By David Dayton

Here’s what I’ve been telling people about starting a business in China. First, you have to really understand what China means for you. China is not competitive in commodities. China is not competitive in small qtty’s. China is not a billion people just waiting for (enter-your-brand-here) because it’s a poor country that only wants something (other than money) from the West. While there are certainly culturally specific rules about working (successfully) here, the laws of business, in particular the rules of due diligence, still apply in China.

To be honest, China is probably a waste of time/money for many small companies when costs, mistakes and shipping are figured in. Really. Unless you know what you’re doing here, China will kill your bottom line and production quality.

For example, I have a client that we just did some QA for (and rejected the order, by the way) who has been trying for over a YEAR, on his own, to work with three Chinese suppliers to get stock, not custom, but stock items, to meet the Chinese suppliers’ own sample quality standards. Back at home he has published catalogs and offered product that was either late or sub-standard or both. Sure, the product he has ordered from here is cheaper than what he could get from local distributors—but what is a year worth? What are a shipment of bad products and untold numbers of disappointed clients worth?

Second, if you’re going to commit to China, do it completely. No half-assed jobs (queue Sherry Bobbins). This is an issue that we have with many first time business clients and an issue that I talk about with buys at shows a lot. The bottom line is this: are you buying a product or two from China or are you establishing an office in China? More people then will admit they are trying to do ½ of both, thinking they’ll save money.

These ½ and ½ companies have a “local” here that they pay (in cash) to keep things going for them. They fly in and out 4-6 times a year. About ½ of what they get out of China is right and the rest is “tolerable” but not quite right. They don’t have a registered office in China but they are doing more than a couple of projects and more than a couple of different products each year here.

If you’re coming to trade shows and buying a few times a year, great. If you’re opening up your own office in China (even if it’s just with two people), great. But being in the middle, hiring people “off the record” passing business cards with a Chinese phone number and address but no registration is not just illegal, it’s asking for problems. How are you going to go after a supplier that breaks their contract with your pseudo company? How are you going to defend yourself when your “employee” leaves with your computer, clients and factory contacts?

Third, have someone on your team that is 100% against going to China—they make great balance for your enthusiasm. It’s vital that you have someone checking your China plans. China is risky and someone that is not sold on the whole China venture is necessary to help you (or whomever is pushing the China agenda) take off your blinders and see those risks for what they really are. Many people are so excited about China (the prices, their first trip to a huge factory, how nice everyone was) that they forget that among East Asian countries, China is just above Myanmar and North Korea in transparency.

Fourth, if you ultimately do decide to set up in China, pay someone to do all registration for you, so you can focus on #1. Just hire an accounting firm to do all the legal work for you. They are professional, they do it all the time, they are reasonably priced, and unless you’re writing a book about red tape it’s unnecessary and so much easier on you. Once you get the initial registration done they can do all the annual re-registration and all the quarterly taxes for you too. These persons are not some guys at the train station with a briefcase or a taxi driver offering connections. I’m talking about hiring a real company with hundreds of similar clients – there are scores of them in Shenzhen alone.

Fifth, on the other hand you can unnecessarily talk yourself out of China if you try. I’ve talked with a number of people who knew that they should be here for the sizes of orders and prices they were dealing with but just couldn’t pull the trigger on moving over. There was always something: “there’s no transparency,” or “the engineers are not experienced enough,” or “nothing is ever on time,” or whatever other excuses you can think off. These are all true issues with China, yes. But the rest of the world can deal with it, rather successfully too, so suck it up. Don’t stay away from China because it’s not the US or Western Europe. Thailand, Malaysia, India, Mexico, Russia, Argentina, Brazil are not either.

I’ve talked with a couple of people that were just amazed that anyone could make money here in China. There seemed to be so many reasons with every order and every plant that they saw that they were sure China was just an over-hyped money pit. It is. But that doesn’t mean that you can be on the receiving end of the money. And that doesn’t mean that just because others have problems that you will too (OK, you will, but if you know what’s coming, you can avoid/resolve them, right?!).

Sixth, set up a company/bank in Hong Kong. Not only is Hong Kong a great break from China, you are not quite sinocized yet, but Hong Kong contracts are enforceable in the mainland, banking services are much better than in the mainland, there are fantastic legal, professional and logistical services that understand the both the West and China, and Hong Kong was also just recently named the world’s freest economy.

If for no other reason than the banking, you should do it. For example, there are offshore and other banking options in Hong Kong available through HSBC. Many of the big Hong Kong banks have overseas offices in many cities all over the West.

And online banking in China still really sucks. We’ve got at least three different banks with online services and none of them are as good as the services offered by my local credit union back home in Podunk Utah. The USB keys are clunky and don’t always work. Wrong password entries have to be reset by PHYSICALLY visiting the branch that issued the key and showing ID. Nuts.

Finally, if I was going to start a new business in China, I’d be looking to import things into China rather than export things from China. China (the government) and China (the people) have cash. They save. They buy luxury goods, cars and houses with cash. The Chinese don’t use credit cards (like we do in the West). They are afraid of domestic quality goods and they want the status that comes from imported brands. I know that, in particular, luxury goods sales are down 30% to 40% but they are still a growing market that, after this year or so, will be pretty exciting again. Remember, there are a 300 million plus middle class in China that want more than what they are used to.

Specifically, I’d be interested in food and health products, education and children’s goods and luxury brands with name recognition and history.

David Dayton, Silk Road International

This is the second part and final part of “Finding Work in China”. Here you can find part one.