Chinese negotiation

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Find a champion to introduce you and vouch for you

this will go a long way to opening doors and minds.

Written references or letters of introduction are also

common. But a whole network of acquaintances and

business contacts around the country is much moreuseful than a single sponsor. Finding a champion or a

sponsor can be difficult for businesses entirely new

to China contact NZTE and KEA for help.

Paying for your partners in China to visit your operations in

New Zealand is a good way of keeping them informed and

motivated. Its also an opportunity to train Chinese staff.

Dont completely fill up the programme with work. About

half should be devoted to rest and relaxation, leaving time

for building the relationship and an affinity for New Zealand

and New Zealand products.

When hosting Chinese guests, remember the effort they

put into hosting and looking after you in China and

reciprocate this .

Investigate placing some of your Chinese staff in your

New Zealand operation on a longer term basis. (Help

ensure all visa applications to New Zealand are filed

on time and appropriately).

Use events like Chinese New Year to send greetings to

important Chinese contacts and friends. Also give your

Chinese-based staff a budget for these events.

If China is likely to become a significant part of your business,

consider hiring a Mandarin speaking member of staff. Longer

term you can commit to the two or so years it takes tobecome a proficient Mandarin speaker yourself.

Be polite and sensitive to Chinese culture.

Make an effort with the language even a little Chinese

can go a long way.

key learnings

Understand the business and commercial environment

and the importance of relationships within it.

Personal relationships are a powerful force in Chinese

business life.

The extent of this power depends on who you are dealing

with and where. Building a good relationship will take time and persistence.

The relationship you develop with an individual also

represents your relationship with their organisation.

Show that you are in China for the long-haul.

Meet and build a relationship with key officials, or at least

take steps to understand the environment they operate in.

Build relationships with the many Kiwis in China.

WAIKATO UNIVERSITY CASE STUDY

MY CUSTOMER, MY PARTNER TH E IMPORTANCE

OF RELATIONSHIPS IN CHINAGood relationships are important for success in any country, but

Waikato Universitys Ed Weymes has found that building and

maintaining strong personal relationships is a make or break

issue for the universitys education business in China.

Ed Weymes, an Associate Dean International at Waikato

Management School, manages the universitys joint degree

programmes in China. Under the programmes, Chinese students

do half their degree in China, taught in part by Waikato staff,

then come to New Zealand to complete their study.

Weymes says the importance of personal relationships is

probably the key difference hes experienced between doingbusiness in the West and in China. Historically, China never had

a strong legal system, so business has been conducted on the

basis of relationships, he says. In the West a business

agreement is cemented with the contract. In China the contract

is less important and business is conducted first and foremost

between people.

As a result, hes had to develop more than just working

relationships with his Chinese counterparts; hes had to develop

personal relationships with them. In China this concept of

working through personal relationships is called guanxi, which

represents the relationship and obligations between individuals.

While Westerners are unlikely to attain guanxi, a trustingrelationship is critical to any business venture.

Developing these relationships takes many visits and dinners

and is established over time. For example, it took two years

before Weymes counterpart in China who spoke fluent English

would speak anything other than Chinese during formal

meetings. When the switch finally came it was a sign that a

relationship of trust had finally developed.

Use Chinese nationals to bridge the culture gap

Having a Chinese national as a mentor can be valuable. When I

first started going to China 25 years ago we had a Chinese

history professor who would come on our visits and explain thesubtleties and nuances of what was being said in meetings. He

advised us on what we should and shouldnt accept.

A Chinese national on the staff also helps Weymes navigate

cultural differences. Your Chinese counterpart may feel more

comfortable raising delicate or difficult issues with a Chinese

national than with a Westerner like you, because this will avoid a

loss of face or embarrassment.

He uses an interpreter rather than a translator to ensure he

understands what is really being said. China is a country where

yes can mean no and no is never said. You need to understand

what level of yes is being expressed: Yes I understand you; Yes I


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agree with you; or Yes we are committed to that.

An interpreter who knows your organisation can explain

the nuances of the responses.

Build relationships with senior staffWeymes says you need a relationship with a senior member of

the Chinese organisation, otherwise your project might not get

noticed. I maintain a relationship with the presidents of the

Chinese universities I am dealing with. I may not meet with

them on a regular basis but I have their cellphone numbers

so if there is a problem and I need to talk to a decision maker,

I can actually reach one.

When dealing with problems protect the relationship by raising

the issue indirectly. Dont accuse your partner outright or issue

threats. Deal with it the Chinese way quietly and indirectly.

Tell them there is an issue you are concerned about. Dont insist

on an immediate response, but wait for them to deal with it,says Weymes.

Maintain your key relationships

To maintain essential relationships Weymes visits China four

to six times a year. If an issue arises you can discuss it by email

or fax. But at the end of the day if you want to get it dealt with

quickly you need to jump on a plane.

Relationships with government officials and State Owned

Enterprises tend to be more formal, while dealings with private

companies particularly in the developed southern and eastern

regions are becoming more like those in the West.

Because business is based on personal relationship rather thancontracts, you need a continuity plan for when key staff leave,

Weymes says. We were about to sign a contract when there was

a change in senior personnel on the Chinese side and we were

asked to put things on hold until the new senior administration

got to know us. It took six months to get back on track.

Tips

In China its who you know, not what you know, that

sometimes counts.

Dont try to form a quick relationship because it wont work.

Accept that it will take time two or three visits just to get

things started.

