Local Knowledge, Global Sense

Global Finance, Jul/Aug 2004 by Wright, Winter

The path to running a successful business in China is riddled with pitfalls. But with careful forethought most problems can be avoided.

Big multinationals have been in China for years. Microsoft, Procter & Gamble, Nokia and other blue-chip companies staked out this territory back when the exotic East more closely resembled the Wild West. But now small and mid-size companies are taking a crack at China. The challenges confronting them vary, but the prize is always the same: a presence in one of the world's largest and potentially most lucrative markets.

"In China, there are only two rules," says Jack Perkowski, head of ASIMCO, a China-based manufacturer of auto parts. "Rule No.1 is, Everything is Possible. Rule No.2 is, Nothing is Easy-whether it's trying to order a cup of coffee with cream and sugar, getting a glass of cold rather than hot water, or trying to understand whether the assurance that 'I'll try my best' is actually a guarantee of performance or just another gigantic qualifier."

Coping with these small but critical daily challenges is what causes many companies to stumble in China. "Some take the approach of running China operations by remote control, viewing them as just another part of a global empire that can be run the same way as in more-developed markets," says Patrick Horgan of APCO, a consultancy. "These people typically run into trouble because they fail to account for China's unique characteristics. Others arc somehow taken in by the mysteries of the East and believe they have to make a radical departure from the way they conduct business elsewhere." They put too much trust in a local partner, Horgan says-someone who promises to make problems vanish if only the foreign partner will do things his way. That usually spells trouble. "You shouldn't be abandoning the same business logic mat drives your operations elsewhere," he warns.

Unfortunately, many companies do. "A lot of people who come to China suspend all common sense when they leave their own borders," says Jim Brock, who advises companies in China's energy industry. A self-described "crap detector" with 12 years of China experience, Brock marvels that so many companies fail to perform basic due diligence, even on projects where big money is at stake. "I've seen situations where people have built factories where they didn't have land rights," he says. "They could have just gone down to the land bureau and checked it, and they would have done so if they'd been back in the United States."

Contracts? We Don't Need No Stinking Contracts

Foreign businesses are sometimes led astray by local partners who insist that contracts and permits are unnecessary formalities. Brock finds this galling, especially coming from young and inexperienced partners such as the twenty-something interpreter who informed him that Chinese banks didn't use letters of credit. "They hit you with this 'You don't understand how to do business in China' thing," he fumes. "I said, 'I've been working here longer than you've been out of high school. Don't tell me how business is done here.'"

Brock is equally scathing when it comes to foreigners who swallow local advice without performing any due diligence. One of his clients was evicted from a factory for failing to obtain the required land permits. "I said, There's no mystery here, you just didn't bother to apply common sense," Brock told the man. "You're 55 years old, you've done business in six countries, you know better than this."

Even so, the "Anything is Possible" side of the China equation means there are often back-door methods for getting a deal to go through. Andy Pi, an independent promoter of martial arts competitions, spent three days wining and dining a contact he hoped would help him get the permits he needed to stage an event. Pi, who does not drink alcohol, forced himself to knock back beer after beer during the three-day bacchanalia. The subject of business never came up, but the agenda was perfectly clear. "Any time you go to someone for advice or help in China, it's basically known that he will sort of get a kickback for it," Pi says. "He will receive some sort of benefit. No one helps you for tree."

Pi says the whole exercise was a Chinese way of proving he was serious. "I showed him I'm willing to go to hell and back. I will drink, I will throw up, whatever you want. If you want me to get on the table and do a little dance, I will do it. I will humiliate myself to get your help." Viewed in terms of Western logic, the ritual makes little sense. But Pi says he and his potential partner now have a relationship that makes a later transaction possible.

Back-door strategies can also take a more ominous turn. Mimi Kuo served as editor of Weddings, the mainland's first nationally circulated full-color wedding magazine. Because all Chinese media are state controlled, foreigners must partner with a local publishing house. In Kuo's case, a rival publication used its connections at the Ministry of Publishing and Media to harass Kuo's local partner and threaten to revoke her publishing license. The pressure mounted, and eventually Weddings was forced to shut down. Kuo observes that rather than improving their own magazine to create a more competitive product, her rivals simply killed Weddings using back-door connections-a typical strategy in any Chinese industry where a dominant player feels threatened by an upstart.