This week we went along to Google campus for an insightful event on how entrepreneurs can do more business with China.
Also taking part was Jeremy Gordon, author of ‘Risky Business in China’; a guide to assessing risk and due diligence in this market.
Whilst a lot of the discussion focused around the many pitfalls and risks associated with doing business in China, and ways to avoid them, the panel also provided a lot of sound recommendations on entering the Chinese market.
Not only does the sheer size of China’s market offer opportunity for growth, many spoke of the excitement and positivity of working in China’s fast-moving environment. Here’s a digest of the discussions, including the audience questions and a summary of panel responses.
What cross cultural differences need to be borne in mind when doing business in China?
Chinese people mix their business and personal lives. So, don’t be too eager to proceed to business straight away as it’s important to take the time to make a connection first.
Westerners tend to be very transaction-orientated, whilst getting to know you as a person and building trust is important to the Chinese. Chinese people can sense if you are genuine or not, so be truthful and make that connection first in order to reach the business outcome more naturally with long-term goals in mind.
The panel was keen to stress that whilst guanxi (relationship networks) and face-saving are rather clichéd ideas about doing business in China, they remain valid. It’s also important to remember that as a Westerner in China, you can’t really attain guanxi.
Speaking from long experience of advising businesses in the market, Jeremy Gordon, was keen to emphasise this point: you will always be an outsider even if you think you have an established network in China.
The need to save face by not directly saying ‘no’ is an important aspect of the cross-cultural differences. This emerges as a significant issue when trying to perform due diligence in China. People prefer not to say ‘no’ directly, not because they are lying or hiding but rather to save face and avoid confrontation or embarrassment.
It’s important to remember to keep your options open even whilst investing in relationships with partners, so that you are left with plenty of alternatives if things go wrong. This was the sad experience of Mark Kittoes, who built and lost a publishing empire in China when his local partners walked away with the business.
From a recruitment point of view, the panel identified that Chinese people tend to be brought up not to question authority, meaning it can be hard to get answers or ideas out of them. Arnold Ma, CEO of Chinese digital agency Qumin, advised that could be an issue when trying to recruit for small businesses and start-ups in particular.
What are the main laws and regulations to be aware of?
In the West the government is told to stay out of business, but in China the government is very involved in the business world. The importance of government cannot be understated. It’s vital to understand the details of regulations for your particular industry but it’s equally important to understand the likely long-term policy direction to see whether your business is aligned to the general direction of public policy.
If you are attempting to do business in China you’re advised to keep up with the legal situation by monitoring it as it evolves. Talk to a Chinese lawyer, and follow China law blogs such as Dan Harris.
Looking at the example of Uber – they started with great prospects because taxis were so tough to get hold of in Beijing. Once taxis drivers started using Uber, they found it was more cost-effective for them so they stopped picking up passengers who weren’t using Uber. The government’s response was to ban Uber. Copycat services later emerged.
The panel also mentioned that, due to high employment taxes in China, it was quite common for firms to pay people in cash. Alternately, many are paid a minimal amount of around 3000RMB as per their contract but then receive an off-the-record bonus in cash to make up their salary to acceptable levels.
The panel were keen to emphasise that whilst such practices were quite common, it wasn’t advisable for overseas companies to engage in them.
Foreign companies tend to be held to a higher standard than local ones, as companies such as GSK have found out to their cost (the pharmaceutical client was found guilty of paying bribes; a practice many consider to be widespread in Chinese healthcare).
Is it essential to have a local presence or partner to do business in China?
The panel remained split on this issue. Some argued that it depended very much on what you were selling: a product or a service. What was essential was doing local research first to understand levels of domestic interest before starting to build relationships in the hope of finding a suitable network. Trade fairs were mooted as a good place to start and the panel advised that it was helpful to find a local partner passionate about your product.
How do you protect your intellectual property?
You’re strongly advised to get your logo registered in China, which costs between £400 and £500. It’s also important to guard your data carefully. One panel member advised against travelling there with laptops containing sensitive data. It’s important to separate key pieces of intellectual property, and have the right agreements in place before doing business. This would include non-competition clauses.
It’s good to have a local partner with their ear to the ground so you can respond quickly if copied. Having a local lobby also matters – make sure your guanxi includes people who have government contacts.
There’s recently been some concerns about government potentially forcing tech companies to have over source code. Unfortunately this kind of hazard seems to be a cost of doing business in China.
Whilst the copying of your website content is a risk, the situation is improving.
It used to be the case that Hong Kong was a ‘stepping stone’ to the Chinese mainland, is this still the case?
This seems to no longer be the case. Hong Kong still has a great deal to offer – the culture for startups is extremely strong and supportive and the creativity and talent is there.
It’s good at supporting new businesses, If you’re launching with a tech product, you are advised to do so separately in Hong Kong and the mainland because different products thrive in the different locations. The exception would be if you launched a service business, which is more likely to be feasible in both.
Hong Kong is no longer the steppingstone it once was and some companies have relocated their offices to Beijing.
How is corruption impacting on business?
The much-heralded drive against corruption is likely to be a long-term, sustained campaign rather than a passing phase (as some cynics first assumed). It’s part of a wider drive to reform the economic system in the light of a slowing economy. The government is trying to develop national champions in some industries, and backing other industries that it deems sensitive to national interests. It seems that in future, GSK-type bribery allegations just won’t be tolerated.
It’s worth bearing in mind that foreign companies usually aren’t as well networked and so aren’t as able to respond quickly when the wind direction changes, such as ahead of a clamp down. This makes them vulnerable. It also makes it increasingly hard to do business from a legal perspective.
The panel was keen to stress that there’s real anger in China about party members living in luxury. Attendance at fancy restaurants and golf clubs is now done much more discreetly – they even described how some 5-star hotels were simply removing a star so that party members could still visit them without stigma! Some of the consumption of luxury goods and services is now taking place ‘underground’ or at least much more discreetly.
This was a fantastically insightful event that identified the many pitfalls of doing business in China and offered ways to avoid them.
Panellists were keen to stress however that doing business in China was not for everyone, and the sheer focus on hair-raising risks associated with this market was sobering for many in the audience. The panel pointed out that China is no longer the world’s fastest-growing market – this honour now belongs to India. Other panelists advised that doing business in Singapore is easier!
The final key takeaway was that entering China is a long-term game and it’s important to commit for a minimum period of five years to reap benefits. Raising the question: do you have the resources and stamina to commit to this lengthy strategy?