Negotiations Chinese style

One of the best places to learn about negotiating in China is the

countrys local markets, Weymes says. If the stallholder asks you

for RMB 700 for a nice shirt you should offer RMB 40 and then

walk away from the store at RMB 80. When you start walking, nine

times out of 10 you will hear the words Come back okay, okay.

The Chinese are tenacious negotiators, so you need to have a

bottom line and you need to stick to it, Weymes advises. If you

acquiesce to a request then another request will be made. If you

acquiesce to that, a third one will be made. While you keep

acquiescing your partners will keep pushing.

When you reach your bottom line stick to your guns. I had a

situation where I was meeting with my Chinese partners at 9am

to spend 45 minutes reviewing all the terms we had negotiated.

Well, 11 oclock came and we cancelled our first train, 12 oclock

came and we cancelled that train. When our partners tried torenegotiate the financial aspects I just drew my line in the sand

and wouldnt budge. And when they saw that I was just letting

trains depart and that we were intent on staying there we

reached a final agreement.

To ensure the negotiations dont collapse in confusion and

frustration, prepare yourself for a completely different approach

to negotiations. When we negotiate in the West we tend to

work logically through the topics, signing each one off then

moving onto the next. In China things dont work that way. You

can reach agreement on an issue and then find that a few hours,

days or a month later it will come back to be relitigated. If you

ask why something thats already been signed off is being

relitigated the response might be: We just wanted to see

whether you have changed your mind.

And remember you are never off duty. Never be flippant.

A casual comment to a Chinese second stringer over a beer in

the evening is likely to get repeated back to you at the formal

meetings the next day.

3.5 NEGOTIATIONS AND MEETINGS

Managing meetings and negotiations

When entering business meetings and negotiations in China be

aware of a set of protocols and expectations that are differentfrom what youd be familiar with in Western markets.

Understanding these differences can be the margin between

success and failure.

Chinese people have traditionally done business on the basis

of mutual trust rather than by written contracts. In this

environment you will need to gain the trust of the key people

you are negotiating with as well as being well covered

contractually. You will also need to develop an accurate

opinion on whether you can trust your counterparts.

This means a successful conclusion to business talks can take

longer than expected. The first meetings are likely to be socialget to know you events such as dinners rather than pure

business meetings.

The Chinese also have a reputation for being tough negotiators

who will push and push to get what they want. You have to be

prepared to say no.

Negotiations

kiwi lesson its a courtship

Foreign businesses will fail if they do not understand the Chinese

way of doing things. There is no need to adopt these ways but

merely to adapt to them. For instance your ace New Zealand

negotiator may not be the best person to send to China.


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They may be too direct, too forthright and used to drawing a line

in the sand and defending it against all challengers.

A negotiator with a high level of emotional intelligence and

intercultural communication skills is preferable someone whois able to read body language and to empathise. Negotiation in

China is a courtship process: you both go out for a while and get

to know each other better, then you move on to the engagement

(prenuptial contract). Things then move quickly and become

more direct when sufficient trust has been built up both take

the plunge. Ed Weymes, Associate Dean International at

Waikato Management School who has more than 25 years

experience in developing partnerships with Chinese enterprises.

Understanding the goals of your Chinese counterparts

One bed two dreams This Chinese proverb highlights the

different expectations that parties to a negotiation may have.

Serious misunderstandings occur when one or both sides atthe negotiating table assume that the goals of the negotiations

are shared.

Understanding what the other side really wants is made more

difficult in China because of language and cultural differences.

At a Chinese negotiating table, everything is negotiable. When

you have a contract you should fully expect to have to negotiate

it again as part of an ongoing long-term relationship.

Where to get help

For help understanding Chinese negotiation techniques talk

to New Zealand Trade and Enterprise, and New Zealand or

Australian business people already in China.

Understanding China Building Bridges for Business Success

by Ed Wymes also introduces New Zealand executives and

managers to the business practices they will encounter in China.

For information on:

the importance of deeper relationships when doing business

in China see the Entering the Market Business

Relationships section

the culture and values that underpin doing business in China

see the Entering the Market Chinese Culture and Business

section

how to use interpreters at meetings and negotiations,

and language tips see the Navigating China Language

and Interpreters section.

kiwi success define objectives

I think a vital ingredient is to make sure you clearly define to

your business partners what your objectives are and what you

believe their part of the bargain is. A lot of companies dont do

this. They do not put penalty clauses into their contracts and

they find in time that things go sadly astraybe very, very sure

of what your objectives are and put penalty clauses in your

contracts for non-performance. Keith Stevens, General

Manager, Ovine Garment Leather Division, Richina Pacific Ltd

kiwi success have a bottom line

Our relationships have been renegotiated over the years. China

is a tough place to negotiate and different from other markets.

Negotiating does not always involve finding a middle ground.

In other markets you can open with your ideal position and end

up with your middle position some while before getting to your

walk away position. In China you usually end up very close to

your walk away position. You have to have very firm ideas on

what your walk away position is otherwise you can end up losing

a lot and ending up with a deal you cannot live with. Make sure

you know what is your absolute bottom line what you cannot

move on (price, length of relationship, company reputation,

standards etc). Healtheries uses an open book policy and we

reveal our margins throughout the chain. Brian Dewar,

General Manager, International Business, Healtheries

Meetings

Understanding meeting protocols

Meetings normally begin with small talk such as your positive

experiences in China and of Chinese people, the weather and

travel. Once people feel comfortable with each other, talk turns

to more formal business matters.

