China can be a dynamic place to do business, if U.S. firms have a good plan and build strong relationships.

There are two large opportunities for companies to participate in China’s economic boom. The first is sourcing (components, sub-assemblies and finished products) from China. The other is selling companies’ goods into the domestic Chinese market. Neither of these necessarily requires setting up in China at all.   

There are two obvious ways to source components, sub-assemblies and finished products in China: (1) direct investment where the company either fully or partially owns the Chinese manufacturing location; and (2) through the careful and disciplined use of contract manufacturers. Each has its positive and negative points which should be weighed before finalizing a China strategy.

Contract Manufacturing
The easiest way to begin sourcing items in China is through contract manufacturing. Contract manufacturing can offer a company the lowest possible costs, often considerably lower than what would be achieved through its own manufacturing facilities in the country. In its entirety, contracting offers significant benefits:

• Total costs that can be equivalent to the costs realized by local manufacturers
  
• The ability to bid, compare and change manufacturers if costs, quality, etc., are not in line with expectations
  
• Low or no exit costs
  

There are three very important requirements to make contract manufacturing work in China. The first is a comprehensive, well-thought-out vendor selection and oversight program. Next is to have one’s own resources on the ground in China. The third is a quality program that is administered with zero tolerance for noncompliance.  

Managing contract manufacturing is not a purchasing activity. Many companies make this fatal mistake. Overseeing contract manufacturers in China is a combination of operations, logistics, quality assurance, legal and “diplomatic” activity. The process requires never-ending attention. Most firms assume the work is mostly completed once the initial order has been placed, and that subsequent repeat orders can be sent routinely with the expectation of smooth, uneventful performance thereafter (like they are used to in the United States). In China, every order must be treated as seriously as the initial one to ensure quality and service requirements are achieved.

It is also important to have resources on the ground in China. There are professional sourcing companies in China that can provide these services at a reasonable cost, or the company can choose to form its own group.  

Companies must recognize, however, that positioning full-time personnel in China is a path that can be fraught with potential problems of its own by introducing the counterproductive potential for skyrocketing costs.

Contract manufacturing does have its downsides,  however:

• Sourcing items through one or more contractors in China can create a longer supply chain and require better planning. Having said that, it only requires 13 days for a container to move from the Xingang Port (near Beijing) to Long Beach, Calif.
  
• Many companies tend to have poor drawings and incompletely defined procedures when beginning the sourcing project. A successful sourcing process requires that these internal deficiencies be resolved up front to ensure that low cost and quality products are the result. I once heard the following statement when a company was asked for their procedures, “We just know how to do it!” This will not work when a component or product is being sourced in China. There must be detailed drawings, specifications and clear procedures to ensure that a quality product is delivered.
  
• Contract manufacturing can result in less control if the company is not prepared to manage the contractors all day, every day. Quality must be driven.

Quality Control is the Key
Quality assurance begins with a country-wide search for potential vendors.  Search methods include the Internet, tax code classifications, state ministries and word-of-mouth. Once the list of potentially hundreds of possible vendors is narrowed down to about five, it is important to follow a consistent selection process. Below is the methodology I use that has proven very effective.

Part I – Factory Profile

• General information
  
• Communication infrastructures
  
• Products
  
• Markets
  
• Capacity
  
• Related pictures

Part II – Factory Organization and Production Process

• Factory organization
  
• Production workflow chart
  

Part III – Production Lines / Capacity

Part IV – Factory Facilities / Machinery Conditions

• Machines for production
  
• Warehouse condition
  
• Public utility supply
  
• Transportation vehicle
  
• Near ports
  

Part V – Quality Assurance

• Quality system management
  
• Product standard
  
• Management information system
  
• Quality control
  

Part VI – Social Accountability

• Labor
  

Part VII – Supply

• Raw material supplier
  
• Subcontractor
  

   
The selection process requires visits to each manufacturer. The request for the above information demonstrates the willingness of each vendor to cooperate.  The selection process is also a first step in the all-critical relationship-building process.

Establishing a Chinese Subsidiary
The legal and regulatory framework in Western countries generally provides relatively safe and lucrative grounds for manufacturers. In China, even though the investment environment has improved dramatically during the last 15 years, additional risks remain. These risks vary significantly based on which of the following corporate structures is chosen for the Chinese entity:

• Chinese-foreign equity joint ventures
  
• Chinese-foreign contractual joint ventures
  
• Wholly foreign-owned enterprises
  
• Foreign-funded shareholding firms

Avoid Joint Ventures At All Costs
The “traditional” investment approach would be to invest in companies in China in the form of “equity” or “contractual” joint ventures. Both of these approaches are fraught with danger, a danger much greater than not just realizing an acceptable return on investment. The real risk is losing the entire investment. It has happened in the past and will happen again.

Fifteen to 20 years ago, China was extremely restrictive, and joint ventures (JV) were about the only opportunity to do business there. But, during the last 10 years, Chinese laws mandating JV have been relaxed. Today, there are only a few areas related to national security such as aviation, communications and energy that require JV.

As a general position, JV should be avoided. No matter how attractive a JV might look in the beginning, priorities of the partners inevitably change over time. Due to cultural differences, it can be very easy to offend a Chinese partner, thus creating an enemy. During my 13 years of working in China, I have converted every one of the joint ventures I inherited into wholly foreign-owned enterprises – this despite the fact that conversion is neither fast nor without cost.  

