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10 Lessons Learned from Demystifying China

By: Kevin H. McKervey, CPA

There is little doubt that a large number of small to mid-sized business owners in southeast Michigan are anxious to learn more as they continually evaluate the impact of the quickly changing global marketplace on their businesses. The next great migration of in U.S. industrial history is moving to other parts of the globe, with China, Mexico, India and Vietnam all vying for the worlds attention. To put it bluntly, "outsourcing," or to be politically correct, "worldwide sourcing", is now an everyday practice. It is an economic fact in 2004.

CHINA DEMYSTIFIED, a seminar to specifically address China's role in the globalization of southeastern Michigan businesses, recently drew over 250 interested entrepreneurs. A well-versed panel of speakers, all small-to mid-sized business owners themselves, shared their experiences in doing business with China. Attendees walked away with at least 10 lessons learned that could be applied to their own situation, as they consider China as part of their global business strategy.

A brief summary of 10 key lessons follows.

1. Look through their eyes

Without preconceived notions, open your eyes to better understand the Chinese marketplace. It is essential to be able to commit the time and money to fully understand the Chinese ways of doing business. It is imperative to think not as Americans do, but to gain the Chinese perspective and think from that their mind's eye. As Americans, we are used to living by a certain set of rules as we transact our business. The Chinese are also used to living by certain rules. However, both sets of rules are equally valuable in each society, but very different sets of rules.

2. Homework is necessary

Your Chinese partner will know the product(s) you are considering, so you better have done your homework. Chinese business is very localized, and it would be wise to consider that the Chinese businessman will interpret the rules to meet their needs in the business relationship.

3. There are no recipes

Each transaction is unique. Too often in our American society, the solution to a problem is a recipe or process for successfully solving the problem. The next time we solve the problem, we do so at a lower cost or lesser time commitment. This is not the Chinese way. Each transaction has its own nuances, timing and characteristics. Without being keenly aware of these unique subtleties, a potential deal may not happen.

4. Culture counts

Culture in China is more important than doing business. What is important and what is different is to be open-minded to the cultural subtleties on a personal as well as on a professional level. The Chinese need to take a good deal of time getting to know you long before they will speak of pricing or "contractual agreements". To know your partner, with the time taken to gain this level of relationship, will pay off in flexible pricing, faster shipping or greater quality of product. What needs to be addressed is how one goes about establishing that relationship, and to proceed being mindful of the Chinese culture and ways, rather than our own. Success in business is not the American way, but the worldwide way.

5. Act now

This world market is changing very quickly. The pace of information and decision-making is so rapid that at times information is dated almost as quickly, or even before it arrives. While there is currently a large focus on China, economic ground is being lost to India, Mexico, Vietnam and other locations at a fast pace. Take action quickly, or you will loose your chance. It does take a significant investment of time to build relationships with your Chinese partners, and if you don't act now, the opportunity will be gone by the time that relationship has been built. And the opportunity may not be in China.

6. Don't get bluffed because you don't know

Caution: you can't necessarily buy it cheaper in China than you can here. This is a common misperception and one that is too easily accepted. For example, if your customer tells you they can get a part at a lower price in China, call their bluff. Once your customer base knows that you have been in China, are doing business there and it's not necessarily cheaper for their particular application, the threat will unlikely happen again. In a broader sense, it is critical to find out what kind of industries this applies in, and where a profit can be made. It is essential to ferret out suppliers who can help and eliminate those who cannot. Until this threshold has been crossed, business cannot be profitable.

7. Government is key

The government is China continues to play a key role in business. The role is a serious one, with heavy involvement and ownership in about 80% of Chinese businesses. While China remains the global growth bubble, there are certainly higher risks that accompany that gain. Under a non-democratic governmental system, the market system is relatively new, with little predictive capability. The government infrastructure is changing and the banking system is experiencing poorly performing loans. There are also new changes in law governing proprietary information. On the other hand, the rewards of higher margins on lower revenues remains attractive, as do lower labor costs and the sheer size of the untapped market to for both sellers and buyers. With this level of governmental involvement, the risks must be managed in order to take advantage of the economic rewards.

8. Choose the method that best suits your business

There is a right approach for your business, and there are several alternatives to consider. They are sourcing direct, using a sales agent, setting up an office, setting up your own manufacturing (WFOE), or outsourcing to a local (US) firm with expertise in China. When evaluating these options there are a myriad of considerations including labor, raw materials, manufacturing overhead, quality control, scheduling, and required documentation to name a few. While each alternative offers its unique advantages and disadvantages, certain rules apply to all. Get your experts lined up early in the process of exploring the alternatives. Utilize the outside expertise of experienced lawyers, accountants, bankers and others in your industry from the start.

9. Entry is difficult and expensive, but it can be done

American entrepreneurs are all cowboys at heart. Take on another challenge, without hesitation. It can be done!

10. This is only a phase

The current focus on China as the largest and most quickly growing market in the world, is only a step in the evolution of global business for most of us. As entrepreneurs, facing the challenges of the global marketplace will be a step in an on-going learning process. However, complacency, while going through the learning process is simply, not an option.

These 10 lessons, learned by other entrepreneurs considering China, are applicable to most small to mid-sized business owners. Applied to individual situations, they could shed a little light and provide some insight for other entrepreneurs considering China as part of their business strategy. However, as the next migration of U.S. industrial history continues to chart new territories, China will be only one part of a successful global business strategy.

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