© Chin Communications

The Eight Fatal Mistakes People Make in China... And How You Can

Avoid Making Them Too

The appeal of the China market is obvious: a population of 1.3 billion people and over 30 years of amazing growth so far equals a market too expansive to miss. The problem is obvious as well: aside from the numbers being skewed from the start, it doesn’t matter how large your market is, if you can’t close the deal or the deal is bad.

Doing business in China can open the door to amazing opportunities, but establishing your presence in China requires careful planning and a deep

understanding of how the business culture operates in the Middle Kingdom. Many businesses, both large and small, make crucial mistakes when trying to break into the market in China, ultimately preventing them from laying the groundwork necessary to become a thriving business entity there.

There are eight primary mistakes that can put an end to your expansion into China practically before you ever get started. A failure to understand the history and culture in China, lack of planning, and language barriers are all common threads among failed attempts to break into this potential market. By understanding these eight mistakes and successfully creating solutions to them, your chances of success are much higher than trying to move forward without a strategic plan.

How to Build a Better Relationship with China by Overcoming the Communication Gap

In This Report, Discover Why Businesses Dealing with China Don’t Make Money and How Chin

Communications Can Make Your Entry into the Chinese Market Much More Rewarding

“We need to engage more on a person-to-person level with Asia

and part of the solution will be break-ing down language barriers.”

The Hon Simon Crean MPAUSTRALIAN MINISTER FOR TRADE

After twenty years of Chinese translation services, we’ve encountered lots of shocking stories about the mistakes businesses make in going into China. We’ve combined them into this new FREE booklet to help you avoid falling into the same traps. Charles Qin, Chin Communications

1. The First Mistake Businesses Make in Doing Business with China - Lack of Proper Planning

The first mistake that businesses make when trying to move into China is a lack of planning. Aside from the language barrier, there are so many different cultural subtleties that mean the absolute difference between success and failure, it is imperative to be fully prepared before you begin the cross cultural venture into China.

There have been many companies that relied on feasibility reports and market research provided by a Chinese counterpart, only to find the information wasn’t reliable. You need to do your own due diligence before entering into any type of agreement. Your strategic planning must consider local conditions, potential partners and assessments of subsidiary performance and look at competitors and consumers. Independently research the local infrastructure to determine for yourself the availability of local suppliers, networks for distribution, availability of a skilled workforce and a local market for your products or services. The availability of these local resources will determine your choice of location and the risk of relying on someone else’s information is just too large to take.

The planning phase should also identify that you and any potential partnership leaders share the same vision – short and long term. A great number of problems in partnerships within China can be avoided by carefully choosing your partners. Many Chinese partners

are not nearly as interested in creating profits as they are in acquiring knowledge and securing continued employment for their existing workforce. In depth investigation of potential partners – whether they are government related or not, and reference to the many other mistakes made going into business with China identified from this report – will help you find the best possible partner for your desired outcome.

Due diligence into the financial and legal specifics of your business is extremely important. You need to make certain that the appropriate legal and financial structure is used from the outset or you will stand to lose huge amounts of time and money.

Australian architectural firm Woodhead International’s lack of planning for their China entry has had long-lasting devastating ramifications. Financial considerations – the huge cost of establishing a wholly foreign-owned enterprise and registering trademarks in every city/province targeted was an administrative nightmare. Instead, the firm relied on locally hired staff to operate the business to get around the bureaucracy. Neither did they enter any formal joint venture agreement as they felt they had established good relationships and goodwill and both the Chinese and Australian sides were benefiting. As success came, the Australian firm learnt the bad news that their Chinese name and brand had been stolen from under them by some of their local

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information to make an informed decision. Planning to do business in China without such expertise in your corner is risky business.

