Selling to China: A Guide for Small and Medium-Sized Businesses

Copyright © 2018 Stanley Chao.

All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the author except in the case of brief quotations embodied in critical articles and reviews.

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ISBN: 978-1-5320-5269-9 (sc)

ISBN: 978-1-5320-5271-2 (hc)

ISBN: 978-1-5320-5270-5 (e)

Library of Congress Control Number: 2018907248

iUniverse rev. date: 09/14/2018

To my children, May and Michael—

may your dreams come true.

Contents

Abbreviations and Definitions

Introduction to the Second Edition

PART 1:   THE CULTURAL AND PRACTICAL REALITIES OF DOING BUSINESS IN CHINA

1     Debunking the Conventional Wisdom on China

2     Finding a Chinese Partner (Just Don’t Trust Them)

3     Choosing a Translator Wisely

4     Understanding the Role of Contracts in China’s Legal System

5     Getting the Contract Written

6     Learning the Art of Negotiation

PART 2:   BUILDING YOUR ACTION PLAN

7     Four Key Questions to Ask Before Entering China

8     Conducting a Market Analysis Study

9     Establishing Your Distribution Network

10   Selling Online

11   Deciding Whether to Register as a WOFE or JV

PART 3:   EVERYTHING YOU NEED TO KNOW IN A NUTSHELL

12   A Quick Lesson in Chinese

13   Fourteen Rules for Doing Business in China

14   Forecasting China’s Future

Afterword

Further Reading

Abbreviations and Definitions

Introduction to the Second Edition

This book was written for the many small and medium-sized businesses (SMBs) that are either thinking of or are already doing business in China. In light of the changes that have marked the past 10 years or so—China’s entry into the World Trade Organization, the growth of the internet, the rise of China’s middle class, and Beijing’s willingness to open its business borders to the rest of the world—today SMBs enjoy the same opportunities in China that were once only granted to large multinational conglomerates.

The conventional wisdom that only large corporations can do business in China no longer applies. While I was attending the UCLA Anderson School of Business in the mid-90s, professors taught that only multinational organizations (MNOs) like IBM, Motorola, and Philips Electronics could afford the time, money, political connections, and multiple failures required to stick it out in China. In those days, companies had to lose millions before seeing any profits, and this might mean they had to pay their dues for 20 or 30 years before seeing any payback.

In the 2000s, China’s economy accelerated at speeds we have not seen (double-digit GDP growth) since the Industrial Revolution in the nineteenth century. Though China’s government is now trying to slow things down to high, single-digit growth, it still has a voracious appetite for products, technologies, and services that the MNOs aren’t able to keep up with. Ultimately, it will be the thousands of foreign small- and medium-sized businesses (SMBs) that are nimbler and more innovative that will pick up the slack. SMBs, however, are only now beginning to make the transition into the Chinese market as they reach the full potential of the US market. Looking to the future, SMBs will have to rely less on the American consumer and more on the world’s demand for craft beer, video games, branded clothing, and industrial-related equipment.

I have consulted for mid-sized medical companies seeking to outsource syringes and band-aids, developed a market-entry strategy for a 10-employee company with barely a few hundred thousand dollars in sales, and sold scientific analytical software for three computer scientists working out of their garages. Some succeeded in breaking into Chinese markets; others did not. Don’t get me wrong—China is still not for everybody. That said, today’s China offers new opportunities to smaller companies that were not available just 10 or 15 years ago.

My views on SMBs in China are shared by Jack Ma, the executive chairman of Alibaba. Similar to Etsy and eBay, China-based Alibaba allows hundreds of thousands of SMBs around the world to sell their products and services on Alibaba’s website to tens of millions of Chinese consumers. In January of 2017, Ma met with then President-Elect Trump to promote trade between America’s Midwest and China. Ma told reporters, We want to focus on small business. [Trump and I] specifically talked about supporting 1 million small businesses, especially in the Midwest of America.¹ Alibaba wants to focus on niche, American-made products like wines, fruits, agricultural products, clothing, and artwork.

Unlike MNOs, however, SMBs are entering the world’s largest market with limited resources when it comes to language abilities, local market intelligence, experienced manpower, financing and capital, and time, so they’ll need some form of external support or aid. In this book, I have collected my insights and anecdotes from more than 20 years of experience working in the industry as a business consultant specializing in launching SMBs in China. If you are an SMB looking to make the transition into the Chinese market, this book will help make up for some of the resource deficiencies mentioned above.

