AmCham-China Daily

If you’re a prospective small and medium-sized enterprise (SME) in China, stop fidgeting over what kind of office you should set up. Kirvan Henry Pierson III, principal of China consulting firm XLOCATE Ltd., has a simple recipe for success, which he’ll discuss at China’s SME Challenge, sponsored by AmCham-China. The event takes place Friday, January 25, at China Resources Hotel. Here are some ingredients:

• One part rep office. Delay filing a Wholly Foreign Owned Enterprise until you need to book RMB revenue.
• One part gumption. Just do it. Put people on the mainland ground, do business development and try to get partners. Small foreign companies have no credibility in China without a respectable office and staff. To do business in China, you must “spend ahead of revenue” (demonstrate a local presence before revenue contracts can be secured).
• One part distribution partners. Don’t think you will start selling direct—that’s expensive and high-risk.

Mr. Pierson doesn’t like to mince meat, or words.

He finds the correct way of doing business in China is often anathema to U.S. businesspeople, and is much more digestible for Chinese, and even Europeans.

“American firms want to make sure they are in total compliance with government regulations at all times, whereas the Chinese firms they are competing against don’t worry about that stuff,” Mr. Pierson said. “If the government finds you out of compliance, they will generally tell you you’re out of compliance. Unless you present a serious threat to somebody who has special connections, you will never get the police called on you and your operation shut down. Generally, do what you want to do, and wait for the government to say, ‘No, you can’t do that.’ Then take steps to get into compliance.”

A joint venture (JV), tossed into your company mix, apparently is as palatable as ipecac.

“Don’t go in with idea that you need to share ownership with a mainland partner,” Mr. Pierson said. “That’s the recipe for disaster. Do not do a JV under any circumstance unless the government requires it in your industry. And even in these cases, there are often ways to structure around the requirement. In a minority ownership JV situation with a mainland partner, you will get your pocket picked.”

Invest your money into building an organization that you own and control, Mr. Pierson said. Write contracts with Chinese partners as appropriate. This reduces risk in the case of non-performance by the partner. The bank account, and the underlying asset you build, should belong to you, he said.

AmCham Member Matt Young, editor & publisher, bizCult.com

This is the first post in a series discussing the upcoming China’s SME Challenge event.