The Wild, Wild East: Doing Business in China
August 21, 2008By Seattle Business Magazine
One trip to China in 2004 was all it took to sell Seattle technology entrepreneur Dave Parker on the idea of doing business there.
Even today, Parker is still ebullient as he describes how impressed he was with Chinas booming but nascent consumer market. He says he likened todays China to the Wild West era in the United States.
After doing business in Japan for 13 years, we saw that China was going to develop into one of the largest consumer markets in the world, says Parker, with a tinge of excitement. Its a very unique opportunity, probably the closest in our lifetime to the Gold Rush. Historically, were going to look back on this time and see how big it was.
Parker knew he couldnt pass up the opportunity to set up shop therethe only question was what kind of shop it would be. He ended up partnering with David Dong, who was lead software architect at the time for Classmates.com. The two decided to address professional networking needs between China and the West by creating 9Spaces, a Seattle-based human resources center that includes job, recruitment, staffing and market research services for firms interested in doing business in China.
Andy Mok, founder of Red Pagoda Concepts, where he consults on Chinese business, agrees with Parker and urges businesspeople to realize that now is the time to stake out their piece of Chinas business territory.
If youre small or midsized, its later than you think, Mok warns business owners. If you dont have a China strategy, you should have one now. [China] is both a dire threat and a transformational opportunity. If you understand that, youll thrive.
Low-cost option, for now
Moks and Parkers vision of China as the Wild West (or East) is apt in many ways, including the dynamics of the countrys vast workforce.
For the uninitiated, the idea of doing business in China may conjure images of cheap manufacturing and even cheaper labor. There is still plenty of truth to that cliche. Although Chinese salaries are climbing, they still remain only a fraction of the wages earned for similar positions in the United States. In 2007, the average Chinese worker earned an annual salary of 21,000 yuan ($2,756), up from 12,422 yuan ($1,630) in 2002, according to a survey from Chinanews.com.cn, as reported in Forbes.com. That same year, Washington workers earned an average annual salary of $44,721, more than 16 times as much as their Chinese counterparts. Those figures, however, dont take into account health-care costs and other benefits.
Still, Chinas wages are rising fast, in large part because of the increasing demand for skilled workers to run the new Chinese and foreign-owned companies that are sprouting up across the country. Workers are also gaining more bargaining power, aided recently by Chinas new labor code, which took effect this year and is intended to protect worker rights and crack down on sweatshops.
Compensation packages across many industries are also rising sharply. According to MRI China Group, the largest salary increases between January 2007 and January 2008 were in banking, where compensation rose by 53 percent, followed by the industrial/manufacturing sector, where compensation was up by 40 percent.
However, the turnover rate at factories and offices is highnearly 50 percent in some low-tech industries, according to the Institute of Contemporary Observationas workers search for better pay.
Retention of quality staff has been a problem for Tukwila-based Vega Helmet Corp. The company manufactures helmets in China for sale globally, and recently opened its own factory in Ningbo, a coastal city that is connected to Shanghai by the Hangzhou Bay Bridge.
Wages have gone up tremendously, but the education level for mid-level workers has also gone up, says Jeanne DeMund, who co-founded the company with her husband. She contrasts the days of traditional cradle-to-grave employment, which was prevalent as recently as the 1970s, to the fluidity of todays labor market. Now its hard to get employees to stay for more than a year, she says.
Twenty-five to 30 percent of workers will change jobs in a given year.
Chinas tricky consumer market
Companies are capitalizing on many other opportunities in the current Chinese business climate as well. One of the newest and most promising of these is selling into the Chinese market, where a fast-growing, brand-conscious, urban middle class is already equal to the size of the entire population of the United States.
But this can be a complex undertaking. According to Ken Myer, president and CEO of the Washington Technology Industry Association, beyond the low cost of manufacturing, there are three primary market opportunities in China for American firms. One option is to sell to Western companies that have set up shop there. Another is to sell to the central and provincial governments, and the third is to sell directly to Chinese businesses and consumers. Of these three markets, it is most difficult for American firms to crack the Chinese consumer code and figure out what will sell best in that market.
Myer contends that one of the longest-standing opportunities for entrepreneurs in China is still high-tech manufacturing, the most mature business-sector relationship that American firms have developed with Chinese partners. Newer opportunities include software or the outsourcing of business processes and information technology. Cell phone usage is also exploding across China, creating great demand for digital content, mobile games and other applications.
Despite Chinas evolving business climate and its recent shift away from labor-intensive manufacturing, experts say the nation will continue its torrid economic growth. Theres plenty of growth left in Chinas economy, says Joe Borich, president of the Washington State China Relations Council. They have about 10 percent growth per year. Over the next decade, thats not likely going to slow down significantly.
That level of growth brings both opportunities and the potential for chaos. The situation in China is so dynamic that any statement you make about it might not be true tomorrow, says David Watts, senior sales director of GrapeCity USA, a Kirkland-based software development firm with headquarters in Japan and offices in China, India, Mongolia and Vietnam. The company is a good example of the in-demand software outsourcing industry that Myer talks about.
Venture capitalists, such as Ignition Partners Shanghai affiliate, Qiming Venture Partners, are taking advantage of the opportunities that such uncharted territory open up. In May, Qiming announced that it had raised $320 million from global investors. The fund will be used to finance startups in industries that cater to Chinas growing urban middle class, including health care, media and technology.
There is a lot of potential for such investment, says Red Pagodas Andy Mok. The government has $1.5 trillion in foreign reserves, he explains. Chinese companies have a lot of money at their disposal. China has the second-largest number of U.S.-dollar billionaires. It presents some really unique opportunities.
The golden rules
Yet for all of the opportunities, this anything-goes mentality can lure imprudent companies toward recklessness and, ultimately, failure. To avoid disaster, experts advise entrepreneurs to remember that core business rules still apply in China, just like everywhere else.
1) Develop good relationships. Forming strong bonds is usually the first and most important step that China experts mention when asked by a company owner how to establish a presence among the 1.3 billion Chinese citizens.
Relationships are important in the U.S., says Myer, but theyre critical in China. You establish a relationship before you establish your business.
These relationships, known as guanxi, can take plenty of time and patience to forge, says Parker of 9Spaces.
You dont fly over and sign a contract, and youre good to go, like in the U.S., he cautions. Thats just the start in China. From there, getting to know your Chinese business partners is more like a courtship that involves attending dinners and events, making factory visits and being genuinely interested. Even people Ive known for three years, were still getting to know each other.
2) Find good advisors. Mok suggests that businesspeople educate themselves about China through organizations such as the Washington State China Relations Council and by reading books such as Dragons at Your Door, by Ming Zeng and Peter J. Williamson. He also recommends getting counsel from others who have established relationships in a particular Chinese sector or industry [see sidebar].
The advisors you choose should include businesspeople who have experience doing business in both the United States and China, Mok adds. They also should help establish a network of relationships that can open doors as challenges arise.
For an entrepreneur beginning from scratch, Mok recommends using multiple approaches to finding advisors: Look on the internet, talk to trade organizations, talk to professional service advisors, ask around. The consultant says that its not so different from hiring an employee in the United Statesyou look at a persons background, references and character.
3) Hire the right people. Its very important to have a core group who really appreciates what youre doing … and feels like theyre a part of the business, says Watts. Your team should feel like its their company.
GrapeCity USAs director of product management, Sanjeev Jagtap, adds that there was a lot of legwork involved in finding the right talent for his companys Chinese office. We create an image [of GrapeCity] in the universities and institutions, so well be recognized as a leading technology firm, attract [potential employees] and manage them very effectively.
Jagtap also advises other companies to focus on growing a good China-based management team. A Chinese team best understands how to find and manage local talent, as well as business customs.
Multilingualism also helps, particularly in financial matters, Jagtap says. A lot of our Chinese workers speak excellent Japanese and English, he adds. Regardless of where you go in the world, everyone likes to be recognized.
4) Cultivate an atmosphere of trust. Unlike most Western managers, who need definite, accurate answers when doing business, Chinese managers tend to be more circumspect, Watts says.
The Chinese are good at the polite art of never saying no, he says. The best way around such behavior is to get to know people and gain their trust.
An important part of GrapeCitys strategy is to encourage openness among employees who, in the past, were conditioned to always say yes to requests, regardless of whether they were practical or not.
In our case, we make them comfortable [so] that they can say no and management wont do something to punish them, adds Jagtap. The company also includes an online forum where employees can vent their feelings and give feedback.
The strategy has proven to be a good one for GrapeCity, notes Jagtap. The companys China office has the lowest turnover rate of all five of its corporate offices.
Intellectual property poaching
Even if all of the above golden rules of business are followed to a T, bad things are bound to happen. For instance, one of the most prevalent problems in China is the theft of intellectual property, which Chinese officials maintain they are trying to get under control.
It seems like almost every entrepreneur who has worked in China has a horror story of intellectual property poaching.
Many of the factories weve dealt with in the past didnt have the same understanding of intellectual property, says DeMund, who cites this problem as one of the reasons she and her husband run their own factory. They say, We didnt know or We didnt think youd know.
She reels off a few examples, such as the time one of the factories that had contracted to manufacture her helmets began manufacturing an eerily familiar line of helmets under the same rooffor an Australian company. In another instance, a separate firm trademarked the helmet companys name, which DeMund and her husband hadnt kept a close enough eye on. We basically had to outbid a third party to get our name back, she sighs. It cost a couple of hundred thousand dollars.
DeMund is not alone. Microsoft, for one, has spent millions of dollars fighting an army of factories that copy the software giants products. The copying of entertainment CDs and DVDs has become so rampant that bootlegged versions of new movies have reportedly been found for sale on the streets of some major Asian cities at about the same time that the film was being released in the United States.
Nonetheless, despite such dangers, the benefits of doing business in China outweigh the challenges for these entrepreneurs. For businesspeople like Dave Parker, the potential and mystery of China are just too good an opportunity to pass up.
In more established markets, like Japan, the rules of doing business are set, making it easier to establish relationships, Parker says. But in China, he adds, the rules are new. … Its a story waiting to be written.
Those who wish to wait for Chinas complex business system to mature, however, may miss the boat entirely. The biggest opportunities will be gone later, Parker warns. Now, there is more risk but potentially greater rewards.
The Seattle-areas famed China expert talks about his extraordinary life and shares some of his secrets for success in the Chinese market.
You might say that Seattles most renowned expert on doing business in China found his passion for the country through an accident of war.
Sidney Rittenberg has led many lives during his 87 years, including union organizer, Chinese Communist Party true believer, confidant to the Chinese leadership and now a well-known business consultant. How he became intertwined with Chinas Communist hierarchy and lived to tell the tale is detailed in his riveting 1993 memoir, The Man Who Stayed Behind.
In an ironic twist of fate, the former Communist now uses his unique knowledge gained from 35 years of living in China to run Rittenberg Associates Inc., a consulting team that includes his wife, Yulin, and his daughter, Jenny. The firm counsels American companies of all sizesfrom individuals to Fortune 500 corporationson doing business in both the United States and China.
Born with a gift for learning languages, Rittenberg first came into contact with China after being drafted into the U.S. Army in 1942 during World War II. At first, he was pressed into service as a Japanese language specialist. However, thinking that such a position would mean many years of military service if Japan lost the war and America became an occupying force, Rittenberg convinced his supervisor to, instead, allow him to become a Chinese language specialist.
That decision would forever alter the course of his life. He unexpectedly fell in love with the Chinese language, people and culture.
The beginnings of the Communist revolution in China also stirred the South Carolina natives activist spirit. After being discharged from military service, Rittenberg remained in China, where he was accepted into the Communist Party and became familiar with many top Chinese officials, including Mao Zedong. He would end up spending a total of 16 years in solitary confinement when his loyalties were questioned and eventually returning to the U.S. with his wife and four children.
Getting down to business
Its no surprise, then, that Rittenbergs musings about doing business in Chinathe country that both embraced and incarcerated himreflect a bit of pragmatism and a healthy sense of humor.
As the Chinese economy fills out and moves up on the technological ladder, Rittenberg is finding that there is much stiffer competition from Chinese companies these days and that foreign firms, including his own, must work harder to prove their worth to Chinese customers.
People used to be really anxious to get your investment, Rittenberg says. Now, its much more of, What have you got for us? What do you bring to the table? [The Chinese] look much more carefully before they make a deal.
One challenge that has remained constant over the years, Rittenberg says, is the potential for fraud. One of the many services his company provides is to vet firms on either side of the ocean for business clients. He recalls checking into two such American companies, which had signed a $500 million contract to reconstruct a Chinese provinces harbor facilities.
[The provincial governor] suddenly realized that he really didnt know who they had signed with, Rittenberg recalls. So, we did a very simple check on these two companies, the presidents of both of which were overseas Chinese in Washington, D.C.
What did he find? One company had only one employee, namely the president and CEO. The other consisted of just a president and a secretary. Neither firm had paid any taxes because they had never made any money.
This was just a show they set upGo over and get something signed in China, then bring that back here to get investment from the American side. Rittenberg explains. This is what the Chinese call a portfolio company, an attache-case company; thats all they had.
The anecdote works in the reverse as well, with American companies of all sizes getting wined, dined and snowed by swindlers who arent part of a legitimate business enterprise. Such stories all have a familiar ring, illustrating Rittenbergs overarching advice about doing business in China: He who goes to China for a quick kill gets quickly killed.
Thats important to understand, Rittenberg notes. As a general rule, American businesses of any size are very likely to succeed if they go into China prudently and knowingly, find out who are the right people to talk with and what the ground rules are. If you go in blind, youre very likely to fall on your face and lose whatever you put into [the deal].
The three Cs
Rittenberg counsels that relationships are extremely important in a country where successful business requires much more than conducting a single meeting and signing on a dotted line.
He tells clients that finding the right business partner consists of investigating the Three Cs: character, competence and connections.
Determining character is particularly challenging for some American businesspeople, but it is important to check potential partners track records, he says. Find out how theyve done business in the past, whether they keep their commitments and pay their bills and are good to work with. One of the ways Rittenbergs company ferrets out this information is to talk with people who have previously interacted with the person being investigated.
The stories are repeated over and over, explains Rittenberg. They talked to a Chinese manager who had passable English, laid out a great banquet, showed them a good time, introduced them to some officials who, they were told, had never before met with foreigners or rarely meets them. And they come back totally pixilatedtheyve found the right man! Actually, he may be a total bandit and they dont know.
The second C, competence, is fairly straightforward: Hes got to either be able to do what you need him to do or be easily trainable, a quick study.
The last qualification, connections, determines whether the businessperson is reasonably well known and regarded with the gatekeepers who can grant licenses, permissions and favors. If he is anathema to the local authorities, thats going to be a problem, Rittenberg adds.
Linking people and economies
Sitting in his Fox Island living room, sipping hot cocoa and warm soybean milk, with wife Yulin nearby, Rittenberg reflects on how 35 years in China have shaped his still-active career.
Though his political revolutionary days are behind him, Rittenberg, through his work, still finds himself on the cutting edge of business trends in China. His client list includes a company that is working on a system to convert poisonous blue algae into biodiesel fuel, another that wants to sell air-purification systems and a third whose water-purification system can create potable water for up to 6,000 people.
You take all the China experts in the world, put them together and multiply by 200, and what they know, compared to what there is to know, is still a very, very small amount, Rittenberg says. Everyone knows their area of experience and their contacts. Its a wonderful feeling to be able to link these two peoples and these two economies together.
Legalese Language Barrier
Attorney and China expert Dan Harris says that when it comes to China, businesspeople need to do their due diligenceand get a good lawyer.
When officials at Bellevue-based Captaris expanded their business into China, they used already-established connections from previous work in Asia. But they realized going in that Chinas legal landscape could be dicey for foreign companies.
