Human Resources in China: “Accept what you’ve got and model them into what you expect them to be”

I hear a lot of people complaining about things that seem to be quite common in Chinese employees.

1. Not saying the truth / Or failing to deliver what they feel are bad news
This sentence sounds quite familiar to me by now: “Lying is not an issue. It is accepted and they do not even think they are doing something wrong”.
Or the “Truth Vs Courtesy” dilemma, a different dimension to the same problem that I read about in the book  “Business Leadership in China” by Frank T. Gallo. It describes how employees often do not want to deliver bad news that may “hurt you”, “make you unhappy” or “make you lose face”.

2. Looking for a scapegoat
It seems a lot of managers believe that when a mistake is made, you need to find who is responsible and give an “exemplary punishment””.

Those are obviously behavioral patterns that you would not like in your organization…So the tip of the day could be something like:
“Accept what you’ve got and model them into what you expect them to be”

Or at least that is what entrepreneur German Torrado tries to do when he takes his new employees through their “in-job training”.

1.When it comes to saying the truth he tells me:
“Here you must acknowledge that an employee may not tell you the truth but still be loyal. Having said that, you really need to work on that, an eradicate that behavior because they may fail to tell you the truth on something unimportant today, but it may be something critical tomorrow”

“Once you identify an issue that has been hidden from you, you need to keep your cool and then deliver the message: “a director needs to be informed in order to be able to solve the issues that come up, and my expectation is that you will inform me to help me solve them””

2. And his tip for “scapegoat” syndrome:
“As part of my new managers induction, I always make a special effort to share my views/experience on how to work as a team and how to lead teams. I know middle management has been told that, when something goes wrong you need to look for the person responsible and give an exemplary punishment. That is not how I want my managers to work, so I put a lot of effort on showing them how to deal with that type of work situation.”

Do you have any insights out there to share?

The Entrepreneur’s Dilemma (II) : How do I navigate through a funding shortfall in China while I increase my capital?

In my last post we discussed what I called the “Entrepreneur’s Dilemma”: determining the optimal capital for the business in China and the debt limit implications (you can read the article here).

German Torrado, from Orienta7, explained to us some of the tools he could be using to navigate through a potential funding shortfall while his company increases capital to the right level for a new business situation.

These are his suggestions (which may or may not work for you depending on your business structure and your relationship with your stakeholders):

1.- Use your SUPPLIERS as a FINANCE TOOL: negotiating with your suppliers can be a good source of extra cash flow:

  • negotiate extended payment terms
  • get credit- guarantee this credit through HK


  • promote exports of some product or service; the cash will arrive to China as an income so it won’t affect your debt limit…

3.- “OPTIMIZE” Salary Structure: if your business has a big number of expat employees this may make sense…:

  • can you organize part of the payments from HK or your home country?

“These ideas may entail some adjustments and a lot of paperwork, but they may help you during a cash flow shortfall….” Mr Torrado explains

I’m sure there are lots of other ideas out there… what are your tips for entrepreneurs in this same situation?

The Entrepreneur’s Dilemma: How much Money do I Invest in my China Business? Will my Debt Capacity be Enough?

This conversation came up during my interview with German Torrado and David Caro, who are about to launch Real Madrid branded products in retail in China (you can read that post titled “Selling a Hot License to the Chinese Retail: a Door-Opening Strategy” here) . Their project sounds exciting and there was only one thing they were concerned about: shall it turn out to be too successful?

But before I get into the thoughts they shared, and just to provide a bit of a background to those less familiar with a WFOE set up process, I will give a very simple explanation of three concepts that WFOEs have to decide upon when they start their operations in China: Registered Capital (the equity they will pledge), Total Investment (amount necessary to realize the company’s operations) and Debt Quota (debt limit allowed-which is the difference between the previous two).
There are rules that establish what the ratio R.C. and T.I. must be given every level of investment.  So for a simple example, if your registered capital is 70.000RMB, your maximum total investment will be 100.000 RMB and your debt limit will be 30.000RMB (as the ratio of R.C. to T.I. for investments bellow 3 million US$ is “at least 7:10”).[1]

And now, going back to the points of an entrepreneur’s dilemma, here you will find some of their thoughts and considerations:

#1. How much money do I invest? I do not want to get more money locked in China than required, as I cannot easily take it back if needed….
“ We have always tried to approach our business in China in a relatively “conservative” way. We have seen too many businesses going wrong and we did not want to get trapped in an oversized business with difficulties repatriating our own money… “.

