China is booming! That’s the story you seem to see everywhere you look. Indeed, this year, China has emerged as the world’s second largest economy with an average annual economic growth of 10% over the past 30 years. Seeing numbers like these can make foreign companies salivate at the chance to tap into China’s growing market. However, Chinese business culture is unlike it is anywhere else in the world and to thrive in this market, foreign companies need to have an understanding of the major practical challenges they will have to face if they want to succeed here.
With over a decade of assisting foreign companies, especially small and medium size enterprises (SMEs), market and sell their products, technologies, and services in China, US-Pacific Rim International, Inc. (USPRI) has come to understand what the major problems are for these kinds of companies when operating or growing their businesses here. Below we offer what we consider the five biggest practical challenges for foreign SMEs in this market and how to address them.
1) Red Tape
In China, many administrative and bureaucratic tasks that have been simplified in the West can still be quite time-consuming. Everything from opening a bank account, to registering your company, to gaining product approval, can drag on for months. The lack of a strong rule of law and an inconsistent application of regulations means that such processes are not always designed for your company’s convenience.
In addition, many procedures that would be handled electronically in the West require reams of paperwork which need to be filled in and stamped by hand. The time required to complete these efforts can be unexpectedly lengthy. We know of many foreign companies that hire 1-2 full-time staffers in China, hoping they will lead their marketing and sales efforts, only to find that their employees spend more than half of their time completing administrative tasks.
To be successful in China, your company will also need a full-time administrative team in place which can handle all of your company’s paperwork in China. This support will free up time for your sales staff to focus exclusively on promoting your company’s products, without having to spend time getting approvals from offices all over town.
Cultural misunderstandings arising from miscommunication are one of the biggest challenges which foreign companies face in China. Although there are an increasing number of Chinese people highly proficient in English, it is uncommon to find someone who understands the subtleties of the language and possesses a strong enough understanding of both Chinese and western culture to navigate delicate business negotiations.
USPRI has witnessed numerous instances where heads of foreign companies make a trip to China, have several productive meetings, and return home with strong business prospects. While communication between the foreign and Chinese companies goes smoothly at first, things start to break down as business issues get more complex and the Chinese side has difficulty explaining to the foreign company business practices that are unique to China in a way that is understandable to a western audience.
What started as a promising prospect for both sides often breaks down due to misunderstandings. To avoid such problems, it is important to have an international team in place which can bridge Chinese and western cultural differences.
3) Human Resources
Year in and year out, western companies in China rate human resources as among the biggest challenges of doing business here. While western employees tend to delegate responsibility and have flexible lines of authority, Chinese workers are accustomed to a more hierarchical structure in which each person has a clearly defined role. Such differences can often lead to tensions between western managers who are used to employees who take their own initiative, and Chinese staff who have been trained from a young age to always follow instructions from the top.
It will be important for your company to have a clear set of procedures regarding incentives for outstanding work and punitive measures for substandard performance. In addition, regardless of the size of the company, you should divide employees into small teams which each have a clear leader who oversees the group and reports directly to his or her superior. To best motivate your Chinese employees, it will be necessary to closely monitor their work while also encouraging them to be creative and take risks.
4) Business Culture
You’re not in Kansas anymore. To succeed in China, your company must realize that it cannot take the same business model, which may have served you well in your own country, and simply apply it to the Chinese market. You will need to be flexible and adjust to a country that practices business according to “Chinese characteristics” deeply related to is traditions. Due to these differences, many business practices in China do not always conform to commonly accepted international standards.
Without a presence and close supervision in China, it will be difficult for your company to ensure its best interests are being advanced by its agents and employees. To adjust to these cultural differences, it is important to be humble and to learn from the new culture you are dealing with so you can have the cultural sophistication to grasp the complexities of this market.
5) Relationships (Guanxi)
One Chinese word you will hear constantly while doing business in China is guanxi. Translated into English, the word means, roughly, relationship. The importance of building strong relationships in business is not a novel concept for western businesses. However, in China, guanxi plays a far more important role than it does in the West. While in the other parts of the world, you may be able broker a deal just through formal business meetings; in China it is necessary to spend time getting to know your Chinese counterparts outside the boardroom during tea sessions and dinner banquets.
In order to develop such relationships, it is important to have the patience to build them. Due to the necessary time commitment, deals may take three to five times longer to complete in China than they do in the West. For your company to succeed in China it is important to spend time cultivating relationships with counterpart businesses, government agencies, and trade organizations.
Anthony Goh is president and Matthew Sullivan serves as the firm’s director of business development and communications of US-Pacific Rim International, Inc.