Indeed, it didnt take very long for the fax software and document management company to become enmeshed in challenges to its very identity. The most common of these scams involve fake companies that claim expertise in corporate, trade and web domain registration. These firms contact Captaris promising to protect the company name from being used by a competing Chinese enterprisefor a fee. Less frequent and thorny are the competitors and resellers who are caught inappropriately using a Captaris-branded trademark in their websites.
Weve had a few instances of being solicited by Chinese companies who say they want to protect our name or trademark, says Matthew Brine, vice president of international sales for Captaris. Its not really a big issue for us.
Other companies capitalize on brand confusion. We have competitors in China whose look and feel is like ours, Brine says. Their website says a lot of the things ours says. The same problem exists in Europe, and theres little protection or recourse for it.
Welcome to the strange and sometimes corrupt world of intellectual property in China. Similar stories are often repeated among business owners, with the conclusion often involving a stern letter and sometimes money. In most of Captaris cases, a letter that includes a statement about the companys registrations in China usually nips the problem in the bud.
Such situations are just some of the many types of fraud cases that attorney Dan Harris deals with every day. A partner at Harris & Moure, a Seattle-based international business law firm, and co-author of the renowned China Law Blog, Harris has monitored Chinas market for years. There are a lot of fakes out there, and a lot involve Russia and China, Harris says. Nearly every month, we get a call [that goes something like] I ordered $40,000 worth of iPods and I got a box of nothing.
Unlike Captaris, Harris says many businesspeople get into trouble in China because they forget to implement the same rules of due diligence when overseas as they would at home in the United States.
Whats always fascinated me is that there are industries telling people that Chinas like nowhere else on earth, Harris says. It causes people to check their brains at the gate.
Harris, whose international expertise spans China, Russia, Spain and Germany, has seen a lot of brain-checking, especially in fraud cases, which he and his firms five other attorneys spend much of their time investigating. While the cases are often complex, the mistakes that expose these frauds often turn out to be something as simple as a misspelling or a fake addressseemingly obvious errors that most clients dont notice early enough.
One of Harris main guidelines for anyone interested in doing business in China is to hire a lawyer who is well versed in both business and China. Though it might sound self-serving, he admits, its a sensible rule, since regulations on what foreign business owners can and cant do change far too quickly for most people to keep track of. Also, theres the issue of interpreting not only the Chinese language but the countrys unique view of legal issues.
Harris also advises entrepreneurs to hire someone before investing money in an enterprise. Sometimes, theres nothing a firm can do once a fraud has taken place.
Overall, business owners are getting smarter, Harris adds. Three years ago, about half of the companies we contracted with were clueless, he says. Now, its only one out of 10.
Here are a few more of Harris guidelines for doing business in China:
Do it legally: Skip the bribes and dont believe something is legal just because a potential business partner claims its so, says Harris. Dont think you can go in under the radar. China is really cracking down on foreigners, and if youre legal, youre pretty much fine; if not, you can get shut down tomorrow, he adds. People will think something is legal because theyre allowed to do it. In general, the rules fall under three categories: Encouraged, such as high-tech businesses, discouraged, allowed only if partnered with a Chinese company, and forbidden, industries such as publishing and military operations.
Do your own research: Often businesses feel pressured to go into China for the wrong reasons, such as following the example of another company in their industry. But Chinese regulations change on a dime. What was true yesterday, theres about a 50-50 chance [that] its true today, Harris says. Things change that fast. Companies that follow someone elses lead, rather than researching their own potential for doing business in China can get burned, Harris notes. He recalls a client that bought property to set up a school without realizing the laws had changed to make it illegal. There isnt much recourse for that kind of situation, he says.
Dont lose your head: Foreigners often go to China with the perception that business there is so completely different that they no longer trust their usual business instincts, a trait the Chinese will use to their advantage. Harris cites one client that was torn between two Chinese job candidates. One was more qualified for the job. Well, which would you pick if this were Peoria? Harris recalls asking. There was a sigh of massive relief on their faces as the answer became clear. Succeeding in China is like succeeding anywhere else.
Photo by Jerry Davis