2. Not Understanding Chinese Culture - Part One:

A large part of the language barrier is caused by cultural differences. One of the greatest mistakes businesses make when trying to establish trade with China is a lack of understanding of the relevance of the Chinese culture. Many Western societies have one set of acceptable behaviour in their personal relationships and an entirely different set of standards for business ethics. In China, that line of differentiation is much finer. The Chinese merge their personal and professional worlds as a matter of culture. The Chinese form relationships on a personal level first, moving into a business relationship after a connection of trust has been developed. The Chinese word for this is . In China, it really is more about “who you know” more than “what you know.” While this attitude is familiar in many cultures, in China, it is a deeply held, fundamental root of how things are done. Any Western businessperson who attempts to establish their business in China without any is doomed from the onset.

literally means “relationships” in the sense of connections. Power in a Chinese business relationship is directly dependent upon how widely and how strongly your connections with other resources have been established.

colleagues, offices set up in their name and many projects were being done under the Woodhead name (even for Australian organisations thinking they were being designed by the Australian company) without any knowledge by the real Woodhead at all. Worse, many of the projects had poor outcomes and further damaged the Woodhead brand. The firm luckily has recovered, but the legal wrangling over trademarks will continue. Planning, including partner choice and company structure, financial and legal advice might have prevented this drama which has been unfolding for almost a decade.

An Australian manufacturer set up a joint venture in a special economic zone attracted by government incentives and tax breaks. The location was not advantageous as it was far from distribution channels and skilled workers and difficult for its expatriate team to settle into. Furthermore competition was much tougher than their research had revealed and when their new, more expensive products replaced the old, trusted brands, they lost their existing market and the business failed.

An important part of planning is assembling a good team with suitable experience to advise on all of these issues. And top of the list is expert language support to ensure your interests are represented accurately, to independently provide translations of documents and all communications and to assist in negotiations to make sure you are abreast of all the relevant

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From local and national government officials to bank officials, tax officials and even local transportation vendors,

must be created on many levels. Many foreign businesses tend to rely on the “borrowed” from their Chinese business partners for this much needed foundation. This is a huge mistake. is a personal attribute, not an organizational one. If you rely on someone else’s and they leave your organization, or weren’t really playing for your team in the first place, you are suddenly without your connections. Reciprocity underpins and if someone does you a favour, it is expected that you will be there to repay it when a need or occasion arises.

Foreigners can absolutely create of their own, but it takes a mindset and commitment to this cultural reality to do so. Making friendly overtures such as presenting a gift, a dinner invitation or even initiating a conversation or compliment can open the floodgates to . One of the most important factors in is trustworthiness. While other cultures might be willing to overlook back-stabbing tactics employed by some businesses on their rise to success, in Chinese culture, this is the kiss of death.

Two organizations we worked with in China had very different outcomes in employing . One, a large manufacturer, had quickly established a significant presence in China and through its expatriate managers and local workforce learned to play the gifts and banquets game, cultivating

key government officials at all levels. An order from a remote Head Office with limited understanding of the cultural depth of , put an end to the wining and dining. Not long after, the venture started to experience regular and very costly power cuts to its operations and this had a major impact on its production.

Another, an engineering company experiencing success in projects along the east coast of China, was suddenly presented with a tax bill for a previously unheard of tax. The company adopted the tactic of working their to try and reach a resolution. By locating someone within the relevant government department and engaging them as a consultant on a bonus was seen as playing by Chinese rules.

Business ventures in China should never be undertaken without doing your own due diligence first, and this includes verifying another person’s proclaimed . Unscrupulous business people will claim to have much greater than actually exists. Most often, if someone has

, you know it because they use it to produce results, rather than discuss it like an office skill. It is perfectly acceptable to test someone’s

; in fact it will be expected. Chinese culture accepts the reality that friendship and business are connected and you will be expected to demonstrate your to your Chinese counterparts. Building specifically for personal or business reasons is legal and ethical in China and your business success depends

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upon your . Although it may seem close to bribery in Western cultures, the gift giving of is strictly intended to be within the boundaries of the law. Westerners may need to consider their own moral compass when working with this cultural form of networking.

3. Not Understanding Chinese Culture - Part Two: The Importance of Face

The communication gap is further widened through another huge and deep part of Chinese culture known as “face” or . Face is an intrinsic part of the Chinese culture in both business and personal relationships. Face is the social standing of a person in society. It is just as valuable as . Causing another person to “lose face” or losing face yourself can destroy a business, just as not having can prevent you from ever beginning one.

Face is all about respect. When you treat someone with the respect they have earned based on their social status, including their , you are giving face. Conversely, insulting someone, criticizing them publicly, or even refusing an invitation from them causes them to lose face. You can receive face by giving face. If you sincerely praise someone, you are giving them face and earning it for yourself. Keeping your emotions in check in the presence of others is another way to gain face.

