China is a rising superpower whose economy is closely connected to and has a significant influence on the world economies. It is one of the most important trading partners for the major western countries, including Denmark. It is also a preferred place for multinational companies to locate their headquarters, or important subsidiaries. When considering engaging with the fast Chinese economic growth, it is important to know the principles of doing business in China. In this Insight, we focus on what you need to know to succeed.
China focuses on cross-border business activities
According to China's 13th Five-Year Plan (2016-2020) approved by the National People's Congress in March 2016, the aim is a more sustainable and open economy to ensure more frequent cross-border business activities and growing oversea cooperation possibilities for China and Chinese firms. According to Thomson Reuters, up until 20 June 2016, the total cross border merger and acquisitions in China reached a record high amount of $111.6 billion, more than that of the entire year of 2015 ($111.5 billion); the oversea purchasing by Chinese firms mounted to $82.2 billion.
Total cross border M&A in China
As at 22 June 2016 China is ranked as the no.1 player representing 20.8% of the total international cross border M&A, with Germany in the second place with 16.1% and USA in the third place with 11.8%.
The economic tie between China and Denmark has never been closer. According to Danmarks Statistik, in 2015, the amount of bilateral goods and service trade between China and Denmark mounted to a record high of DKK 116.6 billion, with a growth rate of 6% compared to the previous year and the amount of export to China tripled in the last ten years to DKK 59.2 billion.
For Denmark, China has already become the largest trade partner in Asia and the second largest oversea investment destination. In terms of trade volume per capita with China, Denmark, Germany and Holland are the top three countries in the European Union, with Denmark DKK 20,079 in 2015. So far, approximately 500 Danish enterprises have established branches or subsidiaries in China.
Understanding the Chinese government structure and your industry and being familiar with Chinese business etiquette and culture is imperative to success.
The Chinese government structure
Affected by the five thousand year history as a well-unified large country, China still has a relatively centralised government under the governance of the Chinese Communist Party. This entails a top-down governing structure. If the Beijing Central government wants to enact new laws, adopt new policies, or wants certain economic activities to happen, it has the capacity to make an influential change. Having said that, the central government is aware that it is not able to govern and manage every aspect of the Chinese economy due to the magnitude and complexity of the country and its population. Consequently, local governments also play a significant role in various economic activities, especially in terms of implementing policies or decisions made by the central government.
As much as China wishes to have an open economy, both inbound investments to China and outbound investments from China are subject to a relatively more complex administrative procedure than in Denmark. On 3 September 2016, China's Standing Committee of the National People's Congress (NPCSC) adopted a resolution to abolish the current approval system applicable to the establishment of most foreign-invested enterprises (FIEs) in China. However, authorities are still deeply involved in any potential foreign related investments, such as the foreign exchange control by the State Administration of Foreign Exchange (SAFE). Therefore, when doing business with or related to China, it is important to make sure different levels of government and all relevant regulatory agencies are properly involved at an appropriate stage. Hiring a lawyer or local consultant to find out the right approach and/or required steps to have a task completed can save you time and prevent barriers due to lack of communication or misunderstanding.
Know your industry
When making business plans, it is important to take the local specific business climate into consideration. For instance, in many industries, state-owned enterprises (SOEs) play a dominant and fundamental role and thereby create a competition advantage for the approximately 100 SOEs and other government related enterprises. The SOEs often get various explicit or implicit government supports, such as easier access to finance opportunities and tacit state guarantee. Consequently, if your business is within an industry with major or numerous SOEs, there is a risk that there will not be a level playing field.
The retail industry is a good example to show the importance of the basics of competitive analysis in a specific new market. Starting in 1995, many foreign retail giants entered China wishing to shake up the industry and copy the success they achieved in their home countries. However, after an early period of significant expansion in the first and second tier cities, they are facing increasing and intensive competition. The rather optimistic and ambitious initiative to expand to the third and fourth tier cities has become a considerable failure for most of the foreign retail giants.
The critical reason is that the common features of the retailing industry in China, similar to many other industries, pose huge challenges to the foreign firms' attempt of market concentration: over capacity, high level of fragmentation and saturated local markets at every level of the administrative governance units (Province, City, County etc.). This situation is especially prominent in the third and fourth tier cities where numerous local retailing firms have better relations with the local governments, well-established customer network, and more flexible approaches or even non-commercial measures to conduct competition. Recently, the foreign retailers encountered another problem.
Large Chinese e-commerce platforms are conquering and re-dividing the retail markets in China and have attracted an unparalleled number of customers. Facing with the immense challenge from the unprecedented boom of Chinese e-commerce giants, the foreign retailing companies need to act fast and adapt to the booming Chinese e-commerce to avoid being left behind.
