By Stanley Chao
Image credit: Steve Webel.
Doing business in China is a daunting task, so complicated that I (along with many others) can write books about it, and consultants can make their livelihoods on it. After twenty years in China, I’ve been able to sum up many of the lessons learned into a summary of 12 rules, but don’t take these rules as the final word in doing business in China. They are not.
I have experienced exceptions to every one of my rules so take each one with a grain of salt. Use them as a foundation, but be flexible and ready to change tactics according to your specific business situation.
Rule 1: Don’t Rely on Gut Instincts
As businesspeople we often make “gut decisions” about hiring a person, partnering with a company or signing a contract. We don’t have all the facts but something just feels right about the decision. A Western businessperson’s “gut” works in a Western setting, but your “gut” won’t work in China.
Westerners just don’t share as much in common with the Chinese as they do with their fellow Westerners. You don’t watch the same television shows, eat the same foods, or speak the same language, so why should you think the same? You don’t. So don’t think you can see through them or make instinctive and accurate judgments about Chinese businesspeople or situations.
Rule 2: You Don’t Know What You Don’t Know
Companies “know what they don’t know” about China and hire me to solve these issues: do a market study, setup a Chinese subsidiary, or find partners. Once the tasks are completed, they typically let me go and continue off on their own. They then fail and call me back to clean up the mess. This common occurrence arises because most Western companies “don’t know what they don’t know” about China.
When choosing a Chinese partner for example, Westerners don’t know the additional questions and problems to consider- is your partner state-owned or privately owned, do they have regional or national coverage, are you creating a competitor, how do you prove everything they say? These are issues that you won’t even bother with when doing business in the States, but they are life and death issues for China since: contracts are basically worthless in China, state-owned companies are notorious for stealing intellectual property, and Chinese businesspeople will lie on just about anything.
Rule 3: Sweat the Details
Many Western entrepreneurs prefer to take action first and ask questions later. This can have dire consequences in China. I have witnessed thousands of hours’ worth of software code and millions of dollars’ worth of intellectual property lost to the Chinese by business owners making brash, uninformed, and shoot-from-the-hip decisions. You will not only lose your China business, but you could potentially be risking everything you worked for in your home country.
I always go through a “what if” analysis with my Western clients. For every decision or action made I consider all the doom and gloom possibilities- What if prices drop? What if government regulations change? What if this happens? What if that happens? I then detail a contingency plan, keeping it in my back pocket to use when needed.
Rule 4: Take the Trust Factor Out
We rely so much on trust in our business dealings. We want to trust our business partners, customers, suppliers, and employees. Not so in China; trust must be completely taken out of the equation. First, China is still a developing country and its people, particularly the older generation that grew up during Communism (I refer to them as the “Mao Generation”), have little or no moral and ethical values. Second, corruption in China is a daily event. We see it at the national level: high-ranking politicians caught receiving brides or holding overseas slush finds. We see it at the local level: speeding motorists paying cops on the take and Chinese immigrants from the countryside buying fake government identification cards.
Make sure your distributors are who they say they are. Confirm that the raw materials used in your made-in-China products are the ones you specified. And check to see that your Chinese employees aren’t selling trade secrets to your competitors.
Rule 5: Never Do Joint Ventures (JVs)
For the most part, doing JVs in China are a thing of the past and a big hassle. There are many inconveniences associated with Chinese JVs: intellectual property theft, training and nurturing future competitors, dealing with a corrupt JV management and board, income and profit dilution, and good old-fashioned strong-arming from local, better-connected, government-controlled partners.
JV’s are for wimps who want to dabble in China- and dabbling doesn’t create success in China. Going to China is a full commitment, not a halfhearted side bet. You are either in or out. If you are out that’s okay, but stay clear away. If you are in, then jump in with 100 percent conviction, prepared to put in maximum time, effort, and money.
Rule 6: Adapt and Move Quickly
Changes that may take years in the States may only take weeks in China. Laws and regulations involving import duties, foreign company registrations, worker labor rates, and corporate tax structures are almost guaranteed to change every 6 months or so. Market conditions change even faster. I’ve seen cabbage prices drop from 6 US cents per kilogram to 1 cent in less than one growing season, and rare earth metal prices shoot up several hundred percent when China blocked shipments to Japan in 2010.
When events like these occur, Western businesses must react quickly and not assume these are just fly-by-night occurrences that will go away tomorrow. They will not. I have witnessed many companies make the mistake of trying to wait a problem out or avoid doing anything about it. Analyze the situation, weigh the choices, and take action at the speed of light.
Rule 7: Never Compete with Locals
Western companies come to me with many different types of products and services to offer to China. I reject four out of every five business offerings mostly because China either already has similar products or services or because Chinese competitors can easily duplicate them.
Foreign players can never match a local competitor’s cost, speed to market, flexibility, and all-around customer and market intelligence. Remember, you are on someone else’s turf, and locals will always have their advantages, just as you know your local market better than outsiders ever will.
