China 101: Market Entry Strategy. 6 Points to Consider

By Andrea Cristancho, Senior Business Development Manager at JLJ Group

China’s business environment is dynamic and particular in its essence. It welcomes business from different nations and demands skills, commitment and long term planning to stay afloat. It can be rewarding for many foreign companies, especially those who conduct the proper research and carefully craft a strategy to execute.

Here are some main points to consider:

1.Regulatory environment.
In China, the Foreign Investment Industry Guidance Catalogue last revised in August 2011 regulates foreign investment. It’s a document issued by China’s National Development and reform Commission (NDRC) and the Ministry of Commerce (MOFCOM), which oversees foreign investment in Chinese companies. Depending on the business activity, the catalogue classifies direct investment as encouraged, restricted, prohibited or permitted. Therefore, one should look into China’s regulatory environment and find out the regulations on their particular business type, licenses required to operate in compliance with the local authorities, costs and duration of the set up process, among others.

2.Market Assessment.
China is a diverse country with unique regional market segments, which should never be looked at as just a single China. In addition cities are divided into tiers cities including tier 1 such and Shanghai and Beijing, and tier 2 cities as Chengdu, Dalian, and Hangzhou, as well as numerous smaller tier 3 cities. When looking at the market, companies should consider target customer and size, generation groups, consumer demands and purchasing behavior, as well as market trends, barriers and key competitors.

3. Location and Distribution Channels.
Whether you decide to go solo, represent your firm, or partner up with a local investor, you would need to spend some time and resources researching your ideal location within China; particularly at the district level and perform some due diligence before choosing your office location. Companies should also be communicating and negotiating with a short list of potential partners, or dealing with a third party provider; while trying to understand cultural differences and working within the demands of the Chinese style. There isn’t only one ideal way, it requires you to find which best fits your business model and is in line with your long term business model and head quarters vision.

4.Internal Assessment.
At the initial pre-entry level, a lot of time and resources are invested on evaluation phase. Most of the time, reports are presented at head quarters or to a board of investors for final approval. At this stage, it is advisable to evaluate how ready is the management and main decision makers of your corporation to invest in China, including financial consideration, IPR, relocation, staffing and management soft issues, and execution planning. In addition, assigning key points of contact is a priority as the approach to china market entry is being developed and communicated across the organization.

5.Entry Modes
Having your business plan and China Market Entry strategy at hand, consider your market approach evaluating the strategic importance for your head quarters and your ability to exploit the market once invested. There are four primary entry modes:

Export Entry.
Using an intermediary agent for the entire process or handling export –in house and a local Chinese distribution partner for import and sales in China. It doesn’t require a large capital expenditure but provides limited control.

Contractual Entry.
Licensing your brand to individuals and companies in China or sub-contracting with local manufacturers. Requires less capital expenditure but again provides limited control.

Equity Entry.
Entering the market by equity includes Wholly Foreign Owned Enterprises (WFOE) such as Manufacturing, Trading, or Service WFOE (examples are consulting, training, restaurants and management service companies), a Foreign Invested Commercial Enterprise (FICE allows greater flexibility in terms of business activities that include retail, wholesale and franchise), or through a Joint Venture or M&As.

Representative Offices.
A Rep Office represents the interests of the foreign investors acting as a liaison office legally established for the parents company. It may conduct market research, develop partnerships and business channels; however, all business transactions are handled by parent company, mainly the issuance of commercial invoices. Rep Offices do not have a minimum investment requirement since they are not considered a Foreign Investment Enterprise.

6.Registration Steps.
Below is the typical process for setting up both Foreign Invested Companies and Rep Offices. The government offices involved in this process includes the Ministry of Commerce, Administrative Bureau for Industry and Commerce, State Administration for Foreign Currency, Taxation Bureau, The Customs Office, and the Statistics Bureau.

In brief, entering the China Market requires experience and long term planning, as any other market, but developing the aforementioned points and assessing your company entry mode should take you closer to success. Therefore, having a solid team on the ground, including your team and your advisors, a solid network of contacts Guanxi will also help you navigate China’s business environment during pre-entry, execution and growth of your business in China.

