China is a unique business environment. The below excerpts from the Australian Chamber of Commerce and the US Department of Commerce outline various important concepts your company should take notice of before embarking on your business plan in China.

Australia Chamber of Commerce

When it comes to conducting business in China, infinite patience is the key. To many foreign business people, the protracted pleasantries at the beginning of each meeting, the drawn-out negotiations where each minor point is discussed at length and the seeming reluctance to close the deal can be very frustrating indeed.

Many companies, when they expand or operate in overseas markets, need to have a detailed knowledge of the market they are going into or operating in. If a company is expanding into a small, comparatively unimportant market, where the revenue potential is limited, it could be argued that this is acceptable, but in the case of China, it isn't. No matter how the world economy develops, China is going to play a greater role as it becomes more integrated into the world economy. While there may be slowdowns and setbacks along the way, this is a major trend which will not change.

Already, China is a major manufacturer for world products. More and more, companies will see China as a market with increased purchasing potential. For consumer products, most of the purchasing capability will be along China's eastern coast. For businesses selling to manufacturers, customers will be more evenly spread.

Virtually all of the leading companies in all sectors are Chinese companies. It is almost impossible for foreign brands to succeed on their own without Chinese partners; the only exceptions are a few luxury brands. As a first step, it is necessary to find out who these players are.

China is still affected by the legacy of the state-owned enterprises, which often are still major players in the economy. The finance and distribution sectors are still heavily influenced by government participation.

Essential Advice for Doing Business in China - U.S. Commercial Service

Diverse Markets Require Careful Research

China is a very diverse market with varying levels of development and regional industrial strengths. From Harbin in China's northeast, to subtropical Haikou on Hainan Island in the South China Sea, China encompasses diverse topographies, climates, cultures, and peoples. Each region therefore has its own consumer preferences and business needs. Some industries are spread all over the country, some are clustered, and others are heavily concentrated in one area. For example, of the roughly 3,000 personal care products factories in China, 2,700 are located in the southern province of Guangdong.

Speak the Same Language

Despite China's commitment to, and success in, developing human resources with good English-language skills, companies that are serious about doing business in China should supply company information in Chinese and be prepared to initiate contact in Chinese. Having Chinese-language material prepared and a Chinese speaker or interpreter available makes a great first impression and demonstrates that a company is serious about doing business in China. Small firms also need to be resourceful about finding affordable Chinese-language expertise. For initial oral communication, a number of companies have used Chinese-speaking employees from other parts of the company to help with sales and marketing to China. Interestingly, once contact was made in Chinese, several companies indicated that they then conducted routine business in English via e-mail without a problem. Similarly, successful companies normally invest in developing Chinese-language material about their companies and products. Companies worked with their distributors on the translations, used outside professional firms, or used their staff to produce business cards, brochures, and other materials.

Find the Right Partner

Small firms typically need to find a counterpart in China to make sales and deliver products for them.

Guidebooks on doing business in China emphasize the importance of personal connections, or guanxi. Networking is an aspect of doing business around the world, but it takes on added importance in a society with a complex bureaucracy and a weak legal system. A web of guanxi helps firms navigate China's bureaucratic and distribution challenges. The importance of relationships is another reason why many small companies choose to sell through trading companies or local distributors, even if they have offices in China. Representative offices, the most basic, least-expensive type of foreign commercial presence in China, may only perform "liaison" activities; Chinese law does not allow such offices to sign sales contracts or bill customers directly. As a result, local agents and representatives are crucial.

It is critical that companies make sure that their partners are reliable and that they have the right motivation. Make certain your client or partner is able and willing to do all he says he will do in the contract. Ensure that it is in your partner's best interest to perform as agreed. Is it in his interest to assist you to protect your brand or other intellectual property rights? Be careful that your partner is allowed by law to fulfill the promises in the contract. Check the reliability of information on your partner or customer through using independent sources.

Finding the right partner or distributor and employing prudent payment practices are particularly critical in China, where the judicial process is slow, expensive, and plagued by corruption. Rather than relying on legal safeguards, companies need to ensure that their Chinese counterparts in any contract have their own motivation for fulfilling the contract.

Have Clear Contract Terms

China's consistent, 8-percent economic growth leads to continual radical transformations in the internal dynamics of the economy. When entering into a contract with a Chinese partner you must be careful. Do not attempt to enter into an agreement without sound legal advice. Have your own legal counsel. In your contracts, specify exact terms of payment and performance standards. Set timelines. Pay careful attention to details, such as initialing pages of contracts and signing properly. Scrupulously follow the contract yourself—or expect to pay a high price. Do not rely on legal advice from your Chinese partner. Beware of claims that Chinese law requires specific covenants in your contract. Verify this with your own counsel. Do not agree to provisions in a contract that are not under your control. For example, if your client or partner wants you to specify in the contract that he must visit your production facilities in the United States, remember that you cannot guarantee that he will receive a visa. This could invalidate your contract. Do not assume that local or provincial officials actually have the authority to give you permits and permissions. Verify their claims of authority through independent sources.

