Lessons in China

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As a result o the tremendous economic growthand liberalization o the past thirty years, Chinahas become an attractive market or American andother oreign companies, leading many to travelthe road to China. Tis is culminating in a urry o business arrangements between domestic Chi-nese companies and oreign entities. Tese ar-rangements have run the spectrum rom complex

joint ventures, investments and acquisitions to avariety o reseller, outsourcing and manuactur-ing arrangements.

Unortunately, the road to China has oten beencharacterized by riction, ailure and the loss o millions o dollars. In short, it has been treach-erous and raught with economic peril. Many lessons on doing business in China have beenlearned, but most o them have been learned thehard way. Moreover, the majority o recent en-trants into China have re-learned those same les-

sons and suered similar rustrations and nan-cial losses as those who came beore them.

Tis article is intended to summarize thekey lessons learned by US companies in thepast thirty years and set orth actors that arecritical or success in China. However, each in-dustry has its own unique challenges and this ar-ticle is not intended to address them. Instead,it is intended to summarize certain undamentalactors that must be addressed irrespective o theindustry, size o company or success in the US

market. It should also be noted that many o thelessons learned overlap. Furthermore, one mustkeep in mind that China is rapidly evolving andthe paradigms o today may not work tomorrow.

Don’t Leave Common Sense at the Border. In considering how to do business in China, therst place to start is to avoid leaving commonsense at the border. Many o the same practic-es that work in the US and elsewhere also work

The Road to ChinaTen Key Lessons on Doing Business in China

in China. Fundamental business practices suchas setting clear objectives and methods to mea-sure success, thinking through the rationale orpursuing such objectives, establishing a tacticaplan to achieve the objectives, nding the rightpeople with whom to work, understanding themarket and competition, and being prepared

work throughout the world. All too oten Ucompanies entering China abandon these undamental practices. Tey become overwhelmed bythe “need” to get into China and their ear o or-ever missing the opportunity. Accordingly, manycompanies rush into China, invest heavily, andproclaim that they will take the market by stormvia superior products and services. In their hasteand enthusiasm, they leave common sense at theborder and orget everything they know aboutbeing successul.

Develop “Guanxi.” In every country, persona

relationships are important or conducting business. However, because o China’s long, tumultu-ous history, the country has a system o organizeddependency. It is personal relationships that openopportunities and get things done. With manylayers o bureaucracy and personal interests todeal with, China is not a place where individualunction alone. As a result, the whole pattern obusiness relationships in China is dierent thanin the West.

Although the Chinese are generally polite, suspi-

cion and distrust characterize all meetings withstrangers. Moreover, China has a history o hostile relationships with oreigners. One will otenhear reerence to the “century o humiliation,”a period during which oreign powers orcedpolitical, economic and territorial concessionsrom Qing Dynasty. As a result, trust is verydifcult to earn, especially or outsiders. Yealmost no business relationship can be ormed

without it.

FEBRUARY 25, 2008

By: James C. ChapmanPartner, Nixon Peabody, LLP [email protected]

Wanli Xu Associate Attorney,Nixon Peabody, LLP [email protected]



US companies and others struggle with thisdilemma that personal relationships are critical tobusiness success in China, but are difcult to es-tablish. In order to gain trust and be successul inthis environment, the US company must develop“guanxi”. “Guanxi” is a Conucian concept o

relationships that is at the heart o all businessin China. It encompasses a complex set o val-ues including hierarchy, respect, mutual benet,obligation and “ace”. Developing “guanxi” takessubstantial time and commitment.

In cultivating relationships with business, gov-ernment and social leaders in China and de-veloping “guanxi”, there is no substitute orhumility. An American coming to China to“show the locals how to do business” is boundto ail. China, like every international mar-

ket, is dierent. Although developing “guanxi”is a long process, a US company may stilldevelop key relationships by leveraging the“guanxi” o others. o accomplish this, in ad-dition to its own eorts, a company may con-sider using “zhongjian ren” or intermediaries

which, or historical reasons, are very commonin China. An intermediary can use his or herguanxi to bridge the trust gap. In essence, theintermediary is “vouching” or his or her cli-ent. Accordingly, intermediaries can be help-

ul in making key connections and acilitatingbusiness transactions.

