Doing Business in China by Glenn P. Wood

For many Western companies, especially smaller ones, the prospect of doing business with China is both tantalizing and terrifying. Between the People’s Republic of China and Europe or the Americas lies a formidable divide consisting of distance, culture and language. Most are aware of China’s economic success and rapid development of its own infrastructure. It seems that hardly a week goes by without a new high-speed rail link being opened or another air terminal being modernized and ATMs are more visible than they were prior to the Beijing Olympics. Thankfully, Western toilets are also more available making visits to China more comfortable. But practical problems remain when it comes to doing business. For example, many Western manufacturers are reluctant to offer their product for sale in China because they feel it will immediately be copied. This provokes them into making two, unreasonable business demands.

Firstly, in the self fulfilling expectation that the business relationship will be very short-lived, a high-price is placed on the product and secondly, the terms of business require between 50% and 100% upfront payment. This is due to the understandable concern that it may be difficult to collect from a company whose creditworthiness cannot be checked.

While this lack of trust is quite understandable, we have seen the other side of the coin in Chinese factories. Amongst the more progressive ones with good equipment, it is usually possible to find an expensive piece of Western machinery mothballed away and not functioning. One will be told that the supplier demanded 100% payment upfront but the machine never worked correctly and the supplier didn’t honor service agreements. This situation is problematic because in China, the supplier is expected to install and demonstrates his equipment at his own cost and only when it is working to everyone’s satisfaction is payment made.

Cultural differences clash here in spectacular fashion. This is a classic case of mutual distrust and suspicion which benefits greatly from the intervention of an intermediary known to both parties and trusted by both.

Wood & Associates International has made it its mission to create that climate of confidence for both parties through personal visits and the development of friendships which, ultimately, of valued more highly than contracts. And talking of contracts, agreements or any legally binding documents, an immediate problem surfaces regarding any reference to the laws which will prevail in the event of a dispute. Naturally, a customer in China will prefer the laws of China to be referenced whereas a supplier in Europe won’t countenance such a clause as they have no knowledge of the Chinese legal system. Occasionally the Chinese client will tentatively agree to being bound by the laws of the United States of America only to become confused when told there aren’t any; US laws relating to contracts are by state rather than federal.

Occasionally, Hong Kong law proves mutually acceptable because it is based on British law and yet Hong Kong courts are conveniently close to China. However, it is a little-known fact that since becoming

a full member of the World Trade Organization in 2011, China is acutely aware of its unfortunate reputation and works hard to mitigate the reluctance of trading partners. So it has set up CIETAC, the China International Economic and Trade Arbitration Commission which will arbitrate at very modest cost between the two parties. It has established a very good reputation for impartiality coupled with a strong willingness to side with the Western partner in the interest of breaking down barriers to trade. From the perspective of Chinese companies wishing to offer their products to export markets, there are similar hurdles to overcome. Not least of these is the reputation that China has for cheap goods of low-quality in spite of the many examples of high quality products reaching international standards for design and reliability. We have had the privilege of visiting factories in China which rival anything that can be seen in the West in terms of cleanliness, health and safety and up-to-date technology.  Although these factories may be located in cities with unfamiliar names such as Jinan, Hangzhou, Wuhan or Huizhou, workers are expected to don protective suits almost like spacesuits covering hair, footwear and clothes.

They may be then subject to biometric checks (facial recognition and finger prints) and required to pass through an air shower before venturing into the production area. Seeing believes and sometimes a personal visit by the client is required to inspire the requisite degree of confidence leading to acceptance of a fair and justifiable price. Having settled price and payment terms, the mechanics of international money transfers between RMB and Western currencies remain to be solved. This is not as straight forward as it might appear. We have learned from the Venetians bankers of the Renaissance and implemented a cashless giro system of credits and debits using bank accounts in China, Hong Kong and USA. We have even found it necessary to offer escrow services to Chinese companies who trust us to hold and release funds at the appropriate time.

 

Ever since the time of Marco Polo, China and the West have been mutually fascinated with each other and both sides have understood that trading relationships can be mutually profitable. This is equally true today and we at Wood and Associates International are committed to facilitating those relationships by fostering trust and confidence on both sides. What we have learned in the process is that another characteristic is essential  for the process to work and that is perseverance. It takes time to develop trust and those who are looking for quick returns, especially in today’s climate of financial uncertainty, may be disappointed but for those who stay the course, trust, integrity and ethical behavior will be richly rewarded. ■