Its helpful to have prepared some notes on your hometown,

city and company. You should also arm yourself with knowledge

about China and the places youre visiting. You can share this

knowledge during conversation, perhaps by seeking

confirmation about something youve read or heard.

Understanding seating arrangements

Formal meetings in China usually take two forms participants either sit in a semi-circle in armchairs,

or around a conference table.

Meetings where participants are seated in armchairs tend to be

less work orientated. The armchairs are arranged in a horseshoe

shape (see diagram below). If the Chinese side is hosting, the

Chinese host will take the seat at the left hand side at the centre

of the horseshoe, while other Chinese participants will be seated

on the left hand side of the semi-circle.

The most senior New Zealand guest will be escorted to the right

hand side of the centre of the horseshoe, and the remaining

New Zealand guests will be seated on the right hand side ofthe semi-circle.

Interpreters normally sit behind the host and chief guest

and interpret for their respective side.

If you are the host, consider hiring a formal meeting room

in a hotel. This can be expensive, so make sure the meeting

warrants the expense.


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Seating arrangement below is case when China side is host If you are the meeting host, you should arrange to have your

delegation sit on the left hand side of the semi-circle, like this:

Seating arrangement below is case when New Zealand side

is host

Interpreter 1 Interpreter 2

NZ 1 China 1

NZ 2 China 2

NZ 3 China 3

NZ 4 China 4

NZ 5 China 5

Interpreter 1Interpreter 2

NZ 1China 1

NZ 2China 2

NZ 3China 3

NZ 4China 4

NZ 5China 5

Interpreter

InterpreterNZ 1 NZ 3NZ 4 NZ 5NZ 2NZ 6

China 1 China 4China 2China 5 China 3 China 6

Where there is formal business to discuss, meetings will often take place around a conference table. Seating will normally be allocatedby name cards. Generally, the delegation leaders face each other at the centre of the table and other participants alternate in order of

seniority toward each other, like this:


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Understanding speaking protocols

Discussions are primarily between the two leaders, although

either may elect to include others in the exchange. Select one

person usually a senior team member to be your group

spokesperson.

Meetings begin with the introduction of the delegations. The

Chinese side (if hosting) will then launch into a reasonably long

and formal introductory presentation. The discussion normally

begins with general issues, before turning to more specific topics.

The New Zealand delegation is expected to reciprocate, and the

chief guest should prepare key messages for delivery.

Some Chinese people are not used to directly saying no. Instead,

they may respond with Ill look into it or Ill see what I can do

on this. Certain phrases such as It can be inconvenient, I am

not sure and maybe, may in fact mean no.

Think about your own strategies for saying no. You dont have

to come out with direct answers. Be non-committal or evasive

if the situation calls for it.

The key messages from the Chinese side may be delivered rather

late in the meeting.

How to end a meeting

If the Chinese side is hosting, they will normally signal the end

of a meeting by referencing the busy schedule of your delegation,

or an appreciative remark about how good the discussion has

been. Your interpreter and senior leader should listen carefully

for those comments.

If youre not the host, then there is generally no need for you to

take the initiative to bring the meeting to an end (unless the

discussion is dragging on unproductively or you have another

commitment to go to).

At the end of a meeting, a simple handshake and goodbye

(zaijian in Chinese) is enough. If it is the first formal meeting,

gifts may be exchanged at this time or at lunch/dinner if there

is one. Guests are expected to leave before the hosts.

key learnings

Be thoroughly prepared, patient and observant.

Do not put your cards on the table New Zealanders canbe too open and honest in negotiations.

Stay calm and dont lose your temper.

It may be possible in some circumstances to involve embassy

officials and trade commissioners this can open doors.

Designate the most senior member of your team as

spokesperson.

Ensure the technical people on both sides have time

for discussions.

Use Powerpoint presentations if possible.

Translate handouts.

Expect ambiguity.

Do not race to the bottom line.

When dealing with a panel, ensure you know who are the

key decision makers. Bargain hard its expected.

Nothings agreed until everythings agreed, so returning

to a point you thought was covered is not unusual.

Get experienced professionals to review draft contracts.

Have a bottom line and dont cross it. No deal is better

than a bad deal.

3.6 CHINESE CULTURE AND BUSINESS

Dealing with Chinas culture and protocols

Chinas culture and protocols are often very different from

New Zealands and may seem overwhelming and mystifying.

The Confucian traditional belief system, ethics and behaviours,

along with relationships and the concept of guanxi (or

functional business connections/ relationships), remain at the

heart of business culture and etiquette in China.

Chinese people generally place great importance on

relationships, ranking and protocols.

Chinas larger cities and southern and coastal regions are more

familiar with international business practice and are more likely

to be aware of what is required for international trade.

There are also some younger generation Chinese who, with an

international education, have a more modern approach to

international business. Despite this, they will still largely

conform to Chinese ways of doing things.

Understanding traditional values

Confucian values and concepts were designed to build a clean,

honest and orderly society where responsibilities and obligations

are observed. However, in practice they also have negative effects.

For example, guanxi can be used to bribe and corrupt public

officials or people in more senior positions, or encourage

practices such as insider trading. For information on how to deal

with corruption see the Navigating China Business Ethics and

Corporate Responsibility section.The key business concepts derived from Confucian values are:

adherence to a hierarchical system including respecting

government representatives and the elderly

collectivism group or family orientation rather than

individualism

the concept of mianzi or face throughout business

interactions

the concept of neiren vs wairen or inner circle vs outsiders

the importance of guanxi or relationships in business.


