DiligenceChina

China is a socialist country. Actually, it is Communist, which is a specific type of socialism. You are allowed to say this in China. It doesn’t bother Chinese people. They all know. Westerners in China, on the other hand, go crazy if you mention socialism or communism. They seem to think it’s a secret or something.

If a potential partner or supplier says, “oh, it’s not REALLY communist anymore”, you should head for the door. You can make money in a socialist system. You can earn profit. You can buy things. But you need to know that the government has a much, much larger influence over business affairs than in even the most regulated industry in a non-socialist system. If you are considering entering the China market, this is significant. You have to know about it, but it isn’t necessarily a “knock-out” factor.

The legal structure in places like Shanghai, Beijing and Shenzhen is fairly well established and relatively transparent. Yes, there are still a few horror-stories about legal and regulatory problems, but if you are dealing with private enterprises you are in no more danger than you would be in any other bureaucratic emerging market. If you are dealing with the government or a state-owned enterprise, however, you are on your own. This is a whole different ball-game.
The biggest impact on most of your businesses will be in terms of the conduct and attitudes of your trading partners and suppliers. That’s were you can get yourself in a little trouble. Here are a couple of behaviors you should be on the look out for.

1) There is still a bias against declaring and accumulating gains among many local businesses. Traditionally, large reported earnings have attracted unwanted attention from officialdom and their arbitrary tax regulations. This tends to leads to short-term thinking and one-time deals. The ramification for new business entrants is that Chinese negotiators tend to talk “relationship” but act “one-off”.

2) I know that everyone talks about long-term relationships and “guanxi”, but that doesn’t really apply to your partnership or supplier negotiations. The key long-term relationships you need to develop are with service-providers, key employees and consultants. Don’t expect suppliers to be loyal or satisfied clients to automatically come back for repeat business. You have to take the initiative and re-start the process each time.

3) Chinese companies tend to “fly under the radar”. It is no coincidence that there simply aren’t too many large private brands. Chinese managers tend to stress diversification over industry leadership. That’s the result of getting shut out of entire industries as rules change

4) Legal protection is still spotty at best. Corruption has been diminishing in the major cities, but just about everyone still feels that the less government involvement the better.

5) Employees don’t see much value in working hard. Traditionally, this has led to more work but very little benefit. There is a tendency for workers to “hold back” and not give 100%. They believe that this weakens their bargaining position. Local workers have the attitude that they will work harder when they get paid more, and not the other way around.

The government in China is like a force of nature. You are not going to change it, but you can prepare for it – if you know what to expect. The real danger is believing that the skies are clear and the waters calm when in fact a typhoon is on the way. Assume nothing, and make good information your number one priority in the early days. Then you should do fine.