Top 10 China Business Commandments

Top Ten Commandments of Doing Business in China

Top 10 China Business Commandments
Hoping to benefit and profit from the vast opportunities that China has to offer, many foreign companies and individuals have been trying to penetrate the Chinese market and to understand how the Chinese business sector truly operates. Yet, few truly understand the legal and tax systems in China, the local rules and regulations, the investment that doing business in China might entail or even whether China is the right market for their business. Laowaiblog turned to Global Business Consultants, Inc., asking for Top 10 China Business Commandments help on how to deal with the new economic power that is China. These Top 10 China Business Commandments should help foreign companies understand how China differs from the West in terms of its business atmosphere.

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The Top 10 China Business Commandments Are:

(1) Determine if China is the right market for you. Don’t go just because others are there or going there

A. Define what you want to do: manufacture, buy production, sales, trading, distribution, wholesale, etc. Conduct and prepare a feasibility study of exactly what you want to do.

B. Hire someone who is qualified in your industry, who reads, writes and speaks fluent Mandarin and English, and who is also a team player. These people should have business and functional expertise as well as a good understanding of the cross-border business and functional issues that must be addressed. Do not make the mistake that an ethnic Chinese, who was not raised in Mainland China, will understand or be able to understand the PRC way of thinking, pressures and system. It is unreasonable to expect them to do so, because their backgrounds may have varied from those of the Mainland Chinese.

C. Understand that the Ministry of Commerce (MOCOM) is responsible for the formation of policies and regulations in attracting foreign investment. The “Catalogue of Foreign Investment Incentives” is essential reading. Is your intended project classified as “permitted,”“encouraged,” “restricted,” or a “prohibited” industry? Thoroughly understand the specific industrial policies set by the supervisory authorities of the relevant industry.

D. Understand how local authorities interpret and implement these policies, what their attitudes is towards the proposed investment, so that the necessary approvals can be obtained.

(2) Line up your Chinese professional services – Legal, Accounting and Banking team

A. Basic criteria for the team qualified member would be someone who can read, write and speak fluent Mandarin and English.

B. Include in your team someone, an ethnic Chinese, who has lived and trained both inside and outside of the PRC, so that this person is familiar with more than one system.

(3) Conduct “Your Due Diligence” as soon as possible and do it thoroughly

A. Take nothing on face value.

B. Test the validity of everything you are told because some things change frequently.

C. Conduct thorough background checks on the people you are dealing with so you know who they are.

D. Know the decision structure – make sure the person you are dealing with has the absolute authority to make decisions.

(4) Establish your China business plan based on the business environment

A. Plan your strategy to determine how your China play fits into your overall business strategy.

B. Take the various levels of governmental planning into consideration

C. Continually update your market intelligence as it constantly changes.

D. Determine if your project is economically viable.

E. Search for problems before they materialize.

F. Do a complete risk analysis of your venture.

Top 10 China Business Commandments

(5) Understand the Chinese Legal System, the Foreign Investment Regulatory Framework, Chinese Tax System, and the Incentives which are offered

A. The government departmental regulations

B. The industry regulations

C. The Economic Zone regulations

D. Learn How to Protect your Intellectual Property Rights

(6) Determine your Form of Commercial Relationship in China

A. Offshore operations

B. Onshore operations – only after you have completed your feasibility study.

C. Government roles – know the system and ensure you follow the rules.

(7) Determine Your Actual Investment

A. Pick the appropriate PRC location based on your feasibility study. China is a large country with 23 provinces, five autonomous regions, four centrally administrative municipalities, and two special administrative regions. Government support, tax incentives, infrastructure, transpiration, market size, labor quality and costs as well as the distribution network are all factors to be evaluated in your feasibility study.

B. Relationship – the right PRC partners can help you in your China business. They have better guanxi (relationships or connections) than you do. Recognize that trust building requires time and effort; do not expect a contract to guarantee trouble-free business.

C. Mind the Store

(8) Know That Knowledge is The Key to Power

A. Understand there are cultural differences between the mainland Chinese and the non-mainland Chinese as well as yourself. Develop a working understanding of the reality of Chinese culture in order to do business in China.