Understand the Role Government Playsin Day-to-Day Business. Te role the “gov-ernment” plays in China is much dierentthan the role it plays in the US. In China, thenational, provincial or local government agen-cies and their respective ofcials are involved inalmost every aspect o business. Te license andpermit requirements are numerous and complex.

As a result, US companies should develop a strat-egy or dealing with key government constituen-cies. Te oundation o this strategy is meeting andcultivating relationships with government ofcialsat all levels. Tis group requires a lot o time andattention. Te rst step is or the US company to bring something o value to China such as jobopportunities, technology or investment. Govern-ment agencies will more likely take interest in theoreign entity i the company is bringing some-thing o value to their country.

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Te benets o developing these relationships wilincrease a company’s chance o success. For exam-ple, there are government agencies whose man-date is to protect oreign investors. Tese ofcialdo not want oreign investors to lose money and

will be helpul in many areas. Similarly, the gov

ernment is very aware o China’s poor reputation with respect to intellectual property protection Although this reputation has been earned ovemany years, part o the problem lies with or-eign companies that ail to understand how thegovernment can be helpul and to develop therelationships necessary to procure such help. TeUS company should make it a priority to developa relationship with the State Administration orIndustry and Commerce (“SAIC”) representa-tives who can be very helpul in combating in-tellectual property inringements. Te companyshould identiy the people with inuence withinthe SAIC. Te General Manager or other topcompany ofcer in China should make a sociacall and introduce himsel or hersel. Tereater, such ofcer should make requent telephonecalls and personal visits to discuss issues o mutual interest. Although it may take weeks or monthsto schedule a brie visit, the US company shouldbe persistent.

Learn to Thrive in the Local Business Environment. Te business environment in the in-dustry or region in which the US company intends to operate is critical. Te company muslearn to thrive in such environment. In orderto understand the local business environmentthe company must learn the local and regionapolitical and business dynamics. In addition todeveloping relationships with the appropriategovernment ofcials, as previously discussed, theUS company must also meet and get to knowthe local business leaders. Tese individuals havesignicant inuence in their respective business

communities. Developing these relationships isnot an easy task. Much time, patience and perseverance is required.

In addition, the US company must learn thelocal business etiquette and norms. Te correct protocol can actually be learned rom theChinese themselves. As previously stated, humility is a powerul tool in China. Accordingly, theUS company must be open to learning rom thelocal Chinese.

“Guanxi” isa Confucian

oncept of rela-tionships that is at the heart of all business

in China.



It is worth noting that even western-educatedChinese, who have spent years in the US work-ing as engineers or managers, oten struggle whenthey return to run operations in China. Tey o-ten suer rom “reverse” culture shock. As a resulto the tremendous change and growth, the China

they let bears little resemblance to the China to which they have returned. Accordingly, a oreigncompany relying on such persons must be patientas such managers adjust to the new environmentand learn the business etiquette and norms.

Know The Market and Your Customers. Related to the need to learn the business envi-ronment is the requirement that the US com-pany must know the market it is entering. A basic knowledge o the competitive landscape iscritical. Te identities o the competitors, theirstrengths, weaknesses and strategies must be ob-tained. Avoid relying solely on research reportsor the advice o marketing consultants.

Te company should also do its own eldwork anddirectly meet with people in the market. Althoughthe Chinese economy has been rapidly growingor many years, the domestic market in China isbrutally competitive. As discussed above, the UScompany must determine which relationships arecrucial or its prosperity. In addition, the company

must “know” its Chinese customers. Whether thecompany sells to businesses or consumers, under-standing attitudes, buying habits and other char-acteristics are crucial. o complicate matters, notonly are the customer likes and dislikes based upona dierent value system and vary rom region toregion, but they are rapidly changing as well. Tereis no substitute or engaging in direct contact withpotential customers. Te company must also beexible to adapt to these rapidly changing custom-er attitudes. A thorough knowledge o the marketincluding the customer allows the US company to

identiy the business opportunities and developthe strategy to be successul.

