extending the service business differs between the Chinese and European subsidiaries of Swiss machine and equipment manufacturing companies. Table 1 illustrates typical competency profiles of Chinese and European subsidiaries. While only the basic service skills are on a similar level between the subsidiaries, the advanced and intermediate service skills are significantly less developed in the Chinese subsidiaries.

If service skills were fundamentally ineffective in the Chinese context, one could assume why some companies struggle to develop them. However, this line of argument would not explain why some Swiss companies have previously developed the necessary service skills and gone on to achieve an attractive share of revenue with services. Our field studies suggest that Swiss manufacturing companies can manage the Chinese cultural characteristics during the development of intermediate and advanced service skills. Typical cultural characteristics of Chinese culture refer to power distance, uncertainty avoidance, long-term orientation, guanxi, renqing, mianzi, the consensus approach to decision-making, and the family as the basic economic actor (Hofstede, 1991, Davies et al, 1995, and Arias, 1998).

Chinese culture tends to exhibit high scores in terms of power distance. This indicates that Chinese people accept the fact that power is unevenly distributed in society and business. Guanxi can be roughly translated as personal relationships on which an individual can draw to secure resources or advantages when doing business. Mianzi can be translated as paying respect and recognising the status and moral reputation of a Chinese person in society, indeed enhancing this status by whatever means possible. It is important not to lose "face" oneself, but it is perhaps even more important to "give face" to others. Renqing is closely associated with giving "face" and is about performing favours and giving gifts. These cultural characteristics greatly affect the provision of the intermediate and advanced service skills. They explain why Chinese subsidiaries of Swiss companies often experience difficulties in developing the necessary service skills.

Cultural Effects on Intermediate Service Skills

The Chinese way of the consensus approach to decision-making limits the willingness of Chinese general management to separate the service from the product business in the context of product-related services for the installed base. Furthermore, separating the service business is also limited by the long-term orientation of Chinese managers. Chinese managers focus strongly on establishing binding relationships with their customers. A separate service organisation would disrupt this customer relationship, leading to two different customer contacts--one for services and one for machines and equipment. Our field studies suggest that a different organisational structure should be used in China. They suggest the deployment of account managers for customers at corporate level to provide product-related services. These account managers communicate with the customers and illustrate the uniqueness and benefit of the company's products and services. This enables Chinese subsidiaries to establish long-term relationships with the customers.

Owing to the familiar structure of most businesses (Arias, 1998), Chinese subsidiaries often experience high attrition of account managers. In order to reduce this attrition fluctuation, Swiss manufacturing companies use incentives such as housing accommodation to attract employees to stay on to establish long-term employee relationships. The account manager will be given ownership of the house if he stays with the company for longer than 10 years.

In addition, Chinese subsidiaries define a service unit and separate it from the product unit. The account, product and service managers are on the same hierarchical level. During the sales process, the account manager will need the involvement of both the product and the service managers. The optimal offer encompass the sales of product and services requires in a consensus approach to decision-making among them.

Nevertheless, we observed that the concepts of guanxi, mianzi and renquing steer the Chinese account managers to provide typical product-related services "free-of-charge". Pricing product-related services and encouraging service managers to charge for them separately are not priority issues for account managers. By not charging their customers, account managers give them "face", pay respect and recognise the importance of their customers, leading to advantages in future business with them. Because guanxi is a central element of doing business in China, it is not possible to pursue the pricing of product-related services directly. Swiss companies should first arrange other possibilities for account managers to establish a guanxi network. Successful companies reported offering their account managers the freedom to be personally available to their customers "24-7". They arranged special budgets and times for personally meeting customers at the airport, showing them the city for a full day and even inviting them to dinner at home or in restaurants. By offering such attractive options to achieve a guanxi network with their customers, account managers are spared the need to offer product-related services "free of charge".

