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Even if you are already a seasoned veteran when it comes to business, you cannot take it lightly doing business in China. China teaches businessmen to follow a different approach and have different perspectives when dealing with business in their shores. Business practices and traditional methods may not be applicable in China wherein you need to adjust your business plan and approach in order to be successful. Factors such as type of government, culture, and different taxes are primary reasons why doing business in China is much more complex. Here are a few tips you need to know when doing business in China.
1. Don’t be Fooled on a Business Trip to China
Foreigners always contact Chinese importers during business trips to China; however, they are unsure of the validity of the certification manufacturing companies provide. Many Chinese manufacturers have fake certificates of compliance. When these importers realize they have been duped, they want to sue their manufacturer; Chinese lawyers tell people it is usually difficult to sue Chinese companies since many manufacturing companies are not actually manufacturers, but rather brokers.
Therefore, foreign businessmen should have a clearly written and signed (preferably in Chinese and preferably sealed) contract with the Chinese manufacturing companies. In addition, do due diligence and verification of the third party’s certification number who issued the doc can also help businessmen avoid risks in China.
2. Establish a Methodology for the Business to Follow
Smart business plan is about methodology. This is the reason why I follow my own style and approach to solve problems with quality, remove the root cause and prevent recurrence of the same or similar issues:
– Create a team
– Describe the problem
– Implement and verify containment action
– Identify the root cause
– Formulate and verify corrective actions
– Correct the problem and establish quality control
– Prevent recurrence and standardization
– Congratulate the team
I know this may sound silly, but it does enhance the quality of the products and gives customers confidence, especially in the context of product design and development.
3. Be Wary if Your China Deal is too Complicated
Negotiating in China can get complicated fast, especially when Westerners ignore sensitive cultural and interpersonal issues during the negotiation part. Here are 10 warning signs for you:
Here are 10 warning signs that a deal is about to get too complicated too fast.
A. Terms that will change at unspecified times or circumstances in the future. This is particularly true of product pricing, cost, product line or technology. As in “we’ll sell you the existing technology at price X, and when the new product line is ready, we’ll lower the price to Y”. May also include: “when we move to the new facility…”, “when we get the approval from the government…”, “after the new product development…”, “when we hire the new engineer…”, “when we tie up with our sister company…” It’s not that they’re necessarily lying – but you can grow old waiting for the conditions to become reality.
B. New technology or connections to be introduced later – but priced now. Many Chinese companies will assure you they can develop a product or technology in the near future that will meet the needs you have now. Your big concern is that the first iteration of new technology won’t work – but will satisfy the terms of the contract. Your other concern is that they never hold up their end at all as an industrial design company.
C. Asymmetrical payouts. You pay now – they deliver at some unspecified time in the future. This one was one of the big problems with all those JV horror stories we used to read about.
D. Open ended liabilities or unsettled valuations. Every deal you do should have very specific valuations and timetables. You wouldn’t sign a contract with blanks – don’t do a deal until you’ve clarified all the terms.
E. Best effort sales/marketing. Another big red flag in China. If you are investing or supplying technology or looking to sell products online and rely on your local counter-party to market your product, make sure they have a solid network, good references, quality management and specific experience in your industry. Make sure you have a way out and a Plan B. Chinese distributors are notoriously sketchy when it comes to fulfilling best-effort sales agreements.
F. Anything involving connections, relationships or trust. If they say, “I have guanxi” you say “I have to go”. Seriously, this is standard good manufacturing practice.
G. Mysterious new players enter – particularly decision makers – and change the terms. This can happen to anyone in any country, but in China it means you are starting over from scratch. This is a common tactic here, and it doesn’t bode well for your partnership. If you can’t meet the people you are really negotiating with then it is bound to end badly. This may be a deal-killer, so be careful about proceeding.
H. Deals escalate into long-term, multi-transaction JVs too quickly. If you want to buy or sell something, then you can start with a few test orders and develop the relationship over time. Don’t believe any noise about Chinese only working with long-term relationships. Reputable Chinese counter-parties work with test orders and short-term deals all the time.
I. They want you to do anything without a contract. Usually this takes the form “the owner/accountant/treasurer is away on vacation and we can’t stamp the contract until he’s back but if we don’t get the deposit now, we won’t be able to make the deadline…” No. Just plain NO.
J. They tell you something is too complicated to explain. They’re right. Walk away now.
4. Learn the Tricks of The Trade in China Payment Terms
It is true that most Chinese companies casually change the payment schedule, when they hold all the financial leverage. They have little motivation to adhere strictly to the contract terms. Therefore, people should take 3 factors into consideration when it comes to payments:
A. Make the terms of payment as concise and clear as possible: This is really for the benefit of both parties. In addition, the calendar should show a given date, a project phase has been completed, or a product prototype has been delivered.
