China is among the strongest economies in the world. China’s power and the size of its market offer many lucrative business opportunities for western companies. Statistics shown that in 2013, China had a total of 446,400 foreign-funded companies active. But Many of these foreign-funded companies, representing a total of 12.32 trillion RMB, faced many challenges.The way western companies do business is notoriously different from the Chinese market.
Indeed There are many mistakes made by foreign-funded companies in that space . This article list the mistakes that every business owner should avoid when operating a business in China.
But before we dive into this topic , it’s important to look at the type of foreign-funded companies that exist in China: The three main categories are a Wholly Owned Foreign Enterprise (WOFE) which is completely launched by foreigners, a Joint Venture (JV) on the other hand is the partnership agreement between a foreign company and another company like a local company for example and last but not least a Rep Office (RO) which is the representative of a foreign company.
Let’s go back to the mistakes that entrepreneurs should avoid in china:
- Hiring cheap services: Many foreign companies which want to establish their brand in China think that because human resources are cheap, hiring local companies to manage the Chinese side of things could be a good deal. However an incomplete local administration staff can cause the company to stop its Chinese operation. As the CEO or manager of a foreign company, it is your responsibility to supervise work as often as possible to make sure that things are done correctly.
- Miscommunication: barrier language can Become a serious drawback in negotiations. Even if your partner communicate in china effectively, it’s still not enough in serious business transactions as Chinese people might not like it. The easiest way to avoid such disagreements is to have some basic Chinese mandarin skills under your belt.
- Closing a deal in one day: Developing trust before doing business is essential in china. Do not expect to close a deal on the first meeting as it all about building rapport . And this can only be developed transactions after transactions.
- Sign contract with a pen that is not black: This may sound funny but this is how things work in china. Many people are not aware that signing documents in china have certain requirements. And though western founders may find it irrelevant, One of these requirements is the use of black pen only. Otherwise documents will be rejected. The black ink is also required in most legal documents.
- Loosing control of your patience: Chinese people will always want to test your patience and drain you. It can take time to make things done in china. There are many authorities and requirements at any levels. Chinese people know how to use time constraints to their advantage. Therefore Be prepared to intense negotiations and transactions but also delays.
- Believing that low VAT is better: VAT stands for Value- added Tax. VAT general tax payer status is essential for company to benefit from tax reductions. There are two of them: small VAT payer status and normal VAT payer status. Small VAT payer status may be the best choice to make. However, One of the biggest problem with this status it is limited in the amount of VAT invoices per month which can implicate serious problems when growing. Therefore, in any circumstances, select normal VAT status. This is how to apply for a VAT Status.
- Talking business in inappropriate situation: There is time for everything. Chances are, your future partner will invite you to dinner. Talking to business over drinks or at a banquet is not recommended in Chinese negotiations. What is important to you is developing good partnerships while taking part in the social activities that are proposed.
- Don’t be too courteous: Business is business. Too much politeness can kill your business and shut down the transactions. It’s important to be direct and go straight to point during negotiations with respect and confidence. What people need is the assurance that you can provide great value to their business. Never forget that and make your point in words that sell and convince.
- Never do a joint venture: As we said earlier, a joint venture is a company that is created through a partnership between foreign and Chinese founders. Many people do think that a joint venture can complicate maters in term of management. However, this is not actually true. If you can afford a WFOE do not hesitate and do that instead of joint venture.
- Saying ‘no’ to early decision: In other to maintain good rapports between you and your partner, It’s important to use words wisely. Saying no directly can be seen as a sign of disrespect and criticism. Your Chinese partner should keep face on the first meeting.
- Write a wrong name on a business license: It may sound obvious, but a lot of business owners still do that. Grace SHI, an expert in Tax, auditing and accounting in both international and Chinese companies , said that most of their consulting firm’s clients make this error. There should be no discrepancy between the name on the owner’s passport and the one in the business license and other legal documents.
- Confidentiality: Under Chinese law, there is no penalty for an employee that shared proprietary information but employers can only claim losses caused by this act.
- Do not understand Chinese culture and spirit: China is one of the most culture diverse country in the world. If you want to prosper in this space you need to understand what they want and how they operate. This facilitates negotiations.
- A legal representative is a local person: Never put a local person in a position of the legal representative. All decisions in the company are made by legal representative. Carefully choose this one.
- ‘Guanxi’: “Guanxi is a general Chinese term used to describe relationships that may result in the exchanges of favors or ‘connections’ that are beneficial for the parties involved. Sounds like a simple way to create business right? The truth is this type of relationship can become somewhat time consuming and complex.” – from worldlearnerchinese.com. In another words, Guanxi is The exchange of favors which is crucial to build business networks in china.
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