#2. Financing through debt has a lot more limitations than back home.
“Back home we can easily get loans to finance our business growth. Here we have the limits imposed by our registered capital… and additionally, corporate banking is in a very primitive stage here. The range of financial products that we can enjoy back home is much broader.
I may be exaggerating, but in the case of a foreign business in China, your company is worth whatever your available “cash” is…. They limit too much your ability to use debt to finance your growth”

#3. Is it not easy to get a loan in China.
“It is not easy for a foreign company to get a loan in China… We have been able to get loans here, but we had to use a Spanish bank that guarantees the payment to the Chinese bank”

#4. So, if the business turns out to be very successful, we risk not being able to quickly react to the increased market demand.
“Right now, our biggest concern is that, if this project goes extremely well, we may have a bit of a difficulty re-dimensioning our business due to the limitations imposed by the foreign debt quota and the time required to increase capital. We will need further financing to increase product procurement to be able to serve clients’ orders. And we will probably need to invest on more fees too.

Having said this, we still feel more comfortable with the “step by step” approach we are taking, rather than trying to start too big and get our money locked in here”

So what can we do? In my next post, we will read a few tips from German Torrado on how to navigate through this funding shortfall while you manage to increase your capital.

Did you face the same dilemma when you started your business in China?

[1] There are plenty of sources providing information on these ratios, you can check this link for a reference.

Selling a “Hot License” to the Chinese Retail: A Door-Opening Strategy

If you are Spanish, jump into a taxi in China and your taxi driver happens to know anything about your country there are two things he is more likely to mention: Julio Iglesias or Real Madrid. So, how would you feel if you had secured a contract to sell “Real Madrid” products in China?

Ecstasy is probably what entrepreneurs David Caro and German Torrado from Orienta 7 have been feeling for some time now. Just one year back they managed to become commercial partners with the company that has been licensed to market Real Madrid branded Food and Beverage (F&B) products in Asia. Today, they are ready to launch their product range in China’s main retail chains. This post captures some of the key strategic decisions they made and details about the project development and launch.

#1. “The Aha Moment”: Licensing as a Tool to Gain Instant Recognition with Consumers.
We are both Spanish and Spain is where our best network is, so our Food & Beverage (F&B) business focuses on Spanish products. The problem we face in a country like China is that, even products that are very famous back home are unknown here.
It is difficult to find exporters who understand and are ready to commit to the big promotional efforts required to open distribution channels here. And these channels are also difficult to open if the products or brands are not already well known here… So we needed to find an option that could deliver the sales required to start knocking retailers’ door, but that would not burden us with a huge promotional investment… And that is when the opportunity to sell “licensed” products came up.

#2. “The Battlefield”: We all wanted that License!
Exit Brand Management is the company that has been licensed to market Real Madrid branded Food and Beverage (F&B) products in Asia.  For us it was a real victory to become their commercial partners because we were competing with bigger players than us. But our networking and our credentials as entrepreneurs gave us the opportunity to see the deal come true.

#3. All about the Contract: Contract Duration, Product Categories and Geographical Scope.
We have signed a contract for F&B and Cosmetic for five years. The products that we will be initially launching are: a) impulse products: chewing gum, chips, frozen tea and cereal snacks and b) other F&B products: instant coffee, chocolate biscuits, Danish cookies, healthy biscuits, noodles and ice-cream.
The geographical scope of our contract is Greater China, Japan, Korea and Vietnam, but China will be the first country where we launch.

#4. Product Development: A China Business.
This project has been completely developed in China.
During the last year, we have identified suppliers for all the categories we are going to be launching. We have obviously been directly involved in all the product development and the quality control process.
Design & Packaging Development:
We have also developed all design and packaging in China. We commissioned the job to a local design agency. They initially had a bit of trouble capturing the brand identity and what we were expecting from them, but we also got very involved on the design & packaging development and we believe the results are really good.

#5. An Unexpected Delay: Intellectual Property Protection in China.
Chinese Government has become very careful with all IP issues. We did not expect it, but we had to go through a lot of paperwork to prove that not only could we make use of the license but that every individual player also approved it.

#6. “Hot Licenses”: A Distribution Channel “Door-Opening” Strategy
Thanks to the Real Madrid License, one of the most famous “Spanish brands”, we have been able to negotiate the launch of a robust F&B portfolio in the main retail chains and convenience store: Carrefour, Wal-Mart, Lianhua, Family Mart, C-Store… This would have not been possible for us without such a strong brand.

#7. The Launch:
a. Coming Soon…. In main Supermarkets and Retail Chains!
June 2010 will be the launch time for our impulse range in all those supermarkets: chewing gum, chips, frozen tea and cereal snacks. In September, we will extend the launch to other F&B categories: instant coffee, chocolate biscuits, Danish cookies and Healthy biscuits. And we have new categories like instant noodles or ice-cream in the pipeline for next year.

b. Promotional Events.
We believe the launch timing is perfect. There will be a lot of interest and news around soccer, as the World Cup kicks off on June 11th.
Real Madrid team is also coming to China in August so that will be the best possible promotion for our products.

c. Promotional Strategy: Channel Oriented.
The promotional strategy will also be adapted to the different retail environments. Wal-Mart will have a “Real Madrid area” (not huge, as we don’t launch full range at once). Convenience Stores on the other have some space limitations that prevent that type of merchandising.

