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The "Doing Business in China" toolbox

 

Many firms view the large Chinese market as ideal for expansion. Nonetheless, engaging in strategic partnerships with Chinese companies remains challenging. In the World Bankʼs ranking of 189 national economies, China ranks in the bottom half for ease of starting a business, obtaining construction permits, securing reliable electricity, protecting investors, and paying taxes.

For example, China ranks 158 of 189 in ease of starting a business. One reason: for a typical new business, the proposed company must complete 13 steps. This compares with an average of five steps in an OECD economy. According to the World Bank, here are the usual 13 steps:

  1. A notice of preapproval of company name is required
  2. Preliminary banking steps
  3. Capital must be verified by an auditing firm
  4. Registration certificate for licensing and taxation
  5. Approval of company seal from the police
  6. Create and make the seal
  7. Pay the fee for the registration certificate from step 4
  8. Register with the local statistics bureau
  9. Open formal bank account and transfer in capital
  10. Apply for permits to print or purchase invoices and receipts
  11. Purchase uniform invoices
  12. File for recruitment of local employees
  13. Register with the Social Welfare Insurance Center

In our experience in registering companies in China, we found that even after we officially get confirmation that the company is registered, the other « last » steps can still take months to be completed. Other things that have to be done in parallel such as finding an office, recruiting staff or opening a bank account all take extra time and authorizations. If the owner of the new company is a foreign firm, all documents from the original company such as registration certificates and bank letters must be stamped by the Chinese Embassy or Consulate in the original country. Of course, most documents supplied must be translated and stamped independently by certified agencies. We recommend that all documents that have to be supplied by the applicants be prepared, translated and stamped before beginning the process. So Doing business in China takes good planning and patience. Recent reforms have made certain things such as obtaining local credit and enforcing contractual rights more business friendly. The new Shanghai Free Trade zone also offers many benefits in terms of money transfers and local contract manufacturing and should be considered by all firms that are preparing to enter the China market.

What is the single most important factor to success in doing business with China? According to a CNN report, having a good local team is the key component. Best performing companies adapt to each local market. However, China has a unique, younger labor market, which is highly competitive. The average Chinese worker changes jobs every 6 to 9 months. To do business in China, you need to adapt your employment recruitment tactics, as well as your product, leadership, and marketing strategies. You need a local brand or some form of localization of your existing positioning, and a strong local team can help immensely with the process of adapting and executing your brand for success in this challenging market.

Some of the other problems that expansion minded Westerners face are inadvertent cultural gaffes, failure to protect intellectual property, failure to document everything in writing, and a lack of preparation, causing problematic incomplete or evasive answers to questions posed by potential Chinese partners. Keep in mind that decision-makers within Chinese companies tend to be at the very top of the entityʼs management hierarchy. Moreover, decision-making tends to be slow. The Western tendency to push the progress may play against a strong-handed negotiating strategy with a potential Chinese partner.

Why such a deliberate process? The Chinese word for negotiation 谈判 combines the characters “to discuss” and “to judge”. From a Chinese perspective, negotiations involve building trust, a dynamic process that requires time. Chinese often perceive Western negotiators as impersonal, impulsive and disinterested in long- term relationships. Moreover, negotiations are ongoing. In the West, we often strike a deal and move forward; the Chinese view the contract execution as the beginning, and not the end, of negotiations and relationship building.

Other issues that arise relate back to a need to understand culture, social norms and mores. Outside of the collective of family and friends, doing business in China is an extremely competitive process. “Win-win” negotiating strategies are rarely employed. Furthermore, as noted, trust is personal; it takes time to establish. The West has centuries of differing political systems that support trust with legal and social structures. In China, much more is made of relationships, as the legal system and social mores do not always protect the Chinese from dishonesty. They instead often rely on the slow process of bringing a partner into their circle. Introductions play a key role here. Having a seasoned pro on hand is an asset in establishing the trust of your counterpart.

One consideration cannot be understated: according to the Canadian Trade Commissioner Service, your negotiation strategy must always include preparation to walk away. You cannot be so determined to enter the Chinese market that you weaken your ability to secure a fair deal for yourself with any specific partner. You must always have in mind your “Best Alternative To A Negotiated Agreement”, or BATNA. Roger Fisher and William Ury of the Harvard Program of Negotiation pioneered this concept. A good BATNA comes from planning, preparation and a flexible approach. Four key factors to determine BATNA include cost, feasibility, influence on your company’s current position, and consequences. Ironically, knowing how to “fail” successfully is critical to a successful negotiation!

The US Department of Commerce prepared a guide in 2012 that is available for download Here. This booklet covers things such as political and economic environment, selling US products and services, and leading sectors for US exports. Also discussed are trade regulations, customs and standards, financing, travel, market research and contacts. It is a worthwhile read, preparing you when you are assembling your local team to help secure your expansion into China.

Sources:

Forbes - http://www.forbes.com/sites/insead/2012/03/06/the-ten-principles-for-doing-business-in-china

Forbes - http://www.forbes.com/sites/joshbersin/2013/04/23/the-world-is-not-global-its-local

World Bank - http://www.doingbusiness.org/data/exploreeconomies/china

CNN - http://edition.cnn.com/2011/10/21/business/china-business-investors-culture

US Department of Commerce - http://export.gov/china/build/groups/public/@eg_cn/ documents/webcontent/eg_cn_025684.pdf

Canadian Trade Commissioner Service - http://www.tradecommissioner.gc.ca/eng/ canadexport/document.jsp?did=139651

China Business Review - http://www.chinabusinessreview.com/negotiations-chinese-style/

China Law Blog - http://www.chinalawblog.com/2013/05/doing-business-in-china-whats-trust-got-to-do-with-it.html

Negotiations.com - http://www.negotiations.com/articles/best-alternative/

 

 

Carl Breau

Carl Breau

CEO | Cemondia Inc.

Shanghai, May 2014

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