China, the Next Gold Rush
Crossing the Cultural Bridge to Strike it Rich
When it comes to doing business in China, I’m frequently reminded of a Rudyard Kipling poem that begins: “East is East and West is West and never the twain shall meet.” The poem speaks to the vast cultural differences between East and West, differences that in Kipling’s time seemed irreconcilable. Well, it’s 2012 and Americans have been doing business with China for almost 30 years! There’s immeasurable opportunity for American businesses in the China market, and many different ways to tap its potential.
I recently spoke with Pat Fong Kushida, CEO of the California Asian Chamber of Commerce, who remarked that the California economy is no longer regional, state, or national—it’s global. To compete, California businesses need to think globally. Given its geographical location in the Pacific Rim, it’s only natural to facilitate opportunities in China. California exported over $40.0 billion dollars to Pacific Rim countries in 2009; if we’re successful, we can make California businesses even more profitable.
On the Horizon: Hot Industry Sectors
I’ve been hearing noise about the big “slowdown” in China’s growth. We need to keep in mind that their GDP is slowing from over 9% to 8.9%, which is still VERY high. Up-and-coming industry sectors are becoming more profitable due to the accelerated rate of connectivity through the internet, and because of the increasing middle class and buying power of the Chinese consumer. eCommerce is set to grow at 400%, and life insurance, wealth management, and personal computers are expected to increase, along with the market for automobiles.
In China, business is more relationship oriented rather than transaction oriented—taking the time to build relationships is critical. There’s a need to conduct business face to face rather than over the phone or via email. Face to face interaction is the foundation of the Chinese style of doing business.
During negotiations, there’s more discussion when it comes to agreements. American businessmen and women need to understand that it’s simply part of the culture, and they need to be prepared to engage in a longer negotiation process.
In the U.S., there’s a greater sense of individualism, whereas Chinese look more to what’s good for the group. This is a big cultural difference and should not be underestimated. It ties in strongly with the social structure in China, which is more formal and hierarchical. In America, it’s a little more freeform.
Even though the potential in China is huge, the fact is that sometimes culture really does get in the way of success. During my time at The Algonquin Group, I’ve come to understand the root of these differences, as well as observe ways American businesses can overcome these obstacles. What challenges have you encountered doing business in China? Please share!
Communication is King
Developing flexible communication styles is key because in Asian cultures, people tend to be more reserved in business settings. It’s important to observe your business associates and really see what they’re trying to communicate to you, not only in words but also though facial expressions and mannerisms. Keep in mind that closing a transaction doesn’t mean that the deal is done- your Chinese counterparts will want to continue to see action, results, connections, and that they are part of the process. More often than not, their objective is to build a long-term relationship with you.
When it comes to conflict resolution, Americans approach issues in a more direct and straightforward way. In China, conflict and confrontation is usually frowned upon. They want to discuss the point in a less confrontational manner. If you need to get a point across, bring it up in a gentler way with decision makers in an informal social setting, away from the group. This ties in heavily with the idea of “face”; face, appearances, and reputation are very, very important. If you’re speaking against something to a Chinese businessperson it might appear that you’re disrespecting them or causing them to lose face.
Big Government: Legal & Regulatory Issues
My conversation with Pat also touched on the fact that China is a communist country with a capitalist economy. Most businesses are state run, and you’ll often need to work with the government before moving forward.
Fred Greguras is a Partner at K&L Gates, with experience representing companies with a market focus on or operations in China, Vietnam and India. He was able to shed some light on major regulatory issues, all of which stem from the fact that the Chinese government is typically very hands-on when it comes to business ventures. There’s tax planning that needs to be done, and labor laws that you need to follow when hiring. Getting involved with restricted industries like natural resources and internet-based ventures is extremely limited- you usually can’t go in at all, or only with minority interest. Foreign exchange is a common obstacle, and moving money around can be complicated. A key question is: “How do I get my money back out of China once I’ve put it in?”
In some cases you’ll see the paperwork on a deal that includes a line that you need to pay 5% of the revenue to so-and-so, and it’s a bribe. You have to be careful because in American law under the Foreign Corrupt Practices Act, the U.S. government can come down hard on companies and individuals who pay bribes in China. Ultimately, you’re best served if you get a killer legal team who will help you get everything in order to facilitate a smooth (as possible) experience doing business in China.Charlene Yu Vaughn, CEO and Founder of The Algonquin Group, will be moderating a panel at China, the Next Gold Rush: Doing Business in China, a joint event with the CalAsian Chamber of Commerce and the UC Davis Graduate School of Management on February 16, 2012. Join us for this free event!