By: Andrea Cristancho
Senior Business Development Manager
The JLJ Group – solutions for China Market Entry
Andrea.cristancho@jljgroup.com

What do you think?

You may also be interested in this articles:
7 Top Tips for Entrepreneurs Starting Business in China
The Entrepreneurs Dilemma: How Much Money do I Invest…? 
The Entrepreneurs Dilemma (II): How do I navigate through a founding shortfall in China?
Researching the Market before you Start your China Business: A Photography Gallery Story
Getting Hold of the Consumers in China: Education and Networking
China Stories: Choosing the Wrong Company Formation Agent could Kill your Business!
Seeing is Believing… and I mean it!
Doing Business in China: 14 Insights Gained on the Ground
The Power of Networking in China
What Do I Need to Know About Guanxi
Is it All About Who you Know?
Foreign Women in Business
Ten Tips for Doing Business in China

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16 Practical Chinese Negotiation Tips and General Strategies (compiled)

GENERAL STRATEGIES AND 16 PRACTICAL TIPS IN THE THREE STAGES OF BEFORE-DURING-AFTER NEGOTIATION IN CHINA
by Vincent F. Yip, PhD MBA, Management Consultant, and Lecturer, Stanford Continuing Studies ( Palo Alto, California)

Note from Foreign Entrepreneurs in China:  I´m planning to share this very good article in some social media forums so this is a compilation of  part I & II that you have probably read in my previous two posts)

For companies in Fortune 500 or even Small and Medium Enterprises, entry into the lucrative China market is a highly desired process that begins with identifying potential Chinese partners and entering into all-important negotiation. Other than generalities such as maintaining “guanxi” and “face”, any western team intending to go into China for business and commercial negotiations should have as many practical tips on the “dos and don’ts” of negotiating in China. I shall be teaching the Stanford Continuing Studies course “Doing Business in China” we will spend half a session on this important issue of negotiation during the six-week duration. This course begins in late June and the description of the course is in this link:

https://continuingstudies.stanford.edu/courses/course.php?cid=20114_BUS+202

Based on this author’s 30 years of experience travelling, living and working inside China, here is a list, not exhaustive by any means, for use in the three stages of before, during, and after the actual negotiations.

(A) PREPARATIONS:
1. Pick a neutral large city & location;
Background Fact: Do not give into pressure to conduct all negotiations in the small city of the Chinese partner, and suggest doing it in a larger international city with modern conveniences and security. There have been cases where the Chinese side can and has resorted to unethical practices to illegally obtain information from you.

2. Do background research on subject and personalities using Chinese sources;
Background Fact: China has no Moody’s, Better Business Bureau or any trustworthy rating agencies on the track record of a company. Best you find several other local Chinese sources to cross check the reputation of your Chinese partner or opponent in negotiation.

3. Pick your own team (age, seniority, sex, attire) carefully. Be consistent from meeting to meeting;
Background Fact: The Chinese prefer to maintain personal relationship from beginning to end, so keep the team intact. Also, youth and women among your team are not frowned upon in today’s China, but make sure your top leader has a title (make up one if needed) that commands respect from their side.

4. Be realistic about your strengths and weaknesses;

5. Bring gifts for your host, bring your own personal effects/medicine;
Background Fact: Most Chinese cities are quite modern and medical facilities are effective and reasonable, but not all your western medicine is readily available.

(B) ACTUAL NEGOTIATIONS:
6. Pick a neutral venue and a convenient time avoiding the eve of long national holidays of both countries, and allow “float” for overflow of schedule or the Chinese may use time pressure against you;
Background Fact: They tend to wait till the last day to raise critical issues and demands, and force you into making concessions because you are pressured to leave.

7. Stay at an international hotel, watch your belongings and intellectual property;

8. Know the wants and needs of your Chinese side, remember Sun Zi’s premier advice of “know yourself and know your enemy, and you will win a hundred battles”.

9. Do not fall prey to food, wine, & women; do not negotiate when tired or pressed;

10. Speak in your native tongue, use your own translator, write it down when it comes to numerals and figures as mistakes are commonly made right here;
Background Fact: Best to hire your own translator/interpreter and when it comes to numerals and magnitudes, insist on writing them down. Because of the difficulty in translating numbers/magnitudes, gross errors can occur even to the best VIP translators and the consequences are horrific of course!

