Advice for Establishing Your Business in China

By Bob Rice, Managing Director of Trans-Pacific Management Partners

The path to doing business in China is fraught with perils and littered with many failed ventures. Your best approach involves following a logical sequence of activities that builds your knowledge and understanding of how business in China really works. As you gain more knowledge and insight, you can better evaluate your company’s business opportunities in that rapidly growing and ever modernizing economy.

Success is possible in this market, but you need to develop effective relationships and gain visibility with potential partners and the local governments. You also need to understand the risks and rewards associated with the challenge of building a business in China. Here are some tips for business leaders who want to do business in China:

  1. Consider the risk of not investing: China has become the global manufacturing center of choice for many nations’ enterprises. Many Asian and international companies are establishing manufacturing footprints in China not only to sell to the domestic Chinese market, but also to take advantage of one of the world’s lowest cost countries for supply to the North American market. If you don’tmake a serious effort to evaluate your business potential in China, you remove a major market from your future growth and you enable your competitors to more effectively compete in your home market. Ignore this huge competitive threat at your own peril.

        2.  Read and learn about China: Here are four books about China that you should considering reading and sharing with your company’s China team.

  • Mr. China by Tim Clissold: If you read only this book, you would never want to do business in China. It’s a collection of “horror” stories many of which involve partnership breakdown. It’s a good read simply as a cautionary tale. The challenges encountered by those in this book can easily happen to you if you try to take shortcuts to success. What’s the lesson? Avoid disaster with the right business development approach.

One Billion Customers by James McGregor: This book offers sage advice particularly with respect to the finance function. It’s an easy read, provides many exambles of real world challenges in China, and provides a context within which to begin to understand business in China. If you don’t have time to read the whole book, read “The Little Red Book of Business” pages at the end of each chapter. These contain quite valuable insights regarding dealing with Chinese companies, local staff, government and a range of other important issues. .

Managing the Dragon: How I’m Building a Billion Dollar Business in China by Jack Perkowski: It’s said that the Mr. China book noted above, is in fact about Jack Perkowski, the founder of an automotive components company in China. This book is Mr. Perkowski’s take on business in China. He offers interesting perspectives on intellectual property rights issues and on “guanxi” (relationships – see comments below).

  • The Coming China Wars by Peter Navarro: This book discusses a dozen or so fundamental trade, economic and social issues at the macro level stemming from disconnects between the world and China. The title seems a bit unfortunate, but I suspect it was intentionally provocative due to insufficient attention being paid to these challenges – which are not going to go away.

Understand Guanxi and how to build yours. The Chinese word guanxi (pronounced gwan she) means “relationship.” For western business people this is one of the most misunderstood, often over-rated and excessively emphasized facets of business in China. You really ought to develop an understanding of what it is and what it’s not.

To understand guanxi, in simplified terms, think of China as a society of concentric circles. The inner circle consists of the most important relationships (family and others to whom one is loyal). Around this core are other increasingly larger concentric circles of diminishing importance and a corresponding lessening of loyalty. These outer circles may include company, school, town, region, province, nation. Most western business professionals can develop close working relationships with their Chinese counterparts, characterized by mutual respect, integrity and openness, though it’s highly unlikely that westerns will ever have “guanxi” in the Chinese social sense.

Don’t delude yourself into believing you can “be Chinese” and get inside the local culture. If you’re not Chinese, you just don’t have the socio-cultural DNA to fully integrate into the culture. But westerners can and must build relationships and the first step toward creating them is to begin with direct, open dialogue geared toward development of a solid partnership based on trust. As your relationship grows over time, you will likely progress through a series of challenges, hopefully mostly successful, which will validate your relationship and demonstrate your commitment to it.

You may have heard the expression: “In China nothing is possible and anything can be done.” Guanxi has much to do with getting challenging work done and projects approved, particularly at the national level. However, relationships are not a shortcut to success. For the foreign company, guanxi usually gains you access to or an audience with a decision maker or person of influence who might be able to provide critical support or approve your business plans for China.