Admitting your mistakes - or your business’s mistakes - will also cause

you to lose face. In the West, when a person or a company admits their mistakes publicly, it is often seen as courageous and can produce an outpouring of admiration and respect. In China, the exact opposite is true. In China, there is likely to be no direct communication at all during a crisis. Losing face is too important in the culture to risk alienating others by publicly discussing personal blame. The melamine crisis in China is a prime example where officials knew about the scandal but kept it under wraps during the Olympic Games and then only acknowledged it after media exposure and the company’s overseas joint venture partner insisted on making public the circumstances around the deaths and hospitalization of many infants.

A client of ours was on a business trip to China and was told that he would be met at the airport on arrival. Unfortunately, a series of minor debacles meant that he didn’t make the rendezvous, so thinking it would be no big deal he made his own way to the hotel. Only later did he learn that there had been a large welcoming party - almost a red carpet for his arrival and to the Chinese he had seemingly ignored this which resulted in a loss of face for the chief. Being aware of the ramifications of face, the businessman realized his gaffe and was able to use his connections to explain to all involved about his actions and to remedy the situation by boosting the face of the chief at a dinner.

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4. The History of China and Trade with the West

In order to have any chance of success with your business endeavours in China, you must understand the history. In the past, China was exploited by the West and this plays a pivotal role in business relationships today. It makes the Chinese masterful negotiators as they play the underdog and win concessions. Time and the patience of the Chinese as they both look long term to future benefits as well as recall their long history of humiliation by the West play against Western negotiators who invariably want a quick deal and are on a tight timeline and sit firmly in the present.

The Chinese people are very proud and are determined to regain their position as the financial centre of the world. Nationalism is on the rise in China, which became apparent to the world during the Olympic Games in Beijing and can sometimes be manifested in protests against certain countries, as the Olympic Torch relay demonstrated. Former President Jiang Zemin advocated a great power mentality to Chinese nationals and understanding the extensive cultural history of the Chinese people is a must for any business hoping to align with China.

China has clearly come of age and is being seen as a financial power and even lifeline to many countries. If a business wants to enter China and become established there, it must realize that it will need to be accepted

by the Chinese, rather than assuming that the Chinese must accept it.

Our earlier example of a western manufacturer replacing a popular local product with something new was one of the factors in its failure – it was seen as foreign. And simply exporting product with its existing labelling won’t work. In order to appeal to a Chinese audience product labelling needs to be carefully designed and translated as very different design standards apply.

5. Not Understanding the Market Potential in China

Many businesses mistakenly believe because China has a population of 1.3 billion and is developing so quickly that the potential market is that large as well. The reality of the market numbers, while still potentially huge, is much lower. In order to get a true picture of the potential market in China, it’s necessary to understand the buying culture of the people.

China is learning to embrace a new lifestyle, with previously forbidden doors opening to new buying opportunities. The target market for many foreign companies is the under-40 group, middle class families in the urban coastal centres of the country. This segment of the population is much more open to Western products and businesses than the older, more rural and traditional Chinese population. There are an estimated 80 million middle class members in China (annual income between 60,000 and 500,000 Yuan). Thirty percent of them

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live in the four richest cities: Beijing, Shanghai, Guangzhou and Shenzhen and 80% of them are under 45. If you consider wealthy households, the numbers are growing from around 1.6 million in 2008 to an estimated 4 million by 2015 (annual income over 250,000 yuan) and this sector of the population wants luxury products. So as you refine the potential buyers of western products, the current targeted demographic is more likely in the millions than tens of millions. Obviously there will be trade from other segments of the population, but this is the primary purchasing power in China. But the landscape is rapidly changing - with China’s ageing population growing, the demographics are heading towards the pattern currently seen in Europe, North America and Australia – so marketing strategies will need to shift from the current focus on under-40 to the over-50 bracket. Furthermore, companies need to develop markets in adjoining hinterland areas that will quickly build a large middle class consumer base.

There is also a great deal of domestic competition in China commanding a respected and formidable portion of the buying market. While the Western world focuses on mega corporations that are reproduced in every community, China is still very invested in a “mum-and-dad” culture in business. While some corporations have made inroads, the domestic market dominates most buying culture. Nearly 80%

of Chinese do their business with the privately owned retail shops that currently exist. This traditional business behaviour makes it even more difficult for foreign companies to successfully settle in and become established in the buying market.

