13 Rules for Doing Business in China
By Stanley Chao
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 20 years in China, I’ve been able to sum up many of the lessons learned into a summary of 13 rules, outlined below.
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 don’t have as much in common with the Chinese as they do with their fellow Westerners. So it makes sense that Western businesspeople can’t always 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.
There are issues that you won’t even bother with when doing business in the states, but they are life and death issues for China due to these facts:
*contracts are basically worthless in China
*state-owned companies are notorious for stealing intellectual property
*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. 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 — 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. 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 Enter Joint Ventures
For the most part, joint ventures 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.
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 six months or so. Market conditions change even faster.
Western businesses must react quickly and not assume these are just fly-by-night occurrences that will go away tomorrow. I have witnessed many companies make the mistake of trying to wait a problem out or avoid doing anything about it.
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.
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. 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.
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.
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 executives and middle management who are appointed to implement my recommendations often feel insulted or 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.” Don’t make the mistake of treating China like any other country. Use consultants or hire experienced Chinese business professionals and listen to what they have to say.
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.
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. No separation of power exists in China.
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.
Stanley Chao has worked in China for more than 20 years and currently serves as managing director for All In Consulting, assisting companies in their Asia and China business strategies. The Chinese-American business consultant is the author of Selling To China: A Guide to Doing Business in China for Small- and Medium-Sized Companies.
Illustration by Salvatore Vuono at Free Digital Photos.net