Business without Borders: Doing Business in China

Recently, the Washington Business Journal and HSBC sponsored a conference, Business Without Borders: Doing Business in China, which featured Craig Allen, Deputy Assistant Secretary for Asia, Assistant Secretary for Market Access and Compliance, United States Department of Commerce; Martha Lacrosse, Director, ExportDC, DC Department of Small and Local Business Development (DSLBD); and Andrew Sherman, Partner, M&A and Corporate, Jones Days law firm.

Here is a summary of what they shared that might be interesting to those businesses thinking of expanding to the Chinese Market.

Be prepared to do your due diligence. When thinking of entering the Chinese market; be prepared to invest and to spend a lot of time gathering information before beginning. While you may already have a business plan, you MUST create a China Business Plan that includes, among other thing: who is going to China? What does that person know about China, the culture and doing business there? What sectors will you focus on?

Also, have an immigration plan. While the Chinese are the biggest users of EB-5 Investors Program green cards, entering their country requires jumping through multiple hoops, including an invitation.

Be prepared for cultural differences. While the United States has a fast pace business environment, the Chinese are not fast when it comes to making a final business decision—BE Patient. If you cannot be patient, then you may want to find a different market. Creating a relationship takes time because in general, when compared to the United States, China is a low-trust culture.

Rituals are very important as are introductions. When business cards are exchanged, the Chinese usually hold the card with both hands and take the time to study the card to really know who they are speaking to. They want to know how high you rank because to them hierarchy is very important. Decision-making always takes place at the very top.

A good way to strategically enter the market is by first doing business in more trusting neighborhoods like Hong Kong, Taiwan, Singapore or Shanghai.

When debating whether to attempt entering the market, measure opportunity versus risks. One of the biggest risks you will face is the unpredictable law system. In China, laws are broad ethical statements that are implemented by local officials. The western region market is especially difficult to enter and is known to be more corrupt than the east. The east region has better infrastructure and officials there are known for interpreting the laws more similarly.

But whether you enter the east or the west region first, you should have good relations with two of the three following groups; the local government and its party officials, the provincial government and its party officials, and the central government and its party officials. You need a good relationship with at least two of these three because the probably of you needing them to introduce you or speak on your behalf to the third party is high.

Be prepared to make changes. When you are trying to gain entry into a new market also remember to customize your product. While in the United States we think getting a three scoops of ice cream for the price of two is a deal, other cultures do not necessarily appreciate our extra-large portions. Customizing your product might mean changing its price, which leads to change in business dynamic, which might require a change in business strategy.

By 2015, the Chinese people will account for 20 percent of the consumption of global luxury goods, or $27 billion. Still, just because China has a 1.3 billion-size market does not mean that every buyer has the same buying power. For more on the Chinese market read our October 5th post The Chinese Market and Its Economy.

Be prepared to protect your IP Rights because the government will not do it for you. Laws are not predictable, especially in the technology field. The concept of Intellectual Property laws is very new; China’s first patent law was just created in 1984 and has since then been amended four times because its goal is a moving target. IP rights are personal laws that do not belong to the US government. When I say they do not belong to the US government, I mean that while the US government may want to help you it cannot force its Chinese counterpart to protect your IP rights. Services to register your IP are available but that is not enough so DO NOT sell your crown jewels, sell products of lower quality, those that you can risk losing.

When dealing with IP, always do your due diligence.

  1. Register your Trademark/copy rights;
  2. Record your Trademark/copy rights with US customs; and
  3. Learn what protections are available.

If you find out your IP rights are being violated, DO something about it, DO NOT expect the government to do it for you. While the US government cannot directly protect your IP rights, it can help you find legal advising.

As for FDI, the Chinese system allows its government to promote investment in specific regions or industries it wants to develop and restrict foreign investment in areas it considers counter national interest or might compete with state-condoned monopolies or other favored domestic firms. As a result of the government’s efforts to move into a more value-added economy, it recently announced it will restrict foreign investment in resource-intensive and high-polluting industries, i.e. basic manufacturing. Additionally, it will also discourage FDI in sectors: 1) where it is working to develop domestic firms into global competitors; 2) that are considered state-condoned monopolies; or 3) deemed important for social stability. Finally, the government also deters investment intended to profit from currency, real estate, or asset speculation.

Be prepared to ask and answer tough questions. Because, as mentioned before, understanding the culture is important and having the right introduction is vital, you will most likely have and need a Chinese counterpart. Whether your boots on the ground is a distributor, an agent, or a partner you will need to ask about its finances, its general capabilities, its other business arranges, and, if you are worry about your IP rights, technological capabilities.

Do your homework when deciding on who will be your distributor, agent or partner. The reality is that while you, as an American, are used to moving quickly to do business and trusting your potential distributor/agent/partner does will not reach the same level of trust as quick.

If you are a small business you need to know that your Chinese counterpart will not leave you hanging when you need to make Friday’s payroll. Will marketing costs be divided? Are they willing to have a stake on whether you succeed or fail?

Ask whether your distributor/agent/partner has a strategy: benchmarks of expected sales, how will they sell your product? How much access to the market do they have? Are they representing competing or complementary products?

Exclusivity means nothings and signed contract may just be a paper that gets filed and forgotten.

If you are an IT firm and at any point your distributor/agent or/partner says it has high reverse engineering capabilities, you should take a step back and either run for the hills or re-access your options.

Just as you struggle to decide whether the partnership will work for you, your Chinese counterpart will also access whether it will be convenient for him/her. Some of the things he/she will take into account are: Is your product/service of quality? What are your short, medium, and long term goals? How well did your product do in the neighboring markets such as Taiwan or Hong Kong or Singapore? Are you flexible and do you have the capacity to grow if needed?

They will ask you these and many questions because just like you they know the size of the Chinese market and want to do business with someone who can expand and develop accordingly.

Finally, while they will not ask you, they will determine whether you respect their culture and whether you were properly introduced.

Other Things to Know.

  • The rewards for successfully entering the Chinese market are great. China is the shining star of the BRIC nations; it is developing fast, investment is increasing daily, infrastructure development is advancing quickly, the size of the market is massive and its luxury goods market is quickly overtaking Japan’s. (By 2017, it will become the second largest luxury goods market after the United States). Get in early when you have less western competition!
  • The DSLBD now has an office in Shanghai and can help you create partnership by providing you with the proper introduction. It also organizes trade mission and sets up meetings on your behalf. DSLBD is currently focusing on the green technology and infrastructure sectors.
  • To get pay you can either work with one of the banks in the DSLBD network or through the Ex-Im Bank. HSBC also has offices in China and can help in the process of sending and receiving money.
  • China has yet to join the World Trade Organization’s Agreement on Government Procurement; therefore, its governing laws are not considered “best practice.”

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