Starting in China
Jeff LoCastro, August 24, 2011
Founder & President, NCCREA
To start a scalable business in China (or to acquire real estate for
development) feels like an impossible task. But it's not. It's just nearly
impossible. However, it may be worth the effort. Just how large and by
what metrics one uses to define China's middle class varies widely. But
general consensus is that it currently rests between 100 to 125 million
consumers. Growth projections also vary widely. Estimates suggest the
Chinese middle-class will growth to between 300 million to 650 million
consumers by 2015. Regardless of whose numbers are exact, the fact
is the consumer market is very large and growing very rapidly. Further,
China's population is currently almost 1.4 billion people and there is a
new Chinese national born every five seconds. So although starting a
The reason it is so difficult to start a business in China is: the system is
just built that way. It is intentionally constructed to be ominous.
Certainly the CPC (Communist Party of China ) needs it that way as
bureaucracy is how bureaucrats create value for themselves. And China
is bureaucracy in a way the CNC (Cliff's Notes Crowd) or the Tourist
can not possibly fathom.
Nothing is going to change that national culture, so the savvy
entrepreneur/developer does not lament it, he finds a way to work with
it. Here's how you do it:
None of these start-up elements are mutually exclusive and it isn't a
step-by-step process. You'll not be checking anything off the list so-to-
speak. It does however have a starting point that continues in a circle
and goes around and around and around and around. If you can master
these three elements, your start-up success although not assured, is
1) Guanxi. Without it, it's a non-starter. Nothing in China is
'bootstrapped.' You will need help and if your project has value you can
find it. The challenge is making the proper initial hook-up that builds
the network. Every purpose, process, method, answer and reason in
China is hidden from plain view through an intentionally created
labyrinth of bureaucracy and you will need help from those who can cut
through it. And this will not just be one person. You may have to
unload your full arsenal of Guanxi at even simple requests as well as
major roadblocks. But, you have to know when to use it. That is, if you
use it for everything under the sun, in the end you may still find yourself
with a business, but not one in which you control. It can certainly be
argued that in any business in any country it is better to have a long list
of dedicated friends that can figuratively open doors for you, clear a
path, and make plain that which was previously clouded. However, how
many multi-billion dollar businesses have been created in the US by
pimple-faced college drop-outs who, armed with only a great idea and
without a network whatsoever made their way to the front of the line?
More than we can count. Serial failures such as Henry Ford, Thomas
Edison, Abraham Lincoln, Winston Churchill, R.H. Macy, F.W. Woolworth
and Robert Goddard to name a few have resurrected themselves each
time on only force of will . . .and a new and improved great idea.
Communal buy-in is not necessary in the west, but it is currency in
China. Force of will and a great idea is not nearly enough here. In order
to get guanxi buy-in, you are going to need something tangible.
2) Unique Idea or Concept. You better have one otherwise you are just
another Laowai (lau-way) coming to carpetbag. A great idea does not
automatically mean unique. For example, Google is a good idea. What
made it great was the Google web-crawling algorithm and the way it
allowed for high value search results based on specific parameters set
by the website owners themselves. What made it unique was that the
algorithm made it the only search engine that could actually make
The unique idea or concept is where most entrepreneurs/developers
stray from the path. Before you assume that because you "heard" that
China is a developing economy and that any idea or concept you might
consider must therefore be a unique idea, think again. Realize that
there have been many, many people that have come before you. That
doesn't mean there is no opportunity. There is tremendous opportunity.
Just don't get caught acting like a CNC. China is changing so rapidly and
is so bureaucratic that it impossible to simply determine the uniqueness
of the idea or concept from an easy chair in Chicago, Paris, or
Melbourne. You have to be in-country and there are a number of
base-line considerations to determine the uniqueness.
Today there are only a couple of verticals that the government
recognizes as "unique" as measured by its importance to the national
interest: GDP. They are consumed by the prospect of surpassing the
US and anything that can help them acquire the means by which to
accomplish this, you will find guanxi and government interest in
abundance. The two verticals that will grab the "2G's" (Guanxi and
Government) are : 1) High Technology 2) Intellectual Property.
a. High Technology
The entrepreneur/developer should ask themselves the following
questions and answer honestly:
If you answered "No" to all of these, stay home.
b. Intellectual Property
In terms of IP, there are only four (4) essential types: 1) Process,
2) Brand, 3) Look & Feel, 4) Trademarks or Patents. Much like the
Start-up Elements mentioned earlier, these IP essentials are not mutually
exclusive and this also isn't a checklist to be worked.
Process refers to a unique set of methods by which your business is
For example, in 2009 Grease
Monkey Oil Change partnered
with SinoPec (a government
owned oil company) to
roll-out oil change locations
at many new SinoPec retail
outlets. There is nothing
new or high tech about
changing oil. All one needs is a wrench and a bucket. What SinoPec
saw was a unique set of processes from the point of customer contact
to when the satisfied consumer drives off in their car. Grease Monkey
has spent millions of dollars and many years perfecting their model.
The government oil company wanted that. So now grease monkey
gains entry into this massive consumer market, an exclusive partnership
with government, and hundreds and hundreds of new locations.
However, Grease Monkey initially gained traction because they had a
reasonably well known international Brand. And the Chinese love brand.
Another essential IP type is Look & Feel. Certainly there can be some
crossover between Process and Look & Feel, but they are fundamentally
different. Without question one of the things SinoPec was also after
was the look & feel of an American oil change chain. Also the entry of
Ikea into the Chinese market signaled the Chinese government's desire
to bring the unique look & feel of Ikea to China. Although Ikea's design
engineering is supreme, there is nothing relatively new about their
Swedish contemporary furniture style. As the average Ikea store is
approximately 20-30 acres the Chinese government allowing the release
of that size tract for use by a foreign enterprise suggests a strong desire
for the unique Look & Feel that Ikea delivers.