When working in China it helps to develop a perspective on guanxi in terms of who you are and what relationships you lack. Many foreign firms overlook the importance of developing their own channels of communication and relationships with local government officials. Local governments function much like an active western board of directors to the companies within their jurisdiction. Local businesses in China report to the local government and together they are co-responsible for jobs and taxes.

There will be times when you need the support of these officials and you need to know them. More importantly, they need to know you, your reputation, and your quality as their partner. Don’t rely solely on your Chinese partner to take you to meetings with the local government. Take the initiative and get to know these people, and you’ll take a small but important step toward creating something similar to guanxi of your own. Keep building your relationships over time. All societies value integrity and as you demonstrate this virtue, your partners and the local government will take note.

Don’t forget that when you begin your business development in China, you’re in an environment where other businesses and people have plenty of guanxi, and you have none. Particularly at the start of a relationship, remember that everybody has a guanxi network and the needs of the network trump the needs of a foreign company. Your needs are not a priority. While you may “use” someone else’s guanxi to gain some introductions to get started, note that guanxi is not transferrable, and using someone else’s often carries a cost. The person may reasonably ask you for some sort of remuneration for use of their connections (in the larger context of support of your business development work) or they may be gaining benefit from the person they are introducing you to. The person’s motivation to help you will often be unknown to you.

Please know that there are many very fine people who will use their knowledge and connections in support of your efforts without personal gain and do so only for the benefit they perceive your successful collaboration will bring to China–these are wonderful patriots of a great nation. Others often are not so inspired.

Also, be cautious, perhaps even wary, of anyone who suggests to you that they or someone they know has guanxi. It’s a bit like someone you hardly know telling you, “I’ve got loads of money,” or “You can trust me.” It’s a huge red flag.

Consider the implications of accepting somebody’s guidance and direction. Ask yourself, what’s likely in this for them? Don’t become a cynic, but do be cautious about the advice you get. Consider the source and what that person’s motivations might be.

Pay your dues with time and effort: There’s no free lunch anywhere and China is no exception. There are no shortcuts and no easy answers. Like anything else in the world, you reap benefit in direct proportion to the effort you put in. Put in focused time and effort to understand the market potential available to your company in China.

Connect with Vistage China: : As part of a broader international strategy, Vistage is expanding into the important Chinese market with its recently launched subsidiary Vistage China, based in Shanghai. As the Chinese membership base grows it will become a valuable resource for members seeking to expand to China.

Take advantage of resources in North America: The U.S. Department of Commerce Foreign Commercial Service – China Desk is a great resource. This desk is usually staffed by people who know China, have lived and worked there and often speak and read Chinese. Many of these people are highly informed on investment issues, business challenges, limitations and other problems encountered by U.S. businesses. In my experience, the staff are most willing to help. For a fee, you can receive dedicated services specific to your needs.

Use American Chambers of Commerce: The Chambers of Commerce have offices in several of the major Chinese cities, including Beijing, Shanghai, Guangzhou, and Hong Kong. Call the AmCham in Washington D.C. at (202) 463-5460 to see what information they may have relative to China. Get the names of AmCham executives at their branches in China and connect with them before visiting China. Let them know of your plans, intentions and your information needs. These contacts will make an eventual meeting in China much more productive.

Network: Ask those within your current business environment for information on China. You’ll likely find other CEOs, suppliers, or contacts who have gone to China and have experience doing business there. Ask them about key success factors and also what leads to failure in China. How would they do things differently if they were starting with what they know now? Most US businesses are willing to share general China experience with other firms, particularly those just starting out. Most executives at foreign firms’ Chinese ventures are reasonably free with their time and are quite willing to help the uninitiated. Remember, they were once where you are now.

