Due diligence

For the last 30 years, people in the West have been passing down collective wisdom on “how to do business in China.” Unfortunately, like most ideas about China, this collective wisdom is the source of much amusement, confusion and often unhappiness.

The dynamics of how people do business in China, like China’s economy, have undergone an uneven but dynamic transformation. How you do business depends on who you are dealing with, not some archaic formulaic “wisdom.”

The new first rule of thumb is due diligence. Find out about the company and its leadership. Most legitimate Chinese companies have websites; some will have an English language section, most will not. While you can get a general idea using a computer, translation is not sufficient by itself, so make sure you have access to a top-notch interpreter to help you as you do your search.

This assumes that you have figured out why you want to do business in China and what your game plan is. For the sake of argument, let’s assume you have gotten to the point where you intend to come to China for a serious meeting with a potential supplier/partner/service provider.

As an aside, I belong to an international charitable organization that has a chapter in Beijing. Each week, we have more visitors than members. Eighty percent of the visitors are on exploration trips hoping to bump into someone who can help them accomplish their goals. Each week, I watch as the lions circle the heard looking for the right opportunity before closing in for the kill. A bit dramatic but clearly not a group you want to be part of.

Getting back to finding out about the company … find a Chinese company to do your due diligence. Do not rely on some local expert from your area, unless they are specialists who have offices in China and a proven track record. Also, be careful about buying business intelligence packages from legal, accounting or consulting firms. Often what you get, for a hefty sum, is little more than an Internet search connected to a canned database prepared by a novice. Ask to see sample reports and ask for references. I am always amazed at the number of calls I receive from so-called experts who are looking for me to figure out the next step for the client who is paying them.

Research the company

You will need answers to many questions about the company you may do business with, including where they are incorporated, what licenses do they have, who are the registered shareholders/owners, who is the legal representative, have they been in the news, are they being sued and length of business operation. Do not assume that these items mean the same as they would in the United States.

The place of registration is important, because businesses registered in different places are subject to different administrative rules and regulations. A company registered in Beijing went through a lot more hoops than one registered in a third-tier city. Remember, capitalism is only 30 years old here and a lot of the expertise and knowledge we take for granted just isn’t available everywhere in China. It will have a direct bearing on how the company conducts its business. Like everywhere else in the world, local businesses use local standards.

Licenses are very important. Business licenses in China are very specific and if it is not included in the license, it is not authorized. Beware of any license(s) that cover too many areas. A license is generally short and specific. Make sure you understand the scope of the license.

Find out who the registered shareholders/owners are. Like the United States, this is not always reliable, as people and companies often hide or disguise their interests, but it will give you an idea of who has the final authority. Look carefully at the ownership percentages and structure. Under Chinese law, there are different levels of rights assigned to different levels of ownership. Many companies have fallen into the trap of thinking that 51 percent gives them control of the company.

You must find out who the legal representative is. They control, literally and physically, the company chop, which is like our version of a corporate seal, except no agreement is valid unless it is chopped and signed by the legal representative. Companies have found out to their dismay that the papers, signed by the person who held themselves out as the company CEO, were not in fact legal and binding, although this area is changing as Chinese law develops more agents and apparent authority rules and standards.

Find out if the company has been in the press, but be careful about positive pieces, as most public relations in China is pay-to-print.

Once you know where the company is registered and licensed to do business, check the local courts for lawsuits. If you find something, get the name of the lawyer who represented them and have your intermediary contact them and try to get information. Chinese lawyers sometimes have a different view of client confidentiality, but remember this cuts both ways.

The length of business operation is important because it gives you a sense of their experience but it is more important to get the names of all the senior officers and their length of employment as this is often the most important story.

Research the people

This brings us to the next issue. Know who you are dealing with. This is the most difficult piece to get information on, but it is just as critical as knowing about the company. Apart from issues of honesty and ability, the central question is who is behind the person/people involved? If they are princlings (children of top level government officials), you need to know and understand what that means. Let me give you a hint: it could help and/or hurt you. Do not fall into the oldest trap in China, the guanxi gambit, where you get sucked into the abyss by stories about how anything is possible because they or their friends are connected at the highest levels. As in the United States, those who have real connections never talk about them and those that don’t are often the biggest name droppers.

Find out where they were born, raised, the schools they went to (classmates are an important part of who you are in China), their employment background. Check the newspapers, magazines, court and internet. Find out how they capitalized their stake in the company, if you can. Find out about their hobbies, as this will give you an idea for a great gift and could provide an opportunity to get to know more about them. As everywhere else, a shared interest is a bond.

Apart form the Internet searches, the only way to get this type of information is through the insiders’ grapevine, which means finding people who know this person and then patching together a profile from what they say. This is where a foreign firm is useless. Chinese people are not inclined to talk to strangers, let alone strange foreigners. The only way to get information is through someone who is well known and placed within the community. They schedule some dinners with friends who can then refer them to other friends who can provide the information. Understand that information is a valuable commodity, and it puts the person receiving it under obligation. Failure to do so will result in a loss of face and will make it more difficult to get information in the future, so it can get expensive.

My suggestion is be generous. The best way to create true guanxi is not over the business table but in social settings. If you invite someone who provided you some valuable information to the United States to visit your home and have some fun, you will probably have a friend for life, assuming it goes well.

In my next Dispatch: Preparing for the meeting.

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