Finally, the last thing that the 2G's will consider is whether you control
the Tech, the IP, or the Look and Feel. That is, do you have a Trademark,
Patent, or Copyright. However, depending on how your uniqueness is
viewed by government, having such control can be a double edge sword.
It must be understood, if the 2G's are cooperating to make the
enterprise a reality (especially government) the long-term goal is to
reproduce (aka, copy) your business under Chinese ownership. Patents,
trademarks or copyrights can make it more difficult to reproduce, but
not impossible. This is China. Most of that stuff is ignored anyway. But
the entrepreneur/developer must understand that it will happen. As
sure as the sun will rise in the morning, your business will be copied. It
may be an awful copy or it may be a frighteningly exact copy, but it will
happen. It was recently discovered that IP pirates had opened up at least
China. The farce was so complete that ostensibly even the employees
were unaware that they didn't actually work for Apple or Disney.
Further, several Chinese furniture and household goods stores recently
opened under the name Furniture 11. The Chinese language translation
of Furniture 11 (Shi Yi Jia Ju) sounds virtually like the word "Ikea" or (Yi
Jia Jia Ju). Even the colors, the decor, the signage, the meandering
through an arrow directed pathway past small rooms of Swedish
inspired furniture mimics Ikea almost exactly.
So it makes no difference who you are or how big your enterprise is, it's going to happen.
3) Be patient, not foolish. Business in China takes patience, heck life in
China takes patience. But the start-up process takes a saint. Not only is
the understanding of cultural differences critical to strategically
navigating the process, but also to what level to reset your
perspective-o-meter. Yet the cultural understanding is no more
important than understanding the limits to which you'll go to
accommodate such differences. Many foreigners, especially Americans
because of our multi-heritage experience in the US, are all too quick
to accept all cultural difference as a given and become guided not by
sound business principles but rather by cultural winds of change; almost
always to the detriment of the venture. Foreigners feel compelled to
only play by Chinese rules. The Chinese clearly understand this about
Americans in particular and will use it against the foreigner often. Any
"mis-communication" will be blamed on culture. And many, many times
it is. But not every time. If you get irked over what seems to be a
pattern of "mis-communication" they will say you are suffering from
"culture shock." Also, in a room full of highly qualified interpreters they
will play the "I don't understand" card. Sometimes quite often. The
point is, you must have a deep understanding of the culture and its
affect on the relationship. But it's only through a deep understanding
that one can know when to say, "enough is enough."
To understand the culture is not about reading some nonsensical blog
written by a CNC about table manners, hand gestures, or other baseless
factoids. It is about understanding the nuances of relationships, the
true timing of certain events and how to get things done. Patience is
required in China, but not at the expense of making tactical errors. If
you are in a business negotiation with the Chinese, they are also skilled
businessmen. Treat them as such.
I recently had a series of meetings with the president of a well-known
bank here in China. This president is one of my guanxi. My friend not
only helps me navigate, but he can fund almost anything I need. During
one discussion, I had asked him to set up a meeting with the government
officials to discuss a new venture. Since all land is owned by the State,
I wanted to meet with the government to make my pitch and have them
physically point on the map to some locations or areas in which this
venture would gain governmental support. My guanxi agreed to set it up
for the following Monday. Yet, Monday came and went. Then Tuesday,
then Wednesday. Back in contact, I said I needed to come in and see
him. The following day my contingent and I meet again with my guanxi.
Instead of being overly culturally sensitive and excessively patient, I
asked essentially, "what gives?" After 10-15 minutes of me asking the
same question over and over he finally relented and said that he felt
that the best course would be locate a piece of land first, then go to
the government. Given my experience I felt strongly that since there is
only State ownership of the land and no "title search" possibilities are
available it would be impossible to determine which sites were available
for development without going to the government first. I reminded him
that is not what we agreed and that if something had changed he
needed to communicate with me; that I understand in China it is
common to just leave things hanging, but my American sensibilities
require that I stay in the loop. That if we are to work together on this
we have to culturally meet halfway. He understood and agreed. My
presentation to the government took place three hours later.
This exchange could only take place as a result of: 1) being a resident of
China, i.e., my commitment to China, 2) the understanding I have about
the Chinese process, 3) the unique value of my venture, 4) the
relationship forged with my guanxi, 5) knowing when to say, enough.
Patient. Not foolish.
China is a massive marketplace growing exponentially everyday. They
are on the road to having the largest middle-class in history and they
have most convoluted bureaucracy in the world. You will need lots of
help to wade through it and a legitimately unique product when you get
there. And, you'd better have a deep understanding of the culture, the
patience of a saint, and know when to say, stop. It's a communal
endeavor in which many will want to dip their brushes into the oil and
apply their own swath of color. It is up to the artist (the entrepreneur/
developer) to stay true to his vision because in the end there is only
one signature on the bottom of his work. Starting a new venture in
China is an art.
COPYRIGHT 2011 JEFF LOCASTRO
DISTRIBUTED BY NCCREA
CHANGZHI, SHANXI, PRC
Contact the author at: Jeff@NCCREA.com or Jeff@CaliforniaSecured.com
Copyright 2011 North Central China Real Estate Association. All rights reserved. All content, web site design, text, graphics, the selection and arrangement thereof are Copyright 2010-2011 by North Central China Real Estate Association. Any use of this website, including reproduction, modification, distribution or republication in any form, without the prior written consent of North Central China Real Estate Association is strictly prohibited.