We are an Asia-based corporate financial services firm with a focus on emerging markets.
Published on June 23, 2020
Three Common Pitfalls Killing Your China Business
Financial controls and standard operating procedures are mission-critical for scalable businesses. While getting employee buy-in is often the difference between success or failure with any new system, China offers it's own hurdles to the mix. Here are three typical mistakes you should avoid:
If the person you've appointed to lead your China initiative relies on a variation of 'this is China' more often than providing meaningful explanations, replace them.
The China Gatekeeper
In the absence of reliable information coupled with being overwhelmed with China's unfamiliarity, foreign investors in China often rely on an early-stage introduction to an insider within their industry in China to help navigate their entry. While these initial advisors can be immensely helpful with introductions and rapidly formulating a market entry, they will often position themselves as gatekeepers to China.
And that is where many companies fail even before they start - relying on one person to dictate their China go-to-market strategy.
A China gatekeeper will insist that you only listen to them and those they deem reliable. They are the 'China expert*.' Being an outsider, you do not and cannot understand how China works. And the gatekeeper will remind you of this regularly.
Once the gatekeeper has firmly ensconced themselves into the foreign investors' China operations, the damage begins. One of the first casualties will be financial controls and standard operating procedures. Anything that limits the gatekeeper's ability to control the local operations and provides clarity to headquarters will be resisted, often by insisting that such controls do not work in China.
China is complex and always changing. You will need to adapt your business to its peculiarities or fail. But China's reality is not insurmountable for a foreigner to understand. If the person you've appointed to lead your China initiative relies on a variation of 'this is China' more often than providing meaningful explanations, replace them.
*There is no such thing as a 'China expert.' You will meet people who are experts in online retailing, supply chains, labor laws, and automotive manufacturing in China. Not on the entire country. While you would politely walk away from the self-proclaimed 'France expert,' you should run from the China expert.
Don't believe the savvy local hire that grew your China operations from scratch to the business unit that contributes 35% of your global bottom line is worthy of leading your APAC operations? You've just trained your local competitor's next GM.
The Bamboo Ceiling
Chinese employees are not all that different as you might think. The best talent in China has the same aspirations as your best talent back home. Aligning their interests with that of the investor will go a long way towards reducing fraud in your China operations, while not training your local competitor's next head of APAC.
The most cynical foreign investors in China assume that senior managers in their organization are taking kickbacks and that it is naive to believe you can do anything about it. Anemic bonuses and below market rate salaries are typical. So are ghost businesses and rampant employee theft.
Don't believe the savvy local hire that grew your China operations from scratch to the business unit that contributes 35% of your global bottom line is worthy of leading your APAC operations? You've just trained your local competitor's next GM.
Incentivize your local teams to perform, and they will embrace the reporting systems that prove their performance. Stock options, competitive bonus and promotion programs determined by KPI's aligned with the company's goals, go a long way to ensure that those who need to be recognized, want the right systems in place to afford that recognition.
'Trust but Verify'
A Russian proverb popularized by President Reagan in the l980's during the Cold War, 'trust but verify' referred to the reliability of information related to nuclear arsenals.
While not as foreboding as confirming compliance to arms treaties, 'trust but verify' in business is often related to the reliability of your financial reporting. Proper reporting systems and financial controls provide visibility into a company's health independent of senior management. Regardless if it is an accounting outsourcing provider or hiring a controller within the company, the team capturing the data and preparing these reports should be able to work without undue influence of local senior management. That usually means that they either report directly to headquarters or operate in a matrix environment.
Do not mistake this with a call for micro-management of your senior China management. It's not. Senior managers genuinely committed to growing your China business will embrace an independent telling of their successes. So hire senior management carefully and give them the authority they need to succeed within the framework you use with your other businesses. You have similar reporting systems in place in your operations back home, why not in China?
Managing a successful China business is hard. There are more stories of failure than success. Increase your chances of success by not treating your China team as outsiders and allowing irrational, 'China is different' arguments stymie your ability to know your China business' health.
Timothy Lamb
Director at ECFO