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When in China, the most important thing is to be prepared,

flexible, patient and be yourself. Enjoy the opportunities of

being a New Zealander doing business in China.

Understanding guanxi or the old boys networkGuanxi equates to: Its not what you know, its who you know,

or the old boys network.

It describes the relationship or network among various parties

who liaise, cooperate and support one another. In the past it has

been a critical part of doing business in China. However, times

have changed.

Deep guanxi is a strong feeling of interpersonal relationship,

loyalty and trust, and moral obligation to maintain the

relationship from both parties.

It can also refer to those people one has a connection with.

In practice, it is an in to many aspects of life, from beingintroduced to a new business partner, helping smooth the path

of an application through a government office or securing a

business opportunity.

A good relationship with the people around you can lead you to

a new network which in turn will lead you to their networks. In

this way youre building up a valuable social and business asset.

New Zealanders who have been involved in China agree good

guanxi enables you to get things done more easily. But there

are negative aspects to guanxi that can present some moral

dilemmas.

For example: If something goes wrong, your relationship can

be challenged.

If you tap into your guanxis experience, resources and

networks or have received a gift you have incurred a debt of

guanxi. Though nothing may be said, you will be expected to

pay back the debt in the future by providing assistance or

favours either to the individual or their network. There is no

time limit on the debt. It can be decades or generations. But

if you dont reciprocate when required, your guanxi will be

very hard to maintain. This is the moral dilemma of guanxi.

You may feel obliged to do something you are uncomfortable

with such as receiving requests for favours.

In order to preserve the relationship and to save face for both

sides, your Chinese partner may offer to provide assistance

thats not needed, rather than just saying they cant help.

When providing advice, guanxi can be the main determinant

for a referral. For example when asked which part of China is

the best place to do certain business, your business partner

may recommend their home city or province. This may not be

the best or most appropriate place, but its where they have

an understanding, a network and guanxi.

Guanxi can also be used as a negotiating tactic for example,

you have to deal with this person, or hire that person

because of the debt from your guanxi. This kind of situation

can be a critical turning point in a business relationship and

one you should be aware of.

For advice on how to deal with negative aspects of guanxi seethe Navigating China Business Ethics and Corporate

Responsibility section.

How to establish guanxi

The main way of establishing guanxi is usually by introduction

through a third party. This may be one of your own Chinese

employees, friends, or New Zealand overseas missions. In a

modern China it can also be through a simple meeting or a trade

event. These connections can come from anywhere at any time.

Find some common interests, learn some Chinese history and

culture and speak some Chinese phrases. These are all useful

tools to help build up guanxi in the early stages.

Nurturing and maintaining guanxi

The way to build up guanxi is to either visit or live in a Chinese

environment or to regularly meet with your Chinese business

counterparts face-to-face.

This includes visiting China often or inviting your business

partners to visit New Zealand frequently.

Reciprocating generosity and hospitality is part of maintaining

guanxi. This means you need to consider returning the

hospitality you received when your business partners visit

New Zealand.

Maintaining regular contacts provides opportunities to enhanceold guanxi and establish new guanxi through these contacts.

Developing and nurturing guanxi can be time consuming and

resource intensive. Consider it a worthy investment in

establishing a strong long-term relationship.

Experience from New Zealanders who have been involved in

the China market suggests that if your contacts claim to have

guanxi in China, make sure they do. Although its difficult to do,

check with them what kind of guanxi they have, how deep their

relationships go and how relevant they are to your business.

Focus on those people who have contacts with key influencers or

decision makers. More importantly, establish guanxi directlywith those influential senior officials yourself.

How not to offend

In China, mianzi represents a persons image, pride, reputation

and social status. Its an important part of relationship building.

A persons face is also their organisations face. The relationship

you develop with an individual also represents your relationship

with their organisation.

Chinese people can be extremely sensitive about gaining,

maintaining, giving or taking away face in all aspects of life.


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Two of the easiest ways to cause a person to lose face are:

to criticise them in public

disrespect their seniority or status.

This can cause unnecessary barriers to relationship building.

When dealing with Westerners, mianzi has a more complicated

meaning for Chinese.

On one hand, the Chinese may give non-Chinese special mianzi

and treatment on account of their foreignness.

On the other hand, many Chinese recall the Opium War, foreign

invasions and colonisation of the 19th and 20th centuries.

Those events are considered to be a source of humiliation

or loss of face by most Chinese.

Today, Chinese people try to balance the need to attract foreign

investment while remembering aspects of history that causedloss of mianzi.

What you can do to give face:

If you are coordinating a meeting or hosting a dinner for a

Chinese delegation, arrange seating according to seniority.

For more information on how to set up a meeting or host

a dinner see the Entering the Market-Negotiations and

Meetings section.

Respect your counterparts seniority in front of their subordinates.

Arrive on time or early for an appointment. Arriving late may

be seen as a lack of respect.

Provide better gifts for senior managers and/or officialsrather than providing the same gift for everyone.

If providing gifts to the whole team, its also a good idea

to give a gift to the interpreter/s.

Publicly thank your counterparts for their cooperation.

For example, raise a toast to them at dinner.

If playing a game such as golf Chinese often allow their

opponent (someone in a much senior position) to win,

even if they are the better player.

Focus on common interests and win-win issues. Though

Chinese tend to point out conflicts and disputes in early

stages of the negotiation, they prefer to leave them for

discussion at a later stage. If there are critical issues thatcould undermine the whole deal, its a good idea to scope

them out early.