There are very few books out there about doing business in China as an SMB. Indeed, there are excellent books about China, but they cater only to the Fortune 1000—or at least to companies with hundreds of millions of dollars in annual revenue. It’s interesting to read about the adventures and problems that McDonald’s, Starbucks, and Warren Buffet face in China. As a China watcher, it’s good to know what they are doing and how they are solving their China problems. But their world doesn’t resonate with the thousands of SMBs around the world hoping to get a crack at China. Big-company solutions and methods simply aren’t practical for SMBs.

This book addresses the real, day-to-day problems faced by the SMBs in China. How do you draft a contract and enforce it, knowing that your Chinese partner won’t abide by it? How can you set up a local office with a limited budget? How will you find potential distributors and customers? I’ll address these issues and give actionable and quantifiable solutions. Further, the solutions I offer have all been proven in the field by my consulting clients.

Much of the conventional wisdom about doing business in China will be debunked. I’m sure you have heard all the old adages: Chinese people will be upset if you don’t use chopsticks; the Chinese lack respect for intellectual property because of Confucian ideologies; and my personal favorite, you can lose a deal if you handle Chinese people’s business cards improperly. It’s these comments that trivialize the complexities of doing business in China and make Chinese businesspeople seem wildly unreasonable, as if they were from Mars. Foreign and Chinese businesspeople share a common goal and that’s to make money. Neither side will let a little impoliteness or cultural ineptitude prevent them from reaching these goals. If someone has truly lost a deal because they disrespected a Chinese businessperson’s card, then my guess is that the business proposition was in peril from the beginning. Success or failure is ultimately based on fundamentally sound business principles.

Businesspeople get bogged down by these dozens of little dos and don’ts—do drink, don’t show your emotions, do give gifts, don’t tell jokes—to the point where they feel unnatural and become someone they are not for fear of offending their Chinese counterparts. This is absolutely wrong. As a foreigner in China, you are already a fish out of water. You look and talk differently. Everybody knows you’re a foreigner, so just be yourself and stop pretending to be Chinese. However, this doesn’t mean you shouldn’t try to understand how Chinese businesspeople think and behave. You don’t necessarily have to do what they do—just understand why they do it. The dos and don’ts that you pick up in other business books are fine for the interested tourist, but they will not improve your chances of business success in China. There are bigger things to worry about, and this book addresses the real issues that will determine the success and survival of your business in China.

My knowledge comes from two areas: working in Japan, Singapore, and China for Fortune 500 companies, and then later, helping SMBs with their China and Asia strategies through my own company, All In Consulting. Transitioning from working with Fortune 500 companies like Philips Electronics, SoftBank and Merrill Lynch to SMBs was difficult. Smaller companies want things done differently. Quantifiable results are demanded in months rather than years; budgets are thousands, instead of millions, of dollars; and there is little or no support staff. So, out of necessity, I have become an expert in various functions: marketing, sales, Chinese law, and export licensing issues.

I was born in the United States but grew up in a traditional Chinese family with three generations living under one roof. Growing up, I learned about Chinese culture and language from my grandmother. She didn’t sit me down and teach me these things; rather, I learned by observing her. I watched her converse with her friends, noting the behaviors, gestures, and subtle nuances that made her Chinese. For example, she always asked my friends when they were visiting the house, Have you eaten yet? Do you want something to drink? Before they could even answer, she would run into the kitchen and come back with some Chinese bread or snacks. It took me 20 years to understand why she did this, as I am now asked the same question many times over when doing business in China.

Learning the Chinese language was also a part of my upbringing, as my parents spoke little English. Even though I have engineering and business degrees from Columbia University, the University of Pennsylvania, and UCLA, I could not do what I do today without speaking Chinese. If I had used translators or had been required to listen to Chinese businesspeople’s broken English, I would not have understood the behind-the-scenes discussions in meetings and been able to differentiate a real yes from a polite one. I owe my parents and grandmother half my salary.

Although many inferences are made throughout the book regarding the Chinese government’s inconsistencies in dealing with foreign companies as well as the sometimes subpar ethical behavior of Chinese businesspeople, in no way do I consider these to be obstacles to doing business in China. On the contrary, these are simply new rules to an old game, and the game is to make money. My role is to teach first-timers to China to be aware of these variables and advise them on the best ways to handle them and thrive in spite of them.