11. Remember such Chinese negotiation tactics as:
– accusing you of violating guiding principles, guilt trip;

– asking for the moon, outrageous demands;

– threatening to go elsewhere for the better offer;

– divide and conquer & outlasting your patience;

12. Remember national and cultural sensitivities, avoid discussions on human rights and Tibet, for example, and always keep face and give face. Jokes seldom work across culture so best not to crack them openly.

(C) POST NEGOTIATION
13. Thank and praise host, take photographs, exchange souvenirs;

14. Redraft final agreement (must be in both languages), check for accuracy, go over details, and always have a scribe/secretary take care of all documents;
Background Fact: Remember that Chinese is a much more flexible and opaque language, but yet the Chinese copy is the one that prevail in their courts. Make sure then those details you had written down in the English version is correctly reflected in the Chinese version, and submit Appendices if needed.

15. Win or lose, happy or not, a farewell banquet (speeches, toasts and gifts exchanged) is definitely required;

16. A contract is valid only if it continues to be serviced, it is only the beginning of a difficult long road towards a successful project.

General Strategies
Many often ask if it is useful to study Mandarin and the Chinese language before going and my answer is normally to persuade them to instead spend their valuable time reading up on China’s history, culture and psyche. One of the most successful China experts is Dr. Kissinger, the legendary diplomat who helped open up US-China relationship in 1972, and he is not known to speak any Chinese. It is much more important to understand what drives the Chinese, their fears, concerns, and wants and needs, and China’s own “pride and prejudice”.

In general, some knowledge of Confucius teachings that are the underpinning of Chinese culture is certainly useful before hopping on the plane to China. But I would definitely recommend spending a week or two to browse through articles and business/military books on the famous Sun Zi “The Art of War”, as many of its strategies and tactics will surface during the long course of negotiations with the Chinese side.

Here is a parting comment that may surprise you. In the west, wars and military efforts are about display of bravery and valor, but Sun Zi said a successful militarist is never short of treachery and cunningness! Then there is also the Chinese saying that “the business field is just like a battle field”, now combine the two saying and you know why negotiation in China is not for the faint-hearted and unprepared!

By Vincent F. Yip, PhD MBA
Management Consultant,
and Lecturer, Stanford Continuing Studies
Palo Alto, California
Email: vyip101@hotmail.com
Cell: 415-860-0660

What do you think?

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16 Practical Chinese Negotiation Tips and General Strategies (Part II)

GENERAL STRATEGIES AND 16 PRACTICAL TIPS IN THE THREE STAGES OF BEFORE-DURING-AFTER NEGOTIATION IN CHINA
by Vincent F. Yip, PhD MBA, Management Consultant, and Lecturer, Stanford Continuing Studies ( Palo Alto, California)

This is the second part of guest post by Mr Vincent F. Yip. You may read the first part here.
Remember that he will be teaching the Stanford Continuing Studies course “Doing Business in China”.  This course begins in late June and the description of the course is in this link:
https://continuingstudies.stanford.edu/courses/course.php?cid=20114_BUS+202

 16 Practical Chinese Negotiation Tips and General Strategies (Part II)

(C) POST NEGOTIATION

13. Thank and praise host, take photographs, exchange souvenirs;

14. Redraft final agreement (must be in both languages), check for accuracy, go over details, and always have a scribe/secretary take care of all documents;
Background Fact: Remember that Chinese is a much more flexible and opaque language, but yet the Chinese copy is the one that prevail in their courts. Make sure then those details you had written down in the English version is correctly reflected in the Chinese version, and submit Appendices if needed.

15. Win or lose, happy or not, a farewell banquet (speeches, toasts and gifts exchanged) is definitely required;

16. A contract is valid only if it continues to be serviced, it is only the beginning of a difficult long road towards a successful project.