The high power distance in China restricts the ability of simple service workers to take on the responsibility for selling product-related services. Thus, the service manager is responsible for the pricing and selling of product-related services. For a European subsidiary, where one service manager defines the pricing strategy and coordinates the service business, there are some 20 service workers responsible for selling product-related services. The Chinese subsidiary, however, consists of two kinds of service managers. The service business manager coordinates the daily service business, while the service sales manager is responsible for selling pro-duct-related services and defining a pricing strategy. The service workers only take on responsibility for delivering product-related and customer support services. During the sales and negotiation process, the service sales manager describes the various product-related or customer support services and explicitly indicates their benefits and prices. Our field studies suggest that, if the service sales manager tales to the Chinese customer about how his problems could be solved through product-related and customer support services, the customer will be more likely to pay an appropriate prize for them. Unfortunately, Chinese service sales managers think and act like customer support people. They manage customer complaints, but do not offer and sell services actively.

Successful companies reported two ways of overcoming this limitation. One involves intensive training to help the Chinese service sales managers to recognise different customer situations more effectively and to be able to communicate various aspects of services more easily. The other way is for companies to modify the role understanding of managers by recruiting overseas Chinese as local managers in China. Overseas Chinese have grown up, studied and worked in other western countries. They act more in terms of a professional service business manager.

The high uncertainty avoidance index leads to Chinese service business managers being highly risk-averse to breaking goals down to the level of individual service workers. The personal risks inherent in linking goal achievement to an incentive system for service workers explain the absence of such goals. Failing to achieve a goal means "losing face". Service business managers are willing to develop goals for the service business, but unlike their counterparts in the west, they feel very uncomfortable about breaking these goals down to the incentive system for each employee. They argue that in China motivating employees is based in particular on personal relationships. Therefore, Swiss companies should give their Chinese service managers the opportunity to cultivate personal relationships with their employees over establishing an incentive system.

Cultural Effects on Advanced Service Skills

When offering customer support services, the Chinese service managers are also highly risk-averse to pricing the availability of their machinery and equipment. The risks inherent in pricing equipment availability relate to estimating the equipment operating risk. Using this pricing mechanism, profitability depends on how accurate the product and service sales managers are in assessing the risks of equipment failure and in guaranteeing a specific up-time along with machine and equipment availability. This requires information gathering and the capability to determine risk realistically. We observed that service managers are willing to develop risk-assessment skills through experience but, unlike their counterparts in the west, are very reluctant to define specifications and enforce contracts with customers. They argued that in China, defining the prices and specifications of customer support services is based in particular on personal relationships. Therefore, Chinese subsidiaries favour the personal relationships between account managers and customers over establishing rigid contractual arrangements. The Swiss headquarters should give the Chinese subsidiary the freedom to rely less on contractual arrangements and to focus more on personal relationships.

Conclusion and Limitations

Our findings have some clear limitations. The main focus was on the Swiss machinery and equipment manufacturing industries, and our analysis is limited to these sectors. However, we recommend applying our findings to other industries and regions which are confronted with similar problems. The ideas and concepts presented in this paper offer a complementary perspective to many existing service management approaches advocated by practitioners. Managers should be aware of how Chinese culture shapes the approach to conducting the service business. As our field studies indicate, manufacturing companies can overcome the limiting effects. The managerial implications and recommendations for achieving high service revenues in China are summarised in Figure 3.

Figure 3: Development of Service Skills in the Chinese Context

Developing service skills in the Chinese context

* Use a different organisational structure in China by also
  defining account managers for customers at the corporate
  level to provide product-related services

* Encourage incentives such as renting houses to establish
  long-term relationships with account managers

* Put account, product and service managers on the same
  hierarchical level to achieve a consensus approach to the
  optimal offer including the product and the various services

* Offer account managers the freedom to be personally available
  for their customers "24-7" and arrange special budgets and
  times for personally meeting customers

* Establish a service business manager to coordinate the daily
  service business

* Establish a service sales manager who is responsible for
  selling product-related services and define a pricing strategy.

* Only give service workers responsibility for delivering
  product-related and customer support services

* Use intensive training to help the Chinese service sales managers
  to recognise different customer situations more effectively and to
  be able to communicate various aspects of services more easily

* Recruit global Chinese as local managers to push the mindset of a
  professional service business manager

* Give Chinese service managers the opportunity to favour personal
  relationships with their employees over establishing an incentive
  system

* Give the Chinese subsidiary the freedom to focus more on personal
  relationships rather than establishing contractual arrangements for
  customer support services.

