China Law Blog

The Sydney Morning Herald ran a story today called, "Like a Bull in a China Shop," discussing an award winning Australian documentary on China Business, called "The Men Who Would Conquer China." 

This article sums up the movie as follows:  "Rule No. 1: you need a Chinese partner with connections. Rule No. 2: don't get screwed."  As obvious as this advice may seem, it is of no value at all. 

It should go without saying that foreign companies should not just show up in China without any local connections.  However, the local connection need not be a "partner."  "Partner" implies joint venture, and as we just discussed the other day, foreign businesses are generally trying to avoid joint ventures by entering China as a wholly foreign owned entity (WFOE).  This is the trend because the Chinese government has greatly expanded the number of business sectors in which WFOEs are permitted and because foreign companies see the benefits of going it alone.  This article's advice also fails to account for the rapid decline in the Chinese government's ability to influence the success or failure of a business. It would be naive to think one can operate in China without government approval, but it would be equally naive to think government  connections are the essential element for success.

I much prefer the advice given in the article by Kevin Hobgood-Brown, an attorney with the Deacons law firm, who says:

"Everybody who is successful in China develops their own networks. If you open a medium-sized factory in the provinces, it is not necessary to have high friends in China. But you do need to have a good relationship with the officials in your county and, possibly, the province," Hobgood-Brown says.

"These officials need to understand what you are doing and recognize you are a good corporate citizen."

Mr. Hobgood-Brown is right to point out that the government officials that matter most might well be local ones and he is also right to point out that the way to establish a good relationship with the government is to make them understand your company is good for business.  Chinese government officials are rewarded when business is good and if they think your company is good for business, you are well on your way to a good relationship.  Government relationships matter, but the best way for foreign companies to get that good relationship is by running an honest and successful business, not with government guanxi. 

As for the second rule: "don't get screwed," well yes, I agree with that, but that is true in everything.