Silk Road International Blog

According to a recent survey by YouGov and London’s Legatum Institute, “93 percent of Chinese entrepreneurs cite guanxi—connections with government officials—as a critical factor in business success.”

I had a client email me this article and ask me, “Is it really still like this?  I thought that China was much more developed” than this.   My response, “This is exactly what China is like.”  But there is more to it than just “connections” as we like to think of it in the West.

You can interpret this survey in one of two ways.  First, “Of course guanxi is important!  It’s not what you know but who you know in the US too.  Stop picking on China.”  Or second, “Doing business successfully in China requires you to have someone in your organization that is well connected and can play the games, pull the strings, motivate in culturally appropriate ways and host the dinners and other events necessary to both keep the doors open but keep others from coming in too often.”

Here is what I’ve seen personally and/or been told first hand about in the last decade in Chinese business:

1. At an official’s request, factory gives multiple pages of signed blank letterhead to govt offical to get all the proper permits completed.
2. Office must pay a cash bonus of thousands of US dollars simply to have govt officials come out and do their job.
3. Any and all testing documents can be purchased and have “official” stamps on them for set (and quite publicly known) prices.
4. Any shipment can be passed through customs if you’re willing to change some of the details on the export documents and pay a price.
5. Anything can be imported into China, for a price.
6. Worker protests and wage demands at one factory are affecting the attitude of works at neighboring factories.  A call to the local security bureau brings out armed police and attitudes are quickly and forcefully returned to normal.
7. New factory that is being built and it will compete directly with other factories in the area which are owned by the local gentry.  New factory can’t get the permits, inspections or certification for workers that it legally qualifies for.  After a 1 year delay, factory is open and then shut down twice in the first 8 months for “violations” of the local health and tax codes.
8. Factory pays off QC to approve shipment which is then paid for in full by foreign client and then rejected by foreign customs for not meeting legal standards.

In my experience there are a few things that are “still” true in China.  First, The “gray market” and “gray economy” are probably as big as the real market and real economy.  Ditto for Thailand and probably every other developing Asian/African/South American country.  What that means for the foreigner doing business here is that what is public and what is on the table is really only ½ of the story.  Yes you can certainly stay out of the gray areas and maintain your principles, but if you refuse to participate in the “gray” areas or refuse to allow your factories to participate your prices will reflect your lack of participation.  Doing business legally in China costs more.  Period.

One of the most ludicrous comments that I ever heard made by foreign businessmen in China was the comments of a man with 2 partial years experience in a large company in SZ, no Chinese language ability and no direct contact with suppliers or anyone outside of his English speaking administrative staff.  He said to me, in all sincerity, “There is no one in our entire company that has ever even been offered a bribe or has offered anything to a vendor or official.  Our standards are so high that everyone we work with knows that we just won’t do that.”  I’ve picked on this guy for this comment before.  I can’t believe that he is right, but I know him personally and I do believe that his personal standards are indeed this high and he would not do this (or consider that anyone working for him would either, obviously).  I know very few other people with this level of commitment to high moral standards–and many of the people I’ve meet in China think that is position is, at the very least, unwise if not flat out crazy.  For his sake, I hope that he’s right.  But I’m pretty sure he’s missing some of what’s “really going on.”

SIDE NOTE: The second most ludicrous statement every made to me was from an recently divorced foreign English teacher who had just come to Asia for the first time in his life, had been in China for 3 months, couldn’t speak Chinese, had self-admittedly recently read his first 3 books on China, had just “fallen in love” with a local that couldn’t speak a word of English and who said to me with more than a little pride in his own intellectual achievement, “I don’t know what the big deal is.  I think that I’ve got China figured out.”  I laughed out-loud in his face (he got offended and left).

