Lee Sands
- 30 years of work experience in Asia in both the public and private sectors.
- Office of the United States Trade Representative, Chief U.S. trade negotiator with China and Japan from 1991 to 1997.
- Negotiated China's entry into the World Trade Organization.
- Speaks and writes both modern and classical Chinese.
- All 8 Best Practices
- Pre-Meeting Discovery Process
- One-on-One Call with Expert
- Meeting Summary Report
- Post-Meeting Engagement
Market Entry Strategies for China
Common Problems
- Misunderstanding the market in China can foil a plan from the get-go.
- The Chinese market is complicated, regional in nature, and in rapid development. It is a highly sophisticated, highly nuanced market (or set of markets) and requires considerable preparation to enter successful. In many respects, China's market is completely compatible with international market practices, but in others, is still highly restricted, or so local in nature that it is hard to penetrate.
China's market is a mix between free market and state-run economics. The government plays a much bigger role in business dealings than elsewhere, and if what foreign companies have to offer doesn't align with the government's needs or meet the requirements of the market, then market entry and market success will be highly challenging.
On the other hand, if you take the time to really understand what the government wants and what you're providing does in fact align with its priorities and interests, your business can do extremely well, and quickly.
It's important to truly study Chinese business practices in the beginning in order to really understand them, and then be flexible in order to adapt to them. - Companies don't know how to navigate the Chinese government and regulatory system.
The Chinese market is the fastest growing in the world and no company that views itself as a global player can afford not to have a China strategy. That said, the market is complicated, the roles that the government and even the communist party play are often different and highly nuanced.
The Chinese market is huge – imagine a market as large as all of Europe – but vastly more complicated, with municipal, provincial and regional markets that vary widely. Cities in east China, for example, have per capital GDP's as high as $30,000, while inland areas still truly belong to the third world.
Regulatory practices differ in different regions, as do cultural understandings, business practices, language, and sophistication. China's market is much more transparent than it was in the past, but transparency brings with it a plethora of laws, regulations and practices that can make it bewildering – even for the Chinese. If you don't set yourself up properly in the legal and regulatory system structure early on, your venture can fail in a pretty agonizing, extended, and expensive fashion.
The first thing to understand are the differences between the Communist Party and the Chinese government. The party makes the policy, and the government implements it. The government publishes a catalog, The Investment Catalog, put out by the ministry of commerce every year that outlines sectors where investment is encouraged and how the approval process in those sectors can be streamlined. In areas where Western investment is not so welcome, there are typically limitations and barriers, including higher rates of initial investment. In order to be successful, you have to have people on your team who really understand the Chinese government and how it controls foreign enterprises.
While many companies entering the Chinese market will mostly deal directly with the government, media companies will face particularly tricky rules and regulations because there are entire ministries that regulate media content, messaging, and so on. These ministries sound to Western ears like government agencies, but they are actually run by the Communist Party. Individuals who work in them may report on a dotted-line basis to government officials, but they report on a straight-line basis to the party.- The Chinese legal system is very different from those in Western countries.
- Laws in China tend to be vague and normative in adhering to the "usual" way of doing things. For the most part, there is no legislative history for laws. There may be records and dates in the National People’s Congress, but it only really meets once a year with a few Standing Committee sessions in between. The intent of the legislature or the intent of the law is known by the officials who drew it up and promulgated it, and the agencies whose interests are touched by it, and frequently nobody else.
China is a very safe country for the most part. Moral law dominates. The horrors that happen these days in India would never happen in most of China. In Shanghai, for example, whether you're a man or a woman, drunk or sober, you can walk down the street at 3 a.m. and you'll be safe.
That said, there are regions that really aren't safe, sometimes because safety isn't considered the role of law. A place like that could be dangerous for a foreigner who doesn't understand the local rules and system, know who is boss or who to deal with, how to speak the local language, or even embrace eating the local food. It's asking for trouble to be in a region like that for someone who doesn't know what they're doing. - Companies are not careful to launch with the right partner.
- Nothing is more important for a company starting business in China than selecting the right Chinese partners. "Partner" can mean a lot things. It could also mean an equity partner, in which case it's important to be aware of whether you, the foreign company, hold a majority or a minority. It's also important to understand what kind of state-owned company you're dealing with since there are many different types.