If a multi-national corporation hopes to succeed in entering the Chinese market, they need to do so with on eye on the long-term picture. Proctor & Gamble has been one of the few retail giants that have effectively established themselves in China. They have been present there for nearly 30 years and have worked systematically at building working relationships with the Chinese government and at introducing world-class technologies to China. Their long-term investment in China has been the key to their continued success.

Automobile manufacturers Volks- wagen and Peugeot illustrate the importance of understanding the rapidly changing market in China. They entered the market at the same time, but Peugeot lost tens of millions of dollars every year and eventually sold its plant, whereas VW’s revenues grew at an annual rate of 77% and enjoyed more than a 50% share of the passenger car market at one time. Experts concluded that Peugeot failed to learn from and adapt to a rapidly changing environment while VW realized who the buyers were and structured their offering to meet their needs and became the most successful car manufacturer in China. Peugeot has returned to China in 2004 claiming

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to have learnt the lesson of how to be successful and VW’s appeal has waned as it failed to keep pace with changing demands and the consumer market.

Foreign companies have the greatest opportunity to succeed in China if they are able to retain some of the flavour of China in their products and services. China is making huge strides in modernizing, but this doesn’t mean that China is Westernizing. Businesses that sell products appealing to the Chinese from the outset will succeed much more rapidly and continue to succeed much longer than foreign businesses seeking to incorporate their own national style on China.

6. The Legalities: Politics, Govern-ment and the Legal System

Political power and government authority is a very covert - and often corrupt - fact of life in China. While democratic societies take their ultimate authority from the highest levels of government and power, in China the exact opposite is true. The national level of government is the State Council, which formulates central policies based on the doctrines and ideologies of the Communist Party. The State Council is strictly big-picture. The governmental power then moves through four more levels - the provincial and the four municipal city (Beijing, Shanghai, Tianjin and Chongqing) governments, city, county and town/village governments, with each level basing decisions on individual and changing circumstances. Local governments can have widely differing

policies. The local government and local Party Committees also have the autonomy to change policy whenever, wherever and however they see fit, within the general guiding policies of the Communist Party as set forth by the State Council.

As a foreign business dealing with the Chinese political and governmental authorities, there is no caution too extreme. When you are conducting business in China, government is definitely a part of the equation.

can make dramatic differences in this area. Much of the industry and infrastructure in China is state-owned. Communist Party leaders carry great influence and you may not even be aware of who they are within an organization. The Party Secretary (every organization has one) has deep

and you must give face to him or you will find extreme difficulties in negotiations and pricing. It may not be apparent who he/she is – often in the background, maybe even presenting as having no business card or a card with an obscure title so as to remain anonymous – but not to be ignored. Use your contacts to identify the key players in an organization and always observe the pecking order.

An example that runs parallel to the red tape facing businesses as they seek to set up in China, illustrates the point. Marriages between Chinese and foreigners are processed through a government department with a name like “The Registration Office for Marriages between Foreigners and Chinese”.

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Each local bureaucrat can request different documents and have the foreigner running back and forth time and time again to satisfy a seemingly never-ending quest, rather than providing a complete list at the outset. Having can mean the process is smooth and painless.

You will also find that the legal system is young and undeveloped in China. Rules are rapidly changing in China and these changes are not always transparent. There is little intellectual property protection in China, which can lead to your trade secrets and proprietary information being stolen right out from under you, leaving you with little or no recourse. Up until recently, if a foreign business person was involved in a court battle and their opponent had outranking theirs, they would almost certainly lose the court case. Fortunately, there is now an arbitration commission that parties can resort to, if their contract allows, which has substantially improved this obstacle. It is strongly advised to have your own local attorney in China, as well as your own lawyer who is experienced in working within China, in your native country. Your legal team, both in China and at home, must be able to collaborate effectively to protect your business assets.

The complex finance and banking rules in China, including repatriation of funds and other regulations, impact how and when funds are given to businesses seeking financial assistance.

The essential costs of and giving good face are also very real financial considerations that must be taken into account when financial arrangements are made. Many aspects of might be considered bribery in other countries, but in China they are part of doing business. It is critical to avoid any criminal action, of course, but offering gifts, doing favours and making connections are part of the cultural behaviour and need to be factored in to financial planning.