Establish Your Own Facility?
Companies considering a move into China often initially believe that means setting up their own manufacturing facilities. However, this might be the very last thing to which a company should allocate its resources. Setting up a manufacturing company and facility is a major investment of time, assets and people. Though building bricks and mortar in China is not the fundamental objective, it can happen very quickly that every available resource and relationship is caught up in the construction project and start-up. The likely end-result is a bright, new and expensive manufacturing facility where the costs are not nearly as low as expected – and no sales.  This happens over and over again.

A company should carefully consider why it thinks it should build a manufacturing facility in China. Foreign-invested manufacturing companies have a way of turning into replicas of the home-country’s facilities, complete with exercise equipment, artwork lining the halls and luxury offices.

Additionally, there will be expatriates with cars, drivers, mobility premiums, hardship allowances, expensive apartment leases, home leaves, R&R mini-vacations and other costly programs that add to overhead expenses.  

Local Chinese competitors see this behavior and experience relief. They realize immediately that the foreign company is no competitor after all. They know that given time, the foreign business will die from its own weight. These local companies also are learning that many foreign investors seem to have a “financial tolerance horizon” of about one quarter of a year. This gives them the confidence to compete extremely hard because they know the foreign company will give up soon. This scenario has been replicated over and over again during the last 10 years. Chinese companies plan for five years, 10 years and 50 years. Foreign companies must adopt this kind of thinking if they are going to be successful in China. Consider Unilever, perhaps an extreme example. It has been in China for more than 130 years and is just now beginning to show good results.

The Secret to Success in China
Personal relationships are generally not considered the essential business driver by Western business people, especially those from North America. A group of total strangers can meet in the morning, discuss what needs to be done and then go out that afternoon and “do a project.” They will part that evening and possibly never see each other again. Westerners can do this. In China, such a scenario could never play out.

Absolutely no business results will be achieved until after a solid personal relationship has been developed. Whether this takes weeks or years, the most important thing is that the relationship must be firmly in place before any business results can be expected. The development of good relationships is predicated on the notion of having top talent on the ground in China that is empathetic to its unique environment. Historically, many companies attempted to send their older employees to China when they were no longer needed in the home office. In China, while “older is better,” age cannot be substituted for demonstrated capability.

Good relationships are not just a Chinese custom. The building process is more a form of due diligence. During this period, the potential Chinese business associate is evaluating every move of the potential new partner to assess his or her trustworthiness and reactions in certain situations. This may be an arduous process, but once established, the relationships will last for a lifetime. Most importantly, one must note that relationships in Chinese are between people, not between companies, which can seem very foreign and possibly scary to Westerners.    

Life just became even more complicated. Maintaining a good relationship with partners and employees in China is another requirement for success. If the manufacturer does not nurture these relations, it will not only lose the key managers who developed the good relationships in China, but also the very relationships that were thought to be key strengths of the company.

Cultural Adversity
There are at least a thousand ways Westerners can get into trouble in China.  The best way to set oneself up for failure is to “just be yourself,” conducting business “as usual.” In practically every component of business behavior, the customs in China are diametrically opposite of what foreigners instinctively do. Examples include issues surrounding competition, relationships, affluence, cause and effect, face, directness, independence, status, confrontation, team work, planning, contracts and agreements, communications, presentations, patience, legal, negotiating, decision-making and time. A Westerner following his or her natural instincts in every one of these areas will almost always be wrong.    

Consequently, no Westerner should be permitted to have contact with anyone in China before some formal cross-cultural training, a mandatory first step to business success in China.

Here are a few examples of the challenges Americans can face in China:

• Americans tend to have limited knowledge of other cultures. This can be an obstacle in concluding deals in China.
  
• Americans tend to prefer negotiating alone rather than in teams. This can become overwhelming, especially if the other side has a large team.
  
• Americans often emphasize the short-term. The Chinese want to know what the long-term effects will be.
  
• Americans usually focus on content over relationships. In China, relationships are very highly valued.
  
• Americans’ emphasis on legal contracts and constant deference to attorneys are seen as an insult in China.

What If a Relationship Goes Bad?
The best way to avoid a relationship going bad is to not allow it to go bad. Relationships only “go bad” through lack of maintenance and carelessness. Be extremely careful to understand where and to whom in the organization the China operations report. An inept manager up the line is the catalyst for disaster.     

The thing that usually damages relationships is change of priorities between the partners in the relationship. When manufacturing in China, the best defense is to have multiple sources of supply, a strategy which can help keep suppliers honest and ensure continuity of supply at the lowest cost.

Sourcing and manufacturing can be done safely and effectively in China, but it is important to have a well-thought-out strategy before starting. Unless you have the experience – many years of experience – ask for help.

China can be one of the most challenging places in the world to do business if you are not familiar with the customs, culture and its people. With the proper plan and good execution, China can certainly deliver the results expected and needed in the global economy in which we live and do business. The results definitely will be worth the effort when done correctly.

W. Ted Revis is president and founder of The Norelli Group. For more information, call +8610 6436 6688 in China or e-mail at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .