Negotiating in China: Trust is just the beginning
By andrew | March 13, 2007
Negotiating in China requires you to make a wide range of judgments about your counter-party. If you are negotiating with a local Chinese business person, you have to deal with a host of cultural traditional business practice issues. The issue of TRUST is going to come up early and often, no matter who the counter party is. But is not a simple matter of determining who is honest and who isn’t. Of course you should check references and evaluate the claims of everyone you do business with, but in China it’s a bit trickier. Save yourself a great deal of time, frustration and money by performing due diligence on three things:
Can you trust their intentions?
Can you trust their ability?
Can you trust their judgment?
Intentions – Do they plan to fulfill the terms of the contract or not? Are they honest and reliable? This is the most basic type of due diligence in China, and it’s relatively easy to spot those with bad intentions – they are the ones who can’t give you references from past satisfied customers or partners. Make sure you get current referrals, and check them carefully. Be sure that you are discussing the same individuals – not just companies or associations. You also have to make a value judgment about the people giving you you’re the reference, so don’t cut any corners here.
Ability – This is equally important. There are plenty of businesses and consultants operating in China who are completely honest – and completely incompetent. Good intentions are great – but don’t mean a thing if the person you are negotiating with doesn’t have the ability to do the job you need done. Chinese counter-parties often underestimate the complexity of the task they are agreeing to or misunderstand your standards. Get very specific very fast about jobs they have done in the past. Make sure you are clear about their experience – did they actually do the work you are discussing, or were they part of the team that did it? Beware of generalists when you need a specialist. Talk about deadlines and schedules, and be wary of unrealistic estimates. Find out what they WON’T or CAN’T do. A competent supplier or consultant will know their limits, and won’t take an assignment that they can’t handle.
Judgment – Standards are different in China, and your idea of an adequate solution may be very different than your potential partner. Ex-pats in China often complain about jobs that they consider to be 75% finished. You need to establish a “meeting of the minds” with your counter-party. Don’t be satisfied with vague statements or simple agreement. Drill down to details, and pose scenario-type questions. It is notoriously difficult to draw out the true opinions and feelings of Chinese business people, but that doesn’t mean they are being dishonest or evasive.
Chinese counter-parties are used to spending much more time getting to know their potential partners than westerners, and you may walk away from your initial meeting with lots of simple answers and agreements that don’t really mean as much as you think they do. Don’t be afraid to ask naïve questions or rephrase the same idea several times. If anything doesn’t sound 100% right, then take the time to explore it thoroughly.
Experienced negotiators in China know that what seems simple and clear at the beginning can quickly turn complex and confusing after money changes hands – even if it is only a relatively small deposit or up-front payment. Take the time to find reliable partners before you agree to anything, and don’t plan on relying too heavily on signed contracts. China business is known for its fluid and dynamic nature, and you may be forced to renegotiate the same agreement several times during the course of business. If you are dealing with an honest, intelligent, sincere counter-party, then that will not necessarily be a bad thing. But a poor choice of partner will yield problems far in excess of the amount of money at risk. It could result in the loss of valuable IP, time and opportunities.
Topics: China Business, Business Entry, Due diligence | No Comments »
Negotiating in China: Checking References
By andrew | March 9, 2007
Professionals and experienced managers know to ask for referrals before hiring a service provider or consultant. But like everything else, getting referrals in China is slightly different from referrals back home.
In China there is still a tendency to judge businesses by very low standards. An expat who has been living in China for 5 years may be satisfied with levels of service that you would find completely unacceptable. “Well, he took 3 times longer than scheduled, did only 40% of the work promised, spent 6 weeks doing something I never asked for and I can now I can only clear customs in Tsing Dao. But he was pretty good.”
The big change in the China service supply-chain landscape of the last 5 years is the rapid rise in quality — and price – among some consultants and service providers. But there are still plenty of duds out there, so you’ve got to make due diligence and transparency your top priorities.
Don’t be afraid to ask naïve questions, and keep asking until you feel you understand the situation to your satisfaction. Remember – in China incompetence and inexperience can be as damaging to your business as fraud and dishonesty. You need to conduct interviews with references that will reveal both.
This applies to expats, multicultural JVs and pure local plays. China changes people’s judgments and SOP, and you want to walk in with your eyes open. So many overseas businesses give preference to expat businesses and consultants that standards have been known to slip a bit. Check these facts:
1) Current references.
You need a range of current professional references from people who have actually done business with the company you are doing the due diligence on. Not just current friends or colleagues from the MNC they worked in once. You are only interested in international deals with clients that live overseas (if that’s your situation.) You should try to get references from their last 3 international deals.
If they’ve been in business for 2 years and can’t come up with a single international referral, you’ve just gotten all the information you need.
2) Same or related industry.
Remember, in China one of the big landmines is consultants who try to be all things to all people. Deal with experienced specialists when possible, or at least know when your consultant is in unfamiliar territory. Try to get references from people who are similar to you in key ways. If you are importing, make sure they have experience dealing with your source country. Companies should be of the similar scale, involved with the same class of product. Also, if you plan on working from overseas, make sure you have references from overseas companies. And if your company doesn’t employ Chinese speakers, you need to get references from other companies used English – or whatever language you plan on communicating in.
3) Same or related transaction.
If they do business registration – do they really know anything about market research or business planning? This is when you should ask about outsourcing and who is did the actual work. Did the referring company have a clear idea of who was handling the business, or was the process opaque? That’s a red flag.
4) Who did the actual work?
Find out who was doing the actual work? Was it the overseas MBA who took them to lunch, or some $100/month graduate from Shandong Polytech? Was it performed in-house, or was it outsourced? This is a good question to compare the answers of the consultant and the reference.
5) Communication style: Follow up? Pro-active? Promises kept?
This is another sensitive area for users of Chinese service providers – and it is not longer confined to locals. Many ex-pat and multinational consultants and service companies have started to get very passive about communicating with clients. Find out from past clients if your potential consultant makes the first move when it comes to making key information available. 20 questions is fun for little kids, but deadly for busy executives.
A related issue worth investigating is the attitude towards verbal promises, including deadlines and added features. Find out from referencing companies if your new consultant has a history of dropping the ball. This is a much bigger issue in China than in the west.
6) Attention to deadlines and timetables.
The acid test for competence in China is the ability to create realistic deadlines and timetables and deliver on time. If you don’t check this out, you are in for some ugly surprises. Unsuspecting novices to China have been astounded by how late work gets done.
7) Did they supply value-added advice, or just execute instructions.
A big issue in China . If you need a certificate applied for or a company registration, then a consultant who simply follows instructions may be just what you need. But if you need high-level, value added advice, then a “yes-man” could be fatal. Many expat businessmen have been shocked to find out that their high-priced consultant has been wasting time and money by blindly obeying the client’s misconceived instructions. Find out from the reference what the consultant’s approach is.
8 ) Degree of management required
We all want consultants that will understand our instructions, disappear and then show up with the completed work on time and on budget. That may happen a lot, somewhere. In China you have to determine how much ongoing effort and management your consultant or service provider will require. Do their clients have to initiate contact when there is a problem? Did the clients have to change the job specification or supply lots of new information on a regular basis? Was the company creative about solutions, or did the client have to devote time and energy to finding fixes and work-arounds? Don’t assume that your working relationship with a service provider or consultant will be the same as back home.
9) Were all parts of the initial specification completed?
If no, why not? Did they spend 3 weeks working on a blind alley? Even if they weren’t charging, it still wasted time. Many overseas businesses have been surprised to find out that a big part of their project wasn’t possible, feasible or even legal – months after the initial job specification was agreed to. You need to find out if this happens with the company you are considering working with.
10) Will they use him again? Why or why not? If not who would you use?
Now that you have some specifics, step back and ask the big questions. You may be surprised. Some people just give glowing referrals – even if they aren’t truly satisfied. And others are natural complainers. When it comes to selecting a consultant, repeat business is the true test. If your reference isn’t willing to use the same company again, you need to find out why. There’s a good chance that the market has changed, or that key people have left. Again – assume nothing.
11) Integrity.
Yeah, the ‘I’ word. Use it. Find out if your potential consultant has any.
12) Competence.
Yeah, the ‘C’ word. Use that one too. Ask the big, naïve questions, and then shut up and let him ramble. This is when you’ll find out what’s what.
If you don’t check references when it comes to hiring a China-based consultant or service provider, you are asking for trouble. Being able to “trust your gut” is great, but it doesn’t take the place of solid due diligence. That is even more important when you are entering a new market like China.
Topics: Business Entry, Due diligence | No Comments »
Negotiating in China: Due Diligence Questions for Service Providers in China
By andrew | March 8, 2007
You can’t go it alone in China — and shouldn’t try. Once there were few options for the Small or Medium Business looking for service providers in China, but now there is a wide range of options. Some are great values — others are money-pits. Due diligence becomes more important the less you know about your potential market.
But the rule in China is: “let the buyer beware”. When shopping around for service providers in China , there is no such thing as full disclosure. One thing is sure – the interview stage is when your counterparty is at his most cooperative, open, and conscientious. Ask hard questions, and make sure you like the answers you receive. This is not the time for ambiguity or vague assurances.
1) Background
Who are they? Consultants with an industry specialty, or industry specialists who consult?
Where are they from? Expat? Shanghaise? Returnees? Taiwanese?
If they are a multi-cultural company, how do they see themselves? Expats with Chinese staffers, or a Chinese company with expats on the staff?
Why are they in this business? What other businesses are they involved in? How long have they been in business?
2) Experience – General
What is their work experience? What is their management experience?
How long have they had their own company?
If they worked for a MNC, what did they do? Did they have client responsibilities?
3) Experience – Specific
Do they have experience in your industry? Have they already done the transactions you will need them to do for you? Do they have experience with clients from your industry? Have they worked with clients of your size? Have they worked with clients who reside overseas? How much of their business is international? How much is repeat business? How much of it is referral?
4) Specialty — Industry and transaction
Can they give you an overview of your industry in China ? Are they familiar with your target market? Where do they see the industry moving? Do they understand the industry drivers? How is the market for YOUR product developing? How does your business model fit in with the future of the industry in China ? What challenges do they foresee you facing in China ? How will they help you to overcome those challenges?
5) Range of activities — do they do everything for everyone?
What do they do? What do they NOT do? If you have a problem that they cannot help with, what will they do about it? Do they have a network of professional referrals, a few classmates, or are you on your own? Do their different business activities relate to a specific set of competencies, or are they purely opportunistic.
6) Local experience & connections
What have they been involved with in your base Chinese city? (Get specifics) What deals have they done as consultants in the cities that matter to you? Have them describe their last 3 deals
7) Operating procedure
Are you the only client? How many clients do they generally have at any given time? What happens when they get 50% more?
What is their general operating method? How will they work with you if you are overseas? How long will it take them to respond to email? Will you be working with the person you are speaking with, or will there be an account executive? Try to meet anyone that you will be dealing with.
8 ) Payment
How much will they be charging for their basic services? You will want as detailed a cost breakdown as possible. How do they compare to others? Why are they cheaper or more expensive? How did past clients structure payment?
9) Value – added assessment of your business plan
Will they be able to assess the feasibility of your business plan, including marketing and operating plans? This is important if you are paying for business advice as opposed to hiring someone to complete a specific transaction.
10) Who owns them? Who invests? Who do they own or have relations with?
Make sure you get clear answers about who the actual owners are. This is can be a problem – particularly in cases were a partnership breaks up. There is nothing wrong with talking to an employee, unless he has represented himself as an owner.
11) References
You want at least 3 international client references from overseas businesses in a related industry. Try to make sure they are recent. Do not trust local references, former colleagues, or people that they have done business with when they worked at other firms. If you cannot get current referrals to international clients, you should probably not be doing business with this firm.
Topics: Business Entry, Due diligence | No Comments »
Successful Negotiating in China: Be Yourself
By andrew | March 7, 2007
I’ve been in China long enough to have gotten into the habit of handing people my business card with two hands, the way they do it here. Whenever another ex-pat sees it, we both laugh. It’s more or less a holdover from earlier times.
Now I council clients and other newcomers not to do that. I tell them not to print up special cards in Chinese. (Years ago I removed my Chinese name from my own business cards.) I recommend they don’t try to follow the rules of Chinese business etiquette that they read in airport newsstand paperbacks and traditional international business guides. Instead, they should try their best to be polite and patient and open-minded when learning about the Chinese business environment.
You have a choice: You can pretend to be a polite Chinese person, or genuinely be a polite western person. If your card has Chinese on it but you can’t speak a single word of Mandarin then you are just confusing people. If you start your relationship from a position of submissiveness and weakness, then you are going to have a jarring transition back to the tough, no-nonsense professional that you are when the real business starts. You can only fake it for so long. (Personally, I don’t like it when new associates ‘BS’ me, and think less of them for trying. I like counter-parties that feel the same way.)
China has 1.3 billion people living in it. Shanghai is home to around 18 million. You will have time to see 8 or 12 of them on a typical 3 day business trip. Your goal is to find the ones that you CAN do business with, comfortably and honestly. If you counter-party is going to be completely flummoxed by a westerner who hands him his business-card with the print pointing gin the wrong direction, then this is probably not your guy. The supplier or partner who forces you to smoke cigarettes, drink horrible liquor and eat weird animal parts before he can sell you bathroom fittings or battery rechargers is probably going to be just as difficult when the shipment comes in short, late or defective.
I went to a party last night where there were Chinese, Americans, Europeans, Chinese-Americans, Chinese returnees with US experience, and Chinese locals with careers at multinationals. These are sophisticated people who see their business as neither Chinese nor Western – but INTERNATIONAL. That is the kind of partner most businesses entering China should be looking for.
It’s a bit tricky to find them, but it’s a whole lot easier if you aren’t spending hours with inappropriate counter-parties who have no experience doing international deals – and who will never understand your goals, methods or requirements.
Be yourself, and find people who you can deal with comfortably and professionally. China has LOTS of good options.
Topics: General China, Business Entry | No Comments »
Negotiating in China: Getting the Deal vs. Doing the Deal
By andrew | March 6, 2007
Negotiating with Chinese service providers is a 2-step process. First, you must agree on terms, pricing, measurement, delivery methods, etc. Next, the service provider must actually execute the services or deliver the product that you both have agreed to.
Unfortunately, those two steps are often wholly unrelated. Experienced managers in
When you are structuring your negotiations with service providers or producers in
The guy who can’t show up on time for your negotiation isn’t going to suddenly learn to follow a schedule after you go home. The consultant who doesn’t return calls BEFORE you pay him surely won’t start checking his messages AFTER he has your money. That obstinate partner doesn’t get more flexible after receiving your IP or deposit. And NO ONE ever gets more honest or trustworthy after the contract is signed.
Doing business and negotiating contracts in
Topics: Business Entry | No Comments »
Problems, Pitfalls and Traps to avoid when hiring consultants and service providers in China.
By andrew | March 5, 2007
What is the purpose of performing due diligence on service providers and consultants when entering the China market? Common sense would dictate that the main danger we want to avoid is fraud and theft. That is, after all, one to the main reasons for traditional due diligence. In China , however, we have an additional set of concerns. We are also trying to protect ourselves from incompetence, inexperience and inefficiency. Although it sounds more like a minor annoyance than a potential business crisis, experienced overseas managers will tell you that they have lost far more to incompetence and miscommunication than they have to fraud or theft.
Whether your losses are the result of dishonesty or incompetence, it does not really alter the fact that your bottom line will suffer. Let’s start by taking a look at what potential pitfalls and traps await you in the China services market.
1) Fraud
Traditional fraud abounds, and we should be on the lookout. A contractor or service provider promises to perform a service, takes your money, and then doesn’t meet the terms of the contract. Simple. While this is as common in China as it is anywhere else, you have to be aware of a few local characteristics that may complicate your life.
Swiping the Cab Fare. You have been having long-distance negotiations with a potential service provider, partner or consultant, and now you are ready to move forward. You structure payment terms that give each of you maximum protection and incentive. You will advance him a small amount to get the deal started, with the bulk of the funds to be released only after certain targets are hit. But after the up-front money is transferred, the other party stops returning phone calls. You are not out much money, but the wasted time, effort, and opportunity are terrible. What happened?
Many expats and overseas managers have learned the hard way that the stakes can be pretty low here. Many potentially profitable deals have been wrecked for sums of money that you may consider ridiculously low. Big money at the end of the deal doesn’t always keep everyone honest here.
Brands, IP and Reputation . Not all fraud is about currency. Your logos, trademarks, product designs - even your printed sales material and brochures – are all valuable, and therefore at risk. In China you may sometimes have an additional risk – your reputation and image. Many overseas businesses have been surprised to see themselves profiled in someone’s advertising material or online directory as a satisfied, long-term customer, when in fact they have never transacted business with the company. More than a few western businessmen have found their own photograph on another company’s website or advertising material – with a caption describing them as a partner, supplier or even staff member.
Also be sensitive about attending off-site meetings with other companies – particularly if you have never heard of the new participant. There is an excellent chance that your potential supplier is using you to sell something else entirely. By representing you as an important international partner – or investor, or parent company, or buyer – a dishonest potential counterparty can make you an unwitting accomplice in his misrepresentation.
Time . Time is not money for everyone, though it probably is for you. That’s especially true if you come all the way to China to meet with a potential partner only to find that the counterparty is completely unprepared or inappropriate. A common complaint of overseas businessmen is that the endless cycle of ‘relationship building’ meetings will continue long after the other side knows there is no chance of completing the transaction. We know of one US based business owner who schedules all of his Shanghai meetings with new suppliers or service providers at a busy downtown coffee-shop. “I can usually tell in the first 5 minutes if the meeting will be a waste of time or not, and then I can excuse myself and use the time productively. Avoid devoting half a day to a meet unless you know it will be productive.”
2) Incompetence and Inexperience
In China , these are definitely due diligence issues. You should always find out about your counterparty has done business with before, and in what capacity.
While there is nothing wrong with taking a chance on a bright, eager newcomer, you should always know in advance who you are dealing with.
ChineseNegotiation.com has a strong bias against being anyone’s first international client. (And local branches of multinationals shouldn’t necessarily count as being international deals.) Just because your counterparty is wearing a nice suit and has a fancy office doesn’t mean you two are on the same page as far as schedules, timetables, standards, quality, etc.
Business entry consulting is a booming industry in China , and that means it looks like easy money to lots of young graduates and MNC managers with 6 months of experience. Don’t take anything for granted when looking for basic services. Find out if they can actually do the jobs that you need them to do, as opposed to some reasonable approximation that they believe will be almost as good.
3) Standards and Quality
Beware of getting exactly what you ask for, because that is a huge challenge in China . There are times when “75% as good” is simply useless to you. If you are working with low-cost suppliers of services, you will probably get exactly what you pay for.
A great due diligence check is to find if your potential service provider feels your goals and standards are reasonable and possible. Don’t assume they will tell you at the outset if it isn’t possible. Many overseas businessmen have been driven to distraction by service providers who deliver a completely different kind of service than the one agreed to because they didn’t understand the original specification or weren’t able to provide it. In the US and Europe , the contractor will inform you and offer an alternate method. In China , you shouldn’t assume that will happen.
Many inexperienced local service suppliers will not understand your quality requirements, and offer something that they feel is “just as good”. If a simple job requires 3 or 4 attempts, you are losing a lot of time, effort…and sanity.
4) Differing Agendas
You would never take a big job with an important overseas client just to gain business experience or practice your language skills, would you? Well, there’s a good chance you may be negotiating with someone who is doing just that. Be very clear about references and work history. Did they actually DO this work for someone else, or did they once work in a company where that kind of transaction was discussed over lunch one day. Are they using you to build their resume, teach them the business, or help them to find a “real job”? Beware of consultants or service providers who are priced below the market – they may not be a true bargain.
Being an unwilling teacher or mentor is bad, but being a patsy is worse. Many “business entry consultants” are really nothing more than shills for their friends and connections that have expensive services and solutions to sell you. Consultants are expected to have industry and commercial connections – but that doesn’t mean you have to buy what their friends are selling. Your consultant works for you, and should be providing value-added advice and planning assistance. Don’t get pushed into tailoring your plans to fit his agenda.
5) Great Experience – but in what?
This is one thing you may not believe until you’ve been around the track a few times. You will meet plenty of engineers who tell you they are experienced project managers, English teachers representing themselves as management consultants, and former office managers handing out cards with “Business Entry Consultant” on them. Related experience may sometimes be useful in particular kinds of circumstances — BUT a graphic designer doesn’t necessarily know the first things about market research, even though she has worked in the same office where it was being done. Get VERY specific about people’s competencies, histories and experiences. Service providers here love rattling off lists of famous multinationals they have worked with, but that doesn’t really tell you anything. If they can’t get specific and detailed, they should get lost.
Due diligence in China includes all the same procedures as in other economies, plus a few new ones. This is particularly true when deciding on service providers, consultants and potential partners.
In general, you are looking for someone with a solid track record of international experience in the kinds of transactions you need done. No experience, the wrong experience, no international experience or irrelevant experience should all be deal-killers.
General rule of thumb for China Due Diligence – If it is too complicated to explain, it means NO.
One final negotiating note. You might be tempted to hire that earnest, hard-working young graduate with enthusiasm and good intentions, thinking that honesty and attitude will make up for lack of skills or experience. Don’t. In China , the road to bankruptcy and regulatory entanglements are paved with good intentions. Pay what you have to for the skills and experience you need.
Topics: Due diligence | No Comments »
3 Basic Ideas for Negotiating your China Business Entry
By andrew | March 4, 2007
There are 3 rules that all owners and managers entering the China market should understand when negotiating during the early stages of your entry to the China market.
Go Slow. The China Market is not going away any time soon.
Build a network of professional service providers first, do business after.
Have a Plan … and a Plan B.
1) Go slow.
China has been around for 4,000 years, give or take. It’s not going away anytime soon. Are you late to the game? Maybe, maybe not. Odds are, you’re right in the middle of the first big upswing.
China is not the place for fast money. When business entry consultants and suppliers hear you are in a hurry, it’s like that cash-register noise from cartoons. A basic rule of thumb is, the faster you want to make money, the further you should stay from China. In other words, you will make the fastest money buying China-made goods in the US and Europe and reselling them for a small profit. If you need a presence in the Mainland for strategic reasons, it will be a long-term endeavor. Step one is to develop a goal system. Assume nothing. Pay for advice if you have to, but make sure you have a few conversations about the feasibility of your overall goals with someone who knows China . This is particularly true if you have experience in HK or Taiwan and plan on applying the same model to China. Your next step is to develop a timetable. It should include the following: Market research Business environment investigation (including macro-economy and regulatory environment) Business planning – Operations, Marketing, and Financing. Network building – Professional service providers and industry contacts. Launch Phase 2 (including office, staff, business registration) How will your company grow? What is your “trigger” for setting up or enlarging your facilities in China? There is nothing wrong with coming to China for a week to visit retail stores or supermarkets in Shanghai, Beijing and a couple of second cities. It could be the best money you’ve ever spent. Remember DiligenceChina’s Golden Rule of China Business: If you are too busy to research the market, then you are too busy to be successful in China. Stay home.
2) Build a professional network first, transact business next.
You should not even consider starting your China business until you have a reliable source of the following experts:
•Accountants. There is a range of qualified accounting consultants in the big cities. You have to decide if you need a bookkeeper, an advisor, or a CFO. All are available. The best way to really screw up in China is to hire a low-priced bookkeeper and base your strategic plans on his/her advice. You wouldn’t do it in NY – don’t do it in Shanghai.
•Lawyers. A good international legal expert should be your first stop when executing a successful China operation. Yes, China has a legal code. NO, you really can’t sue anyone who has ripped you off anc get satisfaction. Lawyers are much more useful for PREVENTING problems in China, as opposed to solving them after you’ve already found yourself in hot water.
•Translator / Assistant. There are many options. Simultaneous spoken translation is the most expensive and hardest to find. If you plan on hiring a translator to help you handle meetings in Mandarin, test them out first. Experience counts, but it is expensive. Translating documents from Chinese to English is relatively cheap and straight-forward. If you plan on doing it often or have big quantities of work , you are best off skipping the expensive agencies and hiring an assistant. Good universities are cranking out English majors by the boatload. Most document translation is priced per word or page, not by the hour.
•Business Entry consultant. This phrase covers a lot of ground. The industry developed around business registration for WOFEs or JVs, but it has now gotten very specialized. Go slow on the business registration, and find an outfit that can add value and help you formulate a solid business plan. Look for relevant industry experience and useful contacts. Be aware that thousands and thousands of new graduates are running around the big cities claiming to be business entry consultants. Experience counts.
•HR (if you plan on opening or hiring a local rep). Good agencies abound. HR will be a major challenge for your China business, and if you plan on hiring a local representative or staff, you had better budget plenty of time and money. Don’t neglect this, just because the salaries seem low and there are plenty of resources around. You will be spending far more time than you think you will on HR.
•Value Added Sourcer. You need a really good reason for going directly to manufacturers on your own. Most buyers in China are going through value added sourcing agents who can help them locate suppliers, negotiate pricing and regulate quality. If you plan on exporting, you should choose a business entry consultant based on their ability to add value in this area.
•Realtor (or serviced office). If you will need space in Shanghai, Beijing, or Shenzhen, you should start doing your research early. It won’t be cheap.
People here tend to be less aggressive (ie: no follow up), so be prepared to make effort to keep the conversation alive. Talk to consultants BEFORE you need them. Schedule appointments from home – or even better, set up conference calls with a variety of players. Talk to large multinationals, medium-sized expat partnerships and small local companies. There is a structure to the service industry here, and until you have a good handle on it you are not ready for China business. If you plan on using the same person for more than one function, have a good reason. Saving time, too much trouble, too busy chasing hookers are all bad reasons. Consultant X is an specialist in my industry and has an HR or Accounting facility is a good reason. Make sure you are using Value added service providers. Following westerners, stupid instructions has become a cottage industry here. You need advice and recommendations. This is not the time to hire “yes men”, so you have to make sure that your consultants are up to the task. Ability - do they know what you should do? Inclination – Chinese consultants are executors, not advisors. Are they willing and able to say – “no, that’s not the best way to achieve your goal”?
3) Have a Plan, and a Plan B.
Take your original notes and plans about China, have yourself a good laugh and throw them in the trash. If your original plan still looks good, then there’s an excellent chance you haven’t done enough research.
Make sure you have given plenty of thought and research to the following key areas: Entry strategy Management strategy Competitive analysis Marketing plan / operating plan Budgets and Timetables Expansion strategy Exit strategy You should be putting in real figures and actual people & company names. There may still be a lot of gaps and question marks, but that gives you good understanding about what kind of work you still need to do. The landscape changes a lot, but that is an excellent reason for doing more planning – not less.
Topics: Business Entry | No Comments »
When negotiating with traditional Chinese organizations, Time is NOT Money.
By andrew | March 1, 2007
One principle of negotiating in China is that your most deeply-held assumptions do not necessarilly hold true here. Hard-driving western managers believe that there is a strong correlation between TIME and MONEY. While young, modern Chinese business people in big cities tend to share that opinion, traditional Chinese managers in State Owned Enterprises (SOEs) and smaller companies are less “time sensitive”.
Dates can mean nothing. Schedules mean nothing.
