by Stanley Chao
 
Do you have the right surplus products for China?

Importantly, companies considering marketing surplus assets abroad must first answer whether they have the proper product and services for the China market. Recycled products in the medical, construction, and electrical industries are in high demand, as are factory process equipment and

industrial machine tools and scrap material. However, recycled products in the telecommunications,
aerospace and transportation, and IT industries are not popular, as China is seeking to leap-frog
several generations of technology to obtain the cutting-edge products in these industries. But if you
decide that the Chinese market may be right for your surplus, it is important to understand Chinese

business practices.
 
Cultural Differences Impact Business Contracts, negotiating and business socializing are all viewed

quite differently by Chinese and American business people, requiring American companies to learn

basic Chinese business principles. Though not comprehensive, these recommendations will allow any U.S. company to develop successful outsourcing relations with the Chinese.
 

Unenforceable contracts
Importers have virtually no legal recourse in China’s court system. With domestic crime growing at
double digits and myriad social problems, China’s courts are not interested in white-collar crimes or
recuperating foreigners’ lost profits. Furthermore, the judicial system is undergoing major changes

as it evolves from communist law. Issues like patents, copyrights, and trademarks are just starting to get attention.
 

A contract’s purpose is different to the Chinese than it is to Westerners. A signed agreement serves
two primary functions for Chinese companies. First, the contract shows good faith and trust in
wanting to do business with the partner company. It’s a symbolic gesture or an extension of the
personal bonding. Along with the dinners, social drinking, and karaoke, the contract is an act of
friendship. Second, Chinese see the contract as a commitment to the terms but only under current market conditions. As market situations change–for example, if there are raw-material shortages or if
demand increases—the Chinese feel that they have the right to make changes. In their eyes, it’s
not fair to be tied down when business is constantly changing. Likewise, they don’t feel offended
if U.S. companies make changes. To the Chinese, the contract is a moving target that both sides

monitor and negotiate as market forces change.
 

A contract assumes that a third party will oversee the terms. In the U.S and Canada, we trust this third
party, the judicial system, to make a just and impartial decision. Chinese companies do not trust their

government or the judicial system. This dates back to China’s Cultural Revolution, when the government was corrupt, the Communist Party jailed professionals, lawyers, educators, and anyone else thought to be associated with subversive anti-government activities, children ratted on their parents, neighbors ratted on friends, government institutions, banks, courts, politicians and police were all corrupt.
 

What does this mean for U.S. companies? Contracts are useless in China because they are not
enforceable. Chinese companies know this. Contracts are important but must be written in such a way that U.S. companies can enforce them on their own, not rely on a formal judicial system. The contract should include only items that can be self-enforced or confirmed by third parties. Assume the worst for

best results As cynical as this may sound, U.S. companies should assume the worst about suppliers and devise preventive measures against worst-case scenarios. The Chinese are not unscrupulous or evil, but  government and economic forces have created a short-term, profitat- all-costs mentality.
 
China’s central government is erratic, with tax breaks, relaxed labor laws, and low pollution standards one day, and currency devaluations, raw material tariffs, or product standards changes the next. The

government acts at its own discretion, and companies must react quickly as a result. They need to
make money now, knowing that policies may change suddenly. The Chinese business mentality is
still somewhat primitive, generally focusing on how to make things cheaper, not better. As happened
with Japan and Korea, China will eventually move up the food chain and make quality products,

but this takes time, experience, and knowledge.
 

Knowing that the Chinese will take shortcuts brings up another question: Do the Chinese feel guilty
about it? Similar to speeding past a red traffic light, the Chinese view their actions as an innocent

crime. So what’s the big deal? Is a little lead paint really going to kill anybody?
 

Some Chinese don’t know that these shortcuts are illegal or harmful, so it would be unfair to categorize all companies as dishonest. Again, due to cultural and economic reasons, Chinese
factories may not know the harmful effects of lead paint. The ages of factory owners or managers are
typically in the mid-fifties to late sixties. Most grew up in a time of poverty and hunger, and didn’t
even have toys as children. Now as adults they don’t understand the big deal about lead paint. As one manager commented, “Children should just be happy to have good, cheap toys. We had nothing

growing up.”
 
