We have dealt with hundreds of clients over the past decade within our operations in China and, overwhelmingly, those company clients that have failed have fell into the below categories.
To note, the vast majority of the clients that have retained us from the beginning of their entry and have heeded our advice have succeeded (some, however, have not – China is loaded with risks).
Some we have, in recent years, advised, strongly, to look to greener pastures with lower labor costs, thus, foregoing our services of winding-up a company in China because of low margins caused by increased labor costs (most have not listened).
The clients that have listened have used our Southeast Asian/South Asia market entry services. Our favorite destination, for most low-skill manufacturing, these days, is Bangladesh and Cambodia. We are finding most low-margin and low value-added businesses should consider, first, Bangladesh and Cambodia and forgo China and other markets with drastically increasing labor, tax and compliance requirements. The Chinese government is even advising this.
However, China is becoming the must-be investment destination for those in consumer products, industries that can capitalize on the growing Chinese middle class, tech and medical equipment manufacturing companies and manufacturing that requires skilled labor at labor costs that are much lower than OECD economies (Korea beware).
We have had a few clients, over the years, squeezed out because of reduced margins or a failure to be able to capture on the Chinese middle class (normally poor market research), but few that had the typical shareholder dispute and government compliance issues that are increasingly the bread-and-butter of our China law firm. Regrettably, many of these bread-and-butter clients, previously, have hired legal and business professionals that were nothing but hacks or utilized counsel with no experience in China (flying out a couple of times a year and no office in China is a clear sign of a hack)
Here is our list. If you have any to add, drop me a comment and I will likely add your comment to the list:
- Wrong joint venture partner. We find many people have done little to no due diligence on the partner and finds, quickly, that the partner is a shark. A shark with friends in the government and teeth that love to bite.
- No or poorly drafted shareholder agreements. Must be drafted by an experienced international attorney doing business in China. A guy from the West coast U.S. that flies in for a few cases a year is not adequate. Some of these guys are great marketers: beware and screen counsel.
- No feasibility study. Legal, Technical and Cost. Again, not from a guy sitting on a sofa in NY. We refer to the best for technical and cost work. However, the best is not cheap and the process won’t simply take a couple of weeks. Good guys in this business are systematic. Systematic guys need time. Trust us, we have never seen an opportunity simply disappear.
- Flagrant violations of Chinese law. If you are in the local newspaper, call your lawyer quickly. Know the law and follow the law to the tee. Compliance doesn’t, simply, mean hiring a Chinese compliance officer that graduated from law school last year. It, also, doesn’t mean hiring a lawyer sitting on a sofa in NY.
- Stepping on the wrong guys toes. Easily avoided. Stay low and dry. The head of our China Practice Team was a U.S. Marine officer and he has learned to always keep his head down and his socks dry.
- No Friends in China. Read: “How to Make Friends and Influence People” by Dale Carnegie and make a lot of Chinese friends and hire people that have a lot of friends in China.
- No IP Protection Strategy. I wrote so much about this on this blog that I am not going to bore you.
- No Internal Processes to Check Quality of Products. If you are producing junk – its your own fault. Build a system and no junk will be produced. If you can’t build a system, we know a Swiss guy that builds systems that will drive you nuts, but will, without a doubt, end in a quality product. Unless you sell junk (scrap metal, trash incineration etc.), then, keep up the good work.
- No Understanding of Chinese Consumer Behavior. We use the best company in market research in Asia (and these guys are quite small). All clients that we have referred have been satisfied, because they are not simply performing surveys, but understand how to read consumers. Simply, Idea Analytics is the best, since they use the best algoritism (weed out the clutter) and have experience with reading Asian consumers.
- Hiring the Wrong Senior Employees. Executive recruiters operating based on contingency, only, will normally feed you anything and often the anything is crap. If you have crap working for you, you will produce crap. Some of the international head hunters operating in China are no better. We have referred to two recruiters in China and had minimal issues with them (communication is not great though), but this is because if they won’t feed us crap, since we will feed them nil in the future and give them an ear full.