Maybe at the start of your discussion in China your counter-party started out with a time frame you considered to be a bit slack. You may have even thought that you had successfully negotiated a much more favorable schedule, and that the matter is now settled. You probably haven’t, and it isn’t. Delays mean nothing here, and neither does a missed target. In traditional Chinese business, there is very little connection between success and one’s ability to manage time. Schedules change frequently here, and there is often very little pressure or importance attached to them. People will consider it odd that you are so concerned about it.
Working frantically through the night is considered a fairly routine option.
That factor is included during the INITIAL, optimistic phase of planning. There is much importance attached to these all-night efforts. When successful, the team members are heroes. When unsuccessful, oddly enough, they are still heroes.
Everything stops before and after at least 3 major holidays.
The winter slowdown now starts around Thanksgiving, in late November and doesn’t really end until March. Don’t expect people to know when the holiday actually starts, or when their offices are closed. Expect dates to change frequently. There are certain weekends when people are required to work, which can be occasionally chaotic. Much business tends to get done in the brief periods between festivals and holidays. Can be quite frenetic.
(Note: This situation is improving in Shanghai and Shenzhen, but can still cause problems. Always double-check schedules, and build in slack time when you are waiting for SERVICES to be performed. Manufacturers are getting better at following timetables and schedules.)
No service contracts, no ongoing deals.
This common decision solves 2 problems. 1) Reduce expense, and 2) Reduce work. A drastically shorter useful lifetime for the equipment or a failed product launch doesn’t really seem to matter much with local counter-parties. You will do one-off deals here. Maybe there will be a next deal. That’s long term. Don’t rely too much on one supplier, one customer, or one service provider.
Oh, and if your standard guarantee has “normal maintenance” language, you might want to check with people in the legal department about tightening that up. As always, check on local laws.
Missed targets, technical inability, lack of skills.
All considered pretty much ok. The failed project is problematic, of course, but in an abstract sense. That salesman who lost the contact information for the potential client? Yeah, that was unfortunate. Terrible. But it will be terrible next time as well, and the time after that. Routine business here is sometimes marked by the lack of pressure to improve. Every time can be like the first time. It’s difficult to get used to, but is still a fact of business life outside of major cities.
Local ‘common-sense’ solutions may surprise you.
Traditional Chinese solutions are still often based on shortage strategies. When I told a friend that my bicycle was stolen, they told me to get a cheaper bike. Then no one will want to steal it. Practical, but it involves dropping standards to achieve a secondary goal. In fact, the advice you receive tends to be a little TOO practical. Yes, the office towers are going up around us, but here on the ground there are a lot of million-dollar telecom systems held together with scotch tape. And it’s not real scotch tape.
Tendency to be satisfied with 80% results.
Solutions that approximate roughly 80% of the intended function are considered a sign-off. Sometimes this is fine, but sometimes it really isn’t enough. Choose your battles carefully. Every yard you move will cost you.
“I know” generally means nothing.
Often counterparties, professional service providers and high level staff will look you right in the eye, and with no apparent motive, will convincingly declare that they know exactly what you are talking about. They are finishing your sentences, gliding effortlessly over details. Their confidence is infectious, and you decide it would be silly and condescending to press the matter.
You return 4 weeks later to discover that there has been exactly zero progress. They had no idea what you were saying. Looking back, you figure that maybe 20% of your meaning was transmitted. They don’t even understand your general goal.
“We are good at it” can have a surprisingly wide range of meanings.
It can mean “I have no idea” or “we are good at approximating short-term patches”. Or, it can actually mean “we are good at it”. You will probably want to make a determination about this quickly.
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Negotiating Sales and Partnerships in China
By andrew | February 26, 2007
Approach negotiation in China as an integral part of the sales process that starts at ‘ni hao’ and continues until well after the contract is signed. It’s not an end unto itself; nor is it a minor detail on the way to the final close.
By the time you approach the negotiation phase of a deal, you should have a pretty good idea about your counterparty’s plans, strategies and goals. This is a great time to step back and make sure you are 100% clear on your OWN plans and goals. Have goal-posts been moved? Has the environment changed since you started working on this deal? As you bored down on the details of the deal, have any priorities shifted or earnings models been discarded?
Step 1 is understanding your own motivations and strategies. Assuming that all checks out, do a quick check on the people you are negotiating with. Are you still on the same page? Do you need to know anything about their future business that you don’t already know? Find out as quickly as possible, because once you start proposing deal terms it may be too late.
There are 3 things that characterize negotiations in
1) The sheer number of potential partners, customers, clients & prospects.
2) Emphasis on Price — not value.
3) Scheduling and timing issues.