General Strategies
Many often ask if it is useful to study Mandarin and the Chinese language before going and my answer is normally to persuade them to instead spend their valuable time reading up on China’s history, culture and psyche. One of the most successful China experts is Dr. Kissinger, the legendary diplomat who helped open up US-China relationship in 1972, and he is not known to speak any Chinese. It is much more important to understand what drives the Chinese, their fears, concerns, and wants and needs, and China’s own “pride and prejudice”.

In general, some knowledge of Confucius teachings that are the underpinning of Chinese culture is certainly useful before hopping on the plane to China. But I would definitely recommend spending a week or two to browse through articles and business/military books on the famous Sun Zi “The Art of War”, as many of its strategies and tactics will surface during the long course of negotiations with the Chinese side.

Here is a parting comment that may surprise you. In the west, wars and military efforts are about display of bravery and valor, but Sun Zi said a successful militarist is never short of treachery and cunningness! Then there is also the Chinese saying that “the business field is just like a battle field”, now combine the two saying and you know why negotiation in China is not for the faint-hearted and unprepared!

By Vincent F. Yip, PhD MBA
Management Consultant,
and Lecturer, Stanford Continuing Studies
Palo Alto, California
Email: vyip101@hotmail.com
Cell: 415-860-0660

What do you think?

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16 Practical Chinese Negotiation Tips and General Strategies (Part I)

GENERAL STRATEGIES AND 16 PRACTICAL TIPS IN THE THREE STAGES OF BEFORE-DURING-AFTER NEGOTIATION IN CHINA
by Vincent F. Yip, PhD MBA, Management Consultant, and Lecturer, Stanford Continuing Studies ( Palo Alto, California)

For companies in Fortune 500 or even Small and Medium Enterprises, entry into the lucrative China market is a highly desired process that begins with identifying potential Chinese partners and entering into all-important negotiation. Other than generalities such as maintaining “guanxi” and “face”, any western team intending to go into China for business and commercial negotiations should have as many practical tips on the “dos and don’ts” of negotiating in China. I shall be teaching the Stanford Continuing Studies course “Doing Business in China” we will spend half a session on this important issue of negotiation during the six-week duration. This course begins in late June and the description of the course is in this link:

https://continuingstudies.stanford.edu/courses/course.php?cid=20114_BUS+202

Based on this author’s 30 years of experience travelling, living and working inside China, here is a list, not exhaustive by any means, for use in the three stages of before, during, and after the actual negotiations.

(A) PREPARATIONS:
1. Pick a neutral large city & location;
Background Fact: Do not give into pressure to conduct all negotiations in the small city of the Chinese partner, and suggest doing it in a larger international city with modern conveniences and security. There have been cases where the Chinese side can and has resorted to unethical practices to illegally obtain information from you.

2. Do background research on subject and personalities using Chinese sources;
Background Fact: China has no Moody’s, Better Business Bureau or any trustworthy rating agencies on the track record of a company. Best you find several other local Chinese sources to cross check the reputation of your Chinese partner or opponent in negotiation.

3. Pick your own team (age, seniority, sex, attire) carefully. Be consistent from meeting to meeting;
Background Fact: The Chinese prefer to maintain personal relationship from beginning to end, so keep the team intact. Also, youth and women among your team are not frowned upon in today’s China, but make sure your top leader has a title (make up one if needed) that commands respect from their side.

4. Be realistic about your strengths and weaknesses;

5. Bring gifts for your host, bring your own personal effects/medicine;
Background Fact: Most Chinese cities are quite modern and medical facilities are effective and reasonable, but not all your western medicine is readily available.

(B) ACTUAL NEGOTIATIONS:
6. Pick a neutral venue and a convenient time avoiding the eve of long national holidays of both countries, and allow “float” for overflow of schedule or the Chinese may use time pressure against you;
Background Fact: They tend to wait till the last day to raise critical issues and demands, and force you into making concessions because you are pressured to leave.

7. Stay at an international hotel, watch your belongings and intellectual property;

8. Know the wants and needs of your Chinese side, remember Sun Zi’s premier advice of “know yourself and know your enemy, and you will win a hundred battles”.