Numbers and colours to avoid

There are traditional taboos around numbers. Some business

people are especially sensitive to numbers in China, especially

in the southern part of China.

Lucky numbers:

3 when pronounced in Chinese, especially Cantonese

(spoken in Guandong province and Hong Kong), sounds

similar to the word for promotion or being promoted.

6 when pronounced in Cantonese is similar to the word

for happiness.

8 when pronounced in Chinese, sounds like a similar

word which means prosperity.

168 when pronounced in Chinese, sounds like a similar

phrase which means money flowing in easily.

Unlucky numbers to be avoided:

4 when pronounced in Chinese, sounds like the word for

death (especially in Guangdong province and Hong Kong).

250 when pronounced in Chinese, sounds like the word

for dumb/ stupid.

In some lifts, youll find there is no number for the 4th, 13th

or 14th floors.

Red and gold are for happy occasions. Black and white are

for funerals.

How to build trust

In China, there is a strong sense of neiren inner circle and

wairen outer circle.

Theres a very high level of trust, confidence and loyalty

associated with anyone considered neiren. People in this circle

have common interests and common languages and can get

things done quickly.

Generally speaking, people from the same extended family,

the same town, even the same province, or friends, colleagues

and acquaintances are treated as neiren inner circle.

When interacting with foreigners, neiren and wairen have

another meaning. People of Chinese nationality are sometimes

treated as neiren while other foreigners are wairen. However,

overseas born Chinese are still expected to conform to the way

things are done in China. If not, they can sometimes also be

treated as foreigners or wairen.

This concept is also applied within China and within Chinese

relationships. Someone from another city or another part of

China can be treated as a wai di ren an outsider by Chinese

from another part of China.

Employing Chinese-speaking staff, establishing your networks

and making use of your Chinese business agents can help break

the ice.

Understanding hierarchy and decision making

The concept of hierarchy influences all aspects of Chinese life

work, school and home.

Simply put, the individual is traditionally subordinate to the

organisation; the minority view is subordinate to the majority;

and the lower ranked official is subordinate to his/her superior.

Although a company director or president may be the boss, the

real decision maker in the Chinese system can be someone in a

seemingly innocuous position; in the case of government


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departments or State Owned Enterprises someone from a

parallel Communist Party Department. While potentially difficult,

at least attempt to identify the real boss or decision maker as

early as possible.

As a result, the decision making process may be confined

to just a few people and may not be readily transparent.

Hierarchy has a huge influence in Chinese business settings.

It determines who enters a meeting room first, how

introductions are made, how seating is arranged in meetings

and at dinner, who speaks, and who makes decisions.

In China the emphasis is on equal seniority of like-counterparts.

For example it is common practice for director to meet director,

manager to meet manager and so on. However, in practice,

this may not always be possible when meeting with your

business partner.

If you can arrange it, a senior person from your business should

visit China. Doing so sends a positive message that youre

sincere and that you consider your relationship with them

to be important.

These meetings also help your representatives in China to be

more effective, because when their position and activities are

supported by senior management they are taken more seriously

by their Chinese counterparts.

Entertaining

Evening banquets are necessary for hospitality, relationship

building and entertainment. They are also a popular and

essential process for business interaction.

For more information on banquets, dining, and drinking, see the

Researching the Market Making the Most of Your Visit section.

key learnings

The Chinese generally consider relationships, rankings and

protocols very important.

They are sensitive about gaining, maintaining, giving or

losing face.

Hierarchy influences all aspects of Chinese life.

Be prepared, flexible, patient and be yourself enjoy the

opportunities.

3.7 DEALING WITH GOVERNMENT AND LOCAL

AUTHORITIES

Dealing with government officials

Regulation is perhaps one of the most opaque subjects in China,

especially when it comes to understanding how laws are

interpreted and implemented by officials. The actual legislation

is often available in both Chinese and English, but by

New Zealand standards tends to be some what ill-defined,

partly to give government agencies and their officials the

flexibility they prefer.

Research is essential; practical ways of dealing with laws

and regulations, and the people who administer them,

can only be found on the ground by the company itself

or by well-qualified advisors

China can be very confusing with a plethora of civil servants

and no apparent decision makers, says Howard Wilcox, Director

Sales and Marketing at financial services company KVB Kunlun.

How to deal with officials

Most officials simply require the basic respect of you having

visited them out of courtesy and being honest about your

companys intentions. The Kiwi straightforward, honest and

low key approach is best.

Stay in regular contact with key officials, pay them visits on

special occasions or in times of success and dont just turn up

when you need them for something. Many officials are in office

for only three to four years so do not expect any cultivated

influence to last past then.

Chinese government officials have a high social status based

on their place in the hierarchy, so interaction with government

officials tends to be more formal.

Mayors and other local officials in China often have far more

power than we are used to in New Zealand. The majority of local

officials are parochial and where they can, they will use the lack

of clarity of in laws and regulations to further local ends.

The Chinese deference to hierarchy can mean that lower ranked

officials are reluctant to speak up, particularly if they are in the

company of their superiors.

If they do not directly answer a question after repeated attempts,

and it seems they do not know, do not push the point and

potentially embarrass them. Back off and ask for the answer

to come later.

Time estimates for how long something will take can be very

difficult often they are highly under estimated, though in some

cases approvals can arrive far quicker than anyone expected.

When interacting with government officials, be careful about

what you say. For more information on this see, Introduction

to Navigating China An overview section.

