Essential China Advice

 

In the Chinese business environment, it is necessary for American companies to have a well-planned strategy. The following list of tips for doing business in China is not comprehensive, but a guideline for an initial market evaluation. Companies entering the China market should consider the following:

 

1. Have clear contract terms. When entering into a contract with a Chinese partner you must be careful. Do not attempt to enter into an agreement without sound legal advice. In your contracts, specify exact terms of payment, and performance standards. Set time lines. Pay careful attention to details, such as initialing pages of contracts and signing properly. Have your own legal counsel. Do not rely on the legal advice from your Chinese partner. Beware of claims that the Chinese law requires specific covenants in your contract. Verify this with your own counsel. Do not agree to provisions in a contract that are not under your control. For example, if your client or partner wants you to specify in the contract that they must visit your production facilities in the United States, remember that you cannot guarantee that they will receive a visa. This could invalidate your contract. Make certain that your partner is not a shell subsidiary of a larger company. If they default, do you have the ability to collect from the parent company? Specify this in your contract. Remember that the best contracts are those that do not have to be enforced. Make certain your client or partner is able and willing to do all they say they will do in the contract. Assure yourself that it is in their best interest to perform as agreed. Lastly, be careful that your partner is allowed by law to fulfill the promises in the contract. Do not assume that local or provincial officials actually have the authority to give you permits and permissions. Verify their claims of authority from independent sources. Question ALL such claims.

 

2. Make certain your project is economically viable. Profitability of a project or the sale of goods and services should be based on sound economic criteria. Do not rely on promises of subsidies, special considerations, or non-market related sources of income to create a profit. If subsidies are offered, they should be used to augment profit, not create it. Make certain your partner has the authority to offer subsidies and assure yourself from independent sources that the subsidies will actually be paid. Look for examples of companies who have actually received such benefits.

 

3. Know your partner. Do your "due diligence," and do it well. Check the reliability of the data on your partner or customer from independent sources. Avoid being "stovepiped" - talking only to those people to whom your partner or buyer directs you. 1. Make sure you get paid. A contract with an insolvent partner or customer is worthless. Pay careful attention to how you get paid, when you get paid, and in which currency. If you want to be paid in U.S. dollars, be certain you are able to convert profits. Use letters of credit, and other financial instruments to protect yourself. If you do not want to use a letter of credit, require your partner to make advance payment. Remember that Chinese companies usually do not use terms that allow unsecured payments after delivery of the product. For example, payment terms of "30%letter of credit, 70% payment 120 days after delivery," would not be customary in China. For most large projects, terms of "70% advance payment, 30% letter of credit," would not be unusual. Offering payment after delivery tells your partner that you don't know how business is done in China and makes you look easy to deceive. NEVER agree to unsecured payments after delivery.

 

4. Do not enter into prohibited agreements. American companies have often entered into agreements with promises from local officials that federal rules will not be enforced in the provinces. Indeed, often they are not. Problems arise when these rules are suddenly applied - sometimes retroactively - leaving the company with little recourse. You must be ready to obey WTO compliant regulations, even if you initially can successfully avoid them. Seriously question any agreement where you are told you can ignore or avoid rules.

 

5. Never pay bribes. This is not only a bad business practice, but may cause you to be in violation of the U.S. Foreign Corrupt Practices Act (FCPA). You should be aware that China is also cracking down on corruption. You do not want your business to be associated with corrupt officials or illegal practices. Many American companies have reported that their Chinese partners respect their requirement to be in compliance with the FCPA and do not expect American companies to pay bribes. You may need to remind local officials of this fact.

 

6. Be careful to base your business on WTO compliant rules. The U.S. government cannot support you if you are relying on a business plan that is not WTO compliant. China has agreed, as part of WTO accession, to change its rules to make them compliant. Some American companies have taken advantage of old rules, which protected existing industries. As such rules are replaced, you will need to confirm that your business plan is compliant. Otherwise you may find your competitive advantage eroded by the new lack of protectionism.

 

7. Search for problems before they materialize. In addition to creating pro forma balance sheets, spend some time at the beginning of a project to create scenarios of what you will do if things go wrong. Try to anticipate possible problem areas. If you can't find any, you are not looking hard enough. Create a strategy to deal with potential problems. Know limits on losses as well. Be sure to limit your exposure. Set milestones in the project for performance. Have an escape strategy for each stage of the project, even though you don't plan to use it.

 

8. Do a thorough risk analysis. Be realistic about how much risk you are willing to accept in your business venture. Make sure you use reliable sources for this assessment. Use more than news media sources, or your immediate partners to evaluate the market. Do not have a corporate risk analysis policy for China that is different than you would have for any other country. If a project is too risky, don't do it - even though it is in China. The majority of American companies currently in trouble in China have been caught up in "Chineurhoria"; and have not performed a thorough risk analysis, assuming that China is, somehow, different. When it comes to taking undue risk, it isn't.

 

9. Mind the store. Projects and sales in China require constant attention. Do not assume they will run themselves.

 

Reprinted with the permission of U.S. Commercial Service China at www.buyusa.gov/china.