Doing Business in China: Cautionary tales and advice
They agree that doing business in China can come down to one word: guanxi.
Guanxi is the Mandarin word for networking, but in China it means much more than shaking hands and exchanging cards at business functions.
Guanxi means getting plenty of assistance to make sure you never run afoul of Chinese rules and regulations, many of which can be obscure or even made up on the spot.
Guanxi means finding the right representative inside China. And it means appreciating a vastly different way of conducting business.
Conner, executive director for international sales/Asia-Pacific for Environmental Dynamics Inc., used the word when describing a presentation he gave to members of a large technical society at their annual meeting — three years in a row.
He said the objective of the first presentation was basically to “say hello.” The second year, it was to get them to say, “Please, give me a bid.” After the third presentation, they were willing to buy.
“Americans are direct and quickly try to get a deal,” Conner said. “That’s not done in Asia. You’ve got to be in here long term.” The Chinese, he said, want to know who you are, where you went to school, who else you might know that they know, whether they can trust you and whether you’re going to be back. As Conner put it, a lot of Americans show up once but seldom return. The Chinese have a 5,000-year history, he pointed out, and they want to know they can count on you and your firm for a long time.
Van Eaton, a principal of Spectrum Consulting Group, said in the United States, “we work out a deal, and then we become friends.” In China, first you become friends, and then you do business.
“It takes a long time and investment in relationship building to do business in China,” Van Eaton said.
Products going to China from Missouri include medical devices, computers, energy products and environmental products.
Missouri firms sold $944 million in goods to China in 2008, according to a 2009 report by the state Department of Economic Development. China is now Missouri’s fourth-largest export market, the destination of 7 percent of all outbound trade.
As many as 120 Missouri firms are doing business in China, a figure that has doubled during the past two to three years, according to the DED.
China’s population is roughly 1.3 billion, which represents one-fifth of the earth’s population. In short: One of every five people lives in China. With a growing middle class and affluence, China represents a market that Missouri firms should be considering now — as in, right now, Van Eaton said. “You either have a strategy to get into China, or you’re going to have one in five years, and then you’ll be way behind.”
Spectrum began operating three years ago, but Van Eaton worked on international economic development for 13 years in Kit Bond’s US Senate office.
Van Eaton also has been working for three years with the Midwest China Hub Commission, a group of business people trying to persuade China to establish a direct cargo connection at St. Louis International Airport.
(Gov. Jay Nixon reportedly postponed a trip to Taiwan in December after the Chinese consulate and St. Louis business leaders complained that the trip could damage the potential deal to turn one of the terminals into a freight hub.)
Cargo flights from China now go to Dallas or Chicago, which creates havoc if a flight is delayed, especially when the cargo is one of Missouri’s exports — live pigs. Van Eaton said he believes the Midwest-China Hub project could become a reality in 2011. But Van Eaton is used to working in China, where business takes time.
Why should Missouri producers, manufacturers and retailers care about China? For producers, including farmers, Van Eaton makes it simple; China is the No. 1 producer of pork, the No. 1 importer of pork and the No. 1 consumer of pork. And pork is just one example, Van Eaton and others noted.
Yet, it can be a difficult market.
Compared with the United States, contract law is less developed and less reliable in China, which is why it is friendship first and business second.
Chris Poli, an international trade specialist with the US Commercial Service, said the complexity of doing business in China leads her to recommend against starting a company’s global experience there.
The Commercial Service, which has an office in St. Louis, says it can help Missouri firms find the right people, whether it’s a partner, sales agent or customer.
“We can help a company focus and cut the time a small company might have to spend to get into the global market,” Poli said. The service also provides free market research on a variety of countries, background checks, lists of translators and other assistance.
Caution from experienced operators
EDI, founded in 1975, provides wastewater aeration and environmental products and services. In 2008, EDI received the “E-Star” Award from the US Department of Commerce for Excellence in Exporting, an honor that has only been given to about 300 firms since 1961. The company has received other awards for exporting as well. Today, export sales to all countries including China account for 55 percent of the company’s business.