Chinese officials often show respect to guests through special

treatment. This may include queue-jumping, over-riding a long

series of traffic lights, or moving around major cities in

motorcades, headed by a police car with lights and siren.

Be wary of matchmaking activities with local Chinese companies

provided for you by local authorities. Often local authority

sponsored events, such as trade missions, are more about what

is good for the politicians, their region and its businesses than

what is in your companys best interests.


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Remember there are lots of alternative ways of entering China

other than getting into bed with local authorities. For

information on these options see the Entering the Market

Typical Models for Entry section.

kiwi lesson help turns to pressure

Early on, when Skellerup wanted to start up in Jiangsu, local

authorities and politicians were very accommodating and

helpful, says company Managing Director and Chief Executive,

Donald Stewart. But once our roots were down in Jiangsu the

level of support changed and the local authorities became very

demanding. They continually put pressure on Skellerup to invest

more capital in the venture.

Skellerup believes these demands are made so officials can meet

their own KPIs. This constant pressure for more capitalisation

has been difficult for Skellerup. Although the demands are

delivered in a non-combative way, they have been persistent.Stewart says Skellerups response has been that the company

is looking at continuing to expand over the next five years if

all goes well. The Chinese authorities have appeared only to

have heard expand and not the caveat if all goes well and

the pressure continues.

kiwi success managed escalation

When Air New Zealand was laying the ground for the

establishment of its direct AucklandShanghai air service,

its central strategy in dealing with government officials was

managed escalation. Air New Zealand and its allies made every

effort to resolve potential issues at low levels of the bureaucracy

rather than going straight to the top. This built up credibility andsupport among stakeholders.

How to find and meet decision makers in government

Finding the actual decision maker in a government agency can

be difficult for an outsider.

There are consultants who can play matchmaker between you

and officials in your region or industry. Be wary that some people

may talk up their networks and level of influence. Every local has

a friend, relative or classmate in a high place.

One way to meet government officials is to network. Be on the

look out for New Zealand Government, New Zealand Trade and

Enterprise and Embassy events where Chinese officials will beattending. Also consider participating in events organised by

other countries such as Australia, Britain and the US, especially

the American Chamber of Commerce.

kiwi success use an agency

International financial services company KVB Kunlun eased the

way for the establishment of a branch in Hong Kong by hiring a

professional agency to introduce the company to the Securities

and Futures Commission which is responsible for regulating the

securities and futures markets in Hong Kong. The company says

the agency helped us with the minimum amount of fuss by

facilitating licensing and other legal and regulatory requirements.

Dealing with government-owned businesses

It can be easy to forget, but China is a communist country and

the government plays a direct hand in all key parts of the

economy and in strategic enterprises. There are still over 1,400

listed State Owned Enterprises and the Chinese Communist

Party is involved at all levels in their corporate governance.

The more sensitive the industry, the more important the

governments role. Most heavy and infrastructural industries

are still government/state-owned enterprise dominated (for

example, energy, telecoms, transport). This can mean unwieldy

but well resourced competitors and much interference. In

contrast, consumer goods tend to be left much more to the

open market.

There are also regional variations in the degree of government

involvement or interest you will have to deal with. In general,

on the east coast your interactions with government officialswill be at a lower level than you can expect in central and

western areas.

kiwi success we regard officials as friends

Our relationships with government officials are exceedingly

important, particularly in Guangxi (province where BioVittoria

has a facility). Without their support we would have great

difficulty. We regard them as friends, theyre not foes. They

havent interfered with what we are trying to do in fact theyve

been hugely supportive. So were very grateful for that. And its

from the highest level to the lowest level that weve got the

support and thats worked exceedingly well for us.

Garth Smith, Managing Director, BioVittoria

Finding out if there is a government connection with prospective

partners is an important part of doing due diligence. Such a

connection is not necessarily a bad thing, but it pays to

understand a companys ownership structure and choose

localities with care. For information on how to do due diligence

see the Entering the Market Doing Due Diligence section.

Party officials still frequently retain a majority of the seats

on strategic company boards of directors.

Its military enterprises have also established wide trade

connections and technical cooperation agreements with

thousands of companies and manufacturers.

However, direct government influence in businesses themselves

is being rolled back. The military has sold off its assets,

however it still has some influence without having direct

ownership or control.

key learnings

Network to find out who the key government officials are.

Visit key officials out of courtesy and be honest about

your companys plans.

A good relationship with officials can help you stay

up to date on law changes and official thinking.


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Interaction with government officials tends to be formal as

officials have a very high social status based on their place in

the hierarchy.

Be wary of local authority matchmaking activities with local

Chinese companies.

3.8 USING AND MANAGING CONSULTANTS

Using and managing Chinese consultants

Theres no shortage of advisors (or advice) on entering and

setting up a business in China. The question is who are the

best advisors for you?

Cultural and language differences make it more difficult

to find good advisors and determine if youre getting good

advice for your particular situation.

A simple place to start is to use China-based advisors. Chinasmarkets and rules and regulations are changing so quickly

it is virtually impossible for consultants and advisors to

keep up unless they are locally based.

Forget about trying to do it yourself.

At some stage you are likely to need the advice of lawyers,

accountants, interpreters and translators, business entry

consultants, human resource advisors and real estate agents.

How to get the best advice

Keep it simple, says Scott Brown of Shanghai-based RedFern

Consulting. With all the current focus and mythology

surrounding China as a market, investors often over think theissues and lose sight of the simple things that got them to that

point or that they would normally have at the top of their list

for any other market.