A Western company’s cost structure alone will be an inhibiting factor against a local Chinese company. Locals don’t have to deal with costs associated with foreign company registrations, expatriates, English-speaking employees, and headquarter overhead. On top of that, Chinese companies often cheat on their taxes, hire lower-waged, undocumented workers, and are lax about work-related safety regulations, while foreign companies stick to the rules and pay through their noses.
Rule 8: Use Multiple Partners
When selling to China, there are a number of key advantages to having multiple partners. Each partner will keep a watchful eye on the others to lessen the possibility of cheating or pirating. Pricing will be kept in check, preventing excessive profits and maximizing unit sales. Relative performance can be tracked and measured, enabling you to weed out the bad ones. And different sales and marketing tactics can be tested with different partners in different regions, with the more profitable strategies later being applied to the whole country.
The same goes when outsourcing from China: use multiple vendors from different cities. This allows you to compare prices, quality, lead times, and service. Especially in today’s rocky economic climate, Chinese companies come and go, and you don’t want to be caught with your pants down with an outsourcing partner on the brink of going belly-up.
If a Western company is already in China working with an outsourcing partner, then it usually doesn’t take that much more effort to qualify a second one. The audit processes are the same, requiring only a few extra days and domestic flights.
Rule 9: Think Long-Term but React Short-Term
For China, Western companies must have both short-term actions and long-term strategies and goals. These two concepts are very different. China is in a constant state of flux, so companies cannot just sit around and maintain the status quo. Short-term actions are not necessarily well-thought-out or planned activities. Rather, they are actions or reactions based on changes in economic, political, or legal conditions affecting your business.
Westerners will encounter many interesting people, situations, threats, and opportunities in China. Act and react to these events. Seize opportunities when they arise, look beyond the obvious, don’t underestimate who can do things for you, and don’t take local competitors lightly.
Rule 10: Listen to Experts
About half of the companies that hire me to develop their China strategies ultimately discard and ignore my findings. The CEO or owner who hired me might agree with my proposals, but the other executives and middle-management, who ultimately are appointed to implement my recommendations, often feel insulted, or worse, feel threatened by my presence. After all, these are usually seasoned businesspeople with years of international experience.
Businesspeople who reject outside China experts often simply “don’t know what they don’t know.” However, once they get burned, lose money, or are cheated, they realize all the unknowns China has to offer, and I (or another China expert) will be there to bail them out.
Don’t make the mistake of treating China like any other country. Use consultants or hire experienced, Chinese business professionals, and most important, listen to what they have to say. Do it the right way the first time.
Rule 11: Don’t Rely on Contracts
There are two reasons contracts cannot be relied on in China. First, contracts do not have the same meaning in China as they do in the West. For the Chinese, the contract is more of a symbolic gesture, the start of good things to come. And because contracts are symbolic, many Chinese feel they can change the terms of the contract at any time. To them, it’s just an agreed-upon set of terms for today based on today’s market conditions. When the market changes tomorrow or 6 months later, they’ll have no problem calling you up and asking for a new set of terms.
Remember, however, when in China do as the Chinese do so don’t feel embarrassed renegotiating the contract for your outsourced product when steel prices have suddenly dropped by 10 percent.
The second reason contracts cannot be relied on is the lack of enforceability in China. Small, private Chinese companies will fold up before they ever walk into a courtroom. And forget about suing a state-owned company as they, the Communist Party and the Chinese judicial system are essentially one and the same.
Rule 12: When in Doubt, Ask Questions
Westerners become quiet in China. Meetings in China are difficult. Conversations are fragmented and interrupted with translations. Many people are talking at the same time. Discussion topics can go astray and wander. And the Chinese, when speaking in broken English, are difficult to comprehend. It can be very frustrating, especially for first-timers to China.
But you are in China to get a job done and to collect data. So ask questions if you don’t understand. Ask the same question again if it still wasn’t answered or if it was misinterpreted. And do it again and again until you are totally satisfied. Most businesspeople consider that impolite, but I would rather be rude than leave China with inconclusive data and wrong assumptions.
Another reason to ask questions is that your potential Chinese partner will often leave out key information that is vital to your decision making. It’s not that they do this intentionally. Chinese people tend to speak in generalities, not getting down to the specifics. They often won’t get the gist of your question and will give broad, sweeping answers in response. So don’t ask general questions like “Can you explain the quality process?” or “What is your sales strategy?” Rather, ask pointed questions as if you were a lawyer cross-examining a key witness, “Can I see the yield rates from the last production run?” or “May I personally meet and interview one of your customers?”
Take these lessons with you to China and review them as you are flying to Shanghai or Guangzhou, meeting with politicians from a state-owned enterprise acting as pseudo businesspeople, or negotiating terms with that shrewd business owner. You just never know- it may save you a few million dollars. I wish you the greatest luck and success in China and hope to hear from you about whether these lessons were of any value to your China endeavors.
Stanley Chao has worked in China for more than twenty years and currently serves as managing director for All In Consulting, assisting companies in their Asia and China business strategies. He is the author of Selling to China: A Guide to Doing Business in China for Small- and Medium-Sized Companies. He holds degrees from Columbia University, The University of Pennsylvania, and an MBA from UCLA. He speaks Mandarin and Japanese.