In China, there's also what's called a Yang Qi – a company that is owned directly by the central government. ("Yang" is short for "central" and Qi" is short for "enterprise.") There are about 120-150 of them countrywide, and that number changes from time to time. A Yang Qi can have extraordinary resources in terms of power. They have official ranks, and those at the top of the company can be moved directly into the government, or moved back out. If you're partnering with a Yang Qi, you're typically dealing with big government. This can be good in terms of the partner's resources and influence, or bad in terms of its ability to smother you.If you're a small company, you might have no choice but to partner with a big, state-owned enterprise because the sector is dominated by the state. But this type of partnership can also be really dangerous because you can be dominated and wind up with very little say in operations. Your technology, for example, might be essentially gobbled up, and you'll have wasted your efforts. The risk of being a small company going into business with a large company is the same as it is anywhere: an imbalance of power.
There's a Chinese phrase that translates as "same bed, different dreams" that captures the typical failed partnership in which both partners want to collaborate, but they have very different reasons for doing so. When both parties' interests aren't aligned, the partnership is destined to end in failure. There is a classic book called Beijing Jeep, by the journalist James Mann, that was published in 1989 and tells one of the most famous "same bed, different dreams" tales. When AMC/Chrysler entered the Chinese market and partnered with Beijing Automobile Corporation to produce Jeep Cherokees, it was a pairing that would on the surface seem perfect. But the problem was that AMC/Chrysler wanted to produce for the enormous Chinese market, and Beijing Automobile Corporation wanted technology that they didn't have, and they wanted to export to foreign markets. Those were very different goals, and the partnership was a disaster.
If the interests of both partners aren't aligned properly from the very beginning, it can take years to undo the damage. - Companies rush into the market without doing adequate research and without developing the right entry team.
Poorly thought-out partnerships can torpedo an enterprise, and often the bad partnerships come about because companies move too fast. They're so eager to enter the Chinese market that they don't slow down to do the research and develop the relationships to make sure that a partnership is sound. Also, adequate preparation is really important in order to really understand where your product or service fits in the Chinese market. Clearly that needs to be done early on in the process.
Another common issue when companies rush to market is that they don't take the time to develop the right entry team, with employees who really understand the country and of course speak Chinese. It's so important to have people on staff who deeply understand China. Companies need to understand that when you enter the market in mainland China, it's not enough to have American Chinese, or Hong Kong Chinese, or Taiwan Chinese, or Chinese from Indonesia on the project. You really need to take the time to find and hire mainland Chinese who understand the system.- Companies struggle to balance international standards with local practices.
Business in China is, in general, becoming more and more internationally standard. For example, regulatory structures are becoming more consistent with standards of international best practices. So it's much easier now to do things in China just like you would anywhere else.
That said, companies entering China have to balance adherence to international standards with how things are done locally -- really with what the local culture dictates. There are at least nine or ten regional cultures in China, and many, many subcultures. Most foreign companies enter the market in China without any sense of the local culture. They assume that business is done one way – their way – and they don't adapt to the local rules of the road. In essence, you have to take an international company from overseas and transform it so that it runs like a local company in China.
It's not just understanding the language, it's understanding the way people think and the history and the traditions. There is a whole subculture of ideas, gestures, and intentions which are critical to understand in order to get a business transaction right. There are many things not said directly, but which are perfectly clear to a Chinese person and completely unclear to a foreigner.
Also, international or American standards sometime clash with a Chinese practice or policy. For example, U.S. companies doing environmental work in China are legally held to EPA standards that the Chinese, simply because they're not as far along as we are in terms of environmental protection, find very baffling. In cases like that, it can be really tricky to figure out how to stick to the international or American rules AND observe the local customs.- Intellectual property laws are different and must be understood, anticipated, and planned for.
- Everyone knows that China has significant intellectual property infringement issues, and it's fairly common for people entering the market in China to get tripped up by intellectual property rights. But if a company take precautions early on to establish a good intellectual property strategy that observes Chinese laws already in place – and which, in fact, are quite protective – they'll be in a good position.
China's legal system is actually fully compliant with the international standards that are defined by the trade-related intellectual property rights practices of the WTO. They're fully compliant with TRIPS (Trade Related Aspects of Intellectual Property Rights). As is the case elsewhere, the problem isn't so much the laws as it is getting judges to enforce them and send people to jail for infringement of intellectual property rights.
Most companies, when they look at intellectual property issues, approach them as they would in the U.S. market and patent everything to death, thinking that will protect them. But it's really important to use local attorneys who understand not just the laws, but the difference between law and practice. For example, you can have all the trademarks and copyrights that you want, but if your product is a really hot technology, and you don't get to market quickly, you may find that your technology is gone and you have to go through a painful process of litigation to get it back.