Visit China: In addition to visiting Beijing, Shanghai and Guangzhou and other major Chinese cities, take the time to travel to Wuxi, Ningbo, and Foshan or any of dozens of other interesting cities. There are a couple hundred metropolitan areas with populations close to or over 1 million people. Include several of the tier II & III cities in your visits. Because China has as much or more cultural diversity than the U.S., regionalism exists and tends to drive a “buy local” mentality.

Observe how your company’s products might be used in China. Does your vision fit with what you see? Seek out foreign businesses operating in these cities and listen to the advice that many of them willingly give.

Meet Chinese leaders in your industry: Seek out Chinese local business and government leaders and ask them questions. Put yourself in an “investigative mode,” listen and learn. If they connect you with other business people, meet them as well but don’t make any commitments just yet.

State your interest in China in general terms and specifically highlight your need to gain sufficient insight and knowledge of the country, your industry and the business environment.

Find your industry association in China. In the past, many of these associations freely provided information. Now, as in other countries, most would rather sell you their industry data. Industry association data typically will allow you to discern the number of companies nationally and annual sales volume by province, concentration of sales, the relative health of the industry, annual production rates over the past 10 years, etc.

Associations can help you discover which of your competitors have established business operations in China and with which Chinese companies. You might also learn about issues facing your industry including regulatory regime, environmental requirements, foreign investment limitations, e.g., energy-related investments are limited to 49 percent foreign equity participation and automotive assembly operations limited to 50 percent.

Be careful with market projections provided by local partners. Though ice hockey is not a nationally popular sport, there seems to be an inordinate number of hockey sticks on the market growth charts. Consider engaging qualified market research organizations to do a quick market survey that gets at both product demand as well as local supply capacity information. Based on results, you may want to focus on a few firms identified in the research and initiate a dialogue with them.

Many industries in China are plagued by over-capacity, resulting from many producers using the same market demand data to justify investments while ignoring existing competitors’ supply capacity already in the market. This situation may present an opportunity for you to acquire existing underperforming assets, turn them around, and then acquire similar companies on a national-key-markets basis.

Establish your vision for success in China: Now that you’ve done lots of reading, considerable amounts of networking and made one or two trips to China, you need to consolidate the knowledge you’ve gained. Here are some questions to consider:  

What are your objectives in China?

    • Try out one or more partners in different regions of China and grow with the winners, or
    • Search for qualified staff to engage as your China executive team and start up your own operations

Is your value proposition appealing to Chinese consumers? 

    • Do you have a product that will sell in China?
    • Have you gained a solid understanding of potential partners’ interests? Do any doubts remain? How can you remedy unanswered questions?
    • What are the shared objectives you have with your potential partners?
    • What are the diconnects and challenges?
    • Do you sense that any of your potential partners have a particularly good DNA fit with your company?
    • How can you start-up with low risk and exposure yet be ready to take on greater challenges when you’re ready, e.g. start with a product/technology that has little intellectual property risk and then add more sophisticated products as your collaboration matures and works through problems?

Which option is best for you? 

  1.  
      • Selling from your home base;
      • Manufacturing and selling in China via a wholly-owned foreign enterprise (WOFE) or a joint venture or by licensee?
      • Rationalize North American production and augment your product line up by sourcing from China.

Give yourself time: It’s critically important that you avoid a rush to judgment with regard to your potential in China. As in all countries, there are fakes and frauds who simply want your dollars. One red flag to watch for is people who tell you, “Don’t worry. No problem. That’s not an issue…”

In China, you may get advice suggesting you don’t have to follow central government dictates regarding some aspect of your intended collaboration. While that may be true, when you hear something like this, take a time out. Find a second and third source to verify and confirm what you’re being told. Often, the US Foreign Commercial Service (US FCS) or the “Economic Section” of the local US Embassy or Consulate can provide insights. Local or foreign law and accounting offices can do the same.

Go as fast as your knowledge allows you. Be ready to move fast when it’s time to move fast. Don’t run until you can see a clear path ahead of you and you’re comfortable with the risk you will take on, the exposure you’ll have and the quality and durability of the relationships you establish.