Second, the only long-term relationships that suppliers have are with local officials, their sub suppliers and their bank accounts.  Don’t delude yourself into thinking that anyone in China cares or even believes you when say that your order is “really big” or your “next order will be huge” or your company has “tons of potential” .   Buyers come and go—usually hundreds a month asking for quotes and “fishing” for the best price.  Suppliers know that most buyers will leave for cheaper pricing at the drop of a hat.  Where’s the value in investing in a long-term relationship if it’s really only one sided?  IF you actually place and order and IF you actually pay your bills and IF you order with the same supplier a few times, things will change.  But don’t expect them to treat you special right off the bat.

Third, government officials’ job performance is directly tied to economic growth and tax revenue is related to land and housing prices.  What that means for you is that if you’re not directly adding substantially to economic growth then you’re not important.  Of course this means that you can most likely fly under the radar for years in China.  That’s good.  But if, for whatever reason, you need more, the only way to compensate for a lack of status is to pay money directly to officials (maybe just to get what you are should have access too and/or are legally required to have in the first place).  This will most likely put you in direct violation of your home country’s laws.

But it doesn’t have to just be working with govt officials that requires good connections and a knowledge of local “customs.”  You have to know your business partners too.  For example, we try to work exclusively with factories that we have either audited first or have read reports from others that have done audits.  Despite that precaution we’ve seen the following, multiple times each.

1. Factory refuses to ship product until we pay for “additional costs” that they did not anticipate.
2. Factory makes mistake(s) in production but refuses to redo the product unless they are paid more.
3. Factory agrees to meet their own internal standards but then doesn’t do it and expects us to pay for all substandard product anyway.
4. Factory parks large trucks in front of their gates so that we either can’t leave or can’t get in or get molds/tooling out.
5. Factory subs out all/most production and then refuses to either do QC or take responsibility for the product.
6. Factory commits to production standard that they know they can’t meet and then spends a couple weeks/months trying to figure out how to fake it.
7. Factory doesn’t think that the standards in the contract they signed are fair so they hold our QC hostage until we either change the contract, pay more or both.

Third, there are really too many stories to detail in a single post–but THE solution to all of these experiences is having the right person HERE dealing directly with factory owners and managers.  This is the person that negotiates with your factories.  Like the person that deals with the govt on your behalf, this person must be both local and entirely loyal to you–they have to know what you don’t know you don’t know, they have to have the ability and permission to negotiate and they must be completely transparent with you.  At the same time they have to have enough chutzpa and experience to be able to navigate the the industrial and governmental labyrinth that is China.  In other words, you need someone with great guanxi.

Fourth, as a foreigner you’re different, you’re a target and you’re in the minority.  As much as I and others complain (about real problems) in China, we’re not going to change China.  We’re never going to be accepted as “Chinese” no matter how long we live here, now matter how much Chinese we learn, no matter who we marry or what our kids look like.  This affects EVERYTHING you do—on a professional level, it absolutely changes the price of goods you buy and nature of business relationships you have.  And this isn’t necessarily a bad thing either.  It just is.

Finally, China will be exactly what you make it (up) to be.  It can be Shangri-La or hell on earth.  It can be one of the most exasperating experience of your life or a trip through the proverbial tulips.  I’ve found that it’s usually some of both.

But what China will not do is change for you.  Especially now with the bad western economy, you’re not special and your “potential” will not get you any special treatment.  You are coming to China to do business and China doesn’t need you, at least they don’t think that they do.  You have to both do business in China they way Chinese do business and figure out a way to keep your own principles at the same time.

 

Tags: Business, China by David Dayton
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10 more reasons why driving in China is like doing business in China.  While some don’t like this analogy, the more I drive the more appropriate I find the analogy.  My first installment of Driving and Business is here. And more on driving tests in China here.

My theory here is that people have personalities that become obvious in routine events—like driving or working in the same office/factory each day.  We’re creatures of habit. People don’t drive different on Thursdays than they do on Tuesdays.  And we don’t make business deals differently on Wednesdays as opposed to Fridays.  We all do the same things over and over and when we think that the situations are similar we tend to do what’s familiar.  Even when we’re in different countries, unless we’re told differently, we act just like we would back home.

