Doing Business in China

1
Doing Business in China A Foreign SME
Perspective Andrew Frank L.A.W. Oct 26.06
2
(No Transcript)
3

• Andrew Frank
• Managing Director
• Oxford Professional Training

andrew.frank_at_oxford-professional.com
4
Background in China

• Since February 2003
• Came to restructure the company from online
  training to bricks and mortar model
• Professional training services company, active in
  B2C and B2B
• Beijing and Shanghai offices, Guangzhou this year
  
• 150 corporate clients, 35 Fortune 500 Companies
  
• Several thousand individual clients

5
Background in China

• Not a China scholar
• No knowledge of the language
• Very steep learning curve
• Regulatory environment, partner selection
• Business culture
• HR, management
• Sales and Marketing
• Experience is personal, and more applicable to
  SMEs

6
First Impressions China is Different?

• It does not seem very different
• Italy, Wales and Texas are also different
• First impressions can be misleading and the
  perceived potential can be blinding
• Effective machine in place to process US1 bill
  FDI per week
• Of course it is different, but how?
• Culturally business and interpersonal
  relationships and motivations
• Size, speed of change and development, nature of
  competition

7
Key issues affecting new SMEs

• Legal structure
• People selection, reporting
• Government Relations
• Accessing support

8
The Legal Structure options

• Representative Office
• Cost effective, quick ,easy
• No capital contribution requirements
• Not a separate legal entity cannot engage in
  revenue generating activities
• Appropriate for market research, to oversee your
  licensee, liaise with PRC clients
• Use local law firm, your Chamber of Commerce or
  market entry consultancy to set up

9
The Legal Structure options (2)

• Joint Venture
• Equity or Cooperative JV
• Complicated, impractical or impossible in some
  industries (check regulations in legal,
  education, publishing, financial services, etc.)
• Seek advice from local market entry specialists
• Issues of control with local partner
• Be thorough in your due diligence!!!

10
The Legal Structure options (3)

• WOFE (Wholly-Owned Foreign Entity)
• Increasingly common for consulting and management
  services providers as well as manufacturers
• Can be easy to set up
• Registered Capital typically US 140k-200k
• Check if Business scope is appropriate

11
People selection, reporting

• Typically the biggest challenge
• Local expert vs expat management
• Significant gap in skills and productivity at
  middle management level
• Educational system ineffective in preparing for
  professional career
• Legacy of central planning
• Gap in problem solving, accountability,
  initiative
• The few high achievers are fought over by the
  large multinationals
• Plan on longer lead times, more mentoring and
  training, more hands-on operational management

12
People selection, reporting (2)

• Local expert
• Knowledge of the culture, language, sales and
  marketing
• Risks Issues with reporting, control, ownership
  creep, adherence to company values/standards
• If you dont trust your CFO like your mother,
  give your mother the job

• Choose a proven manager and check references
  and CV claims

• James McGregor One Billion Customers

13
People selection, reporting (3)

• Expat
• Expect a 1-2 year learning curve
• Expensive housing, education costs amongst
  highest in the world
• Small but growing pool of westerners with China
  experience
• Other choices HK, Singapore, Malaysian Chinese
  managers considered almost Chinese
• Sea Turtles Chinese returnees (not just a few
  years at a university)

14
People selection, reporting (4)

• Expect significant translation between O/S HQ
  and China office
• How to successfully implement business model
  locally and maintain standards
• How to translate China factor in local
  operations to HQ
• Local forecasts, management accounts, audits,
  best practices

15
Government Relations for SMEs

• Helpful in fast-tracking administrative issues
  like licences, visas
• A powerful Chinese partner or Government contact
  helps to keep distractive annoyances at bay
• Less important for small SMEs than for large
  multinationals
• Consider working with middlemen or agents with
  pragmatism

16
Operational Issues

• Organisational structure
• Difficult to implement flat structure or
  meritocratic culture
• Put in hierarchical, clearly defined roles
• Put in more internal controls than you would at
  home
• Use processes such as CRM systems, multiple
  approval layers, independent auditors to reduce
  risk of graft
• Zero tolerance to corruption?

17
We have no choice but to be in China

• Likely true. But now?
• Expect 1-2 years to understand the market and
  develop appropriate strategy and implementation
  plan
• If done cost effectively, earlier is better than
  later
• To be successful you will need to prove your
  commitment to the market and must earn trust

18
Approach

• A long term investment, not a quick buck
• Be hands-on, do not leave your business in the
  hands of local management or partner
• Keep arrogance and superiority about business
  model and practices in check
• Pragmatism, not cynicism or naïveté
• Your business must adapt to China, not the other
  way around

19
Helpful Contacts

• Your embassies, Chambers of Commerce in China
• Local, foreign law firms in China
• For significant investment use proven local
  advisory services for partner selection and MA
• www.vermilion-partners.com
• www.mahonchina.com

20
Thank you Andrew Frank L.A.W. Oct 26.06
21
China Stories from personal friends

• CFO losing department labour contracts, giving
  24 hours notice, then leaving with whole
  department
• Operations Director invoicing for non-existing
  operations in another city, faking a family
  illness and using the time to secure company
  clients for own venture
• Country MD jumping to a competitor, using
  influence over former sales staff and local
  partner to extract larger severance
• China franchise owner setting up improper leasing
  arrangements then selling back at huge mark-up to
  parent company who must save the brand
• Managers setting up competing operations (fact of
  life)
• Kickbacks, kickbacks, kickbacks