Doing Business in China:
Establishing Small- and Medium-sized American Enterprises
Milton Kotler *
© Copyright, May 2008
Most of the American commentary on doing business in China has focused on large multinational companies. But more and more people with small and medium-sized enterprises (SME) are seeking to establish a foothold in that country and are searching for principles and policies that will help them avoid the pitfalls inherent in setting up a business in a foreign culture with new and evolving rules of business conduct. They need two kinds of information: 1) detailed information about regulations, business intelligence, demand and supply, and the marketing practices of their industry in China. This kind of information is readily available from business journalism, technical reports and industry reports. And 2) a general sense of how to conduct their search for Chinese and American counterparts with whom they can work—partners, experts, strategic allies, customers, managers, staff and support services. That is the human side of business and it is a minefield for the newcomer. This article outlines basic policies for avoiding these pitfalls, based on nine years of serving the interests of Chinese and SME American businesses. This article is excerpted from Why China? An American Business Adventure.”**
Policies for Establishing a Business in China
The American business man or woman needs to know how to acquire an effective introduction to China, how to facilitate his or her way into the country and once there, how to find partners: how to build, manage and lead the business; and how to serve clients and customers. (Americans will also need to become familiar with the Chinese language and business culture and, if they plan long stays in the country, how to find the friends who will make their lives there pleasant. These are dealt with in the author’s book.)
Before You Go. Important sources of information in the U.S. consist of colleagues, experts and friends who are already involved in China. In addition, journalists’ coverage--particularly the business press—and technical reports are helpful. But for the most useful background Americans should turn to U.S. academic institutions, the Chinese embassy and consulates in the U.S., the trade and professional associations in their fields and local Chinese-American and Western meet-up groups.
University business schools often have executive seminars on doing business in China. While the cost of attending may sometimes be high, it is seldom prohibitive and these are important busness investments, not only for their educational value but also the benefit of introducing you to peers with whom t0 share information. Every Chinese consulate throughout the U.S. has a commercial officer who is there to talk with American entrepreneurs and can supply official and personal knowledge. There are Chinese business groups in almost every American city at which Chinese-Americans merchants and professional meet regularly. They willingly reach out to the broader community and will welcome you to a meeting where your business interests may fit opportunities some of them are seeking.
Several national associations have Chinese programs. The U.S. Chamber of Commerce conducts a Chinese business program in several cities. The U.S.-China Business Council in Washington, D.C. holds workshops in the U.S. and publishes reports on various business topics. And the National Committee of U.S. China Relations has a very active program of public affairs education concerning China in many cities. Their membership is prominently involved in business, government and academic institutions in China.
Many trade and professional associations are increasing their Chinese programs to meet the business needs of their members. There are also informal “meet-up” (see http://www.meetup.com/) groups of Chinese and Western social and business networks in every major city. These offer a good way to make Chinese acquaintances who can introduce Americans to friends in China. (Be careful to check out any grandiose claims a new Chinese “friend” may make.)
Once You’re There. In China you will meet people who can connect you to potential partners and help you make practical decisions about your business mission. The American with a modest budget who hopes to establish an SME must find a good Chinese partner early in the game. While Chinese commercial policy requires joint-ventures in designated industries, you’ll also have a practical need for a Chinese partner for a wholly owned foreign enterprise. You will also need a professional advisor or consulting firm--either American or Chinese (the American advisory, or consulting firms are far more expensive)--for strategic assistance. Most of the Chinese consulting companies have Western-trained, English-speaking staff and know the Chinese industries, companies, and leaders better than the American firms. Check their client list and ask for references. There are also independent consultants who will offer you their help. The American should be careful in dealing with this group and should not waste time with anyone who offers to help on a commission or success basis.
Still a third group of people who will facilitate your entry into China’s business world consists of Chinese companies who will contact you. Communications among the Chinese is very fast and word will spread quickly that you are looking for a partner. Companies in your field of business will soon know that you are looking for a partner and will--after some screening to be sure you’re legitimate--ask you for a meeting to discuss a possible relationship.