#8. The Secret Weapon: “Consumer Motivator” vs. Brand.
One of the reasons why we are so confident about this project is the product itself. It is not just Real Madrid branded, but it also portrays the main players. In China, we believe the “consumer motivator” or opinion leader is even more important than the brand, and having players like Raul or Ronaldo recommending your product in the Chinese market is going to be a sure hit.

#9. The Road Ahead: Capitalizing on Distribution for other products they represent.
This project has been a huge investment for us during the last year. We have gone through all the process of securing the deal, developing sourcing and products and negotiating with retail… our own money backing all that and no income so far. But we believe it has been worth all our efforts. We could have never developed the type of relationships we now have with retail chains without this brand. Our plans for the future are to capitalize on this work so that the rest of our business (non Real Madrid F&B business) can also enjoy access to this distribution channels.

7 Top Tips for Entrepreneurs Starting Business in China.

Are you considering setting up a business in China? Would you like to hear some top advice from experienced entrepreneurs?

In 2005, Juan Gutierrez and Veronica Menendez set up LinkPoint Europe, a China consulting and sourcing business. Their five years experience has provided them with valuable market insights that they are now willing to share with new comers to the Chinese market.

Tip 1: Start with a lean structure and minimum expenses.
Experience: When we landed here we set up a big office, we decorated it… we incurred in a lot of unnecessary expenditure. This is something we would definitely do different if we had to start all over again.  Fortunately everything worked out well but not having a bunch of bills to pay allows you to make no-pressure non-rush decisions and places you at that stage in a better negotiating platform.

Tip 2: Land here with a client in your portfolio.
Experience: It may sound obvious, but ensuring that you already land here with a project in your portfolio is a really good situation to see yourself in.  So, if your business nature allows it, do a bit of homework back home before you base yourself here. We came here for a three month project. Once in China we realized that there were plenty of opportunities in the market. We felt we could do a much better job than what we were offered locally (as a matter of fact, we had to re-do our local marketing agency’s job), so we decided to settle here and benefit from the existing opportunities.

Tip 3: Be opened to shape your business as the opportunities materialize and your market knowledge expands. The idea you have when you land may not be the best business opportunity after all.
Experience: During our first years here we did lots of consulting work. After 3 or 4 years, the trading part of the business started growing and taking a bigger share of our time, with also more satisfactory results.  It is not what we first foresaw, but it is working really well for us. We are also involved in some very interesting longer term investment projects that we hope will further reshape our business.

Tip 4: Promoting your business: Go for targeted efforts. Quality is better than quantity!
Experience: We have tried a variety of promotion strategies for our business. Our experience is that quality contacts are the best way to go. We have a sales director in Spain that approaches potential clients based on our knowledge of their markets and our conviction that we have value to add. We also get good business volume from our own network and from satisfied clients’ referrals.

We have done press and on-line advertising in the past, but we were not getting the same type of quality contact. We wasted lots of time trying to screen through the requests we received and in general it was difficult to assess which ones deserved our time and efforts.

Tip 5: Do not be afraid to set your own conditions and have a client screening process. Sometimes it is better to lose a potentially uncommitted client than to waste time.
Experience: We started chasing every project that would fall in our hands, and sometimes clients were not really committed to them. Now when a sourcing client requests our services, we charge a fee that gets deducted from their final order. This has several positive outcomes:

1)      Allows to screen clients that were not really serious or committed to looking for sourcing here

2)      Prevents us from wasting our time, so if no order materializes we at least get a remuneration for our work

3)      And, it does not penalize clients that finally place their orders, because it gets deducted from the order.

Tip 6: Be tough with bad suppliers and understanding with the good ones.
When we have a bad experience with a supplier, we stop the relationship. We had a case in which we had to reject an order because of a big mistake in the production. Later on, we realized they had started including small amounts of the rejected product in new orders. After we realized, we never worked with them again. If they are ready to play a trick on you once, they will keep on doing it in the future.

On the other hand, we have some suppliers that are really good and with whom we have developed a good working relationship through the years. It is not easy to find good suppliers, so, when a problem comes up with one of those (and they do come!) we try to work out with them the best possible win-win solution. It is a bit like working “the Chinese way”, building on “trust and relationship” to solve problems together.

Tip 7: Never relax! Even with good suppliers.
Experience: Never relax! Production monitoring and quality control is still critical even when you work with your most trusted suppliers! The underlying issue is that our perception of what “acceptable” means is quite different. Your supplier may candidly approach you questioning why you can’t you take a product which is not meeting your specification if it still serves the purpose…

So, do you have any good tips for entrepreneurs setting up business in China?