Select the Right Partners, Suppliers andResellers. Although this concept sounds obvi-ous, many US companies have ailed to exercisethe patience and persistence required to selectthe “right” partners, suppliers and resellers. Alltoo oten, the Chinese idiom “same bed, di-erent dreams” describes the difculties shared

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between the US company and its partners in Chi-na. Te US company must work hard to understand the objectives and motivations o any party

with whom they plan to do business. Tis is noan easy task in China. Americans tend to bestraightorward and open. Te Chinese are not

Learning and understanding the objectives andmotivations o such parties is part o the relation-ship building process. Te US company must bepatient and persistent in this regard.

A thorough due diligence is required in choosingpartners, suppliers and resellers with whom to workin China. Even though the sources o inormationand tools available in the US make it much easierto investigate the backgrounds, histories and trackrecord o potential partners, suppliers and resellers, nding the right relationships in the US is stilvery difcult. Such a task is even more difcult ina oreign environment like China. Although thesesame due diligence tools are not available in Chinacertain sources o inormation are useul. For example, local government ofcials can be helpul inthis regard, as can other organizations interested inprotecting oreign investors. Te US State Department, Commerce Department and other US gov-ernment agencies located in China and elsewherecan provide valuable insight. Prior relationships

with customers, academics, suppliers and other

can be leveraged when investigating a potentiapartner or reseller. Inormation obtained shouldnot be taken at ace value but must be checkedand re-checked or accuracy. Finally, the US company should consider evaluating multiple partnersTere is nothing like a competitive situation to il-licit cooperation. In its desire to move orward, theUS company must be patient, do its homeworkand not rush into the wrong relationships, ensuring that thorough due diligence is conducted onany prospective partner, supplier or reseller.

Internalize Chinese Cultural Values andWays of Thinking. It is no surprise that theChinese have a dierent value system than Americans. Tat value system dramatically aects howthe Chinese think and lter inormation. In ordeto develop benecial relationships and avoid problems and misunderstandings, an understanding oChinese values is highly recommended. Te di-erence between the Chinese and American valuesystems is dramatic. For example, Americans place

..humility is a powerful tool

in China.



great value on the individual. Te Bill o Rightsis designed to protect this undamental value. TeChinese place high value on the group or collec-tive. Te concerns o one individual are o littleimportance. Americans tend to be more egalitarian

emphasizing equality under the law and equality in relationships. Relationships among businesspeople in the US tend to be on a “rst name” ba-sis. Te Chinese place great value in the status o a person and strict hierarchical relationships. Evenrelationships among amily members are not al-

ways on a “rst name” basis.

Americans tend to be inormation oriented; theChinese are relationship oriented. Americansusually break problems and issues down intopieces while the Chinese tend to look at problems

and issues as a whole. Americans view themselvesas problem solvers who are constantly seeking theright answer or solution. For the Chinese, theprocess o building the relationship is more im-portant than solving the perceived problem. InChina that process oten involves exercising thecorrect amount o deerence due to someone witha particular status. Finally, Americans usually takea “reason-based approach” to conronting prob-lems or negotiations. Te Chinese on the otherhand, love to haggle. Tis process is not only im-portant because o Chinese “jiejian” (thrit) and

desire to always seek a bargain, but also as a pro-cess o compromise where each party can hold anequally valid position.

Furthermore, in order to tap into the Chinese way o thinking, knowledge o the national lan-guage is a must. Any US company traveling theroad to China must possess ample skill in Man-darin Chinese. Additionally, knowledge o thelocal dialectic is very helpul. For example, theability to speak Mandarin Chinese will be help-ul in Shanghai. However, the ability to speak “Shanghainese” while in Shanghai will increasethe likelihood o success.

Appreciate The Chinese Negotiation Style. Asa result o the dierent value systems, the Chinesenegotiate dierently than Americans. A thoroughunderstanding o that style, combined with theChinese value system, will help the US company to be successul in negotiating with the Chinese.Such understanding will acilitate better agree-

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ments and allow the US company to avoid therustration and animosity that oten characterizeUS-Chinese business negotiations.

