What’s your Chinese Counterparty’s Plan B?

In China Planning to Fail is Failure to Plan

Brad is a client’s nephew – and like most nephews he has a business plan that centers on revolutionizing the ____ industry in China. He’s being graduated from a well-known MBA program in the near future, so he is ready with a polished slideshow and spreadsheet.
Brad is happy when I ask him what can go wrong. His slideshow has a “Challenges” section, and his spreadsheet jumps to a worksheet with a light red background. He’s ready.

What about the upside potential? Brad doesn’t miss a beat. He’s even anticipated the old-school VC koan – what if an investor offers you 10X the funds you say you need. He’s good with growth.

What will your Chinese partners do if everything goes well? Brad tilts his head and, for the first time since I’ve met him, has nothing to say. I have to repeat the question a couple of times a couple of different ways, but in the end Brad gives the one answer that is genuine: he has absolutely no idea what his Chinese partners will do in the event of success.

Americans Plan for Failure
Western risk management techniques are all about failure and loss. We go in with risk assessments, thick contracts, penalty clauses and lines in the sand. We know what to do if everything goes to hell.

In China, Success Brings Problems
In China, however, failure is a relaxed, low-key affair. We all know what happened – the product didn’t sell, the regulation never came in, the process didn’t work. The money is gone, the tech didn’t meet its promise, the market has spoken. In China, however, life gets tense when the business works – and now there are assets and cash-flows worth fighting for and stealing. When you are transferring funds into the business and paying the bills, it’s all guanxi bromance and harmony. But the minute there’s a bank or a brand, its all “The Prince vs. “36 Stratagems”  .

New planning for New China Hands:

Every managers, partners or entrepreneur entering the China market needs to be able to answer these three questions:

a) What will your Chinese counterparty do if things go wrong? (Best Buy, eBay) This one is simple – they’ll say goodbye. You’ll pull up stakes and he’ll update his CV (if he hasn’t already done it that already). The fact is – he probably knew before you did.
b) What will they do things go according to plan? (Ikea, YUM, Starbucks) He’ll collect a paycheck, learn whatever he can and prepare for the next phase of his career – adjusting your brand for China, or working for another local who has the same idea but more capital. This is business as usual.
c) What will they do if results exceed expectations? (Danone, Apple, AMSC). Chinese partners at successful businesses will have two imperatives – getting your business (brand, process, IP) and getting you out of the picture.

Failure in China is simple and manageable. This is what most Americans plan for when they develop business plans. If things go well and the China business does fairly well, Western bosses are at their best – managing growth, developing a brand, leveraging off successes.

But Westerners in China tend to get in trouble when their brands, products or services are a big hit. That’s when partners and governments decide that it is worth the time and effort to make a concerted play for your business. Unfortunately for Westerners taking a traditional approach to risk-control, contracts, courts and due process don’t really work in your favor. If someone steals from your shop in China, you have recourse. If someone steals your chain of shops, the same people with power to protect you are probably already involved.

Next time: How do you protect yourself for large scale success in China?

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