If my tone at times seems condescending and critical of the Chinese, that is not my intention. In fact, I have the utmost respect for them, and I wrote this book not to scorn them but to try, in my own small way, to bridge the gap between Western and Chinese cultures, languages, and histories in the context of doing business. Many Westerners label Chinese businesspeople as black hearts or unscrupulous entrepreneurs. They are not. China is in the midst of its own industrial revolution. Many historians point out that what China is going through today—unfair labor practices, human rights violations, environmental pollution, shoddy quality control, and tainted foods—is exactly the same set of issues the United States grappled with during the nineteenth-century Industrial Revolution, or as Japan did in the 1960s when it was resurrecting itself from World War II’s destruction. The only difference is that today’s unsavory events are magnified by television, the internet, and opinions from bloggers and smartphone users reporting in real time. Furthermore, the world is a whole lot smaller than it was before. A small factory on the outskirts of Shenzhen can now ship microwave antennas to an electronics manufacturer in Pocatello, Idaho. Everything now is just a few clicks away.

China is also still recovering from the self-inflicted catastrophes of the Cultural Revolution and the Great Leap Forward—Communist Party socio-political programs in which tens of millions of Chinese perished. Hundreds of millions more Chinese, even today, suffer the mental anguish and pain of China’s past. I refer to this population throughout the book as the Mao Generation since it was Chairman Mao who created a living hell for these lost souls. Most Western businesspeople will unfortunately be dealing with the Mao Generation, as they are the current political leaders in the Communist Party, and the general managers and CEOs of Chinese companies. I’m not making excuses for China, but these historical realities are indisputable facts. China needs time to catch up to the West. We probably won’t see the end results for another generation or two. But I have faith that China, in time, will be equal to the West with regard to human and civil rights, religious freedom, and ethical behavior. Unlike the Mao Generation, the 20- and 30-something Chinese—or as I like to call them, the Me Generation—have traits and values that are identical to their Western counterparts. They are educated and well traveled, speak multiple languages, and want what every other young person wants in life: a good job, a family, an iPad, and the resources to do and go wherever they want. I have faith that China’s Me Generation will take China to new heights.

You will come away with two things after reading this book. First, my advice will give you the tools to determine whether your products or services will be successful in China. You’ll be able to make a business plan and act on those plans by learning how to find local contacts, how to perform a China market study, how to deal with the Chinese and their culture, and, most important, how to deal with the many unforeseen threats that you will undoubtedly face in China. The work won’t be easy. On the contrary, the same tenacity and grind that made your current business a success will be needed to do the same in China.

Second, you will gain an understanding of how the Chinese think and act as it relates to business. Study them, and better yet, learn their unwritten business rules, customs, and social behaviors enough to use them and show your Chinese hosts you want to do business their way. The Chinese have always had the upper hand when doing business with foreigners—they know our cultures, languages, and histories. My book, however, will put you on equal footing with your Chinese counterparts. You’ll know what they’re thinking before they think it and how to react to their actions. Again, this won’t be easy, as you’ll naturally want to revert to your old customs and habits of doing business. But with plenty of practice, you’ll soon be, as the Chinese like to say, an old doughnut in the ways of doing business in China.

Many readers of the first edition of this book felt the content wasn’t complete without discussing the future of China, so I put on my prognosticator hat in the last chapter. Other readers, especially Chinese ones (yes, Chinese businesspeople are also reading the book), felt Westerners needed a quick course on the Chinese language. Thus, I included a chapter on some Chinese words and phrases that businesspeople will likely use while in China. Last, any good China business book is only valid for a few years given the continuously rapid changes going on in China. I needed to add a new chapter on internet selling, update the dos and don’ts, as well as add some new business examples that have come up since the first edition. Please note that the examples I cite in the book all come from real-life business cases that I and my consulting clients have engaged in. They are all real, except for many of the names that have been changed to protect the innocent, not embarrass the culprits and, more importantly, keep me out of trouble with my consulting clients.

It is a very exciting time to be involved in doing business in China, and we are at the point of a huge explosion in growth, with SMBs poised to take center stage. I hope you will join me on this adventure.