7. Lack of Personal Management of Your Business

Many businesses that start up in China fail due to essential management issues. Whether it is managing suppliers or your own employees, you are operating in a different culture and language environment. If you attempt a hands-off style of management, your business is in jeopardy. You need to be actively involved on an ongoing basis. You need to expect and plan for difficulties in recruiting and retaining skilled staff and develop loyalty and trust from them. There are intrinsic cultural difficulties when you manage a workforce of mixed cultures. Expectations between management and staff may be viewed quite differently by Chinese natives and foreign management and employees.

You must invest the time and money into studying cross cultural issues and the particulars of hiring the right people with experience in both cultures. Your own trained professional translators and interpreters are vital so you know

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the facts and realities of how things are functioning behind the scenes and get the full story. Incentives and gifts to your staff can be used to build

and cooperation. Provide extensive training, opportunities for overseas travel and a clear path to promotion opportunities to your staff as evidence of your commitment to the long-term success of your business and your commitment to the Chinese culture.

You must also plan on regular visits and communications with your suppliers if you intend to do business in China. Clear procedures must not only be established, but they must be monitored to ensure they are being adhered to. Your products must meet certain quality standards and effective communication is needed to clearly define the product and technical specifications necessary to meet those standards. You cannot assume that procedures and policies will be consistently carried out in your absence. You also need to inspect your manufacturer’s facilities as well as individual shipments for quality control purposes.

Chinese toy makers have had a great deal of safety and quality issues in recent years including the use of potentially toxic coatings resulting in a number of recalls. This might have been avoided with better and closer inspections, but also by realising that constant demands from Western buyers for lower and lower prices forces manufacturers to cut corners.

8. The Communication Great Wall: Language - Interpreting and Translation Difficulties

You wouldn’t want your bridging finance to be directed into the latest bridge-building project, would you!

The number one mistake people make when expanding into China is failing to realize the enormity of the communication hurdle. The language barrier in China is extensive for several different reasons. First and foremost, Chinese is the language of China (not English!) and communications must be in Chinese. If you want to do business in or with China, you need to make it easy for your offering to be clearly understood and show respect; relying on a Chinese counterpart to translate your correspondence and materials into Chinese means it probably won’t happen, or if it does it will be slow and not necessarily correct. The cultural etiquette in China is extremely different from the Western world. English may be understood to some extent, but the key players still require communications to be in Chinese. Chinese businessmen may mask their ability to understand English as a matter of saving face and many of the real power brokers and decision makers will not understand any English at all. Further compounding the problem, local Chinese translators and interpreters are not the best solution to the problem.

China-hired translators and inter-preters may not fully understand the need to translate accurately and

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impartially; they may not be trained language specialists at all, simply the best or only speaker of English in the organisation. Cultural aspects such as and face play a huge role here. Even though you hire them to work for your business, cultural re-straints may prevent them from act-ing in your best interest, whether intentional or not and issues of face may impede the full and accurate translation of your words when it is easier to miss out or make up words where something is simply not un-derstood. In order to protect your business financially, legally and ethi-cally, you need to hire your own in-terpreter and translator, rather than depending upon finding sufficient and capable translators in China. In doing so, however, there are several key points to keep in mind.

Regardless of where you hire a translator and interpreter from, you must find one that is professionally trained. Subtle language nuances can mean huge misunderstandings and in business that means money - and possible disaster. In addition to ensuring that your translator is properly educated in both Chinese and English (or your own national language) and in interpreting/translation, you also need one who is intimately familiar with your business and industry. Every industry has its own jargon which must be clearly communicated between all parties involved in a transaction. Your individual business also has its own systems and proprietary information

that must be understood by your translator before it can be properly and correctly communicated to your Chinese counterparts. Good preparation and working with the same interpreter/translator over time, can add enormous value to your negotiations.

At a negotiation over a potential training deal, the Chinese chairman indicated that he was so impressed at the Western institution’s experience and offering that he determined: “We’d like to send groups to your college for training”. Their interpreter: “We’d like to carry out friendly exchanges with you in the future”. A potential big loss was retrieved by the Western party’s interpreter who quickly interjected.

Poor communication abilities are one of the largest hindrances to foreign businesses who are attempting to break through Chinese cultural barriers. In order to protect your business and achieve success, the ability to bridge the language gap precisely and without error is paramount.

There are great opportunities for companies that want to do business in China. However, the failure to properly plan your strategy, address the language barrier, research the history, culture, and political and government conditions can close the doors permanently and lead to big losses. Taking the time to fully investigate every detail is a must for any company considering business with China.

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