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Tips On Doing Business in China

When doing business in China, the ability to navigate cross-cultural issues is just as important as the goods and services you bring to the marketplace. This is true whether your company is just now considering the China market, recently gained its first sale or maintains an in-country presence. In the Chinese business environment, it is necessary for international companies to have a well-planned strategy. The following list of tips for doing business in China is not comprehensive, but a guideline for an initial market evaluation. Companies entering the China market should consider the following:

* Never underestimate the importance of existing connections.

In China, personal relationships are very important and sometimes partners may not be completely truthful about problems or potential problems if they feel it may have a negative impact on the personal relationship. Chinese partners may also be under pressure from government or party bureaucrats (as well as business associates) to compromise ethical standards. You need to be dealing with a Chinese person of influence when problems arise, you should have excellent contacts among officials at the local, provincial and central level governments to manage the issue. If that contact feels you are trustworthy enough, and if they can get their network of contacts to trust you, there is a chance you will succeed. Asians want to do business with people they trust. But there is no real trust unless a person is in their circle. At first, they don,t know if you will be a good partner. Show respect by keeping some distance. Focus on building the relationship before talking business. Do not go for big profit on your first contract.

* To protect your intellectual property and to know your partner, use the same due diligence you would in the West plus more.

Do your "due diligence," and do it well. Make certain that your partner is not a shell subsidiary of a larger company. If they default, do you have the ability to collect from the parent company? Specify this in your contract. Remember that the best contracts are those that do not have to be enforced i.e both partners have the same motivations. Be sure that your negotiating partner has the authority to make a decision. Establish ground rules at the outset of negotiations, including keeping minutes. Be prepared for protracted negotiations. Make certain your partner is able and willing to do all they say they will do in the contract. Assure yourself that it is in their best interest to perform as agreed. If the project is not  win-win you can expect that enforcement of your contract will be difficult  regardless of your legal rights. If you have to go to court to enforce your contract, it is already too late. Is it in their interest to assist you to protect your brand and/or other intellectual property rights? Be careful that your partner is allowed by law to fulfill the promises in the contract. Check the reliability of the data on your partner or customer from independent sources. Avoid being "stovepiped" - talking only to those people to whom your partner or buyer directs you. You can lose a lot of money if you make a great deal with the wrong partner.

* Be realistic and do a Thorough Risk Analysis

Be realistic about how much risk you are willing to accept in your business venture. Make sure you use reliable sources for this assessment. Use more than news media sources or your immediate partners to evaluate the market. Do not have a corporate risk analysis policy for China that is different than you would have for any other country. If a project is too risky, do not do it - even though it is in China. The majority of American companies currently in trouble in China have been caught up in "Chinaeuphoria" and have not performed a thorough risk analysis, assuming that China is, somehow, different. When it comes to taking undue risk, it is not.

* In addition to creating pro forma balance sheets, spend some time at the beginning of a project to create scenarios of what you will do if things go wrong. Try to anticipate possible problem areas. If you can't find any, you are not looking hard enough. Create a strategy to deal with potential problems. Know your limits on losses as well. Be sure to limit your exposure. Set milestones in the project for performance. Have an escape strategy for each stage of the project, even though you do not plan to use it.

* Have clear contract terms

Everything in China is constantly changing. China's consistent 8 percent economic growth leads to continuous rapid transformations in the domestic economy. Nothing is fixed. Thus, when entering into a contract with a Chinese partner you must be careful to plan for all reasonable contingencies. Do not attempt to enter into an agreement without sound legal advice. Have your own legal counsel. Pay your lawyer a little to ensure a clear contract; or pay your lawyer a lot more later when you have a dispute. In your contracts, specify exact terms of payment, and performance standards. Set time lines. Pay careful attention to details, such as initialing pages of contracts and signing properly. Scrupulously follow the contract yourself  or expect to pay a high price. Do not rely on the legal advice from your Chinese partner. Beware of claims that the Chinese law requires specific covenants in your contract. Verify this with your own counsel. 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 they must visit your production facilities in the United States, remember that you cannot guarantee that they will receive a visa. A visa denial could invalidate your contract. Do not assume that local or provincial officials actually have the authority to give you permits and permissions. Verify their claims of authority from independent sources. Question ALL such claims.

* Do not rely on promises of subsidies, incentives, special considerations, or non-market related sources of income to create a profit.

Profitability of a project or the sale of goods and services should be based on sound economic criteria. Do not rely on promises of subsidies, incentives, special considerations, or non-market related sources of income to create a profit. If incentives are offered, they should be used to augment profit, not create it. Make certain your partner has the authority to offer incentives and assure yourself from independent sources that the incentives will actually be paid. Look for examples of companies which have actually received such benefits. Viability may look very different over the short, medium and longer term. Many Chinese partners will insisit you look at the longer term potential of the market and sacrifice your profit in the early stages. This is treacherous. Your floor becomes their ceiling. In China, as in any high growth economy, it is difficult to predict the future, so, make sure that you can reach profitability in the foreseeable future and can build a sustainable model for the medium and longer term.

* Never pressure your Asian colleagues for a decision. To speed up the decision process, slow down. Start from the beginning and work through to a solution in a logical, step-by-step fashion. Then stand your ground.

* The negotiation process will be anything but smooth.

Your best strategy is a walk away mentality. You have to go in trying not to make the deal. Explain your position in clear, concise words. State your terms clearly. Respectfully. Then be prepared to walk away if your terms are not met.

