10 Questions to Ask Yourself Before Starting Your First China Deal
Chinese are initiating more and more deals with Westerners, both at home and abroad. A Chinese entrepreneur or SOE representative might be on his way to your office RIGHT NOW – and he is ready to charm your sick-of-the-recession-socks off with El Dorado stories of 1.3 billion consumers and great connections. Before you go chasing China market dreams, do a quick reality check and figure out if you are ready to swim in the deep end of the shark tank.
I’ve been living outside of China for a little over two months, and I’ve had the chance to talk business with many smart people who are considering doing deals in China but lack experience. I’ll repeat one of the best single pieces of China business advice I’ve ever heard — “Don’t Check Your Brains at the Border.” (I heard that line from a speaker at an NYU business school presentation years and years ago – anyone who knows who originally said it wins a prize.)
Let’s be clear on two things.
- 1) Yes, it’s possible to do absolutely great in China — but it is neither quick nor easy. If you are talking to Chinese counterparties or consultants who are making guarantees or telling you that it’s a sure thing, you should be concerned.
- 2) Trying to succeed in China without a plan is like playing blackjack while blindfolded. In a burning building. On the rim of an active volcano. You may win big — but it’s not likely.
The China Story is not all bad.
It’s 2012, and Europe has left the building. Japan too. The US, while not roaring back, has been upgraded from critical condition to serious. China — well that’s a funny story… In China the people with the least to worry about are the only ones panicking – even if it’s about how much can go wrong. That’s a pretty good definition of the successful entrepreneurial class in China today. And they are looking at the US as their saving grace, or at least a solid Plan B.
SOEs (State Owned Enterprises) are also starting to expand their reach to Western shores. They like natural resource plays, and tend to make big bets on mines, farms, forests, oil fields, and the like. But they have also been known to get involved with SMEs that service or support infrastructure or resource firms.
In other words, you may very well come into contact with a Chinese counterparty who is serious about doing business in your backyard. He may represent a private firm expanding to the US, a potential partner, or even a representative of a giant SOE. But once the initial flush of excitement wears off, you have to make some hard-headed decisions about whether or not it’s worthwhile to explore the deal. The good news — the Chinese side of the equation is looking better and better. Chinese businesses are on a much more solid footing than most other countries’, they have cash, and are motivated. Privates need to expand into Western markets, and SOEs are under pressure to source abroad and improve their internal operations.
There’s Harm in Talking
The downside of “exploratory talks” with Chinese counterparties is that they probably want information, technology, and know-how. That means you have plenty to lose from just talking — unless you know who you are involved with and where you want the conversation to go. For information-oriented companies, there isn’t always a huge difference between relationship-building introductions and your intellectual property. If you make microchips, you know where to draw the line. If you restructure companies or market products, the line can be a bit fuzzier. Experienced China hands know that saying less is more, but newcomers to China often give away too much — particularly when drinking and socializing is involved. Chinese counterparties have been known to suffer isolated intellectual blockages when Westerners are explaining what they do for a living. Don’t make your proposal so detailed and specific that you solve the problem for free.
What’s the Plan?
It’s hard enough to do well in China if you know what you’re doing and have a solid plan and a lot of backup options. Unfortunately, inexperienced China newbies are falling for the “I’ve got guanxi” patter that Chinese dealmakers use as a throwaway line to introduce themselves with. Old hands don’t even hear it anymore, but it’s apparently still a door-opener in the US.
If you can’t answer these basic questions, you may want to delay your China negotiation until you’ve done a little more groundwork:
- Why China? There are a lot of great reasons to do business in China, but “some guy offered me a deal that was too good to be true” isn’t one of them. Opportunistic one-off China deals falling into your lap from complete strangers have a pretty low hit rate. Can you justify the time, effort, money and manpower needed to bring this deal in. Question two — do you have any idea how much time, effort, money and manpower will be needed to bring this deal in?
- How did this opportunity come about? There are three possible answers: On plan, off plan or out of the blue. On plan means you were intentionally cultivating the China market or developing sources or other business there. Off plan means that an opportunity has arisen that is right in your wheelhouse. Maybe it’s the same business that you’ve been doing in another overseas market. You know how to operate in an international environment, and now you have the chance to add the China market to your multi-cultural business roster. Out of the blue means it’s a business you don’t really know — in an unfamiliar environment. If you are working out of the blue in China, then Excelsior, Sir! I salute you. You will be dead soon. Dead and broke.
- What’s your goal for this deal? This is another one of those pesky strategy questions that the Ivory Tower types are always asking. It’s like this – you gotta have a plan. Making a lot of money isn’t a plan. It’s a wish. I don’t want to be a buzz kill, but everything in China takes longer, is more difficult, and pays off less than you were led to believe. You need an overarching strategic goal to keep yourself on track. It lets you know when things are going right, and when they are going wrong.If you don’t know what a win looks like, then you are at the mercy of your environment and your counterparty. If you can’t describe what success is, then you are just a compulsive-gambler type working hard at losing. In China you have to know when to fold your hand, and when to cash out a winner. You need to decide on benchmarks before you start.
- Can you do this deal now?How disruptive will a China negotiation be to the rest of your operation? Put another way — when the phone rings at 3:00 AM, who picks up ? If you’re the boss you are now grappling with the eternal choice. Delegate to someone who is not as good as you – or work even more insane hours and make your current wife start calling divorce lawyers. Of course, you may have hooked up with a potential China partner who doesn’t even bother calling — so someone’s got to chase him down just to keep you in the loop.How long will the negotiations take, and how many trips to China are involved? While it’s impossible to know the right answer, I can tell you that “quickly, and none” are rarely the right answer. Americans in China tend to be better at planning for failure than success. You know what you’ll do if they say “no”, but in China you are much more likely to hear, “maybe” — or “soon”. Can you drop everything and get on a plane to Beijing tomorrow? Do you have someone else on your team who can?
- What resources will you have to devote to it? Yes, of course you are brilliant and resourceful and an incredible powerhouse who never needs to sleep or rest. But a China deal is more like Hannibal crossing the Alps than a quick sprint across the street to the ATM. You’re going to need a budget – and a timetable. But you have to distinguish between operational plan and negotiating strategy. In China, you have to treat deal-making like a campaign that requires a separate budget, manpower plan and timetable. The Chinese do. If you run out of resources or over-extend your supply lines midway through a deal, they are going to eat your lunch.
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