1.  Local drivers know where the speed traps are.

Most driving is done between the two cameras.  When you drive in China, you don’t need to know the laws to stay out of traffic-cop trouble, you only need to know where the traffic cameras and check points are.  As long as you’re not speeding past a camera or driving the wrong way down a street that’s monitored, then you’re OK.  99% of driving is done in where there are no cameras.

I think that business here is much the same.  As long as you aware of whom the government is looking for today or where the “check points” are set up, then you can pretty much do whatever else you want.  How many Chinese factories are afraid that Governmental Agency X is ever going to show up and check on what they are doing—as long as they keep their heads down (and their wallets open), they won’t get them chopped off no matter what they do.

I think that this fits in with the larger cultural issues of shame (vs. guilt).  There is no absolute right or wrong, only shame if you get caught.

2. Driving in the middle of the road, in two lanes at a time, is the best way to keep all your options open.

Why limit yourself to just one lane (or one line of business) when you there is no one else on the road?   You’ll move if you have too, right?  This isn’t bad driving or inconsiderate, it’s smart.  On a road that may be under construction and un-marked, or an off-ramp that may not be marked until after the exit, this is often the only way to stay alive!

Business is no different.  Consider rules that change, laws that are just now being enforced for the first time, new international products and standards.  Laws about business (hell, real, enforced laws in general) are relative new to China.  And the legal culture that is so common in the West is just not here.  In this changing environment—where the signs of change are often posted AFTER the off ramp—you have to leave all your options open.  Driving down the middle of the road means nothing hits you coming from the blind sides.  It means you move when you have to, when you see an on coming car, but the rest of the time the roads yours.

3. Ignorance is an acceptable excuse, and sometimes it’s the truth!

Most people that are driving in China (I read this I swear, but I can’t find it now) have only had their licenses for less than 2 years.  That means, for those of you counting at home, most drivers here are as about as experienced at driving as your average high school senior.  Yup.  They really don’t know what to do yet.  Throw in the fact that a ton (who knows the number?!) just bought their license and never took Driver’s Ed or even a test at all and you can see why driving here is taking your life into your own hands.  But hey!  Not knowing how to drive is no reason not to get behind the wheel, right?!

Business changes so fast and there are so many new opportunities coming to China that much of the factory personnel are in the same boat—they just got their factory or their college degree and they’ve got to hit the ground running.  Actual experience is optional.  Sure they’ve heard of your product.  Sure they make something similar.  Sure they have some of the same machines that you’ve seen back home—but that doesn’t mean that they can do what you’re expecting.

Remember, outside of Guangdong province China has only been open for business since the early ‘90’s (and Guangdong only  started to open up in ’81 with Shenzhen).  Almost no one in this entire country has been doing business here for more than 20 years—no one!!

Side Note: Ignorance works for foreigners too.  I’ve been stopped while driving in Taiwan, China and Thailand.  In each case I spoke anything BUT the language that the policeman spoke—So in Thailand I spoke Mandarin and in China and Taiwan I spoke Thai.  Works like a charm.  I shrug my shoulders, act completely ignorant of whatever is being said and pretty soon they get so frustrated that they can’t communicate with they let me go.

4. Just back up and try it again!

When drivers have missed a freeway exit, no problem, just back up (into on coming traffic) and try it again.  Of course it’s stupid to go miles out of your way to keep going to the next exit and loop around (remember rule #1—no one’s looking)!  And if you’ve gone to far to back up, just turn around and drive against traffic for a few km.  Just go slow and honk a lot and you’ll be fine.

How many times have factories just figured, “We’ll just adjust fix the current (rejected) product.”  They don’t want to remake molds.  They don’t want to throw out product and do it (right) again.  They want to just “fix” what they’ve got completed already.  Just go back and do as little as possible to get it as close to “right” as possible without doing it over again.