9. Do not fall prey to food, wine, & women; do not negotiate when tired or pressed;

10. Speak in your native tongue, use your own translator, write it down when it comes to numerals and figures as mistakes are commonly made right here;
Background Fact: Best to hire your own translator/interpreter and when it comes to numerals and magnitudes, insist on writing them down. Because of the difficulty in translating numbers/magnitudes, gross errors can occur even to the best VIP translators and the consequences are horrific of course!

11. Remember such Chinese negotiation tactics as:
– accusing you of violating guiding principles, guilt trip;

– asking for the moon, outrageous demands;

– threatening to go elsewhere for the better offer;

– divide and conquer & outlasting your patience;

12. Remember national and cultural sensitivities, avoid discussions on human rights and Tibet, for example, and always keep face and give face. Jokes seldom work across culture so best not to crack them openly.

Coming soon, post negotiation tips and general strategies.

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A China Joint Venture Success Story (Part III). Where To Go Now?

Today I bring you the third part of “A China joint venture success story”, an anonymous guest post by somebody who has been a partner in a joint venture in the manufacturing sector in China for over ten years. Make sure you do not miss the first and second part. You may read them in the links below:
A China joint venture success story (part I)
A China joint venture success story (part II). The lessons I have learnt.

Today´s post will describe this JV´s new situation. After more than 10 years of successful operation, key aspects of the relationship change: different players, different capabilities and new decisions to be made. Let´s read about it.

A Joint Venture Success Story (Part III). Where To Go Now?

We have had an excellent relationship over the past 11 years as we have been very profitable and able to sort out our differences amicably (and there have been some big differences), and accepted each other’s foibles. But the one thing we have not been able to do is to get the JV to change to meet the new and different market realities.
Our GM moved up the ladder some five years ago, as a bright and competent leader should, but he could not break the unspoken rule of the SOE (State-owned enterprises)  and find a replacement for himself outside the organization, even on our insistence.
We ended up with the accountant running the operation. Although managerially able, she has no commercial sense and we are suffering. We therefore will continue with the JV as long as it works for us but have already started up our own plant elsewhere in the same area. I understand, having spoken to a lot of people about our experience, that this is the normal cycle for JV’s and that eventually one partner outgrows the other and the “joint” goes out of the “venture”. We have reached this stage but it was great while it lasted.

 

What do you think? Is this the expected life cycle for a China joint venture?

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If you are interested in this topic you may also want to read the following article:

A China Joint Venture Survival Guide. 22 Facts and Practical Tips

China 101: Chinese Negotiation. 10 Top Tips for Chinese Negotiation (part II).

This is the second part of the article by guest contributor and Chinese negotiation expert Andrew Hupert. You may read the first part here.

10 Top Tips for Chinese Negotiation (Part II- tips 6 to 10)

6.  Have a strategy for getting information.
In Chinese negotiation, it is more important that you know the right questions than the right answers.  You have to know enough to assess his proposal and solution.  Western partners have a terrible habit of relying on their Chinese partner to keep them supplied with basic information about markets and regulations.  Plenty of great sources of information and knowledgeable contacts are available – make use of them.  Depending on a counter-party to keep you informed and up-to-date is suicidal.

7.  Beware the balance of power shift.
Chinese partners are known for purposely appearing weak and non-threatening at the start of a deal and manipulating the Western partner into injecting valuable assets or teaching vital information.  Once the Chinese side closes the gap, you can expect their negotiating style to become much more aggressive and demanding.  Guanxi relationships are a function of utility value, and once they no longer need you then they are going to squeeze you.

8.  Have a strategy for adding value.
They have to need you more than you need them.  Their learning curve will flatten much earlier than yours.  Once they understand your technology and your procedures, they will feel they no longer need you.  If you are dead weight, then it is worth it to them to get rid of you.  Know what your Chinese partner can’t do, and then make it central to your partnership.  Innovation, branding, new product development, and overseas sales are examples that have worked for Western partners in the past.

9.  Pick the right partner before you start negotiating.
Know what your strategic and operational gaps are, and then conduct a methodical search for a Chinese counterparty who can close the gap. Novices often find China overwhelming and tend to start negotiating with the first Chinese person they meet.  Most of the time the Westerner ends up giving away his business strategy and marketing plan to a potential competitor, without getting anything in return.  Know what you want from a local partner, and keep screening until you find an appropriate candidate.

