Most private company owners staying at James Reilly's hotel near Shanghai echo the same sentiment about building a business presence in China: "They're frustrated in the beginning but once up and running, they're relatively happy."
As the CFO of
Solatube International, a producer of tubular daylighting devices, Reilly began sourcing solar panels in China two and a half years ago.
After finding he could manufacture the panels cheaper in China, his company entered the domestic market this past February by opening its first light manufacturing facility in Suzhou, a city an hour west of Shanghai. The business park Solatube moved to, which houses 130
500 companies like
, stands as compelling proof that everyone who is anyone is staking out China.
For Solatube, being in China paid off when it was hired to install its product in one of the arenas for the 2008 Olympics in Beijing. But like any foreign company that's reaped Chinese rewards, it has faced the same cultural clashes that have taken others down.
Chinese law changes almost every month, so if you modify your business model, revisit your business plan, recommends Alexander Pan, a tax partner with PricewaterhouseCoopers' Private Company Services practice. For instance, don't just assume the labor laws you have been following will suffice if your work force grows.
To avoid culture shock for your small business, memorize these three Chinese truisms.
1. You Can't Please Everyone
"If you're in bed with the government, you're better off," Reilly advises. That sounds easy enough, but when every rung of government (from local to national) has its own power base, sidling up to them all becomes a juggling act.
"You can ask government officials on different levels the same question and get different answers," Reilly adds. Each rung of government governs different departments like social welfare and labor, making the equation more complex.
Solatube is over a year behind goals because of time lost trying to meet such divergent requirements. Despite the inevitable frustration, Reilly recommends being prepared to wait it out, gaining trust locally and hiring a native manager to aid with navigating the system.
2. Contracts Don't Hold Up to Handshakes
In the U.S., contracts bind business deals like superglue. In China, they're more like written recommendations, Reilly explains. None of his contracts have gone bad, but he recommends developing stellar relationships with your local government just in case. "The chances of winning against the government in court is very slim," he says.
"Even the governor can promise you something one day and then be in prison the next," says Feng Xue, partner at DLA Piper.
In China, more business deals come through parties and dinners than company reps; relationships built on informality and trust are common. As a result, most transactions don't involve contracts, says Pan.
As a foreign company, try your best to obtain a contract for any major agreement, but never assume you will be protected by it, Pan continues. "A contract by itself is not sufficient. Make sure every step of the contract actually takes place, and don't assume someone delivered the goods or made a deposit."
To avoid offending Chinese business partners used to giving their word in lieu of a written contract, let them know you trust them 100%, but your U.S. parent company or shareholders require some sort of written agreement.
3. Size Doesn't Matter
"I don't know if anyone has a really good grasp," says Reilly of private companies and major multinationals operating within China's often complex legal and regulatory culture. "
took 10 years to get going here."
Reilly has seen companies of all sizes stumble because they were unprepared for vast cultural differences.
While a private company's flexibility helps it to nimbly maneuver the system, all the companies in Solatube's corporate park have the same issues. A friend of Reilly's who works for
, for example, said its plant completely shut down for months due to an argument between local and regional governments.
Small Biz, Step Up
It's not easy to get going in China, but success stories like Solatube's prove small businesses can make it on both sides of the globe. The positives win out eventually, Reilly believes, which for his company include lessened freight costs, a vast pool of engineering talent, access to budding local markets and an Olympic deal.
Though it's still a lumbering work in progress, China's legal system is migrating toward standardized laws and foreign-owned private companies are widely seen as better corporate citizens than large corporations, says Pan. "Local governments want to encourage investment in China, so you have that on your side," says Reilly.
As a safeguard, says Pan, have a good understanding of the legal system before you pack your bags, talk to locals in your industry and, most importantly, don't assume anything will be the same in China.