One of my biggest frustrations about working here is that there doesn’t seem to be any point where suppliers are willing to say, “You’re right, it can’t be fixed,” or “You’re right we’ll just have to do it all over again.”  Sometimes you can’t fix it–a pig with lipstick is still a pig.  Sometimes there just isn’t “one more chance” to try to get it right.  Sometimes opportunities are really just gone.

5. The infrastructure is to blame.

I used to get mad at all the traffic problems.  Then I started driving myself—now I know that it’s not all their fault.  For example, how can people know to get off on a specific exit if the sign for that exit is physically posted at or even after the exit itself!?  You can’t be a good driver if they signs are working against you.

Just like line workers who may know what you really want but usually can’t make any changes themselves unless everyone from the top down approves the change first.  Social infrastructure can be just as limiting as physical infrastructure.  Often one person, usually a manager, that misunderstands or wants to save money can sabotage a project even though everyone else knows what’s right.

6.  If you never make eye contact you don’t have to stop, slow down or admit that you did something wrong.

If you don’t make eye contact with the guy you just cut off, who cares if he’s screaming and giving you the finger?!

It’s the same for working with the government—if you never interact with them, you’re never going to get punished by them.  If you keep your head down and don’t actually embarrass anyone (in public) then you’ll be just fine, no matter how many rules you break.

I think that this is often the attitude with clients as well.  Just get the product on the container without too much info/emails/photos/contact with the client and there will be little or no time for them to complain/reject/change the product before it’s done.

7. Just break the rules so egregiously that no one can believe it.

This is the guy driving the wrong way down the left lane of the freeway with his hazard lights on to get back to his exit.  Everyone honks and says “I can’t believe that guy.”  But nothing happens to him.

In business, this would be “Chaodan” (Jordan) brand shoes or the Chinese “Sony” brand of electronics or the guys that sell all the knock off movies from actual store fronts.  Or the entire Shenzhen Louhu Commercial Shopping Center (at the train station) that is owned by the government, run by gangs and filled to the top floor with fake and/or illegal products.  Or the factories that are selling molds that belong to other clients, or selling product from their client’s molds to other clients.

8. If you have a really really nice car then you don’t have to follow the rules at all.

Until the laws changed just a few months ago, all anyone had to do was to pay all their tickets and they could keep their license and keep driving.  So rich people just ignored all laws, speed around as fast as they wanted and then paid the fines each month.

Now it’s a bit different, if you get too many tickets you lose your license—but what are the chances that you’re going to get stopped and arrested for driving without a license?  Something close to 1 in a million, no doubt.  So now people are driving without their licenses.

This is still the way that it’s done here.  Make payments and you’ll stay in business. We’ve had factories tell us that they are not worried about pollution, labor violations, tax evasion and other issues specifically because of the “check-points” they’ve already passed prior to the point of actually doing business.  One factory told us when they built their new building they set up an official company bank account and put a specific amount of money in it each year but then gave all access to a local govt official.  One company told us that they gave officials sheets of signed but otherwise blank company letter head and had no idea what they will ever be used for.  These are extreme examples, but they are true.

Less fantastic examples are factories that are set up especially for clients and inspectors and to meet govt regulation while most of the production is done somewhere else.  Or middle men that set up a tour of a factory that is great, but will never make your product once you’re gone.  Or product that is specifically selected to meet testing standards but then production doesn’t meet these standards.

9.  If everyone breaks the law, is it really illegal?

When driving it’s illegal to enter a crosswalk when there are pedestrians there  already—does anyone in Guangdong province follow this law?  No.  Here the “culture” is cars have the right of way—probably because of rule #8.

“This is how it’s done in China,” I hear all the time from foreigners who are breaking the law and Chinese that don’t want to keep their contracted commitments.  For some reason, “illegal” and “culture” are often considered to be synonyms.  And when I have the gall to point out that it’s illegal in China too, the foreigners usually say I’m being ethnocentric and the Chinese just shake their heads and tell me I don’t get it.