10.  Trust with vigilance.
It’s possible to find Chinese partners who are honest and loyal, but your chances improve if they need you more than you need them.  Trusting the wrong person in China is fatal -but being too suspicious and controlling will alienate potentially valuable partners, staffers, and colleagues.  The Chinese side has to feel vested in the profitability of the enterprise, and see a clear path to their own success.  Striking the right balance between common-sense skepticism and healthy confidence in a colleague is a real challenge, but it often is the most significant factor to your success in China.

What are your views?

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China 101: Chinese Negotiation. 10 Top Tips for Chinese Negotiation (part I).

This article on “Chinese Negotiation” is part of the China 101 project. I would like to thank Andrew Hupert who has kindly accepted my invitation to join this project and has shared with us his best advice on the topic.
Andrew Hupert has spent the last 9 years as a corporate trainer, writer, and lecturer in Shanghai, working with both local and multinational businesses.  His professional work has focused on improving the deal-making and negotiating skills of both local and multinational corporations.

Andrew publishes several websites and weblogs concerned with international management and cross-cultural negotiation involving China:
ChinaSolved.com addresses management issues for international managers already engaged in running a China-based operation.
ChineseNegotiation.com focuses on China-US negotiating issues.
He has also published articles in business journals such as Shanghai Business Review and the China Economic Review.  He has recently published his first book – Guanxi for the Busy American.

China 101: Chinese Negotiation. 10 Top Tips for Chinese Negotiation.

Negotiating in China isn’t a special niche for an elite group of international lawyers and diplomats any more.  China is the second largest economy in the world and is becoming a vital counterparty for many individuals and businesses that have never done cross-border deals before. If you haven’t done business with a counterparty from China yet, then it is probably only a matter of time before you or someone in your organization does.  Plenty of Westerners have had great success in China, but it requires preparation and a little research.

Chinese negotiators have an undeserved reputation for being difficult, enigmatic, and unpredictable.  They simplyhave their own approach to business.  Since the global financial crisis of 2008, however, Chinese dealmakers are more confident and secure in their own methods.  Westerners who expect Chinese negotiators to accommodate American or European notions of best practices are setting themselves up for failure.  Chinese negotiators aren’t about to abandon traditional methods like relationship-building and guanxi that have been successful for them, especially since Western standard operating procedure has been looking so shaky over the last few years.  When you negotiate in China, you are in their house – and if you don’t understand the local rules then it is your problem, not theirs.

Here are ten tips that will help Western negotiators be more successful in China.

1.  Don’t disregard guanxi.
Chinese negotiators don’t have to like you, but they have to feel that they know you and understand how you’ll behave as a partner.  In the West, successful transactions lead to relationships – in China, successful relationships lead to transactions.  You have to understand the difference.  Relationship-building rituals like banquets and boardroom meetings where you are introduced to the entire management hierarchy aren’t a prelude to serious negotiating — they are the negotiation.

2.  Guanxi and relationship-building are the traditional Chinese version of due diligence.
They care more about the kind of person you are than the assets your company controls.  Show them who you are if you want to move forward.  While it’s true that Chinese negotiators don’t like to settle details right away, they are still “on the job” during the social meetings and banquets.  To the Chinese side, understanding your character, business philosophy, risk tolerance, and commitment to China determines what kind of partner you are going to be.  If you are evasive, uncomfortable, or withholding during the initial meetings, they may consider you to be dishonest or untrustworthy.

3.  Chinese negotiations don’t end.
The Chinese side feels that they aren’t supposed to.   Westerners believe that a signed contract regulates the partnership, but Chinese feel that an understanding between honest people is the only true constant in an otherwise unpredictable business world. Traditional Chinese negotiators don’t draw a sharp distinction between relationship and negotiation, so as long as the relationship is intact then deal terms are in play.   They feel that environmental shifts and changes in relative circumstances are valid reasons for renegotiation.Plan for the post-contract negotiation in advance, because it is most certainly going to occur.

