Sunday, 2 September 2007

Beijing and What you need to know about Doing Business with Chinese

A brief consultation by guest writer C.B.C.

Do you want to make business with Chinese partners? In principle, if there is a good business proposition and both partners can gain out of it, is worth pursuing. At the end of the day everybody in China wants to make money. Here, are the biggest capitalists - not in the US.

Nevertheless, before getting a culture shock you should know the following:

- Contracts can mean very little in China. They are just one agreement before the next one is reached. It is not unusual to negotiate something and then renegotiate the same point that was agreed before again and again if conditions change or there is a new opportunity. The usual tactics is to ask for the work to start before any ink is put on the contract, and then the foreign partner is locked in and cannot move back otherwise it will loose the initial investment. The other approach is to ask for an initial brand investment to be paid by the foreign party. This is not a bad idea per se but again you have made the initial investment.

- Legal protection exists but it is usually to the advantage of the Chinese side. Hardly any foreign firm wins against a Chinese partner. See the example of GM with Cherry on the QQ car. It is an exact copy of the Chevrolet but they lost the case.

- Don’t be nice in the negotiations. If you make a concession always ask for something back. If you feel that the partner does not agree to your point, never only use logic to make your point rather ask for something in return. This is more convincing for him. Remember you are not looking for a "win-win" situation. Otherwise this means there is still room for your partner to improve "his" deal. Always give the impression he has taken all he could have from you. Show signs of distress like you are uncomfortable of what you have just given in. ...

- The Chinese will try to copy all your products. Here you can buy a lot of fakes. For e.g. furniture: the "Barcelona Chair" costs in Europe around 6000 EUR. In China you can get the exact copy for 500 EUR. So do not be surprised if they will try to copy your brands or popular designs and offer it on the “other side of the street” with a slightly modified logo and company name.....(of course this does not always happen but often). In the Chinese culture a copy is not considered as "bad". It is rather "smart" if you can build more or less the same product at half the price or less. In Europe owning a copy is something "morally bad" and you would not openly talk about it. Here for many people it is different.

- One fake is not considered as one if it differentiates in at least 5 points.

- Even if they will copy your product - brand is everything. If you have "brands" and reputation you will always attract the “rich and wealthy” who want to differentiate themselves from the mass of more than 1 billion people.

- It can be very helpful especially here in China if your partner is "politically influential" as well as a good business man with proven record. Do not underestimate the bureaucracy and regulatory environment of doing business in China.

- Market growth is incredible in all the business sectors. A business plan that does not show growth rates of at least 30% are conservative or you are doing something really wrong.

- Always make sure you have the leverage. For example, it may not be advisable to share all critical details or contact names with the partner. If you wish you may try his loyalty by sharing some information but not everything. Or ask yourself what would you like to have back from him?

- Payments overseas are a story for it selves. It is not that easy to make payments overseas especially for non material goods (such as royalties, license fees, technical agreements etc.). On the contrary it is rather easy to pay physical goods if a particular contract and supporting documents exists. So your deal should be drafted in a way that you will get paid easily.

- If you are in the furniture business, from my ignorant point of view I would look at the following Business models:
a) obtain exclusive franchise of high end western brands (as mentioned before Chinese love luxury brands),
b) make furniture at relatively high quality for a fraction of the price and export it back to Europe. I am sure there is a market for furniture between the luxury design brands and the "Ikea" category. So to say Ikea price at better quality. Make sure you have a quality person on site, don’t’ trust that your drawings/specifications are implemented correctly. It is not uncommon that such tests are carried out without proper control. In China quality control is key.
c) help a Chinese manufacturer to produce a certain quality furniture and help him expand overseas.

Source: C.B.C., the author of this brief consultation on 'Doing Business with Chinese' works as Vice President and CFO in a German-Chinese Joint-Venture in Beijing. I am glad that he agreed to share his insights on my blog.


Neva said...

My son now lives in Beijing and he was home for 2 weeks...It is interesting reading this as he agrees with every point you make and has had to learn the art of negotiation....he is quite good at it now that he is fluent in Mandarin....I really enjoy reading about Beijing from your blog.

- Susan - said...

Hi Neva,
thank you for stopping by and leaving a comment.
I am glad to hear that your son agrees on 'every point'.
I hope that I do not sound too negative about Chinese.
I try to post good observations as well. I like to live here.
See you around.

Rebecca Klein said...

I visited Beijing, Yi Chang, and Shanghai this summer as part of an MBA campus abroad program. I have a few points to add:

1) Many businesses assume one of the best ways to enter China is to form a Joint Venture. While it is true that having strong relationships with key people is of utmost importance, forming a Joint Venture may be quite difficult especially given the fragility of contracts as you have mentioned in your post.

2)Accountability is very important in the Chinese culture

3) Chinese people are interested and curious to understand how business is carried out abroad but they prefer to leverage the information they acquire to make their own decisions.

4) Name presentations are counter-intuitive to Western Culture; the last name comes first.

5) Always accept gifts, and business cards, with two hands

6) Chinese people are very superstitious but life insurance companies are gaining headway in China due to recent natural disasters that have started to alter this mindset

7) It is essential to understand Chinese culture before trying to enter with a foreign enterprise

8) A Chinese shame culture vs American Guilt culture

7) Local companies are favored over foreign owned enterprises

There was so much more that I have learned through my experiences in China, but too numerous to discuss now!


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