10. Getting forgiveness is much easier than getting permission.

Why ask if you can drive the wrong way down a one-way road or park on the sidewalk?!  Just do it.  Probably someone will yell at you.  The worst that can happen is that maybe you’ll get a parking ticket.  But likely you’ll get nothing but the best parking spot in the lot—for free!

Similarly, if you don’t ask if you can do something or not, chances are you won’t get caught or told no.  Why ask if some great deal is illegal if you can at least get the first round paid for and then just pay your way out of any complications that crop up in later orders?

There are personal habits and general cultures that people follow regardless of if they are driving or working. People don’t magically change their respect for the law after they’ve parked their car in the garage and entered the office door.  You think Chinese traffic is crazy?  You should try doing business!

 

 

 

 

Tags: Business, China by David Dayton
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READER QUESTION:

I have been approached by some Chinese businessman who are requesting that I source and import some items from Europe. I do not have a registered company, but I am able to orchestrate the affair. I am currently in China, but I would really appreciate some insight into how one should perform operations above board. I have a connection in the Port Authority – how do I use him?  Any information regarding the import of luxury products into North China would be appreciated.

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MY ANSWER:

Thanks for the comment/question on the blog.

In general, I think that if I was going to start a company related to China now (or any time in the last 5 years) I’d be doing importing (as opposed to exporting), so you’re on the right track. The glory days of exporting are over here and for the next decade at least, China will be buying more and more.  I’ve talked about importing on my blog before too–read this for some of the other things to consider when getting started on your own.

First, if you have a connection in the Port Authority, carefully gauge how helpful he will be willing to be with you, what exactly he can do for you and of course (very important) how much it will cost you for that help.  Unless you already have an open invitation to use his services/position for your own business/gain, feel this out very carefully and don’t tell anyone else what you’re doing.  A night out over drinks or dinner is the best way to approach this so that it’s not in his office or home.

Having said that…

Second, When I speak in HK for Global Sources, I always caution people with connections AGAINST using them.  It’s just asking for problems on multiple levels.  First, it’s likely illegal in both China and your home country.  Second, it’s dishonest–you should have personal issues with this.  Third, it’s temporary at best.  If your connection leaves, get’s arrested, get’s fired, dies, anything, your business folds as soon as you can’t use his personal position any more. Fourth, it means that you’re dependent on a single individual and he can, at any time and for any reason (his kid gets sick, his wife loses a bet, he gets greedy, you name it) take advantage of you (or expose you).

But if he can help you do the LEGAL processes more quickly and smoothly, by all means, take advantage of his willingness to help.  But remember, even if it’s a great deal, if it’s illegal you can never know when it will end and you can never know if you’ll get busted and your entire business will be wiped out.

Third, you need to get someone with an import license to help you if you’re not planning on getting your own.  To get one on your own, it will probably take a month and (I think) about $250,000 in a bank account—you’ve got to set up a WOFE.  Ask Dan at CBL for the specifics.  Or you’ll have to use someone else’s import license and pay them a % for all that you import.  Again, if you’re using someone else, do all the DD that you can to find someone that you can really trust, as they will have copies of ALL your documentation and could easily copy your business model.

For the boot-strappers, I know that the even the guys at CLB have suggested that you just get started anyway you can and then form your Chinese company later when you have the cash (Here’s link to their latest on WOFE’s.) That is what many do.

UPDATE:  I told Dan that I’d point out in the body of the post that his firm does NOT advocate doing anything illegal in any way, even if it’s “just to get started.”  See his complete comments below.

Fourth, I would suggest that you talk with EVERYONE you can find that will talk to you about how to LEGALLY import things into China.  I’m sure you’ve got neighbors or friends (or neighbors or friends with relatives or friends) that are importing right now.  See if you can hook up with locals and foreigners in at bars, clubs, church groups, social activities, etc., that can help you out.  There is more than one way to skin a cat, and while you can know every single legal step to take, you still may be starting without enough real experience on your side (this is also where your port connection may come in handy).

