1. Understand Guanxi Chinese special relationships
Guanxi is a Chinese concept referring to “special relationships” the Chinese have in their market and how they leverage off of these. Although Guanxi is less important than it was perhaps a few years ago, it is still important in certain provinces. Chinese business people can actually market their Guanxi via consulting or finder’s fees. Before considering taking advantage of such a service, whether this be the offer of business contacts, or other help, you should perform careful due diligence on the individual concerned and employ the services of a well-respected legal firm in China to draft a contract for services. Clear this contract with your legal firm in the UK first before signing it.
2. Be wary of corruption
There is no room for involvement in corruption either from a Chinese regulatory perspective or a UK perspective, so proceed with caution. If your gut feeling is that a deal is not right, then it probably isn’t and you should avoid it. You are entering the second largest economy in the world, so always think and act long term, and steer away from channels to opportunities that don’t add up or feel right. Your brand will benefit from this in the long run.
3. Understand the importance of face
Face is an important cultural aspect in China. Loss of face in its simplest form means embarrassment. Avoid, as far as you can, causing loss of face to members of your business circle in China. This can be very difficult, as the Chinese can be more sensitive to comments than the English. Face is particularly important when it comes to contract negotiations – it can make or break a deal. You can give face too, which means providing that person with something that adds value to their image or profile. This is a useful tool in contract negotiations and relationship building.
You can get up to speed on the concept of face by learning from your western contacts who have had experience in China, or from people already on the ground in China. There is also a wealth of information written on the subject.
4. Do your research on joint ventures
If you are entering China via a joint venture, conduct due diligence on all aspects of the company and partner. You cannot limit this to a balance sheet audit; you should also include a thorough check on the key stakeholders of the JV partner. Your JV partner’s background and their relationships should be considered carefully before any agreement is made.
Be aware that if you find the company you are buying into has not been compliant with, for example, local tax rules, it can be more complex than it is in the UK to clean up and move forward in a compliant manner. By cleaning it up, you might be bringing to light inconsistencies that involve local authorities. Local authorities are important in China and you must ensure you do not damage these important relationships. Find a well-respected local advisor who can help you find an acceptable pathway to a solution for both the local authority and your own company’s Chinese and UK regulatory compliance. If you can’t find a solution, this is an important consideration in determining whether to proceed or not with the joint venture.
5. A company’s seal is its word
Your company’s official signature on paper or wax is known as a “seal” and is very important in China, particularly for contracts and payments. A company in china will have a company seal and a finance stamp. Both are required to be used when transferring funds. You need to make sure there are proper controls over both, so ideally the person managing the company seal should be different from the person managing the finance stamp. Once a seal is used, the terms of the document bearing that seal can be very difficult to exit from.
Similarly, your China representative for your company has a lot of power in China, so ensure that you choose this person carefully and you are absolutely confident they are the right person for you.
6. Pay attention to law enforcement
Pay particular attention not just to the law, rules and regulations in the areas of China you will be conducting business in, but also the enforcement track record of the law, rules and regulations. You might find that on paper you have the comfort that you require for, say, Intellectual Property protection or commercial contracts, but the reality might be that enforcement is weak. Take on-the-ground legal advice to understand just how protected you are before executing your strategy.
Doug Alliston is managing director of CFO Services Asia, which helps British and European-based businesses launch in Asia.