Speak Chinese only When choosing a vendor
U.S. companies often view English as one of the major criteria in the 

selection process. Quality becomes a secondary concern when they find English-speaking employees at a factory. U.S. companies are not worldly enough to adapt to local customs and languages. Rather, they expect foreigners to adjust to them. Foreigners, Chinese included, complain

about the “Ugly American”; and the “English-only” attitude doesn’t help this sentiment. An executive at a U.S. medical equipment company said in a recent trip, “We are the customer, and I expect Chinese vendors to speak English.
 
English is the world’s business language.” This attitude has lead to some of the past misunderstandings resulting in quality-related recalls. Language will not solve all problems, nor will it prevent a Chinese company from being dishonest. It can, however, provide insight into our Chinese counterparts. Many intangible qualities are revealed when speaking in one’s native language-

-educational background, social status, and family upbringing. It can also detect behavioral patterns–

optimism, doubt, nervousness, or confidence. These clues are not easily observable when the Chinese are speaking a foreign language such as English.
 
U.S. businessmen complain about the difficulties of analyzing their Chinese counterparts’ personalities or behavioral patterns. This is due to the language barrier. Speaking in broken English will not reveal the true person because he or she cannot express complete and detailed thoughts. Only simple child-like comments can be communicated– not enough to “size up” the person. An ad hoc translator, typically one of the company’s managers, often lacks proficiency and complicates matters.
 
The ability to speak Chinese has another advantage. Having Chinese-speaking members allows

U.S. companies to control meetings. Typically, the side with better language abilities will dictate the

agenda, negotiate better terms, and achieve more of their demands. However, companies make the mistake of using translators from local translation firms. They can be used for general business discussions but are not well-versed in specialized terminologies.
 

A professional translator was used in a plastic injection-molding project, but the native Chinese, having an English and tourism degree, was unable to understand tooling jargon such as “hot runner” or “stack molds.” In subsequent meetings, a Chinese mold engineer who had worked at a Western company translated the jargon. Having staff that can read and write Chinese is even more valuable than verbal skills. Companies can clearly document their demands without having to use broken English. These documents then become part of the formal contract. U.S. companies will have documents in Chinese and in English. The Chinese contract should be referenced when problems or

misunderstandings arise. This leaves no doubt as to the U.S. company’s intentions and procedures. Reading Chinese is also invaluable in factory audits and inspections.
 

Factory quality documents, test data sheets, inspection reports, and government-related specifications are always in Chinese. To appease Americans, the factories have poorly translated versions that typically leave U.S. auditors confused. Chinese documents, stamped with government-
approval seals, are never corrupted because factories can lose their licenses if caught. Translated
English documents are not officially recognized and can be doctored without any government penalties. Factories can say that their English documents were incorrect due to translation errors.

 
Entering the China market China is uniquely different from other foreign countries. At first glance, companies wrongly assume China is similar to Latin American or European countries, yet China shares no common cultural or historical similarities with the West. It’s unique culture, huge-mostly rural population, Communist government and recent entrance into the world’s stage make China unlike any other country. As a result, “China experts” will be needed.
 
The initial market entry point is the most difficult for foreign companies. How do we get started? Who do we partner with? It is recommended that Western companies find a local Chinese partner to work with. This partner may be a distributor, manufacturer, or a service provider. When finding a partner, companies can choose several strategies:
  1. visit a China exhibition or trade show
  2. do their own research and
  3. use a consulting company
 
Each strategy has its pros and cons. A key point when screening potential partners is to take a close handson- approach and scrutinize them in detail. This includes: reviewing their financial performance, calling on their foreign partners for references, visiting their customers and analyzing
their management structure and after-sales programs.
 
Once a company has established its initial entry point, it must now learn the basics of doing business in China. Issues concerning contracts, negotiating, translators, behavior differences, technology transfer, trusting your China partner, aftersales service, and payment terms are all important issues for consideration.
 
CONCLUSION

Is it worth going to China? From an investment recovery standpoint, the need for high quality surplus
machine tools, transformers, medical equipment and other products will continue to be in high demand. Yet, China is still the wild frontier, as were Japan and Korea, and it will take a few generations for Chinese manufacturers to think and act like their Western counterparts. Until we reach

that point, U.S. companies need skill sets to handle Chinese outsourcing and quality issues and appreciate the differences in the Chinese and Western business practices.
 
Reprinted from ASSET 2.0, the Investment Recovery Business Journal, Vol. 5, 2008

© The Investment Recovery Association