You can burn up a lot money and mental energy trying to get

the correct answers to the wrong questions. In China the gap

in knowledge covered by you dont know what you dont know

is huge.

Advice may also appear contradictory, but needs to be put into

context. This is why local advice is essential. Chinese markets are

so complex, diverse and fast moving, being out of the country

for even a couple of months will leave you out of date.

If you are looking to use New Zealand-based advisors on the

basis of their connections and associations with China, make

sure they have strong and well-placed connections relevant to

your business. There are also cost implications as they will add

a margin onto whatever services are provided from China.

As well as the big-name professional advisory companies, there

are smaller consultancies (in some cases staffed by Kiwi expats)

that may be suited to the smaller size of New Zealand

companies.

New Zealand Trade and Enterprise has a list of consultancies

that may be suitable for NZ companies.

You should be wary of advisors who claim they can cover all

bases for you. In China it is highly unlikely anyone can do

this effectively.

You should also be cautious around people saying they willtake care of everything. You need to control processes such

as registering local trademarks and getting customs recordal

and not cede them completely to advisors or consultants.

It is advisable to do some form of due diligence on potential

advisors to gauge their trustworthiness, competence and

experience. This is also important for protecting intellectual

property. For more information on this see the Entering the

Market Doing Due Diligence section.

kiwi lesson also form partnerships

I guess what makes [finding the right person] difficult in China

is that with various boundaries such as culture and language it

makes it a lot harder to work out whether that advice is the right

advice for you and how beneficial that is to your outcome. So I

would suggest definitely local advice, but to me its more than

advice. Youve got to form partnerships here and that can be in

the form of your own staff that you employ or it could be again

tapping into local consultant companies or the sort of

companies in your industry. Jade Grey, Beijing-based Kiwi

entrepreneur and owner of Lush Bar and Pyro Pizza

key learnings

Dont do anything without local Chinese advice.

Be wary of advisors who claim they can cover all bases

for you. Do due diligence on potential advisors.

Be careful regarding how much control of business

processes you give advisors.

While making use of advisors, make sure you have access

to other sources of information.

3.9 DOING DUE DILIGENCE AND

AVOIDING SCAMS

How do I make sure I dont get deceived?

Performing due diligence in China can be a lot more difficult

than in other countries, but it is an absolutely necessary partof every China entry strategy.

As with many developing countries, corruption and scams are

not uncommon. And while the situation is improving, anyone

operating in China needs to be aware.

On top of difficulties such as distance and culture and language

differences, companies looking to research Chinese business

people and companies have to deal with a shortage of accurate

and up to date information. Theres no national company

registration system and Chinese companies are also notoriously

non-transparent.


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Despite these difficulties it is essential to research any Chinese

companies or individuals you are considering doing business with

to ensure that they are legitimate, credit worthy, reliable and can

do what they say they can do. This includes independently

verifying all important information that they provide you.

A wrong move in China can later prove to be very costly in terms

of time and money.

Use local experts

Kiwi Scott Brown of China-based RedFern Consulting says

simple checks can be made in China through companies such

as RedFern that are capable of verifying the credentials of

Chinese businesses and business people.

He also suggests:

where possible get public information from government

agencies and other authorised bodies such as law firms

do a legal background check to ensure that ownership,

structure and registrations are clear

consider contingent liabilities. Who really owns the shares or

the parent company? Who really owns the land and what

kind of rights do they have to it? What may seem reputable

may often not be

meet company managers and judge their willingness to

open their books, answer questions and provide legal

documents. If a company is nationally reputable, or exports

to large foreign clients, it will likely have been through

this before

if the company has international clients, ask for the listand double check it

for quality assurance issues, you can use independent

third parties to do an audit.

Do not trust financial data unless you have had this physically

audited by experienced professionals. It is very common in China

for local firms to carry multiple sets of accounts for tax or

management purposes.

China-based consultancy Dezan Shira & Associates suggests

getting a Capital Verification Report to check how much of

a companys registered capital has actually been paid up.

In China registered capital, one measure of financial size,isnt automatically paid up just because a business licence

has been issued.

New Zealand Trade and Enterprise (NZTE) can provide a list

of agencies capable of doing due diligence or seek

recommendations from China veterans.

kiwi lesson take a holistic view

Jude Hooson, Director of The Providence Group, says due

diligence is not just about numbers. Its also about

understanding the Chinese culture.

kiwi lesson minimise risk

Allow time to validate and verify what is being sought.

Doug Ducker, Managing Director, Pan Pac Forest Products

Choose partners carefully and have an unhitching strategy

in case things go wrong. Bruce Heesterman, General

Manager International, Airways Corporation

kiwi lesson make sure you get the right partner

The advice I have for New Zealand businesses seeking to enter

China, above all else, is to emphasise patience and due diligence.

Talk to a lot of people, do plenty of reference checks up stream

and down stream, get credit reports on those shortlisted

companies before making your decision.

I think one of the frustrating things for exporters to China is that

the number of genuinely capable companies who operate with

integrity and that can reach the broad market is very limited.

If you cant find a partner to work with that fulfills the criteria

that you are seeking then dont be frightened to hold off.

Sometimes its better to wait than to enter too soon to work

with the wrong partner and have a set of problems to recover

from and repair that could potentially take you several years to

get over. Brendan OToole, Managing Partner, Summergate

International

For background on Chinese business culture and ethics see

the Entering the Market Chinese Culture and Business

and Navigating China Business Ethics and Corporate

Responsibility sections.