4.  They will make a play for your IP. 
Technology, processes, and know-how are considered private property in the West, but many Chinese still consider them to be intangibles that are up for grabs.  Saying they can’t have something only makes it more desirable.  Don’t expect to collect rent on last-year’s innovations.  Chinese only pay for technology once (if at all).  The best way to handle software and technology sales is to start planning significant upgrades early.  Apple keeps partners honest and stays profitable in China by perpetually selling the next version.

5.  The same people who can open doors can shut them and lock you out.
Don’t assume that you will be running the show.  If your strategy involves relying on local partners, key staff, or powerful connections to keep your business going, you are in a precarious position.  Successful negotiators are constantly building up their network and adding new connections.  Negotiating strength is a function of the size of your contact list.

Coming soon. China 101: Chinese Negotiation (part II)

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China 101

 

Next week, I start a series of posts themed “China 101”. The articles
in this series will cover a wide range of topics relevant to foreign
businesses in China: what you should consider when deciding on your
legal entity, tax issues, quality control, negotiation – just to
mention a few.

In order to bring these articles to you I have contacted a number of
experts in different fields, and they have crafted their articles
trying to sum up all the basic information they feel you should know
about their areas of expertise.

If you are not already a subscriber, do not forget to sign up for the
regular updates on this blog

If you have a view, or some lessons learned, from your own “China 101”
days, do share it by commenting on the series.  And if you believe you
could contribute with your own article, just drop me a line.Have a nice weekend.


 

A China Joint Venture Success Story (Part II)

Today I bring you the second part of “A China joint venture success story”, an anonymous guest post by somebody who has been a partner in a joint venture in the manufacturing sector in China for over ten years. Make sure you do not miss the first part. You can read it here.

 A China Joint Venture Success Story (Part II)- The Lessons I Have Learnt

Over the past 12 years of dealing with the Chinese,  I have learned three lessons which have been very useful to me.

 1. “When in China, do as the Chinese do”
The first is the BIG cross cultural issue of “when in China, do as the Chinese do”….even though it is inefficient, ineffective and sometimes humiliating for the person performing the task. It took a good 5 years for me to accept that I must only look at the result and not how it was arrived at, of any request I make; as trying to prescribe a given method invariably ended in failure and frustration for both parties.  The Chinese are particularly inclined to follow the known path and have learned, after millennia of having their heads cut off for straying from it, that it is the safe route.  This is particularly true in a JV where you really have little power to influence the day to day unless you have tremendous resources and patience to expend in imposing “your way”. We were lucky that we had been preceded (as customers) by large Japanese companies who had set up the control systems  and thoroughly trained the production  and quality staff in the making of their transformers.The  manufacturing methods therefore were already excellent when we arrived on the scene. But heaven forbid we try and change any of these methods!! So as long as the end product is good, you don’t need to know how they made it. But then lesson 2 applies.

2. Chinese culture is about form over function
The second lesson was to realize that the Chinese culture is about form over function. Probably the best example of this trait is the tradition of gift giving. If you are a frequent visitor to China you invariably end up with a trunk full of trinkets. You would expect this to stop or at least to receive different gifts when you visit the same company many times. But no, you will continue to receive the same framed Beijing Opera masks or tea sets you got last year and the year before that. No one asks you what you would like or find useful. Gift giving is a form that must be fulfilled whether the recipient likes the gift or not.   This principle of form over function applies everywhere so you must be very specific as to the end result you want or you will get what I call “ token outcomes” that meet the request but not the spirit of what you are looking for. This is particularly important to be aware of in quality control where a product can pass all the functional electrical tests you specify but no one on the line will fail the product for an obvious mechanical fault that was not on the list.  This is how Mattel gets lead in the paint used on its toys and melamine ends up in milk powder. You must make your functional expectations abundantly clear in a detailed fashion or you will get very creative surprises from people with generally the best intentions.

