Five Facts Every Businessman Should Know About China
Here's all you need to know before establishing your moorings in China
If you're about to enter the Chinese market, make sure to install the right messenger on your smartphone, find out if your customers like Peppa Pig, and cross-check your business plans against the five-year plan of the Communist Party. Otherwise, you may be setting yourself up for a quick exit.
A survey of representatives of small and medium businesses on their relationships with Chinese partners shows that most difficulties are caused by lack of understanding of three main things – local laws, the consumer market and cultural context.
Indeed, the particularities of China can't be ignored. One has to learn them and adjust accordingly. When working with the Chinese, one needs to consider five key factors that determine the way business is conducted in the country.
1. Geography. There is no monolithic China – all of its regions are different, primarily in terms of economic prosperity. Despite the country ranking second globally in number of US dollar billionaires (373 in 2018), according to UN statistics 14 percent of the population lives below the poverty line, earning less than $1.50 a day.
Regionally the country is divided as follows – Eastern China is a coastal zone with well-developed trade, historically the richest region. Heavy industry and old industrial manufacturing facilities are concentrated in Central China. And the West is agrarian and poor.
Despite the fact that the country produces approximately 90 percent of all personal computers in the world, China’s urbanization rate is a mere 56 percent, meaning 44 percent of the population lives rurally. Additionally, the country features more than 60 different distinct dialects, meaning Chinese from the south will not understand their countrymen from the north.
With all of this in mind, when starting a business in China, you might want to hire a local expert who can explain the specific conditions and characteristics of the region you want to enter. Last year, Peppa Pig became an incredibly popular brand all over China except within the Xinjiang Uygur Autonomous Region. Why? Because this region is home to a large number of Muslims who don’t eat pork.
2. Leadership. The Western concept of a leader is an exceptionally capable individual who is admired and followed by others. In China, a leader is a mini god and the bearer of truth. Therefore, all business, like any other power structure, from political to familial, is built on the Confucian vertical principle. All decisions within the company are made only by the director with almost no delegation of authority. Unless the head of the company approves your deal, it's a no-go.
Here’s a typical situation – after some great negotiations, a Chinese manager tells you that you will soon receive a draft of a contract. You wait a week, a month, and eventually three months but your emails still have not been answered. What happened? The boss simply didn't like your terms. However, the aforementioned manager can't just let you know that the deal is dead and this decision is outside of their power, as doing so would be losing face.
For this reason, when negotiating, don't try to force a Chinese partner to give a strict commitment. After all, the Chinese language lacks the word for “yes” (the Chinese express agreement by repeating a verb “Let’s go? – Let’s go.”). In addition, China follows contractual law instead of Roman law, so don't be surprised when a Chinese party requests significant changes to an agreed upon contract the day after it has been signed.
3. Collectivism. Picture a mountain with cascading rice fields. Every morning the Chinese person who owns the highest field must open a door to let the water from their field drain to the neighbour below, who then opens their door to the field below them. If any member of this chain fails to let the water flow, the fields at the bottom will dry out.
Historically, social interaction is a deeply rooted way of life for the Chinese, which occurs in units of clans and groups. When you communicate with a Chinese person, you need to understand that he or she exists as a node within a network of contacts and structures. For example, a few large clan companies own Hong Kong. If you are able to partner with one of them, you can enter the market and do business with no one stopping you, as the clan interaction network covers almost the entire region.
4. Understanding of business. “Business” in Chinese is 生意 (shengyi). The first hieroglyph means “to appear” and “meaning,” which explains why the Chinese so eagerly copy other people’s products. They believe that any idea or product altered with even a minor new element brings forth a new meaning. Doing business means imbuing the old with something new. However, there is another reason for the urge to copy any new idea – the competition in the Chinese market is fierce, and any newly emergent niche will soon be occupied by thousands of companies. Be ready for your new product to be copied instantly.
The general understanding of a company's activity in China can be described with the traditional hieroglyph 聴 (ting), or “to hear.” It is made up of several elements: “power,” “10 people,” “ear” and “heart.” When the Chinese do business, they “listen” to what is happening in the government. Active Party officials occupy a position in every company, and all decisions have to align with the general policy of the Communist Party and the current five-year plan. In addition, they closely monitor the behavior of their customers (“10 people”) and adapt their internal structure (“heart”) to changing conditions.
5. Digital technology. 600 million Chinese people actively use online services (compared to 250 million in the US). Chinese online platforms sell Boeing airplanes and luxury apartments. And Chinese businessmen almost never use email to communicate. WeChat messenger is not only a way to send messages – it is widely accepted as an ID. If you have a Chinese passport or work permit, you can pay for goods, do bookkeeping or order services from the government using WeChat, and messages can be used as evidence in court. When entering the Chinese market, make sure to have a good understanding of its unique digital infrastructure.
To sum up, to operate effectively in the Chinese market seeking out advice from local experts is a must, but not sufficient. No matter what, you will have to adjust your attitude toward business and learn to meet the needs of your Chinese partners. After all, it's not China who needs you but you who need China.
The life experience of Oleg Remyga, an expert in HKUST-SKOLKOVO EMBA for Eurasia programme, has always revolved around China. In the roles of Head of China Unit in the SKOLKOVO Business School and representative of the business school to China, he develops educational programmes for entrepreneurs seeking to do business in Asia. He draws on both his professional and personal experience in China in his work.