The fascination surrounding China as a source of remarkable opportunities for American business is undeniable. As one of the world's fastest-growing economies, and the United States' third-largest trading partner, China's door stands open for American firms eager to expand their business horizons while dramatically increasing their profits.
While opportunities are abundant, challenges and potential pitfalls are equally abundant. Any company that expects to do business in China the same way it does it at home may be in for a parade of confusion, frustration and even financial devastation.
Take, for example, the recent experiences of Corporate Sourcing, a small provider of products for the promotional marketing industry.
After solidifying terms with a European client, my company headed off to China to find a supplier that could provide products within the client's price point. It was so simple: attract the customers, find the supplier, focus on customer satisfaction, make money. Everybody wins — but not this time.
The painful lessons of this experience form the following list of do's and don'ts.
Communication is key to solid and profitable business relationships. Initial meetings, whether in person or by phone or e-mail, create lasting first impressions, and if they are not strong and positive they can quickly become roadblocks. Corporate Sourcing, with offices in Hong Kong, has a wealth of information concerning both the language and accepted business behavior in China, and that understanding has helped open doors.
Organizations interested in doing business in China would be wise to provide company information in Chinese, and even to solicit the services of an interpreter who can initiate contact in Chinese. This demonstrates respect for the culture and a genuine interest in doing business in the country. It wouldn't hurt for principals involved in initial meetings to learn a word or two of the language as a further indication of respect.
“Ni how ma?” (“How are you?”) is a simple greeting in Mandarin, which is spoken all over China.
An absolute must is the exchange of business cards, using both hands as a sign of respect, with your name facing the other individual.
When accepting the business card of someone in China, make a point of looking at the information on the card — never just pick it up without looking at it— and acknowledging the information before putting the card down.
Those efforts, while perhaps time-consuming and out of the ordinary for most American business professionals, will be influential in establishing good working relationships.
Have a contract signed by both parties stating the terms of the order, a mutually agreed upon time frame for any returns or claims and indicating that any legal disputes will be governed by the laws of Hong Kong or your home country.
Corporate Sourcing entered an agreement with a factory having asked appropriate questions and having reviewed approvals and certificates for the product. The European client had submitted a large order, and the factory began shipment to three of the client's locations.
Doing business with suppliers in China requires full payment prior to an exchange of the bill of lading. Therefore, as the goods started arriving in port the factory was paid, and the products were sent to the end users. Corporate Sourcing, eager to invoice the clients and recoup our initial investment of $315,000, breathed a sigh of relief as everything went off without a hitch.
It was at that point that the nightmare began.
Within 24 hours of shipment, more than 100 calls about the products had been received, with complaints ranging from annoying to dangerous.
The client immediately ordered a recall. The factory refused to replace the defective parts and quit responding to all attempts to communicate. It was time to find legal assistance.
Finding good legal counsel was a huge challenge, as there were numerous legal firms on the Internet that appeared to be authentic, but which were not recognized or licensed in China.
After a variety of dead ends, we were forced to contact the U.S. Embassy, Trade Council, and Consulate and were eventually referred to a bona fide legal firm.
Bottom line — have your own legal counsel prior to entering into any business agreement with vendors, suppliers or partners in China, and make sure your contract is airtight.
Don't take your supplier's word for how things are done in China; let your legal counsel research the system. Give yourself an exit strategy for each phase of a project to ensure that you won't be trapped in something that just might eat you alive.
Familiarize yourself with the legal system in China. When you are on their turf, you'd better know the rules because you'll be required to follow them.
Chinese courts only recognize original documents as valid. Faxes and e-mails are not legally binding.
The Chinese government only recognizes documents that have been validated by government-appointed legal firms or the Chinese consulate.
Corporate Sourcing found a Chinese-appointed legal firm; however, there were still questions regarding what could and could not be done when legalizing documents.
Chinese law only recognizes losses based on the contracted purchase order. Other losses such as client costs, warehousing, freight and airfare are very difficult to recoup. Corporate Sourcing has had to eat thousands of dollars' worth of trips to China, phone calls and recall expenses.
Verbal agreements and handshakes to confirm a deal are meaningless, and contracts signed by both parties may not stand up to scrutiny. Avoid taking unnecessary risks with your business, your reputation and your future.
Attempts to recoup losses, no matter how valid, are rarely successful.
For Corporate Sourcing, this has been an expensive and exhausting series of lessons. As of this writing, there is still no final settlement between parties.
And since the beginning of the nightmare, we haven't received one order from that former large client. Even though the client understands the situation, the damage has been done.
However, after a year and a half of disasters, frustration and legal brick walls, my company is still on its feet and focusing on a different set of expectations and more stringent criteria for doing business in foreign locations.
China remains Corporate Sourcing's first choice for suppliers, given the low labor cost, but what we have learned could fill volumes.
We will step more carefully around the numerous barriers and pitfalls that are part of doing business in China, and we suggest you do the same.
Sheryl Bauer-Shewman is president and founder of Corporate Sourcing LLC, a direct importer with offices in Denver and Hong Kong.