Make a plan with milestones: Create a strategic plan to guide your business growth. Develop the framework for this plan as you ramp up your basic knowledge of China and as you network through the US FCS, AmCham offices and North American businesses that have China experience. Fill out the plan as your knowledge base grows and develop key elements as you go.

Review the development of your collaboration with your partner on a regular basis. Stick to the plan and course correct as needed. All relationships have problems and all problems have solutions. You will run into tough issues along the way. Have faith. If your partner and you have shared objectives, you’ll get past the problems. It’s not always easy.

Create open, trust relationships: Trust is fundamentally important in China, and it begins by establishing a dialogue that leads to open communications. Be clear about your interests and understand clearly what partners are looking for in a relationship with you. Don’t be afraid of the tough issues: if you don’t discuss these, you will never know what the other party has in mind. If you’re not aligned on tough issues, they will eventually surface and damage your partnership.

Getting a potential partner to openly state interests and objectives is not always easy, particularly at the start. Ask a few questions about background, such as:

  1.  
    • Has the partner considered partnership with foreign firms?
    • What were the drivers of that collaboration?
    • What were/are the objectives?
    • How did you structure the partnership?
    • Which party did what?
    • What skills, assets, and technologies did the Chinese party bring and what did the foreign party bring?
    • Was the partnership successful and in what terms?
    • What were some of the challenges and lessons learned?
    • How would the partner describe the success of a hypothetical collaboration five or 10 years in the future?

Host a reciprocal visit by potential partners: Host a visit to your company by your potential Chinese partner(s). They need to know you and your company, see your facilities and get a feel for your business in your home market.

Be careful with language and interpreters: China is a vast continental country with seven major linguistic variants of the Chinese language and dozens more minor variants. The national language is Mandarin. If you’re not a Mandarin speaker, or if you are and find yourself in a Shanghai locale where the Shanghai dialect is being spoken (and you don’t speak that either) you’re at a double, sometimes triple disadvantage. The first is that you have to rely on someone to interpret for the Chinese party you’re meeting with and you don’t have a clue as to what’s being said; the second is that the translator may or may not speak English well enough to convey the intended meaning of what’s said. A third risk is that some of what’s being discussed may intentionally not be translated.

Hiring your own interpreter can help you somewhat with the first two risks but not always with the third risk. Remember, your relationship with a hired interpreter is likely trumped by national guanxi. Don’t be cynical, but be aware of the risks.

Finding, hiring and retaining key staff: Once you’ve opened an operation in China, you’ll likely encounter the same problem you have in your home market: finding, hiring and retaining good people is a challenge. In China, the challenge is compounded by a shortage of talented managerial staff and an environment where key executives often “jump ship” for more money and a better deal. To keep key staff, companies should: 1) create remuneration packages that make it desirable to stay and “painful” to leave the company, and 2) establish open channels of communication with the employee about his/her future in the company and a channel for the employee to communicate his/her needs regarding career development.

Professionals want to be able to envision their career path and get a sense of what opportunities exist for them with the company. All too often, foreign companies view China as a “low-cost” country where labor, including management, is just a cost input. Failure to use your best human resources tools in China can lead to high turnover and slow-to-no growth for your company. To build a solid foundation, make your company a “great place to work”—a place where employees, especially the executive team, are committed to excellence in the pursuit of corporate objectives.

The advice above is by no means comprehensive, but it’s enough to get you thinking in the right direction for establishing a presence in one of the fastest and largest growing economies in the world.

Bob Rice, Co-Founder and Managing Director of Trans-Pacific Management Partners (www.gototpmp.com), has 26 years Asia-based experience in part­nership/alliance management, strat­egy development and implementation, M&A and joint ventures, and project management. You may contact Bob at bob@gototpmp.com or 425-281-3401.

Courtesy of Vistage.

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One Response to “Advice for Establishing Your Business in China”

  1. […] Original post:  Advice for Establishing Your Business in China « China Lawyer […]

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