Rarely will the Chinese oer a air deal. It i

up to the US company to ensure that the deais structured airly and results in a win-win ar-rangement. Similar to Section 7, a comparison oundamental US-Chinese negotiation approaches is the easiest way to understand the Chinesestyle. Americans seem to be inherently restlesand like short meetings. Te Chinese require along courting process characterized by lengthymeetings, banquets and social events. Te Chinese are ready to take advantage o a US com-pany’s over eagerness or impatience to get a deadone. Accordingly, the US company must quick-

ly demonstrate that it will not be taken as a oolOnce this is established, the second set o nego-tiations will be much easier. Americans, as a re-sult o their historical development and egalitarian nature, are oten inormal. Te Chinese, intheir respect or hierarchy and status, are otenormal. Americans are willing to make cold callsTe Chinese are not comortable with this ap-proach and, instead, draw on intermediaries innegotiations and other business dealings. Te

American negotiator tends to have substantiaauthority. Te Chinese negotiator usually has

limited authority. op-level Chinese executivesrarely bargain. It is not their role. Rather they

will ocus on evaluating the relationship and thesincerity o the Americans. As a result, the US negotiation team must careully evaluate the person

with whom it is dealing.

Americans are direct and usually do not hesitateto discuss their interests and what they desireto achieve. Te Chinese are the opposite. TeChinese approach is very indirect and cautious

American negotiators need to be very patientTey must also be attentive, looking or subtleclues and hints. Determining the Chinese in-terests and agenda can be likened to the processo putting a puzzle together. Similarly, the Chinese will oten use misdirection or make outra-geous demands just to see i the US company wilagree in its desire to get its oot in the door. Inreality, the Chinese are using this tactic to test the

American’s resolve.

Even relation-ships among family mem-

ers are not al-ways on a “first

name” basis.



Also, Americans eel more comortable workingon a proposal such as a drat memorandum o understanding or term sheet. Te Chinese pre-er substantial dialogue. Oten when Americanssubmit a proposal, the Chinese will ignore itor oer to “kan kan” or” yanjiu”, i.e. study theproposal. Americans, in their “reason-based” ap-

proach, argue the “pros” and “cons” aggressively.Te Chinese use questions to elicit inormationand learn about the other party. Americanstend to seek to resolve each issue in a sequentialashion. Te Chinese, on the other hand, jumprom issue to issue and back again. In negoti-ating with the Chinese, Americans must also beprepared to discuss all issues simultaneously andin a haphazard order. Nothing is settled until ev-erything is settled.

As mentioned many times, Americans tend tohave little patience; whereas “endurance” is animportant part o the Chinese culture. Te UScompany should always be on guard or state-ments such as “trust me, this is how we do thingsin China.” Tis type o statement is a negotiationtactic. Similarly, a US company must be careulin making “goodwill” gestures or acquiescing orthe purpose o generating goodwill. Te Chineserarely do this. From the Chinese viewpoint, suchgestures are oten seen as a sign o weakness andactually cause a loss o respect. Although the

Chinese way o negotiating is dierent, the UScompany hoping to be successul in China mustbe exible and adaptable to the way the Chinesenegotiate. It must also be patient and thorough inensuring that bottom-line business objectives aremet and the US company truly understands theChinese party’s intentions.

Understand The Role of Contracts in Busi-ness Relationships. Te role o contracts is oneo the big dierences between Chinese and USbusiness cultures. In the US, contracts are a key

component o any business relationship. Con-tracts memorialize the intent o the parties andserve as a tool to ensure that there is a meeting o the minds between the parties. As a result, con-tracts tend to be very detailed, long and providesolutions to almost every conceivable contingency.Te execution o a binding contract tends to be amajor milestone or Americans. Te Chinese, onthe other hand, are much more interested in therelationship than the contract. Tey oten ocus

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on the spirit o the agreement and not the actualanguage. rust and harmony are more impor-tant to the Chinese than any piece o paper. Aa result, or the Chinese, the negotiations otenbegin once the contract is signed. In additionthe “negotiations” may never end. Tis common

practice has led to a tremendous amount o rus-tration or US companies.