Setting Up a Representative Office in China (I): 10 Steps and Some Practical Tips

Considering setting up a Representative Office (R.O.) in China? Barbara Cisneros from INAEL Electrical Systems SA takes us through the steps she followed and gives us some tips based on her experience setting up in Shanghai in 2008.

1. – Obtaining the License.
Tip: Get somebody to guide you through the licensing and legal process.
Experience: There is a huge load of paperwork and you will not be able to do it on your own. In our case, we hired a Spanish law firm with an office here, as we also needed to legalize/authenticate paperwork for Spain. Once you have all the paperwork ready the process may take 2 to 3 months (at least in our case!)

2. – Designation of a Chief Representative.
In order to be able to start operating you MUST designate a Chief Representative for the R.O. This person will hold legal authority and will be legally liable. The Chief Representative will also pay taxes in China.

3. – Registering with the Tax Bureau.
As R.O.s don’t make profits, the Government has devised another way to get some money out of us. We are charged a percentage of the expenses our office incurs, including wages, rental, etc… I believe this percentage may vary depending on which city you live in, jurisdiction, municipality, district… In our case we pay 10% of our expenses.
Tip: I go back here to my first tip “get somebody to guide you”.
The law firm that navigated us through the licensing process also took care of this.

4. – Accounting.  Somebody in your Team or Outsourcing?
As soon as you get your license you must start paying taxes. You pay the income tax monthly and the office taxes every three months.
Tip: (This tip is for very small R.O.s like ours (just me and a local employee.)) Unless you have hired somebody with an accounting background who additionally, and this is very important, has good contacts at the tax bureau, then I would recommend outsourcing it to an accounting firm.
Experience: In our case I decided to hire somebody with a bit of an engineering background so that she could help with my work beyond just picking up the phone. I outsourced the accounting tasks to an accounting firm.
There are plenty of companies, both multinational and local, that can do this for you. … When you are a very small company you don’t have the budgets a big multinational may be expecting from a client… so I contacted a local firm for which I had got very good references. It is working really well for us and my contact there speaks perfect English.
Extra Tip: It will save you some money if you include the cost of the annual audit in the accounting fee.
Experience: During the first three months of each year, the R.O. is audited for the previous year activity. This is done by special companies licensed to provide this service. I was aware it would have an extra cost so I negotiated the inclusion of this cost in our accounting fee.
The auditors are very thorough. I was surprise that they devoted four hours to such a small office as ours.

5. – Recruitment.
You may choose whom you hire but you cannot complete the recruitment process directly.
: One of the limitations a representative office has is its inability to recruit directly. Instead you need to use an employment agency that has a license to provide this service. When I set up the office I was told the only available option was FESCO (Foreign Enterprise Human Resource Service Co). I’ve been told that there are a few more options now.
In my case, my boss already knew a good person for the job, so I interviewed her and passed the information to FESCO so that we could complete the recruitment process through them.

6. – Opening a Bank Account.
Experience: My Chinese staff and I visited several banks. We were taken through all the relevant information, account types, processes and fees, and with all that info in hand I made my decision.

7. – Looking for an Office.
You cannot just set up a Representative Office anywhere you want. The location/building needs to have a certain type of classification. A Chinese company can set up in locations we are not allowed to.
Tip: Study carefully all services that should be included in the office tenancy agreement (building management fees, official invoice…) as they may represent an unexpected extra cost afterwards.
We were very lucky. There were offices available in the same building where our law firm was. We benchmarked with offices in some other locations in Shanghai and we realized the deal was good.

8. – Office Renovation … the office may need a bit of renovation before you move in….
Tip: Get somebody to manage it for you. Get a recommendation for somebody trustworthy! It may have an extra cost but it is the most efficient way to do it and it will pay back!
Experience: I had to travel and just couldn’t be on top of every step of the process (plumbing, wiring…). The Chamber of Commerce recommended somebody who “tailor-made” a project for me. I chose some office furniture, I even told him how I wanted the wiring, where the internet and the electricity sockets should go … and he managed everything for me.

9. – Becoming Operational_Office Services.
In our case we had to get telephone and internet installed. Usually other services like electricity and water are already provided by the office management.
Experience: The exact same internet service had different quotes depending on the source…You always feel there is something better out there, but you just need to focus on making a choice with the best information available so that you can become operational a.s.a.p.

10. – Becoming Operational_Office Supplies.
You obviously need office supplies, including computers.
Tip: Outsource anything which may distract your attention from your key tasks, especially those jobs for which specialized service is available, like information technology.
Experience: I got a contact for somebody who was doing computer maintenance/ IT support for another office.  I briefed him on what type of computer we needed, the quotes I had already got, and where I had checked them out… I requested him to take care of everything, from buying to set up. This person now provides us with IT support on demand and makes sure everything runs properly.

Have you set up a Rep. Office in China? Would you like to share your experience?