Doing Business in the World's Second-Largest Economy

The author of ‘Selling to China’ offers advice for American entrepreneurs eager to do business in China, the world’s second-largest economy.

Yum! Brands, the fast-food purveyor whose brands include KFC, Pizza Hut and Taco Bell, generates approximately half of its global revenue in China. Lots of other U.S. companies do good business in the world’s most populous country, too. Could your small business learn — and earn — from their example?

Yes, says China expert Stanley Chao, especially if your firm sells primarily to other businesses, is in good financial shape, and offers products superior to those already available in China. It also will help if your company supports an industry that China’s government is trying to grow right now, such as aviation, nuclear power, biotechnology, automobiles or medical care.

Still, going to China is quite a leap. Why traipse halfway around the world in search of sales?

China, ho?

“You can do well in the U.S., but if you’re looking for the kind of growth we saw in the U.S. maybe 20 or 30 years ago, that’s happening now in China,” says Chao, managing director at All In Consulting and author of the recently published “Selling to China: A Guide to Doing Business in China for Small- and Medium-Sized Companies.” “You’re talking about potentially increasing your business by 25 to 30 percent, and sometimes 40 percent. There’s nowhere else in the world where you are seeing the kind of growth we’re seeing in China, and this is the time to tap into it.”

While the opportunity in China may be enormous — it is the world’s second-largest economy, after all — capitalizing on it can be hard work. China presents a stiff language barrier to U.S. entrepreneurs, and a business culture far different from the one most U.S. business owners know.

Consider the Chinese take on contracts. In the U.S., they’re binding legal agreements. In China, they’re more like an expression of good faith, one that symbolizes a desire to do business together but remains open to revision and reinterpretation as business conditions change. Chinese business partners will happily sign contracts, Chao notes, but those agreements are largely unenforceable under China’s legal system.

Still intrigued? Make an honest assessment of your prospects, Chao advises, beginning with a close look at your balance sheet. “You’ve got to be financially stable and have some money in the bank,” he warns. “You can’t go to China to make up for your losses in the U.S. It’s not a quick buck. It’s going to take two to four years to get established, build sales and generate profits.”

Next, ask whether your product already has a competitor in China, or if it can be easily copied or pirated. Beating the indigenous competition can be difficult without a clearly superior product, and selling something that can be easily copied could doom not only your China business but ultimately your U.S. business, too. Finally, make sure that you think China can become a meaningful part of your business. “If you’re only going to add 5 percent to your revenues, don’t bother going,” Chao advises.

Get an inside look

Answering questions like these can be difficult, especially if you’re a China novice. To make it easier, Chao says, attend one of your industry’s trade shows in China or even in another Asian country, where all the important Chinese players are sure to be represented. Then, if the early indications look favorable, begin studying the market in earnest.

Spend two to three weeks in China meeting potential partners, government officials and competitors. The latter are surprisingly open to Western visitors, Chao promises, especially if they see a partnering opportunity. Take along your business development experts or engineers if you think they’ll be helpful, and pay special attention to finding a good translator. For your translator to be both effective and efficient, you’ll want someone who not only speaks English and Chinese fluently but also understands your industry and its terminology.

If you don’t have the time or confidence to do all this on your own, consider hiring a consultant, preferably one with extensive on-the-ground experience doing business in China. Campbell, California-based GraphOn Corp., a software company with about three dozen employees, hired Chao four years ago when it wanted to establish a foothold in Asia, including China, Japan and Indonesia. The company still uses Chao to help manage its business relationships there, says John Dilworth, GraphOn’s vice president of sales and marketing.

Dilworth says that like many companies breaking into the China market, GraphOn has had to be patient. While the company is now generating about 15 percent to 18 percent of its annual revenues in Asia, its China sales still rank only about third or fourth in the region, owing in part to the challenging language barrier. Still, Dilworth says, his company is pleased with its prospects there.

“We have four major distributors in China, all of them stocking distributors, and we’re doing very well,” he says. “And in the past two and a half years we’ve tripled or quadrupled our sales. Our biggest challenge has been getting those distributors, or integrators, up and running. Once that is done, I think China is going to do much better for us.”

For many entrepreneurs, China is the ultimate foreign market: big, complicated, exotic. But for those in the right industry who are committed to aggressive growth, its potential rewards may be too alluring to ignore.

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