* Respect face. Never argue or voice a difference of opinion with anyone--even a member of your own team. Never make the other person wrong. Never say "no" directly, as that is considered rude and arrogant.

* Account for the fact that most Asians understand less spoken English than we think they do. The easiest thing in the world is for a Chinese to say yes. Their smiles and nods have more to do with saving face than getting your meaning. Talk in short sentences. Listen more than you speak. Pause between sentences. Find four or five easy ways to say the same thing. Never ask a question that can be answered with a simple yes. Avoid all slang. Skip humour altogether.

* Manage the way you present written information. Document everything in writing and in precise detail. Present your ideas in stages. Write clearly, using plain English text. In order to appeal to Asian visual bias, use sketches, charts and diagrams.

* Prepare for every interaction. Do not count on your ability to wing it. A lack of preparedness can cause loss of face and trust. Do not give or expect to receive partial answers from your Chinese colleagues, as that is considered offensive.

* Make sure your facts are 100% accurate in every detail, or you will lose credibility. Do not present an idea or theory that has not been fully researched, proven, or studied beforehand. If you make a mistake, you are not to be trusted.

* Everyone on your team needs to know how to avoid costly gaffes.

Most of us are not by nature sensitive to the differences in culture--we have to be taught. Time-honoured passive resistance could bring your company to its knees. It makes sense to teach people the cross-cultural factors that have a direct impact on your profits.

* Mind the Store

Projects and sales in China require constant attention and clear lines of communication. Do not assume they will run themselves. There is often a gap between perceptions of the individuals managing your product or project and headquarters in the United States. U.S. based managers must visit often to evaluate the situation on the ground. Developing and nurturing personal relationships are important. Be prepared to provide good training and technical assistance to assure product and management quality. Keep an eye on the the company,s account books, or if licensing, on the licensee's account books. Neglect of oversight can result in compromised product quality and lead to a struggle for management control as well as possible unethical activity. When things go wrong, you cannot rely on the court to offer a clear or consistent legal settlement in a manner that would be consistent with U.S. practice and or other parts of the developed world.

* Get Paid

A contract with an insolvent partner or customer is worthless. Pay careful attention to how you get paid, when you get paid, and in which currency. Check with legal counsel to determine the specific payment terms that are customary for a certain type of transaction. If you want to be paid in U.S. dollars, be certain you are able to convert profits and remit funds. Use letters of credit with international banks, and other financial instruments to protect yourself. If you do not want to use a letter of credit, require your partner to make advance payment. Remember that Chinese companies usually do not use terms that allow unsecured payments after delivery of the product. For example, payment terms of "30%letter of credit, 70% payment 120 days after delivery," would not be customary in China. For most large projects, terms of "70% advance payment, 30% letter of credit," would be common. Offering payment after delivery tells your partner that you do not know how business is done in China and makes you look easy to deceive. NEVER agree to unsecured payments after delivery.


* Establishing a Presence in China (Representative Office, Wholly Foreign Owned Enterprise, or Joint Venture)
Representative offices are the easiest type of offices for foreign firms to set up in China, but these offices are limited by Chinese law to performing "liaison" activities. As such, they cannot sign sales contracts or directly bill customers or supply parts and after-sales services for a fee, although most representative offices perform these activities in the name of their parent companies. Despite limitations on its scope of business activities, this form of business has proved very successful for many U.S. companies as it allows the business to remain foreign-controlled.

China's Company Law, which has been in effect since July 1, 1994, permits the opening of branches by foreign companies but, as a policy matter, China still restricts this entry approach to selected banks, insurance companies, accounting and law firms. While representative offices are given a registration certificate, branch offices obtain an actual operating or business license and can engage in profit-making activities.

Establishing a representative office gives a company increased control over a dedicated sales force and permits greater utilization of its specialized technical expertise. The cost of supporting a modest representative office ranges from USD 250,000 to USD 500,000 per year, depending on its size and how it is staffed. The largest expenses are rent for office space and housing, expatriate salaries and benefits.

On May 19, 2004, the Chinese State Council published its decision to cancel and adjust the administrative approval on organizations. Starting July 1, 2004, foreign trading companies, manufacturers, forwarding companies, contractors, consulting firms, advertising firms, investment companies, leasing companies and other economic and trade organizations can register their representative offices directly with AICs without prior approval from the Foreign Economic Relation and Trade Commission.

* Establishing a Chinese Subsidiary

A locally-incorporated equity or cooperative joint venture with one or more Chinese partners, or a wholly foreign-owned enterprise (WFOE, often pronounced "woofy"), may be the final step in developing markets for a company's products. In-country production avoids import restrictions - including relatively high tariffs - and provides U.S. firms with greater control over both intellectual property and marketing. The establishment of a WFOE in China has gained in popularity among U.S. firms as a result of an easing of restrictions, directly attributed to China's accession to the WTO.

The role of the Chinese partner in the success or failure of a joint venture cannot be over-emphasized. A good Chinese partner will have the connections to help smooth over red tape and obstructive bureaucrats; a bad partner, on the other hand, can make even the most promising venture fail. Common investor complaints concern conflicts of interest (e.g., the partner setting up competing businesses), bureaucracy and violations of confidentiality). The protection of intellectual property, no matter the form of cooperation, is one of the most pressing matters for U.S. firms doing business in China. American companies should bear in mind that joint ventures are time-consuming and resource demanding, and will involve constant and prudent monitoring of critical areas such as finance, personnel and basic operations in order for them to be a success.

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