Tips for doing business in China

China is a great place to do business—if you know the 'rules'

Jack Daniels -- Purchasing, 7/14/2005

Now that the commercial and industrial infrastructure of Mainland China has reached a stable and sustainable level, many companies are considering establishing purchasing programs there. Drawn by the opportunity to lower costs, broaden supplier bases and localize supply for Asia-Pacific region manufacturing sites, there is a flood of RFQs rushing into China.

China is now a great place to do business but entering any new market has its risks. Here are five steps to take before doing business there:

1. Pick your products carefully  While almost any class of product can be purchased in China, not all make economic or strategic sense. Products which have a majority of their value tied to their raw material content rather than the value-add probably should be purchased close to home. A good example of this model is the bath and kitchen cabinet segment. Particleboard and veneers represent most of the value in cabinets. These raw materials most often originate in North America, so even with Chinese labor rates at less than 10% of the U.S. norm, cabinets still cost less at home. A better play in this market is to purchase cabinet hardware, which has a higher value density.
2. Know your supplier  The physical and cultural distance between you and your supplier is magnified when trading in China. As a general rule, engaging with a new supplier through their agents and representatives is only a start. To minimize the gulf and establish a productive relationship, you need to hold face-to-face meetings with members of the prospective suppliers' management teams. It is essential to interview key executives, tour their facilities, ask for and check references.
   The corporate structure and ownership of companies in China can often be murky and at times beyond comprehension. A useful start to your due diligence exercise can occur when arriving at the factory. Does the name on the sign match the name on the quotation? There may be a logical reason why it doesn't, but it pays to find out.
3. Build a relationship steeped in communication  While most Chinese suppliers employ at least one proficient English speaker, their mother tongue remains Mandarin (and often a second Chinese dialect). There are significant culture-based differences in communications styles around the world. In China, the boldly stated response of "yes" or "no problem" often means "I acknowledge your question" or "we'll try it once."
   A productive approach when meeting to review specifications, discuss scale-up plans and negotiate pricing is to proceed slowly. Speak slowly, avoid slang, jargon and contractions, and pause often to review key points. It is also useful to collaborate on a meeting summary, written on the white board before leaving the conference room.
   If you decide to move ahead with a new supplier, we recommend assigning a communications specialist within your organization. Learning to navigate one another's organization chart, phone tree and mix of personalities is a daunting task, in both directions. Your communications specialist should be the go-to person, who can field all questions related to the procurement project.
4. It's all in the terms  Special attention should be paid to commercial and shipping terms, usually referred to as "Incoterms". If you're accustomed to doing business domestically, most often the goods are shipped EXW (Ex-Works) or FOB (Free On Board). In Asia, the range of shipping methods is much broader, as is the responsibility matrix associated with the associated terms. It's your responsibility to understand when the title to the goods changes hands and which party is responsible for each element of the freight charges. Discuss which Incoterm is most appropriate for your company and model the costs and risks before sealing the deal.
5. Be patient  Most Chinese suppliers are building their businesses for the long haul. They've made significant investments in machinery, waste-treatment equipment, MIS and training. They're not fly-by-night counterfeiters. If you put in the time and build a relationship, or "guanxi" in Mandarin, you will have a dedicated and loyal partner that will move mountains for you when you're in a jam.
   If you enter China with your eyes open and are willing to learn about local business culture and build it into your plan, building a strong procurement program can be a reliable and important element in your overall strategy.