1) The number of potential negotiating partners is practically unlimited. Most markets tend to be highly fragmented, and there are more new entrants to most Chinese industries than you can keep track of. The good news is that there are always more prospects for you to pursue. The bad news is that there are always more prospects for your counterparties to pursue as well. The message here is twofold — First is to keep your options open. I prefer to have multiple negotiations going on at any given time. Although this is cumbersome and time consuming, there are some very sound reasons for this that will be discussed below. The second point to keep in mind is that you can’t get bogged down with just one potential partner. There is a good chance that they will take all of your ideas, research, plans and information — and disappear. It’s a very common negotiating tactic here (actually, its fairly common EVERYWHERE, but since the topic of this note is negotiating in China, it merits mentioning).
If you are having trouble finding a suitable client or partner, just be patient. There is a constant flow of new businesses setting up all the time. I tell my clients that their best bet is to look for clients and partners among the expat community. They tend to understand value and deal-terms.
2) Chinese counterparties tend to focus on price more than business-people back home. If you are selling value-added products or services, you may have trouble leading your counterparty to the leap from Price to Value. Make your “thumbs up — thumbs down” decision on each prospect early. If they start out talking about price, then that’s what they will end up talking about. Chinese counterparties tend to discount things like IP, design, service and quality. You simply won’t convince traditional SOE managers that they should pay more for these things. But remember the previous point — there are always new entrants to the marketplace. The key is to make the determination about your prospect early — don’t allow a dead-end deal to dominate your schedule. Keep relationships cordial and professional…but be ready to MOVE ON at any time.
3) Chinese manufacturers have a pretty good handle on schedules and deadlines, but the same is not true on the service side. The usual tactic for Chinese counterparties is to demand a deal proposal with extensive background information RIGHT AWAY, and then disappear for weeks or months after you deliver. The same attitude prevails when it comes to deadlines and deliverable dates. I know of many expat managers who negotiate very aggressively to get a suitable schedule — only to watch helplessly as the Chinese counterparty routinely ignores the agreed-upon timetable. Chinese organizations are simply not as time-sensitive as US companies, and this is often a source of tension and problems. Either build some sort of incentive for meeting deadlines into the agreement (incentives tend to work much better than penalties for missing deadlines), or structure a deal that is not time sensitive.
This is another great reason to have multiple counterparties and multiple negotiations going on at every stage of the deal. Don’t allow yourself to get locked into a relationship with a single supplier or partner until they have demonstrated that you can work together.
For more on doing business in China, go to www.DiligenceChina.com and www.ChinaSolved.com .
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China Business Strategy Basics: What do you NOT know?
By andrew | February 24, 2007
What do you know?
What do you know you don’t know?
What do you NOT know you don’t know?
Sounds like a word game, or a hippy philosophy discussion. In China , though, figuring out what you DO NOT know is your top priority for surviving your first year. Before you start doing RESEARCH on the China market, you have to INVESTIGATE the China market.
Rule #1:
The China market is a work-in-progress. The ground is shifting beneath our feet. No one really knows what the situation will be tomorrow. Tracking changes to regulations and laws is the easy part. At least they get published. But YOU are responsible for tracking changes in attitude, custom, fashion and business methods.
Rule #2: Everything you’ve ever heard about China is a misconception, a mistake, a lie – or at least out of date.
If you want to make a room full of Chinese professionals laugh, read to them from Time magazine, or a 3 year old marketing textbook, or yesterday’s New York Times. Tell a 26-year-old professional woman in Shanghai that “brand awareness isn’t too strong in China ” — she’s likely to point out that your own ensemble is two years out of date. Mention to a local associate that China ’s infrastructure and distribution network are under-developed, and they’ll show you a subway system that makes New York ’s seem crude and primitive.
Rule #3: Understand the Hardware - Software dichotomy.
First the shiny new buildings go up, and then they figure out how to fill them. A lot of bad decisions have been made by westerners who believed that the guy in the nice Shanghai office actually knew what he was talking about. In China , the infrastructure tends to outpace the business practices.
Rule #4: China experts like to fill in the gaps with easy-to-digest cultural punditry.
Giving face. Building relationships. Market opening. Cultural difference. These phrases sound great and make newcomers feel like they are making progress demystifying China . The only problem is that these words don’t really mean anything. People who live and work in China don’t really talk this way. Spend a little time saying “so what?” or “what does that mean?” Ask naive questions, and make NO assumptions.
Rule #5: Due diligence is more important when you don’t know what’s going on.
Get specific fast. Price breakdowns, itemized costs, references, partners, length of time in the business – you know the drill. Yeah, right – that’s not the “Chinese way”. But you’re not Chinese. There is only one constant in China – no one gets more cooperative or transparent after the funds have been transferred. Your pre-deal conversation is your one and only shot at getting answers to the hard questions. Oh – and don’t be afraid to ask the same question several times. If you get a variety of responses, then you’ve just heard your first alarm bell.
Topics: Business Entry, Due diligence | No Comments »