PART 1

THE CULTURAL AND PRACTICAL REALITIES OF DOING BUSINESS IN CHINA

1 Debunking the Conventional Wisdom on China

One of the things I do with new consulting clients is give them a crash course on what to expect in China, especially if they have never been there. We discuss the basics: some history, politics, law, culture, and business strategy. Invariably, I get odd questions: Do Chinese wives have to walk three steps behind their husbands? Will monkey brain be served at our business dinner—and is it rude if I don’t eat it? Should I not openly disagree with our Chinese partner so he can save face? Though I have eaten some strange things—beaver, donkey testicles, scorpion, silkworms—I’ve never come across monkey brain. Other more conventional questions concerning guanxi, socializing, Confucianism, and trust come up as well.

My guess is that these queries arise from embellished anecdotes, old Charlie Chan movies, or, even worse, from books written about China in the 1980s and 90s. I want to finally set the record straight on these assumptions, which are mostly folklore.

Many of the half-truths and sweeping generalizations about China oversimplify, trivialize, and fail to do justice to how Chinese people actually conduct business. Authors, Chinese experts, and consultants exaggerate the importance of these generalizations—really misinformation—to the point that businesspeople often lose track of their own business instincts, which are what made them successful in the first place. So, my advice is not to listen to the so-called experts so much, and apply the best business practices that made you successful in the West to China. When I interviewed Christopher Wright, the Australian government’s senior trade commissioner based in Shanghai, he showed me a manual written by a consulting company that described dos and don’ts to observe while doing business in China. Using cartoon scenes, the manual was a serious attempt at describing differences in culture and behavior etiquette. One of the comic strips showed a foreign businessman fumbling for his business card in one hand while reaching for his Chinese partner’s card with the other. A second scene has a foreigner taking notes on the Chinese person’s card while the Chinese businessman looked on in obvious anger.

It is material like this, says Wright, that confuses foreigners. They mislead companies out of good, common business sense and commercial practices into thinking that some black magic exists for success in China. It’s all made up by these consultants. At the end of the day, practical business sense will determine if companies succeed in China—nothing more, nothing less. We lose focus, lose clarity, and dive into the black magic.

Many of the how-to books for MNOs stress certain mannerisms, behaviors, and proper etiquette. When General Electric’s CEO meets a senior Communist Party official in Beijing, some of the conventional wisdom still applies: everything said and done at this meeting is on record and for all the world to see. Indeed, it would be embarrassing for General Electric’s CEO to be seen fumbling with his chopsticks or eating with a fork while others are using chopsticks. But SMBs will rarely face such pomp and circumstance, so don’t fret if your chopsticks skills need improvement. For SMBs, much of the conventional wisdom does not apply or at least should not be a central focus in a meeting or relationship. Ultimately, foreign businesspeople must be comfortable in their own skin and not focused on trying to be people they are not or on pleasing their Chinese counterparts. Unnatural behavior is a recipe for failure.

Why Guanxi Is Not as Important as You Think

The term guanxi refers to a person’s connections—in particular, to people in influential or high-level positions who are willing to perform favors for you because their favors will undoubtedly be reciprocated sometime in the future. Expressions like he owes you one or I’ll scratch your back if you scratch mine are synonymous with guanxi.

Though both Western and Chinese cultures have similar expressions, the degree of the favors given is vastly different. In the West, we tend to use guanxi for something special or out of the ordinary like securing hard-to-get basketball tickets from an old friend, borrowing money from a family member, or asking a business associate for a job interview for your son or daughter. In China, however, guanxi was traditionally a matter of life and death. The Chinese, having lived in poverty for the past 2,000 years, used guanxi to get the basic necessities of life: food, clothing, and shelter. Without guanxi, you were alone and had to fend for yourself.

During communism, anything in short supply or that needed an official’s signature—entrance into college, a train ticket, or a job—was obtained with guanxi. Having a relative or friend in high places meant a ticket to better government housing, a higher paying job, or access to Friendship Stores where you could buy hard-to-find goods like Cadbury chocolates and American-made soap.

Similarly, foreign companies in the 1980s and 90s ran their China businesses based on guanxi, rather than on good, solid business practices. This is precisely why only the MNOs could lay claim to China at that time. Besides having money, they nurtured and extended guanxi over periods of 5 to 10 years before seeing any concrete progress. Relationship building with the Communist officials who wielded all the business power at that time was slow and cumbersome.

My aunt, who lives in Wuhan, a city in central China, gave me an example of how she used her guanxi. In the early 1970s, her just-married son wanted to move out of the family apartment. Most Chinese at that time lived in government-owned apartments, and these were always in short supply, sometimes requiring a four- to five-year wait. My aunt, who