  • Different perceptions –
China View of Westerners Westerners’ view of Chinese
Direct, assertive, up-front, and can give offense An indirect approach, distrust appearent openness and wonder what the hidden agenda is
Use colloquial, unfamiliar language opinions are not expressed strongly
Dominate in meetings which shows that they don’t think the Chinese are competent Don’t want to share information; difficult to tell if silence and nodding of heads means a “yes”or “no”
Difficult to tell if they are serious or joking Don’t show physical signs of urgency or excitement
Tend to be culturally arrogant
  • You must understand the five relationships –

Ruler – subject, Parent – child, Husband – wife, Elder – younger, Friend – friend

  • Face is very important; you must understand the concept and the role of face. Face is about one’s self respect and prestige and one’s standing in the group. It is a public phenomenon and has powerful emotional consequences. The emotions are about dignity and dignity’s enemy, shame. Face can be lost by: insulting someone intentionally or unintentionally, cultural insensitivity or pure ignorance, declining an invitation to a social or business function, refusing a request, refusing a present, being too independent, or losing control of yourself by displaying anger, aggression, or grief.
  • Overtures to Business – Westerners – tend to see things in black and white as opposed to Chinese – prefer to talk over a meal on anything else but the business on hand, they go to karaoke, drink, and then shake hands later on the deal.
  • Different concepts of time, seniority, attitudes to age, gender, etc.
  • Learn to read body language emanating from the other side.
  • Learn then difference between “high” context cultures such as China, and “low” context cultures. In high context cultures, communication depends on the non verbal aspect of communication, i.e. interpreting what is meant rather than what is actually spoken.
  1. What is unsaid, but understood carries more weight than a verbal or written contract
  2. Agreements are made on the basis of general trust.
  3. Negotiations are slow and ritualistic.
  4. Relationships and goodwill are highly valued.
  • Low context cultures such as the US or the UK, communication depends on what is actually said or written.
  1. Negotiations are expected to be quick and efficient. Don’t waste time.
  2. Relationships are not a priority.
  3. Legal contracts are necessary and binding.
  4. Expertise and performance are valued above reputation or connections.
  5. Interpretation depends on what actually is said.
  • The Chinese notions of space and time are very different from Western ones. Chinese perception of time is that it has a much slower pace.
  • There are four stages of any negotiation –
  1. Exploration –  in China, this is a lengthy process. Here the Chinese determine how much guanxi they have and how they can hope to gain from the interaction.
  2. Expectation structuring
  3. Solution building – compromise is a natural, healthy outcome.
  4. Finalizing the agreement – there is a fundamental difference in perception and attitude. For the Chinese, formalization of a contract does not imply that it is final and fixed. It is a snapshot of a relationship, meaning the parties do really understand each other, and there is now a platform for further trading and mutual exchange of favors.

B. Put the right talent on the right job – ideally try to use overseas returnees, Mainland Chinese who have lived, studied and worked abroad. These people will serve as a critical link for your business.

C. Gain respect by showing respect, understand that all Chinese are not the same.

D. Use English Effectively - As the English language is becoming more widely spoken and it is now considered the business language in China, one has to bear in mind that this does not mean that people in China will speak English at the same level of competency as you do. English is possibly their second or third language. Accents and speech patterns affect clarity, even for native speakers (remember that your audience may have learned British English, rather than American English. Furthermore, their instructor was most likely not a native American or British speaker).

(9) Set up Your Appropriate Financial Structure

(10) Determine Your Exit Strategy

You must have a comprehensive exit strategy and the appropriate clauses written into your investment contracts in order to protect yourself and minimize possible difficulties during the exit process. The problems of an early termination of a venture exceed the application and approval process. If the contract does not spell out the details of a termination clearly, the negotiations will be tough. A failure to pay attention to the details in the set-up stage can cost you “break-up fees” in order to get your partner’s consent to dissolution.

If you do not follow the above Top 10 China Business Commandments, you will lose your wallet.

If you do, you have a chance to be successful.

Top 10 China Business Commandments were written by Lawrence A. Freeman and Anita Y. Tang from Global Business Consultants.

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