B. Demand a nontrivial amount upfront and confirm payment before they even lift a finger: It’s not only a show of good faith by the Chinese side; but also, to prove the Chinese side can in fact make a payment on the contract.
C. Add 10% to their charge and include it as a final payment due after delivery: Due to the fact that Chinese companies insist on receiving delivery in full before making the final payment – and then never make that final payment.
5. Dealing with China’s Restricted Internet
The perception of China can often be greatly maligned. Westerners can often make assumptions about the way of life in the country, arising from a misunderstanding of the reality. However, China is not the only country which is wrongly perceived. People imagine many Africa countries to not even have electricity, or that in other countries those with money set the rules. Many of the beliefs people hold do have a level of truth to them and questions arising from misunderstanding the situation are legitimate to ask. One of this perception directly relating to China is about how the internet in China is controlled, with many Western businessmen also wondering whether this may affect international business.
How does this Affect Your Business?
Majority of businesses situated outside of China will not run into any issues with their eCommerce business plan. There is already a supplier selection network in place for companies outside of China to connect directly to suppliers. You may already be aware that the Chinese government restricts Google, an incredibly useful company many businesses utilize services from globally. This includes access to Gmail as well as Google Docs and other features. However, despite the government restriction on Gmail, you should not be concerned about sending emails to China if you already have an existing Gmail account.
Chinese users and businesses will still be able to receive emails from these addresses to whichever email provider they use, they just cannot use the applications created by Google. Therefore, in terms of communication, foreign firms and individuals should not encounter problems communicating to China if they use a Google service.
However, where issues may arise is mainly applicable to larger multi-national corporations. Imagine within your company you issue out a specific type of phone to employees to use for business. If it runs Google’s operating system “Android” and you have employees in China, functionality may be impaired.
Many companies recognize restricted and unstable internet within China is a problem for themselves. This can lead to an increase in direct costs, decrease in efficiency as well as a lot of production lead time wasted in setting up operations. While users who use Gmail to send emails to China won’t encounter a problem, large corporations based within the country who use the Gmail platform internally would encounter issues.
The Other Side of the Coin
In addition to foreign companies finding damages as a result of the Chinese internet policy, the country itself is also starting to see damages. With the developed world being more connected than ever to the internet, the prospect of restricted internet deters young professional from moving to China. While silly to some, it is a genuine concern for many of the world class graduates produced globally who have social media engrained into their lives.
13% of companies out of a sample size of 300 surveyed by the European Union Chamber of Commerce also said they deferred or cancelled research and new product development projects in China. With this industry being identified as a key area for the Chinese, this response underlines the impact the countries internet policy has on China.
It appears quite clear that a restricted internet damages both foreign companies and the country of China. However, when it comes to smaller companies or design companies who import from China the impact is much less severe. In fact, many people may not notice a difference to themselves personally. Ultimately, it boils down to the level of involvement you will have with China. If you expect your company to be based there, then you may encounter problems and significant prior planning is advised to take place.
Clearing Misconceptions about China: Is it still worth it to do Business?
Although there is an increasing number of foreign brands coming to China, Beijing will move up at its own pace. The fact is several unrealistic assumptions exists such as Chinese firms are all crooks or foreign businesses can’t thrive. Here are some truths:
1. Chinese Consumers Vote with their Wallets: Starbucks and other global brands are more popular than ever – or anywhere.
2. Beijing Bureaucrats and Shanghai Shoppers: Two Trains Running – Right at Each Other: The gulf between official industrial policy and consumer preference raises more questions than it answers. There are two trends running head-on towards one another, and it’s not going to end well.
There are 3 possible themes for how the second part ends:
1. The New Foreign Devils. Beijing doubles down on the dangers of Western cultural influence. Growing – and increasingly direct – pressure on international businesses attempting to access the Chinese market. Unequal standards for foreign and local firms will eventually make China the pre-glasnost Soviet Union of international markets. On the surface, both MNCs and CCTV will pretend that an open economy exists, but in reality Western firms will start viewing China as an expensive niche market with prohibitive unofficial hurdles that will preclude most commercial efforts.
2. The Home Plate Effect. Large MNCs will be restricted and over-regulated, but under-the-radar entrepreneurs of all stripes and colors permitted to flourish as long as they do the right thing (i.e.: follow local laws and don’t command too high market share).
3. Beijing declares victory and we all get on with business like it used to be. MNCs are still held to more stringent regulatory standards, but the headlines will be about big fines for corruption or poor quality management (brought upon by inspection companies) – not arrests over national security.
Whatever the outcome, the only thing we know for sure is that Beijing will move according to its own logic, for its own reasons.
The following tips mentioned above are all based upon my first-hand experience after several years of doing business in China. I may never consider myself as an expert when it comes to business with the Chinese, but I certainly know what I am talking about and the tips I gave out have helped me thrive my contract manufacturing venture in a very challenging business environment here in China.