In talking with others you’re going to get told every way to do it illegally that you can imagine.  And you’ll probably hear a bunch of ways to avoid the law that you could never imagine.  But remember, you’re different—you stand out, your foreign.  You’re easier to follow, easier to kick out, easier to check up on, easier to blame than others. BUT you can learn a lot of tricks from people in the business already.  Just because you’re doing it honestly does NOT mean that you have to be stupid about it.  Just like paying an accountant to help you get out of all the taxes you can in the US, you want to do the same things here.  Because you really are competing on an uneven playing field—all your Chinese competition isn’t going to be paying what you are.  (Just read the first paragraph of this post if you need a second witness.).

Fifth, unless you have unlimited amounts of time and no life, you’ll not be able to manage EU suppliers, shipping, importing into China, sales and distribution in China all by yourself. So start thinking about hiring a Chinese person that you trust (or a foreigner that you trust that speaks Chinese).  This may be very very hard to find as people with experience either already have a job and/or know enough about business in China (e.g. more than you) that you’ll have a hard time trusting they’ll keep your best interests in mind.  There is a reason why owners of even the largest Chinese companies usually have a relative over their accounting departments.

Sixth, Once you know that you’ve got all your ducks in a row, meaning: logistically and financially you know that you can do what you want to do, you need to involve a lawyer to help you set up your company in China.  Maybe the lawyers will say you need this first, but if like I mentioned above you don’t have the cash to start off with a WOFE, then you’ll want to be talking to a lawyer through-out and then finalize and legalize things later on.  But you do want to do this sooner than later.

Finally, you’re in luck!  There are two books written specifically about importing luxury goods into China.  Read both (I have), they are definitely worth it.  Here’s my review of the first one.  They are:

Elite China, Pierre Xiao Lu
Luxury China, Michel Chevalier & Pierre Xiao Lu

Good luck and thanks for the question.

 

Tags: Business, China by David Dayton
4 Comments »

Over the past three weeks I’ve had the opportunity to speak to hundreds of people at 8 different shows in Guangzhou and Hong Kong–that’s significant because it means that even over Passover/Easter weekend there are more buyers coming to the HK shows than we’ve seen in the past two years.  While the economy is still not great, it seems to be getting better.  And the audience seems to be changing too.  Many more Aussie, South American and Middle Eastern Buyers than I’ve worked with in the past.  The majority is still Western Euro and North American buyers, for sure.  But the % are probably 1/2 what they were 3-4 years ago.

Here is a sample of the positive response I’ve received from buyers.  Thanks so much!!

Dear David,

Thank you for the presentation. And thank you for your speech. It was the most helpful conference at the [Global Sources China Sourcing] Fair. Our company is looking into starting doing business with China, and the amount of questions that rise with that proposition is immense. And I believe you answered practically all the questions that were overwhelming my thoughts in the past few months. And for that I am truly grateful to you.

Truly yours,
Vladimir ********
Project Manager

And to try to help others that did not have the opportunity to attend the show here are some links to the presentations.

1. Link to video file for Global Sources, “What New Buyers Need to Know.”

2. PDF version of slide presentation of Global Sources, “Buying from China: What New Buyers Need to Know.”

3. PDF version of slide presentatation of Global Sources, “Advanced Sourcing Strategies: Improving Sourcing Performance.”

If you can’t attend the shows, or if you’d like a postview of what was there, Global Sources now has a new service called: Online Sourcing Fairs.  Actual photos/video of the booths, products and items in the shows here in HK.  Three of the shows are online now, Security Products, Garments and Textiles, and Gifts and Premiums.

And the latest version of the China Sourcer magazine from CSIC is out today too.

Tags: Business, China by David Dayton
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