The Great Gamble: Starting a Business in China

The Great Gamble: Starting a Business in China
Feb 27, 2012 By Caitlin Dwyer ,

It's hard enough starting a business in your own country, but imagine doing it abroad. Language barriers, differences in business practices, licensing requirements and visas all affect a small business' ability to get off the ground. Even more than at home, creativity and flexibility are key to starting a successful business in China. I spoke with several small business owners in Yunnan province to get some insight into the process.

The Great Gamble: Starting a Business in China
Dangsters. Photo:

WOFE vs. shared partnership
Foreign entrepreneurs have a choice when starting up a business in China: they can find a Chinese business partner, or they can establish a wholly foreign-owned enterprise, or WOFE. 

The advantage of a local partnership is getting in with someone who already knows the local scene. A Chinese business partner will often have the connections and savvy to help a business get off the ground quickly. In this type of partnership, the Chinese partner will likely control the business officially. This helps businesses to avoid the lengthy licensing and registration processes that go along with creating a foreign-owned business.

Licensing requirements also demand that WOFE owners have a certain amount of capital in the bank – and keep it there for three months – in order to obtain their visas.  If you don't have 70,000 USD hanging around, then this might be a prohibitive step. Chinese partnership means that foreigners can register as employees of their own business, making for an easier visa process.

But there are disadvantages as well. Periodically having to leave the country to renew one's visa can be a real hassle. But even more importantly, not having control over your own business is a major concern for many business owners. Having a WOFE means that owners get control over their finances and licensing. It also allows them to transfer money internationally or change it in euros or dollars.

The licensing process

Establishing a WOFE requires a significant time investment. This is because different types of businesses require different types of licenses – and owners must deal separately with each licensing agency, from fire safety to food and beverage. This can take between three months to several years.

Tim Verplancke is a part-owner of O'Reilly's Irish Pub, a new bar in Kunming's northern Beichen district. He also owns and manages the Dangsters, a popular hip-hop dance studio that recently expanded into a second location. He says that the dance studio managed to obtain their licenses within a few months. But his bar - which opened December 2011 – is still waiting for licensing from several departments.

"We have to take people out to dinner and establish guanxi," Verplancke says. The licensing goes more quickly and easily if an owner can establish a connection with the licensers. Sometimes, forging this connection means treating people to meals, toasting them with baijiu or slipping them a red envelope with a little bonus. This can be a frustrating process, but many foreign business owners find it a necessity: when in China, they adapt their business practices to fit the culture.

Marketing your business

Steve Hoi is an organic farmer in Yunnan. He grows salad greens, herbs, potatoes, a variety of vegetables and flowers, all using what he calls GAP, or good agricultural practices. 

For Hoi, breaking into the organic produce business has meant finding consumers who want what he's selling. "Local markets do not pay well for produce," he wrote in an email. Finding a market for new products that don't fit the mould can pose a difficult challenge. While expat customers might be familiar with an unusual product, it can take time for locals to become interested – or visa versa. For a speciality product like organic food, marketing across cultural barriers can be one of the biggest challenges.

"(Locals) do not buy 'Western' veggies easily," he said. Even his tomatoes have trouble finding buyers in the local markets. So instead, Hoi opened his own restaurant, which he uses as a channel for the organic produce he grows. He has also established partnerships with several other local restaurants, funnelling his produce to their kitchens.

Marketing to a particular audience can sometimes lead to surprising results.  Verplancke expected the Dangsters dance studio to appeal mostly to expats, who were already familiar with hip-hop music and dance. But he was surprised when locals began signing up for dance classes. "We have 1,300 students," Verplancke said.  "And 99% are Chinese." Verplancke had to adjust his expectations – and his marketing strategy – to reach out to this new audience.

Sometimes entrepreneurs must turn to creative marketing strategies. The familiar outlets sometimes don't reach the appropriate audiences in China. To advertise the Dangsters, Verplancke organised a flash-mob dance in Kunming's central shopping district. Free and highly visible, the flash-mob attracted a lot of attention for the studio. Inventing creative ways to market seems to be key to entrepreneurial success in China.

Lack of local support or knowledge

"I went into a local place that served Guinness, and it was 50% head," said Verplancke. "I asked them, ‘can you redo it?' They didn't know why it was wrong."

In establishing a local business, foreigners might find that locals aren't familiar with the particulars of that trade. For Verplancke, pouring a perfect pint is the key to a successful Irish pub. He taught his bartenders – experienced locals who had simply never poured Guinness before – the technique. "If you pay for it, you get it served right," he said. Many business owners find that communicating their expectations to Chinese partners, employees or even customers requires a bit more pedagogy than it would at home.

Hoi has been working with local farmers to teach them GAP. "The neighbours will be spraying all sorts of pesticides, insecticides…with wind and local conditions, I have found it tough to avoid," he said. It has been difficult for Hoi to spread the gospel of organics, as "folks have the unique local practices" and are often resistant to change, especially from an outsider. When a foreign-owned business presents a challenge to local traditions, it often meets opposition.

Similarly, foreigners might find themselves lost when integrating into a Chinese market. "You have to deal with Chinese businesses and Chinese suppliers," Verplancke said, and sometimes those relationships are confusing at best. Foreign owners should make an effort to understand local customs, but without giving up the quality they require to run a successful business.

Trusting your business partner

Verplancke runs O'Reilly's with a childhood friend. He says that trust is key in business relationships, whether between people of the same nation or cross-culturally. Many start-ups in China have failed not due to lack of money or vision, but because the owners had difficulty communicating. When cultural differences are added onto the stress of running a business, it becomes clear that trust is key.

"I couldn't do it without him," Verplancke says of his business partner. "Oh yeah, it also helps that he speaks fluent Chinese."

Related links
Do You Dare Start a Business in China?
3 Things to Expect When Starting Your Own Company in China
Seizing the Moment: Entrepreneurs in China

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Nov 08, 2012 19:46 Report Abuse