Business Advice

To succeed in your business operations in China, you need to have almost infinite patience. For many, the protracted pleasantries at the start of a meeting, the extensive and sometimes apparently drawn-out negotiations (that include at-length discussions of each minor point) and the apparent reluctance to close a deal can be extremely trying and even exasperating.

When deciding to engage with or expand into overseas markets, your company needs detailed knowledge of the destination market. As the world economy develops, China has a significant role to play, perhaps even an increasingly important role as it becomes more and more integrated into the world economy.

More and more China is seen as and, to some extent actually is, a market with massively increased purchasing potential. For consumer products, the majority of this purchasing ability is concentrated on eastern coast, however for organisations that are working with manufacturers, customers are much more (geographically) evenly spread.

China is still, to some extent controlled, if not influenced, by the legacy of the state-owned enterprises, which often are still major players in various industry sectors, In particular, the finance and distribution sectors are still heavily influenced by government participation.

Key Advice

  1. Conduct Extensive Research
  2. Language Use
  3. Partner Choice
  4. Clarity of Contract
  5. Project Viability
  6. Avoid Prohibited Agreements
  7. Practice Problem Prevention
  8. Risk Analysis
  9. Competition
  10. Payment
  11. Look Before You Leap

  1. Conduct Extensive Research

China is a diverse market and across its vast geography has varying levels of economic development and regional industrial strengths. The country encompasses diverse topographies, climates, cultures, and peoples. Each area has therefore its own consumer preferences and business requirements. Some of the industry sectors are distributed across the entire country, some are clustered provincially and others are heavily concentrated in a local area.

  1. Language Use

Across most industries that operate internationally, there is a commitment to, and success in, developing human resources with good English-language skills. However, companies that are committed to conducting business in China should provide company information in Chinese and be prepared to initiate contact in Chinese. Such material and the engagement of a Chinese interpreter generates a positive first impression and demonstrates your serious approach to doing business in China. The very least that a company should consider is to provide a bilingual (including Chinese) business card upon first encounters.

Interestingly, once contact has been made in Chinese, it is not uncommon for there to be an indication routine business can hence be conducted in English, in particular via email. Most successful companies have invested in the development of Chinese-language promotion and informational material.

  1. Partner Choice

To initially succeed in China, SMEs need to find a counterpart in China to make sales and deliver products for them. There is a lot of emphasis placed on personal relationships (or guanxi), and for good reason. Developing networks and business contacts is an important aspect of business in China and takes on added importance in a society with a complex bureaucracy and a relatively weak legal system.

The importance of relationships is another reason why many SMEs prefer to engage local trading companies or distributors (even if they have offices in China) in order to make use of their professional and personal networks.

It is critical that you make sure that your partners are reliable and that their motivation matches yours. Due diligence before engagement is vital to ensure such issues as whether your potential is allowed by law to fulfill the promises in the contract.

Finding the appropriate partner or distributor and employing prudent payment practices are particularly critical in China, where the judicial process is slow, expensive, and where corruption is still widespread. Rather than relying on legal safeguards, you should ensure that your partners are motivated (in line with your business strategy) to fulfil any contract you set up.

  1. Clarity of Contract

China’s consistent economic growth leads to continual radical transformations in the internal dynamics of the economy. When entering into a contract with a Chinese partner you should obtain sound and local legal advice. In your contracts, specify exact terms of payment and performance standards, set timelines and pay careful attention to details. Do not rely on legal advice from your Chinese partner and beware of claims that Chinese law requires specific covenants in your contract. If you are unsure, engage reputable legal counsel with knowledge of the China market and legal system. Do not agree to provisions in a contract that are not under your control; for example, if your client or partner wants you to specify in the contract that he must visit your production facilities in your home country, remember that you cannot guarantee that a visa will be granted.

  1. Project Viability

The success (i.e. profitability) of a project should be based on sound economic criteria and should not rely on promises of subsidies, special considerations, or non-market sources of income to create a profit.

Ensure that, if such subsidies are offered, your partner has the authority to offer such and verify from independent sources that the subsidies will actually be paid.

Some Chinese partners will encourage you to look at the long-term potential of the market and sacrifice early profit. Bear in mind that in China, as in any high-growth economy, it is difficult to predict long term and doing so may be detrimental to your ultimate success in the market.

  1. Avoid Prohibited Agreements

Creating viable contracts is challenging in any business transaction, so to avoid becoming unwitting victims of illegal agreements, ensure that you are familiar with the overarching rules governing agreements at all levels of jurisdiction.

Verify and attempt to confirm any promises from local officials that central government rules will not be enforced in the provinces. Indeed, often they are not, however problems arise when these rules are suddenly applied—sometimes retroactively—leaving you with little recourse.

Ensure your company follows all WTO-compliant regulations and seriously question any agreements in which you are told you can ignore or avoid these rules.

  1. Practice Problem Prevention

It is often extremely beneficial to spend some time at the start of a project to imagine possible worst-case scenarios and develop appropriate responses. Anticipating possible problem areas and creating practical strategies can save many headaches later on.

Relationships in China are very important and sometimes partners may not be completely truthful about potential problems if they feel these may have a negative impact on a relationship.

  1. Risk Analysis

All operations contain some element of risk and you need to be realistic about how much risk you are willing to accept in your business venture.

You should engage relatable and objective help to make this assessment and to evaluate the market and not just rely upon media sources or your immediate partners.

  1. Competition

There are strong competitive pressures in the Chinese market and local brands are strong and gaining market share in many sectors. In many Chinese markets there is a constant downward trend for prices and local competitors, particularly those from the state-owned sector, often have very low capital costs.

Overseas companies should not necessarily expect a level playing field, as the government strongly supports state-owned enterprises

 

  1. Payment

It is vital to pay careful attention to how you are paid, when you are paid, and in which currency. If you want to be paid in a non-Chinese currency, ensure that you are able to convert any profits/payments.

It is important to realise that within China, not all companies have the right to make payments in a foreign currency, and payment can sometimes be arranged through a “window company”. An important part of the due diligence process when finding a partner, is to inquire about a potential partner’s payment process. Letters of credit and other financial instruments are particularly important methods of protecting yourself, however should such instruments not be suitable for you particular business relationship then you should require your partner to make advance payment. Typically Chinese companies do not use terms that allow unsecured payments after delivery of goods. For most large projects, terms of “70 % advance payment, 30 % letter of credit” would not be unusual. Never agree to unsecured payments after delivery.

One critical difference between China and many other markets is the country’s lack of a predictable, systematic approach to the management of credit and receivables. Indeed, perhaps the primary risk of doing business in China today is the difficulty of collecting full payment on time.

The lack of credit infrastructure makes determining creditworthiness challenging but not impossible. Companies looking to find a partner in China need to initially use their resources to analyze a partner’s creditworthiness and then minimize their risk exposure in case of non-payment.

  1. Look Before You Leap

Success in China requires both persistence in your efforts but flexibility in your strategies in order to take advantage of the changing landscape.

China is a rapidly changing market that requires a great deal of caution and patience. Perhaps the best advice is that you should test the water carefully before jumping in. With proper preparation, however, you can position yourself well to profit from China’s growth in the years to come.