Partners. A Sino-American partnership involves many more than two parties. On the Chinese side, private enterprises may involve family, friends, investors, and other businesses with which the enterprise is associated. There are also support partners in the areas of supply, distribution, governmental relations, business development, finance, customer relations and operations. All of them participate in the value of the enterprise and most of them have to be consulted by the Chinese partner for consensual agreement before entering a Sino-American partnership. The American “partner” may also, of course, consist of more than one participant, but seldom to the same degree. Americans may be confused by the fragmentation of the Chinese enterprise they are dealing with but in reality, the American side, which is more vertically organized, may in fact take a longer time for communication and decision than the Chinese side takes to move horizontally. American vertical decision patterns are just as confusing to the Chinese as theirs are to us. It is well to keep that in mind when negotiating with Chinese partners.
Goals. Americans tend to look for short-term, transactional deals since they have a world of industrial trade and investment opportunities to choose from and can find a lower-cost provider or a better market. The Chinese, who are new to the global marketplace and therefore less sure-footed, tend to look for on-going relationships. The American has to decide at the outset of a partnership discussion if he is in for the long haul and he must communicate that very clearly. If he only wants a transactional deal, then he must be prepared for the fact the Chinese side may short-change him in exact proportion to the weakness of the intended business relationship.
Age. American partners are usually older than Chinese partners. It is not unusual to meet a 35-year-old CEO of a multi-million dollar company. Even State-owned companies have largely replaced an older generation of managers and executives with younger, well educated people. But this age disparity is good for Sino-American partnerships because Chinese culture in general reveres age and young Chinese managers respect older businessmen from American and Europe whose experiences has been in free markets rather than planned economies. It’s good policy, therefore, for an American SME to send its most experienced, and probably oldest, executives to China to make deals the company is looking for.
Transparency. Americans expect a transparency of information from potential Chinese partners, but that is rarely possible. Many Chinese business relationships are not formally documented; accounting standards differ; relationships with government are based gaunxi (personal relationships); and so on. Chinese company governance is different from that of American companies. They do not have to report to the government or to their shareholders the same amount of information that American companies are required to report and a great deal of activity that is off the books is very hard to uncover. You need to engage a competent professional to conduct due diligence. There’s not much you can do about all of this, except to press your Chinese counterpart for more information and then adjust your risks factors to accommodate for gaps in information.
Cultural Rituals. All the Chinese you deal with in your search for business relationships will want to spend a good deal of time with you in order to assess your character and learn about American business practices. This involves a ritual of lunch and dinner meetings which may seem unnecessary to the American who wants to make a deal and head home. But for the Chinese, personal dignity is tied up in every deal and if something goes wrong, your Chinese partner loses face in the eyes of his peers. No lawyer can repair this, so there has to be time to build genuine trust and confidence in the American party. There is always an uneasy mix of Chinese sociability and American impatience.
Managing Your Business in China. No American SME can succeed in China with a competent, industrious and responsible general manager (GM). In the beginning your GM will have to handle the development of the business and your staff. Your company is bringing a new value to the Chinese economy and it is up to the GM to introduce you to Chinese CEOs who are interesting in doing business or partnering with you. Unless you speak fluent Chinese, your GM will have to be your voice and your ears in all transactions, so it is essential that he or she has a good command of English and can interpret effectively.
Actually, you, as the leader of your company, will play only a small role in negotiations with the Chinese. Your job is to make your requirements very clear to your GM, present a gracious attitude and character at meetings and be available as needed. Your GM builds and sustains the relationship with the Chinese counterparts. However, the American SME must maintain a presence in China and that will require frequent trips.
Staff. You will need a good senior staff and this starts with bringing a top member of your U.S. company to China. He or she will work with your GM to set the standards of professional performance for the rest of your staff. This person must be willing to stay in China long enough to build a competent staff, for he or she serves as your alter ego for the quality of the work your company will do in China just as your GM serves as your alter ego for business development and management. Knowledge of Chinese is not a requirement for the job, since your GM will serve as translator and interpreter in dealings with the staff. But the person you choose should have the background and disposition of a teacher so that he or she can be effective in training new staff members. It is important to remember that members of your staff are working for you both for wages and for career development. They are serious to learn American modern business methods to advance within your company or to leverage their experience into another company at a higher position and salary.
You must learn to adhere to Chinese rules of company organization, which are much more rigid than American rules. If you say something to a subordinate that you have not cleared with his or her immediate superior, you upset the chain of command and create difficult management problems. Remember not to encourage personal staff initiatives without checking first with your GM.