Conner said the key to developing guanxi is finding the right representative, which could take several years. “A guy with a fax machine and a computer is not the person you want,” Conner said, noting that his firm gets solicitations constantly from “agents.”
The search might start at the US Embassy, Conner said. His firm has taken advantage of the help offered by such overseas services and the local US Commercial Services offices.
Doing business in China also requires being there; three of EDI’s 110 workers are based in China, and a fourth are based in Columbia but travel to Asia frequently.
If a prospective representative says he or she can represent your firm throughout China or claim exclusive rights to anything throughout China, that’s a red flag, Conner said. China is too big for any one person or company to cover the entire country, and it is too diverse to believe that any one person has exclusive rights for anything, he said.
Yet, the right representative is crucial to the development of guanxi as well as to putting it into practice.
Again, Conner can provide an example of how it works.
One of EDI’s Chinese representatives managed to get members of the Chinese Municipal Design Institutes of Shanghai to attend a 10-day training seminar presented by EDI and the University of Missouri. Members of these design institutes are much like consulting engineers in the United States and are often involved in shaping the specifications for municipal projects, such as wastewater plants.
Today, EDI has more than 100 installations in China, with an office in Beijing and a network of company representatives in the country. But after EDI’s 10 years of experience in China, Conner, executive director for international sales in Asia and the Pacific, can tell you one thing: “It takes time,” he said.
The communication barrier
Four years ago, Alex LaBrunerie found a fast track to guanxi when a colleague of one of his friend’s put him in touch with a top investment firm owner in Hangzhou, China. The result was the Columbia firm Rising Tide, founded by LaBrunerie of LaBrunerie Financial and Yi Zheng of Hexin Flush and Flush Financial. Rising Tide provides US investors access to translated financial information developed by Yi’s firms.
LaBrunerie and others emphasized the importance of a good translation, especially when it comes to contracts. Simek noted that his Commercial Service can provide a list of translators and, more importantly, translators in a particular firm’s area of expertise. Businesses need specialized translators who know the terms and specialization of the specific industry. For example, a US firm involved in exporting medical technology to China uses a nurse and former employee of the Chinese equivalent of the Federal Drug Administration for translation.
“You need the right expertise in the right field,” Simek said. In some situations, he also recommends double translation, translating the material from English to Chinese using one translator and then having another translator translate it back into English, to ensure what was communicated in Chinese was what the English contained. It is expensive and time consuming, he noted, but it could save time and money in crucial situations.
Stay flexible, take care
Russ Potterfield said he had to overcome a steep learning curve to open a field office of Battenfeld Technology in China last year. One of the most important lessons in doing business in China, he said, is learning to “roll with things.”
At one point, he found out he needed a new business visa because of a newly revealed rule, which he speculated was fabricated on the spot. To get the visa, Potterfield had to rush to Hong Kong for two days on an hour’s notice. But he was nonchalant about the disruption. “It wasn’t that big of a deal,” Potterfield said. “Once the paperwork was completed and the police had been able to visit the office to make sure we were doing what we said we were doing, things clicked along nicely.” In fact, he was relieved at the relative ease of getting his visa sorted out, given the horror stories he’d heard from other foreigners living in China.
“China is a very exciting market, but check your facts,” Conner said. His firm has run into difficulties with Chinese firms attempting to copy the design of their products and even with a person claiming he was representing EDI, complete with a website.
“Intellectual property and property rights are still a big issue in China,” he said. If you partner with a Chinese firm, “be sure your partner is not going to be your competition in two or three years.” Again, it involves trust, relationships and guanxi. His firm has worked with the US Department of Commerce to find out what Chinese firms are legal and respected.
Conner also offered this last piece of advice: “Don’t assume you know 100 percent of what’s going on in China or Asia.” This includes acknowledging cultural difference and even those that exist from north to south and east to west in China.
“You will never have all the facts,” Conner said. In China, it’s never just about the price; it’s always about the product, the price and the relationship.
Despite the difficulties, Conner and others said the future is in China. In fact, EDI is looking for more representatives in China to do business beyond the developed eastern and southern areas of the country and moving into the western and the middle areas. Conner said he is planning three years ahead because, as he noted again and again, “It takes time.”