References

Arias JTG, 1998. "A Relationship Marketing Approach to Guanxi", European Journal of Marketing, Vol 32 No 1/2, pp 145-156

Bar Julius, Im Banne des Drachen--Schweizer Firmen in China, 2005.

Bowen D and E Lawler, 1998. "Empowerment im Dienstleistungsbereich", in Meyer A (ed), Handbuch--Dienstleistungs-Marketing, No 1, Schaffer-Poeschel, Stuttgart, pp 1031-1044.

Davies A, 2003. "Are Firms Moving 'Downstream' into High-value Services?", in Tidd J and Hull FM (eds), Service Innovation, Series on Technology Management, Vol 9, Imperial College Press, London, pp 21-34.

Davies H, TKP Leung, STK Luk and YH Wong, 1995. "The Benefits of "Guanxi". The Value of Relationships in Developing the Chinese Market", Industrial Marketing Management, Vol 24 No 3, pp 207-14

Gronroos C, 1998. "Marketing Services: The Case of a Missing Product", Journal of Business and Industrial Marketing, Vol 13 No 4/5, pp 322-338

Guiltinan JP, 1987. "The Price Bundling of Services: A Normative Framework", Journal of Marketing, Vol 51 No 2, pp 74-85

Heskett JL, WE Sasser and LA Schlesinger, 1997. The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value, New York, Free Press.

Hofstede GH, 1980. Culture's Consequences, International Differences in Work-related Values, Sage Publications, Beverly Hills, CA.

Haley U and G Haley, 2006. "The Logic of Chinese Business Strategy: East vs West: Part I", Journal of Business Strategy, Vol 27 No 1, pp 35-42

Lovelock C, 1994. Product Plus, McGraw-Hill, New York.

Vandermerwe S and J Rada, 1988. "Servitization of Business: Adding Value by Adding Services", European Management Journal, Vol 6 No 4, pp 314-24.

Dr Heiko Gebauer

Institute of Technology Management

University of St Gallen

Table 1: Development of Service Skills in Chinese and European
Subsidiaries of Swiss Machine and Equipment Manufacturing Companies

Level of        Service skills (1)           Chinese         Swiss
service                                    subsidiaries   subsidiaries
skills                                        (n=23)         (n=32)

Basic service   Performing routine
skills          tasks involved in
                informing customers
                about the technical
                specification of the
                product                        4.5            4.7

                Defining the legal sales
                contracts                      4.6            4.5

                Providing information on
                the terms of payment           4.8            4.9

Intermediate    Pricing product-related
service         services                       2.8            4.1
skills
                Offering and charging
                product-related services
                separately                     2.4            4.3

                Assuming responsibility
                for selling product-
                related services               2.1            4.8

                Setting up a separate
                business unit for
                services                       1.9            4.2

                Defining performance
                measures for the
                service business               2.0            3.9

                Breaking performance
                measures down to the
                level of individual
                service workers and
                managers                       1.4            4.2

                Understanding the added
                value of product-related
                services                       2.1            4.1

                Managing the business
                unit for services as a
                professional service
                organisation                   2.2            3.8

Advanced        Pricing complete service
service         packages                       2.8            3.7
skills
                Defining specific              1.6            4.1
                contractual arrangements
                Maintaining low
                fluctuation among
                account managers               1.9            4.4

                Developing personal
                relationships between
                account managers and
                customers                      2.0            4.2

(1) Skill development was measured on a 5-point Likert-type scale with
1 being not developed and 5 being fully developed as the anchors

Figure 1: Main Difficulties of Swiss Machine and Equipment
Manufacturing Companies in China

Strong competition                                            19%
Cultural differences                                          18%
Establishing a profitable service business                    17%
Availability and education of Chinese workers and managers    15%
Differing goals among collaborating partners                  13%
Intellectual property rights                                   7%
Quality of local suppliers                                     6%
Overestimation of the market potential                         5%

Note: Table made from bar graph.