|
China Reux: Part II
|
| |
|
Kellie Holloway is a Commercial Officer with the China Business Information Center, US Commercial Service (kellie.holloway@mail.doc.gov).
|
By Kellie Holloway
In China Redux: Part One, the author described the rapid increases made by the People's Republic of China in just three decades. In Part Two, she walks readers through the Do's and Don't's of developing trade relations with the country.
Find the Right Partner
Small firms typically need to find a counterpart in China to make sales and deliver products for them. The importance of personal connections, or guanxi (GWAN-shee) takes on added importance in a society with a complex bureaucracy and a weak legal system. A web of guanxi helps firms navigate China's bureaucratic and distribution challenges. Finding the right partner and ensuring they are reliable and have the right motivation, is especially important in a market where representative offices, the most basic, least-expensive type of foreign commercial presence in China, may only perform "liaison" activities. Chinese law does not allow such offices to sign sales contracts or bill customers directly. As a result, local agents and representatives are crucial.
Companies can locate distributors or sales agents through a variety of methods, including trade shows and business connections. The Department of Commerce offers a program that helps companies find representation in the market the Gold Key Service. Knowledgeable Commercial Service trade specialists research and develop appointments with the contacts you need to do business in China. The Gold Key Service can provide instant business relationships for companies new to China, by setting up tailored appointments with potential importers, distributors, end users or trade associations. Companies already in China seeking further representation can utilize this service to penetrate the market in new regions.
A Diverse Market Target Your Efforts
In a geographically large market, separated by preferential tastes and industrial concentrations, knowing where to target efforts is critical. Second-tier cities, or those markets outside of Beijing, Shanghai, Guangzhou and the leading economic powerhouses that first come to mind, are cities roughly the size of Boston growing, on average, twice as fast as the national economy. Not only do these markets account for over half of China's demand for goods and services from abroad, but also small American companies can capitalize on lower saturation, less competition, and government policy momentum. Fortunately, the Department of Commerce has feet on the street in 14 of the leading second tier cities through its American Trading Centers. Operated in partnership with China's national trade association, CCPIT, the U.S. Commercial Service provides exporters with customized products and services include developing partners and distribution, key contacts and in-depth market research.
Perform 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, do not do it-even though it is in China. The majority of American companies currently in trouble in China did not perform thorough risk analysis. Part of that analysis must include a review of intellectual property vulnerability. If you have a successful product or brand name, most likely you will be a target for intellectual property pirates. This toolkit was created to help companies understand the scope of the IPR problem in China, educate them on how to best protect their rights and give them an action plan for what to do once they discover their goods, designs, logos, software, packaging and so on have been illegally copied and sold.
Have Clear Contract Terms
China's consistent, nine percent economic growth leads to continual radical transformations in the internal dynamics of the economy. 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 timelines. Do not rely on legal advice from your Chinese partner have your own legal counsel.
Beware of claims that 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 he must visit your production facilities in the United States, remember that you cannot guarantee that he will receive a visa. This could invalidate 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 through independent sources.
Ensuring Payment
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. Be advised that not all companies have rights to provide payment in foreign currency, and payment may be arranged through a "window company." Inquiring about a company's payment process is an important partner screening element. 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 goods. For example, payment terms of "30 percent letter of credit, 70 percent payment, 120 days after delivery" would not be customary in China. For most large projects, terms of "70 percent advance payment, 30 percent letter of credit" would not be unusual.
Never agree to unsecured payments after delivery. One critical difference between China and most other markets is the country's lack of a predictable, systematic approach to credit and receivables management. Indeed, perhaps the primary risk of doing business in China today is the difficulty of collecting full payment on time.
The lack of credit infrastructure makes determining creditworthiness challenging but not impossible. Companies need to spend the time and money to analyze customers' and partners' creditworthiness or minimize exposure to the risk of nonpayment. The Commerce Department's International Company Profile service can help companies understand the background of potential customers or business partners by providing reports on individual Chinese companies.
A small U.S. firm that provides specialized training for the financial services industry in China ran into trouble when it attempted to save money by foregoing due diligence, relying instead on a personal referral. The first training session it organized with its local partner was well attended, but success soon gave way to a trade complaint. A company representative stressed, "When I say the Chinese company took advantage of us, I mean it in the full extent." In this case, the partner collected $10,000 in registration fees but refused to share information on the number of paid participants.
The representative continued, "When it came time for [the partner] to pay us the money agreed upon, she reneged. She paid me $1,000 cash and promised to pay 50 percent via wire. We will lose 90 percent of what we agreed to." Given the vast need for financial services training in China, the U.S. company decided to plow ahead despite this experience, but with a more cautious strategy. The U.S. company found that locating a reputable partner through extensive research and requiring third-party confirmation of information could help avoid further trade disputes.
Look Before You Leap
Companies must be persistent in their efforts but flexible in their strategies to take advantage of the changing landscape in China. A Chinese proverb states, "It is the flowing water that stays fresh" (liu shui bu fu). To help you stay abreast of market opportunities, regulatory changes, assistance with market research, locating suitable and reliable partners or providing feedback on the viability of a business plan, the China Business Information Center is a good place to start.
The Commerce Department has an office in Massachusetts ready with expert international business counsel. China is a rapidly changing market that requires a great deal of caution and patience. Companies should test the water carefully before jumping in. With proper preparation, however, firms can position themselves to profit from China's growth in the years to come.
|
|
|
|