Reward good performance with an extra bonus, in addition to the annual New Year bonus everyone expects. If you can’t match the salary increases they can get in another company, give them good references and don’t stand in their way. When a staff member falls short of doing the job you expect, work with your GM to explain his or her failure and spell out what you want him or her to do. It is you job to build the company culture. If the staff person continues to do a poor job, he or she must be dismissed with a careful explanation, without malice, of the reasons for the dismissal.
Support Services. All American companies in China need the support of lawyers, accountants, research companies, and other outsource firms. Given the evolving nature of Chinese commercial law and complex tax and regulatory issues, it is important to have a Chinese accounting firm to handle the bottom line of budget and control, receivables and payables, tax and social welfare payments, balance sheet, annual audit, regulatory compliance and foreign payments. Chinese policy changes frequently in the growing market economy. There are several large Chinese law and accounting firms that are very trustworthy for on-going service. They are much less expensive than American firms. For the start-up, however, though they are more expensive, it is probably easer to deal with an American firm in China and move toward a Chinese firm later.
Dealing with Clients, Customers and Experts. Once you have set up your business and are dealing with Chinese clients and customers, you will find that they expect you to do a great deal more for them than would be the case with American counterparts. Details abut service deliverables, product quality, logistics and payment schedule must be pinned down with as much precision as possible or the customer will always ask for more. There will always be latitudes of interpretation in any contract, so it is necessary to budget with full awareness that you’re going to be asked to do more that you’ve agreed to do. In addition, market circumstances and government policy can change over night and the SME must be constantly aware of these changes and continuously adapt project management and deliverables throughout the course of a project.
An American SME may have to outsource a number of elements of a project. Either Western or Chinese expertise may be necessary. The Western expert will undoubtedly to be more expensive and will usually require tutoring by the SME to prepare them for the Chinese situation, additional demands by the client or for changes in government policy. If the expert is not flexible enough to deal with this situation, the project is in danger of foundering. Chinese experts, on the other hand, my be less expensive at the outset but may be carrying an overload of other assignments at a lower cost in order to attract more business. The danger here is that either they cannot deliver on schedule or they subcontract the assignment without your knowledge and deliver poor quality. It is prudent to investigate their true workload and to develop very specific and deliverables, personal responsibilities and schedules so you can terminate the relationship without legal headaches if there is a performance failure.
Your Chinese clients will expect you to attract investment funds for his or her project as well as design the project. Every private Chinese company is looking unceasingly for capital. Chinese banks favor State-owned companies, so there are limited capital vehicles for private businesses. Unlike American marketing consulting companies that separate strategic marketing from investment attraction, most Chinese companies will not pay for marketing studies without an identification of prospective investors. There is a danger in integrating investment attraction services with every project. Investment services target a particular niche of investor interest. The momentum of this targeting can force its way into the strategic direction of your company and drive it to focus on that niche to the detriment of a broader service offering.
Americans in China. American and other Westerners are not bringing a market economy to China; the market economy, although only 25 years old and still growing, is already there. And Westerners have to find their way to enter it by bringing something new and valuable into a dynamic pattern of growth. The Chinese business culture does not exist from 9:00 am to 5:00 pm. Chinese owners and managers work hard and take little time off for recreation and family affairs that Westerners find so necessary.
The concept of “saving face” is all-important to the Chinese, whereas Americans are more concerned with creative deal making and legal formulation than with personal honor. The American business person can inadvertently humiliate his Chinese counterpart and in order to avoid it has to recognize that a Sino-American partnership is a trusted collaboration with all of the collateral elements of business--partners, investors, operators, customers, suppliers, connections, friends and family.
Despite the pitfalls which confront the American leaders of SME businesses in China, the chances for establishing a successful business there are growing exponentially. Chinese industry is now beginning to develop strong domestic markets to match the strength of the country’s global activities and American SMEs can take an active role in contributing to that development while working with their Chinese partners.
*Milton Kotler is President of Kotler Marketing Group (KMG), headquartered in Washington, DC with offices in Beijing, Shenzhen and Shanghai, China. KMG China has three divisions: strategic marketing; urban and industrial land development and marketing and marketing and sales training. KMG China has been operating since 1999. firstname.lastname@example.org; http://www.kotler.com.cn/. My thanks to Carla Sykes for editing this article.
**Kotler, Milton, Why China? An American Business Adventure, (forthcoming)