Business culture in China
Pay attention to the hierarchy of firms
Usually Chinese companies have a clear division of ranks, which is reflected in the management. In these top-down management structures, the decision-making is normally left to the top level, while the mid-level management often only has the delegation power to pass words upwards.
In that case, when dealing with Chinese counterparties, it is of critical importance to meet and discuss relevant matters with a person at the right decision making level. Even if this is not always an option, knowing how this works will help you understand why a decision is not made until the matter reaches the right person, and that it may take some time for a matter to be passed among people at different hierarchies. Therefore, to make any business plan happen, you need to consider this factor, work it appropriately into your deal schedule, and - to the extent possible - make sure that discussions are with the right persons.
Build trust patiently
A Chinese businesspersons' perception of friendship is often quite different from that in Denmark. China is generally an acquaintance-oriented society, which means that people know each other and build friendship first. This friendship is usually a prerequisite for doing business together. In Denmark, it is common to follow the opposite order; people do business together based on a mutually beneficial basis and if it goes well, a friendship can be built, which might enhance more future cooperation.
One explanation for this business custom is that on the one hand, Chinese highly value credibility, and on the other hand, they tend to believe that opportunism, dishonesty and fraud exist to a great extent. For many Chinese, the effective and preferred way to protect themselves is through building a solid relationship with people that can be trusted and subsequently become their business partners.
Thus, in order to do business with the Chinese in China, you have to be esteemed as within the 'in-group' of the counterparty.
How to build trust is another important issue. Face-to-face meetings are key to establishing trust, and you have to be patient. The first one or two meeting might end up with nothing, but discussing everything except business is necessary in order to create the opportunity to do business in China. Any intentional or even subconscious expression of impatience might possibly be esteemed as an act of unfriendliness and cause 'losing face' (see more below) and thus obstruct further talk.
After work activities matter
When it comes to building trust, it is worth mentioning that this will often not be done in the meeting room but rather through after work activities. Usual occasions are dinners, karaoke, sports events etc., where people can relax and bond without discussing business.
It would not be unfair to say that a majority of agreements and consensus of transactions are reached around a dinner table. At dinners, alcohol normally plays an important role to create a relaxed and close atmosphere, and you should not be surprised by the numerous and endless toasts, such as drinking to 'the health', 'the friendship' etc. but rather try to be a part of it.
Guanxi - relationships above all
To understand the meaning of trust in China you also have to understand the meaning of Guanxi. Guanxi is best described as the social resources at your disposal when you want to have your business done. Guanxi is a two way street, it means more than 'I scratch your back and you scratch mine', and the obligation does not cease after one or two times but often lasts a lifetime. Correspondingly, it also takes a long time to actually build a Guanxi.
As described above, China is a society with both a centralised central government and decentralised local governments, and restrictions towards foreign investors, governance inefficiency, or even bureaucracy is sometimes unavoidable. Being able to rely on established Guanxi to find the right person or the right approach to make sure your business plan can be executed is very important.
Mianzi - losing face - why and how you should avoid it
Another consequence of the acquaintance-oriented society in China is the proclivity of maintaining Mianzi (face). Face means the kind of respect a person thinks he or she deserves, 'Losing Face' describes a state where a person perceives that he or she becomes less respectable. Losing face normally means a severally damaged and often irreparable relationship leading to an end to the business relationship.
It is probably not unfair to say that Danes generally have a very direct way of communication: we say what we think, are quick to utter disagreements and often use sarcasm. Many Chinese prefer a less confrontational and less direct way of communication, which means that their actions or behaviours do not necessarily show what they really think. In order for your counterparty not to lose face, be careful to avoid confrontational expressions of opinion or emotion, such as criticism, making fun of others or ignoring others' requests. Instead, you should express sentiments such as disagreement or displeasure indirectly. For example, you can use the phrase 'may be' or 'we'll discuss it in the future' to indicate your hesitation or reluctance to do something, rather than saying "no".
Perception of a contract - when is it final?
In Denmark, we often set out with a standard contract, which is altered to reflect the result of the parties' negotiation. For Chinese, a standard contract in the beginning is irrelevant. Only when all matters have been negotiated and agreed will a contract be discussed.
When doing business in China you should be prepared for the fact that for Chinese a contract or deal is never final. A negotiation can be prolonged forever; long agreed matters can be overturned very easily due to different reasons. Even though a contract is concluded, still the counterparty might reach out to ask for a change or concession, usually due to emergence of some new matters or whatever new perspectives that come up or come into its consideration. Of course, there is no "one size fit all" recommendation how to handle or to react to such request, but you should be noted that regardless of the legal basis of such request, do not take a 'no' answer for granted, and try to show some extent of flexibility if doing so would still benefit both parties.