Ensure Project Viability

Profitability of a project or the sale of goods and services should be based on sound economic criteria. Do not rely on promises of subsidies, special considerations, or non-market sources of income to create a profit. If subsidies are offered, they should be used to augment profit, not create it. Make certain your partner has the authority to offer subsidies and verify from independent sources that the subsidies will actually be paid. Look for examples of companies that have actually received such benefits. Viability may look very different over the short, medium- and long term. Many Chinese partners will encourage you to look at the long-term potential of the market and sacrifice profit in the early stages. Doing so may be detrimental to your ultimate success in the market. In China, as in any high-growth economy, it is difficult to predict the long term, so make sure that you can obtain profitability in the short term and sustain that profitability in the medium term.

Avoid Prohibited Agreements

Creating viable contracts and agreements is challenging in any business transaction. However, given an unfamiliar business environment, many companies can be unwitting victims of illegal agreements. Be familiar with the overarching rules governing agreements at all levels of jurisdiction. Many Western companies often enter into agreements in China with promises from local officials that central government rules will not be enforced in the provinces. Indeed, often they are not. Problems arise when these rules are suddenly applied—sometimes retroactively—leaving a company with little recourse. You must be ready to follow all WTO-compliant regulations. Seriously question any agreement in which you are told you can ignore or avoid these rules. Also, make sure that your managers know all relevant laws (from your own country). You should be aware that China is also cracking down on corruption. You do not want your business to be associated with corrupt officials or illegal practices. Be aware of Bureau of Industry and Security regulations on the transfer of dual-use technology to China. Many Western countries law’s prohibits transfer of some sensitive technologies without a license.

Practice Problem Prevention

In addition to creating pro forma balance sheets, spend some time at the beginning of a project to create possible scenarios if things go wrong. Try to anticipate possible problem areas. Create a practical strategy to deal with potential problems. Set milestones in the project for performance. Have an escape strategy for each stage of the project, even if you do not plan to use it. In China, personal relationships are very important, and sometimes partners may not be completely truthful about potential problems if they feel the problems may have a negative impact on a personal relationship. Chinese partners may also be under pressure from government or party bureaucrats (as well as business associates) to compromise ethical standards. When problems arise, you should have excellent contacts among officials at the local, provincial, and central government to manage the issues.

Perform Thorough Risk Analysis

Be realistic about how much risk you are willing to accept in your business venture. Make sure you use reliable sources for this assessment. Use more than news media sources or your immediate partners to evaluate the market. Do not have a corporate risk analysis policy for China that is different than you would have for any other country. If a project is too risky, do not do it—even though it is in China. The majority of companies currently in trouble in China did not perform thorough risk analysis.

Expect Fierce Competition and Pricing Pressure

Recent economic analysis suggests that there is a significant surplus in industrial markets. There are strong competitive pressures. Chinese brands are strong and gaining market share in many sectors. In many Chinese markets there is a constant downward trend on prices. Chinese competitors, particularly those from the state-owned sector, often enjoy very low costs of capital. Thus, they can enter markets quickly, and they can expect to receive strong encouragement from the government for their efforts. The Chinese government makes no secret of its support for state-owned enterprises. Foreign companies should not expect a level playing field.

Ensuring Payment

Pay careful attention to how you get paid, when you get paid, and in which currency. If you want to be paid in U.S. dollars, be certain you are able to convert profits. Be advised that not all companies have rights to provide payment in foreign currency, and payment may be arranged through a "window company." Inquiring about a company's payment process should be an important part of screening for partners. Use letters of credit and other financial instruments to protect yourself. If you do not want to use a letter of credit, require your partner to make advance payment. Remember that Chinese companies usually do not use terms that allow unsecured payments after delivery of goods. For example, payment terms of "30 percent letter of credit, 70 percent payment, 120 days after delivery" would not be customary in China. For most large projects, terms of "70 percent advance payment, 30 percent letter of credit" would not be unusual. Never agree to unsecured payments after delivery.

One critical difference between China and most other markets is the country's lack of a predictable, systematic approach to credit and receivables management. Indeed, perhaps the primary risk of doing business in China today is the difficulty of collecting full payment on time.

The lack of credit infrastructure makes determining creditworthiness challenging—but not impossible. Companies need to spend the time and money to analyze customers' and partners' creditworthiness or minimize exposure to the risk of nonpayment. To minimize risk, companies just entering the market can protect themselves by not selling on credit. Time and again, companies are strongly warned about the problems of protecting their intellectual property rights in China. If you have a successful product or brand name, most likely you will be a target for intellectual property pirates.

Look Before You Leap

Companies must be persistent in their efforts but flexible in their strategies to take advantage of the changing landscape. When they need help, companies should use available services, from their Department of Commerce as well as from the many professional law, accounting, marketing, translation, and other firms.

China is a rapidly changing market that requires a great deal of caution and patience. Companies should test the water carefully before jumping in. With proper preparation, however, firms can position themselves to profit from China's growth in the years to come.


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