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5 Things to Know before Doing Business in China
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The Middle Kingdom offers business opportunities aplenty, from low cost manufacturing to a lucrative market for English language training classes. But like all decisions in business, there’re a few things you need to consider before setting up in China. Here we bring you 5 things to know before doing business in China.
As the article is targeted to expats in China, I thought it would be appropriate to hear from an actual expat who has set up a business in China. I put a few questions to an American friend of mine in Guangzhou. She runs an education consulting business for Chinese students who want to study abroad. She wished for her and her business to remain anonymous, so she will be known throughout as B.
1. Understand Chinese Culture
Regardless of whether you think business is done better in your own country, there are certain Chinese cultural customs that you simply have to understand in order to successfully do business in China. Here are three of the most important.
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The “Chinese Calendar”
Even though the Western calendar is used for practical purposes, Chinese holidays are arranged around the lunar calendar. This means that sometime around the late January and early February, Chinese workers will take one perhaps two weeks off work for Spring Festival. Likewise in the first week of October, businesses will shut down for China’s National Week. If you run a business, make sure you are clued up as soon as possible on holiday dates so you know when your factory or school will be closed and plan accordingly.
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Emphasis on Astrology
Bear in mind too, that many in China place a lot of emphasis on astrology. Certain so called “auspicious dates” on the lunar calendar may be favoured by your Chinese business partner for opening your business or holding a special event. This may sound peculiar to expats, but again, it does not really matter what you think of it. All that matters is that you understand it, and realize that you may have to just go along with it as part of doing business in China.
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Hierarchical Company Structure
Another custom you need to be aware of is that Chinese companies often have a very rigid hierarchy. Staff are usually very clear about who is responsible for managing which department and carrying out which tasks etc. With this in mind, one article from McKinsey and Company suggests that for those working with Chinese business partners, they should be clear about “who interacts with whom at the joint-venture partner and with relevant government officials. Chinese partners like the certainty this provides” (McKinsey).
These of course are only a few customs. Before doing business in China, you should consider spending some time in the country, making connections and generally getting a feel for areas of Chinese culture you think will impact upon your business.
2. Understand “Guanxi”
This word will come up a lot. In English, it roughly translates as “relationship” or “connections.” But it means so much more than that. “Guanxi” can make or break your business opportunities in China.
For B, “guanxi” is particularly important for getting more clients. Many students go to her for help because of personal references from previous clients.
Important too in China, is “guanxi” with local government. This however, is something B does not have to deal with directly. She says her agent probably has some sort of relationship with government officials. It is worth remembering that the need to have “guanxi” with local government will vary depending on where exactly you are based in China. In more developed cities for instance where there may be a more rules-based system, “guanxi” may be less important than in a smaller city, where your ability to do business depends more on your relationship with local government.
“Guanxi” can also be crucial when forming business partnerships or just developing bonds between employees. A BBC News article entitled “Doing Business the Chinese Way” talks about the relationship between Michael Yu, head of education company New Oriental (Xindongfang), and Deng Feng, a venture capitalist. The two were involved in a car accident resulting in a damaged BMW. But the positive to come from the experience they said, was that their “guanxi” was improved.
Business people in the West may believe that they can successfully secure a good deal between two parties who barely know each in a formal business meeting. In China, the mindset is a little different. Do not be surprised if your boss or (potential) business partner wants to take you out for dinner and or drinks outside of working hours. “Guanxi” on a personal level is seen as a means towards successfully doing business in China.
3. Choosing a Chinese Business Partner
This is not necessary for B to run her business, although she pointed out that having a Chinese business partner would certainly help. For expats running schools in China on the other hand, she says a business partner is a necessity.
For numerous other industries in China, a Chinese business partner is a requirement. I guess this is to ensure that businesses in strategic industries remain at least in part in Chinese hands. Or, as B points out, it might just make things easier. Either way, you should have some criteria for choosing a business partner.
To this end, 1421 Consulting has a few suggestions. They say you should build a relationship by meeting in person and gauging their interest. Consider what questions you will ask them to establish if they are really in it for the long-term. Beyond this stage, you should conduct an initial background check. This may involve checking the other party’s Chinese business license. You may also need to get a third party to check that no legal or financial difficulties will entail from working with your potential business partner.
All other things aside, make sure you also exercise a degree of common sense when choosing a Chinese business partner. If they appear to unreliable or not knowledgeable about the industry in which your business operates, it is probably not meant to be.
4. Know Your Competition
Keeping a close eye on competitors is of course important in business anywhere. In China, you should know that companies within certain industries are heavily subsidized by the government. This may make it harder to enter certain areas of the market.
The Financial Times for instance, reported this year that oil company Sinopec was amongst the biggest recipient, whilst car manufacturers also received a substantial amount. The Harvard Business Review stated that solar panel manufacturers in China, have been heavily subsidized since 2008.
Beyond subsidies, you should also consider the scale of competition you will be up against when doing business in China. For B, many big companies are already in the Chinese market offering similar education consulting services. My previous employer in Shenzhen sold electronic products manufactured in China on online shopping platforms. Most of you reading this will probably not need me to point out that many in China are already doing this.
With this in mind, you will need to think very carefully about how your business in China fits into any niche parts of a particular market. Think about how your business stands out from the competition. This may take time.
5. Tailor Your Business to the Chinese Market
In some ways, this is another reason why you need to understand Chinese culture. Like any marketing decisions, there are a whole range of factors you need to weigh up when tailoring your sales pitch to the Chinese market.
For B, this is something she is still working on. Generally speaking, for private education (including training schools and consultancy for students of any ages), marketing should speak to the aspirations of Chinese students and their parents. After all, private education has flourished in China precisely because parents are eager for their children to achieve academically. Education First (EF) used the slogan “Hello to Harvard,” to give the message that even students with basic English would eventually be able to get into a top US university.
Similarly, Entrepreneur.com gives the example of Western luxury goods. For Chinese consumers, buying Western brands of cosmetics or jewellery is more than just making a purchase. It represents part of a brighter and more prosperous future.
Consider too, simple things like the significance of colors in Chinese culture. Red symbolizes luck and good fortune. White on the other hand, is associated with death and mourning. So choose wisely when making those marketing decisions.
Be Bold but be Rational
If you are even the least bit familiar with China, you certainly do not need me to tell you that business opportunities are abundant. As with business anywhere, you need to be motivated, creative and willing to put in the hard yards. But you also need to take time to make decisions. In short, you need to be bold but rational.
Making the right decisions may involve more than just online research. You may have to go to China, speak with people face to face and ultimately immerse yourself in Chinese culture. As an expat, taking these steps will relieve a big burden when doing business in China.
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