Negotiating – maintain the right balance
Negotiating is always one of the most important steps for cooperation, but it needs to be done smartly. As stated above, maintaining face is an extremely important part of the Chinese business culture and face can be given and taken or lost. Therefore, confrontational negotiation should normally be avoided. However, negotiating itself means at least two parties representing different interests will be discussing relevant matters, where some extent of discussion or even confrontation can easily happen. To maintain the right balance, there are some principles that you should follow:
- be prepared: you need to familiarize yourself with every aspect of the transaction and preferably have at least one in your team that is familiar with Chinese business culture;
- be patient: consider when and what kind of signals you want to send, what kind of result you expect to achieve, and understand what kind of signals the Chinese counterparty is responding with. Sometimes, the Chinese counterparty might show a bit of anger or threaten to deal with others to press you to concede strategically, or dodge the questions asked for a period of time to agitate you;
- be ready to end up with nothing after going long lengths: the Chinese negotiators might take advantage of your psychology of 'reaching an agreement before we go back';
- be aware that friendship with your Chinese counterparty might be used by the Chinese side as a leverage to ask for more concession; and
- review every detail before signing the contract - your Chinese counterparty may suddenly come up with some new ideas or changes without keeping you fully informed.
Deal making and deadlines
Chinese businesspersons can be both very strict and very oblivious with respect to deadlines. The Chinese put huge emphasis on friendship and Guanxi and they have a presumption of 'trust until there is a reason to', so a deal making can be dragged into endless meetings, negotiations and discussions, despite the fact that you are under pressure due to a looming deadline.
However, once the Chinese counterparty is determined to make a deal, for instance, when trust is built or there is a sincere will of cooperation from your side, they can pursue the negotiation and deal making with lightning speed. When that happens, because of the comparatively more intensive working environment in China, you may sometimes be dragged into consecutive midnight meetings just to close a deal faster.
Business etiquette in China – 8 things you need to know
Doing business in China requires careful navigation of its business etiquette. Kromann Reumert recommends that, as a minimum, you should be aware of the following:
|Dress formally: Chinese would expect others to be dressed in formal attire for a business meeting, which is seen as a sign of respect, however, for numerous after-work activities, they will remove the tie to show, that they are relaxed and casual.
||Translate your business card: a business card is seen as a symbol of Mianzi (face) in Chinese business culture, and very meaningful. Therefore, it is given and received, using two hands to show respect and it is polite to stand up when the exchange is made. In addition, it is a sign of courtesy to have your card translated into Chinese.
||Match the rank: rank and hierarchy is very strict on business occasions, and respect to others is generally allocated according to that. Therefore, on an official occasion, such as a meeting, it is important to send a delegation of same rank to meet the other party to show your politeness and respect.
||Bring gifts: Chinese tend to use gifts to show their hospitality and friendship, so it is a good idea to bring small gifts for your hosts (the symbolic value matters more than economic value). It is very usual to bring small gifts such as souvenirs from your home country or regions and wrap them, preferably using red colour. Avoid gifts that have negative connotations for Chinese, such as clocks (death) and books (loss). Moreover, gift giving should also reflect hierarchy where person ranked higher get more valuable gifts. It is customary not to open any gifts until you get home.
|Use titles and avoid politics: It is important to address others using their title such as 'President Wang' or Mr/Miss and the last name. When choosing a subject of talk, it is better to choose some safe subjects such as culture and family, but avoid politics unless you are very familiar with your counterparty. Try not to act offended if you are asked more personal questions, such as marital status. If you do not wish to answer, do this in a polite way.
|Sit facing the door: a banquet is an essential part of doing business, so make a good impression at the dinner table. When you are hosting a dinner, you should understand that most Chinese are not enthusiastic about western food and prefer Chinese food. As the host, you will take a seat facing the door and the guests are seated in a descending order according to their seniority. Try to get used to the endless toasts to 'good health', 'friendship' and do not raise your glass higher than the person you 'cheer' with, especially one with higher rank than you. What matters the most is to fit in.
|Don't say "no": during a business meal, it is traditional for the host to serve food to the guests and not take 'no' for an answer. It is customary that the host pours the drink for you frequently to make sure your glasses are filled.
|Send agenda and avoid jokes: prior to a meeting you should send the agenda and information regarding the participants and their ranks/titles by email to your Chinese counterparty. Your Chinese counterparty would expect to know the agenda or purposes of the meeting and they need to know the participants and their ranks on your side to arrange a delegation comprising staff with more or less the same ranks and introduce/present participants from your side in descending order of seniority. When doing a presentation for a group avoid jokes, unless you are sure it will serve your purpose and that your audience can actually understand it as a joke. Focus on a cost and benefit analysis of your products - the Chinese are in general very keen to save money.
Kromann Reumert has considerable experience in advising Danish clients doing business in China and Chinese clients doing business in Denmark. We can prepare you for cross-border business initiatives and make doing business in China easier and more convenient for you.