Getting credit checks done

The four big credit rating agencies Standard & Poors; Moodys;

Dun & Bradstreet; and Fitch Ratings are all present in China

and/or Hong Kong. There are also some local rating firms such as

Xinhua Far East China Rating; Chongqing Business Credit

Investigating and Consultation Centre; and Huaxia International

Credit Group.

NZTE can provide referrals to companies that can be

commissioned directly. The work is out-sourced to local credit

companies. The cost can range from a few hundred to a few

thousand dollars depending on what is requested, the speed the

report is required, the location of the company being checked

and how much information is provided on the Chinese company.

How to do due diligence on potential manufacturers

While many Chinese factories are modern and automated, some

are not. New Zealand fire detection equipment manufacturer

Pertronic Industries warns that some of Chinas manufacturers

can appear very impressive on the surface, but the quality

control is abysmal and products are shoddy.


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Alibaba.com recommends the following steps to ensure you

are talking to the right manufacturer:

examine their financial health, production capacity, quality of

goods, client references, export history, intellectual property

performance and level of experience with Western

companies

compile as broad a list of potential factories as possible

get product samples shoddy quality or unreliable delivery

should immediately eliminate candidates

narrow down the field to three to five suppliers that look

good on paper and produce good-quality products at a

satisfactory price

order a detailed factory audit in China.

The last step is for your company to make a detailed, second-

level assessment that integrates buyer requirements into the

evaluation. This process usually rates the candidate as a whole,

including all business practices, with a specific grading scale for

each set of criteria. Your company can then either choose one

candidate or start a bidding process between the potential

suppliers on your shortlist.

Ask questions such as:

Does the Chinese vendor run its own compliance checks

on quality control and have sufficient oversight?

Is the Chinese supplier likely to outsource the order? Second-

degree outsourcing makes it more difficult for companies to

monitor supplier quality and ensure that there are no

environmental, health, safety or child labour violationsin the manufacture of its goods.

(BPMC. (2004). Sourcing from China, Part 3: Assessing the costs.

Hong Kong: Alibaba Group.)

Always visit the candidate factories before making a final

decision.

For more information on sourcing a manufacturer see the

Manufacturing in China Finding a Manufacturer section.

How to avoid scams

As with many developing countries, corruption and scams in

China are not uncommon. And while the situation is improving,anyone operating in China needs to be on their guard. In

Transparency Internationals 2007 Corruption Perceptions Index,

China scored 3.5 out of 10 (a mark of zero represents highly

corrupt) and ranked 72nd out of the 163 countries surveyed.

As well as putting your integrity on the line by getting involved

in scams or corruption, you are exposing yourself to severe

penalties because the Chinese Government is cracking down

on corruption.

How to deal with unsolicited enquiries

Only a small percentage of Chinese trade enquiries are of a

dubious nature. Most are genuine enquiries that do not make

unrealistic demands. NZTE is able to provide information on

commissioning a report on the Chinese company if New Zealand

exporters believe the trade opportunity is genuine and want to

follow up independently.

Its common for first time exporters to be convinced that they

have found the right partner through an email contact or an

internet trading portal. There are innumerable cases of

businesses transferring spotter-fee funds to China and finding

that nine times out of 10 the receiver of these funds has given

a false address and pursuing them would be futile and

very expensive.

The important point is not so much that all cold contacts are

scams but that due diligence, checking on bona fides and creditworthiness, is vital before entering any transaction in China.

Relying on an online site or an email contact to provide this

is very unwise.

Points to consider when you get an enquiry include:

Does the enquiry fit your company strategy in terms of

market and the sector within the market?

Is the suggested market entry strategy one that has been

used by you in other markets?

How much does the enquirer appear to know about the

China market, and about the details of entry and of the

various legal requirements? How much do you know about exporting and specifically

about exporting to China?

Is your brand protected in China?

Some simple checks can be done to attempt to determine the

credibility of the enquirer. If the enquiry comes from China:

look at the email address the address of an ISP or a portal

(eg gmail, hotmail, yahoo, sina, sohu, 123.com etc) often

indicates a new or small company or an individual calling

themselves a company, or an individual using a legal

companys name

check the company name on Google even if the site is allin Chinese that is a start

insist on the Chinese company providing a copy of their

business licence as well as full contact details

ask for details on the companys trading history, including

products and markets

ask for their experience

ask for references from other companies they have dealt

with in New Zealand and internationally

do not be afraid to ask the hard commercial questions

(eg how will you remit the funds to me).


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Who can help?

NZTE has three offices in mainland China Beijing, Shanghai

and Guangzhou. Through its network in the region, NZTE stays

up to date on scams and other market intelligence.

key learnings

Due diligence

Do not use the term due diligence in front of Chinese

business people in Mandarin it translates as investigation

which is likely to give offence. Better to use words like

research or information gathering.

Be ready for Chinese partners to discourage an investigation

stick to your guns, but be polite.

Do due diligence on prospective consultants and specialists

you are considering hiring to do due diligence.

To keep due diligence manageable, confine it to your

potential partners intentions, abilities and judgment.

Dont neglect hard questions for the sake of getting or

maintaining a relationship.

If the relationship is at risk, transfer blame for the need to

do this research to a third party, eg banks, the board etc.

Avoiding scams

Be extra careful with unsolicited approaches.

Bear in mind the old adage If it looks too good

to be true, it probably is.

CHINA

CHINA CUSTOMS TERRITORY


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Chinese negotiation