American companies make a lot of mistakes in China. And even when they don’t make mistakes, they get frustrated.
I view both of these results as healthy, because mistakes and frustration are par for the course in China, and the sooner companies realize that the better. That said, they could avoid at least some of their heartbreak by following these five principles…
- Do not underestimate the up-front time commitment. All companies tend to underestimate the time their senior managers will need to devote to China, but the worst offenders are SMEs (small and medium sized entities). SME owners often think they can go to China one time, hire a brilliant local staff person to run the show, and they’ll never have to come back. Companies like that rarely make money in China — they either go out of business quickly or discover that their local staff person’s brilliance is matched only by his self-dealing. Doing business in China is difficult, and almost never works without high-level people from the home office coming to China for at least a couple of years.
- Do not underestimate how long things take in China. We Americans like to get things done fast. But China operates according to its own clock and sometimes you just have to back off and let things happen. Realize that many Chinese companies are not primarily motivated by economic efficiency. Their goal may be employment for the local community, or to fill a quota, or to get the boss’s son a green card.
- Do not think you have a deal until you have the deal. My firm’s China lawyers are always getting called by American companies wanting us to document a deal that never really existed. So many things can go wrong on a China-U.S. business deal. A Beijing-based American lawyer recently told me that around half of the deals on which he has worked “never closed due to cultural differences between the American and the Chinese sides.” If you add in another 20% or so for deals that fail to close because they cannot legally be done (though both parties thought that they could) or because the Chinese side found someone else (it is very common for Chinese companies to be negotiating with multiple companies at the same time) or just changed its mind, you can see why just doing deals can be so frustratingly difficult.
- Do not underestimate the difficulty in finding quality personnel. Few Chinese professionals today understand what American companies need. This might change over time, but right now they generally do not understand the level of detail, the idea of thoroughness, the standards and the expectations that American businesses take for granted. Chinese professionals tend to be reactive and will blindly follow directions even when they know the method employed is ineffective or counter-productive. Six months later when it turns out this was the wrong thing to do, your Chinese managers will tell you they knew this all along, but that they were just following your orders because “you’re the boss, and you said to do it.”
- Do not rely on guanxi. I am convinced that our clients who never use the word “guanxi” have a ten times higher China success rate than those who do. This is not because having good relationships in China is not important — it most emphatically is. Rather, it is because having good business relationships is important everywhere, not just in China, and those who use the word guanxi seem to use it as an excuse for abandoning common business sense. As in, “Why did you send them $500,000 without a written contract?” Answer: “Guanxi.”
If you are planning to set up a long-term operation in China, you should cultivate important connections and a network of useful connections, just as you would do in Amsterdam, Chicago, Sydney, or anywhere else. But if you are buying a container of stuffed animals or bathroom fixtures, your time would be better spent inspecting the goods and negotiating solid sales agreements. Do not let talk about guanxi divert you from taking appropriate precautions and insisting on adequate protection.
Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Chicago, Beijing, and Qingdao. He is also a co-editor of the China Law Blog. You can reach him by email at firstname.lastname@example.org.