Te Chinese response to lengthy US contractoten take two dissimilar paths. Te Chinesmay review it, submit modest comments andsign it. Tey do not take this approach becausethey agree with the provisions o the contractTey take this approach because the negotiationhave not yet begun. Alternatively, in their loveto ‘haggle,” they may aggressively negotiate eachprovision. In such case, the Chinese companymay or may not care about the particular provi-sion being negotiated but instead is establishingits power, saving ace, adhering to the long pro-cess o developing the relationship or just testingthe Americans. However, a common tactic usedby the Chinese is to insist that the US company’obligations are very detailed to ensure that theChinese can get what they want rom the agree-ment, while leaving their own obligations vagueand broad. Tis lack o mutuality in obligationdoes not trouble the Chinese. Tis approach give

the Chinese room to maneuver, claim a dierentinterpretation and otherwise avoid perormanceNotwithstanding the Chinese attempts to keepcontractual provisions vague, the best practice isto clearly set orth in the contract anything thais important enough to aect bottom-line objectives o the US company.

Develop a Comprehensive “China Strategy”Te key step or a US company is to thoroughly understand why it wants to do business inChina. A clearly dened goal needs to be de

veloped ollowed by a realistic and detailed planor implementing it. Yet the plan must be alsobe exible permitting the company to adapt tothe constantly changing market conditions. Apreviously mentioned, the road to China canbe difcult. Te conventional wisdom is that“in China nothing is impossible, but everythingis hard”. remendous patience and perseveranceare required.

Te Chineseapproach is

very indirect and cautious.

American nego-

tiators need tobe very patient.



Also worth consideration in the strategy is thatChina is not a homogenous market. Tere are sig-nicant cultural, language, legal and business di-erences rom region to region within China. Forexample, business practices dier between Shang-hai, Beijing and Shenzen. Although most people

will speak Mandarin Chinese, the local dialects

are dierent. In addition, not only are Chinesesuspicious o oreigners but Chinese rom onegeographic area tend to be suspicious o peoplerom another geographic area. Accordingly, i aUS company intends to sell products throughoutChina, it must be mindul o “guo qing” or the“special circumstances” o each region.

Finally, a key element o the strategic plan orChina must be the recruitment o strong lo-cal leadership in China to execute the plan. Temanagers in China should have access to thecompany’s top leadership in the US. Te bestpractice is to initially select a great local teamand keep it intact rom the initial planning stagesthrough the start-up o operations and growthphase. Given the importance o relationshipsin China and the benets derived rom the rela-tionships with governmental and business lead-ers, having a senior leader who knows the history o the company and the relationships developedin China will help tremendously. Oten the topmanagement located in the US does not appreci-

ate the competitive nature o the Chinese marketsand difculty o doing business in China. Whenresults do not meet expectations, the natural reac-tion is to quickly change the management teamin China. However, it may be that the initialstrategy (usually developed in the US) was deec-tive or expectations unrealistic. A quick changeo management oreits the lessons learned andrelationships developed.

ConclusionChina’s evolution to a market economy has been

breathtaking. Although tremendous opportunity exits, US companies must be open to continu-ous learning and adaptability in order to managethe complex environment and the rapid pace o change. US companies must appreciate the chal-lenges waiting or them on the “road to China”and navigate the potholes, traps and other ob-stacles encountered along the way. Success inChina can be especially difcult; it is a place

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where US managers ace exceptional languagand culture dierences and a constantly changingenvironment. In any competitive market, turning dreams into reality is challenging, and China’scomplexities double that challenge. However, in-ternalizing the lessons described above and exer-

cising patience and perseverance, a US companycan achieve success in China.

Mr. James C. Chapman is a partner in Nixon Peabody’s Palo Alto oce. His practice ocuses on securities law, venture capital, mergers and acquisitionsIn the past twenty years, Mr. Chapman has been involved in over 175 mergers, acquisitions, nancingand public oering transactions. Mr. Chapman alsohas extensive background in international businestransactions. He helps U.S. clients structure investments in China, acquire China based companiesand also represents Chinese clients in public and private securities oerings in the U.S.. Mr. Chapmanis a requent speaker at China-ocused events.

Ms. Wanli Xu is an associate in Nixon PeabodyPalo Alto oce where she represents a wide variety odomestic and international businesses rom privatelyheld start-up companies to publicly traded corpora-tions. Ms. Xu’s practice involves a broad range o

corporate matters, particularly China related mat-ters. Ms. Xu holds law degrees rom both Chinaand the U.S. and speaks Mandarin and CantoneseChinese fuently.

We welcome your questions and comments.

For more information, please contact:

James Chapman

[email protected]

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Lessons in China