3. Some people will stay in the organization forever no matter how incompetent they are
You must accept that the people that are part of the organization when you start your relationship will probably be there forever no matter how incompetent they might be. Because of the Chinese habit of job changing (mainly in the younger generation), in the psyche of Chinese management, anyone who comes to work every day is worth keeping. The other reason, of course, is that many employees have some sort of political or economic connection with the company which makes them unmoveable. Their uncle may be the local tax collector or a sister is the secretary to the Chairman of the company.  My experience is coloured by that fact that our partner is an SOE and I understand that this phenomenon is particularly bad in this type of organization, but I have also seen it in private companies too. So if your engineering manager is a moron and your partner accepts that as fact, you cannot automatically expect him/her to be replaced. If you are lucky he may get a very competent assistant.

4. Listen to the “view from the other side”
A final thought is that our Head Engineer, in our home country headquarter, played a very large role in making this relationship work as he truly had a foot in each culture and understood the assumptions and frustrations each side brought to the table.  He was always able to offer me the “view from the other side”to  consider  before making up my own mind. This was invaluable as it  gave me perspective to work things out in an acceptable manner to both sides. A diplomat in your organization is a good investment when going to China.

What is your experience?

Coming soon: “A Joint Venture Success Story (Part III)- Where To Go Now?

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A China Joint Venture Success Story (Part I)

A few months back I wrote a series of posts entitled “A China Joint Venture Survival Guide”. It was based on the story of a joint venture that had gone very wrong (you can read it here). As soon as I finished the articles, I started looking for a joint venture success story, and I soon found it amongst my readers. Today I start a series entitled “A Joint Venture Success Story”, for which I´ve only written this introduction. This is an anonymous guest post by somebody who owns a Chinese Joint Venture, and although he wants to keep his company identity anonymous he has been very generous devoting time to these articles. In these posts he shares the lessons he has learnt during his eleven years of Chinese joint venture experience. This is a story very worth reading.

 A CHINA JOINT VENTURE SUCCESS STORY

We are a custom electronic transformer manufacturer with 26 years in the business and 32 employees in our home country,  of which 18 are involved in manufacturing our low volume and highly specialized products in house (while our JV in China produces the higher volume product).  China represents 20% of our turnover and we supply to contract manufacturers.

We currently have a joint venture with a medium sized SOE where we own 35% of the shares in the company and hold one seat on the Board of three people. The joint venture company has 250 full time staff plus another 150 contract workers. Our partner is an SOE Group of 20  companies all in the electronics sector. The Group has been in the business for over 50 years and our specific company within it started making transformers and inductors for Japanese companies back in the early 1980’s.  Basically we bought into a going concern, not a start up.

Why Did Our China Experience Start?

Custom transformer manufacturing is a labour intensive process and for that reason we decided to go to China in 1999 to find a manufacturing company we could work with. Our Head Engineer was Chinese and had seen the need,  well before Management woke up to the fact,  that we were losing the competitive fight in our home market to international distributors who were already sourcing out of Asia. 

How Did We Choose Our Supplier?

At that stage we tried to draw up a list of characteristics a Chinese company would have to have in order to be able to work with us but  in the end we settled on only one:
they would have to be truthful at all times.

We then did the usual quoting, sample orders, quality checks, etc. with five possible companies and we stuck with the one which did what it said it would do, our current JV partner.

From Supplier to Joint Venture Partner

We traded for over  18 months and this gave us both  the opportunity to get to know each other as individuals and as organizations. The trust that quickly developed between our operations can be credited to my opposite number who is one of the most forthright persons I know. He had started on the production floor and risen through the ranks, through sheer ability, to become the GM. Even though he is 15 years my junior, we  developed a very close personal bond, also shared by our Head Engineer,  which permeated the whole commercial relationship. We were very lucky!

In 2000 the GM came to us with the proposal of our buying into his company to form a joint venture (JV). It meant  good tax benefits for the operation as a whole and we understood that he was looking for the prestige within the SOE Group and the technology transfer that such an arrangement would bring. We, on the other hand, had not even contemplated a JV option, but having traded with Chinese companies for two years, we had learned that you are generally given service and pricing proportional to the amount of business you bring to the table. For us the JV presented the opportunity to sit at the table and therefore insure most of our requirements were met regardless of volume while we built the business up. The due diligence and subsequent value negotiations were very easy because of the tight personal and organizational relationship previously developed and by January 2001 we were partners.

Coming soon “A China Joint Venture Success Story (part II)

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