How Not To Do Business In China, Part I -- Travelling With The Government

This is actually probably part 100 of this series, but it has taken me until now to label it.

Just came across a great post by Andrew Hupert on the DiligenceChina blog, entitled, "Matchmaker, Matchmaker, Make Me a Profit."  The gist of this post is Hupert's disbelief that small businesses are still going on China business tours for old style meet and greet sessions with local government officials.   

I cringe every time one of our clients says it found its China partner on a trade mission with its local politicians.  I cringe because I know exactly what this means. 

I have a really smart client in the process of going into a business in China.  For attorney-client reasons, I cannot get specific about the business. This client has substantial international experience. China will be its third Asian country in which it will have operations.  My client spent months narrowing its choice of Chinese cities down to two.  The client's plan is to find a Chinese partner with an already built facility, and then work with that company to upgrade its product and, most importantly, market it to Western businesses, many of which are reluctant to use this product/service from/in China because of quality concerns. 

My client met with government officials in both cities to explain its plans.  Both cities strongly urged my client to partner with a particular company in their respective city that they touted as by far the best in the field.  My client met with both touted companies.  In conducting its due diligence on the various potential partners in both cities, it concluded these two were by far the worst candidates.  Both of these companies were at least five years behind the other companies in terms of technology and the buyers know it.  Buyers go to these two companies only if given deep discounts or if the other companies are too busy to handle them.  Both companies had hundreds of extra employees.  Not so coincidentally, both companies had substantial city ownership and both were "rumored" to be moneymakers for city officials. 

Hupert's post starts out by noting his having recently heard of a 2 week trade mission arranged by a major US state's small business advisory board with the declared goal of helping small and medium sized business "learn about ways to find mutually beneficial ways to participate in China's economic development:"

They are spending 2 weeks in NE China, meeting with government officials, and visiting cities like Zibo, Yantai and Weihai. They will be spending a lot of time meeting with officials from the various Special Export and Processing Zone ' and then participating in various 'matchmaking' events to find local partners. The trip starts off in Tianjin, and finishes with 2 days in Beijing ' to meet with more officials and to engage in more matchmaking.

Hupert expresses surprise "we" are "still doing this" and then asks, "have we not learned from bitter experience that this sort of guanxi-driven government sponsored meddling is going to end badly?"  The post then talks about how in the "bad old days (pre 2005), we could claim that this sort of arranged marriage was the 'least-worst' solution in a regulatory environment that required JVs and controlled access."  But with foreign businesses now allowed to form Wholly Foreign Owned Enterprises (WFOEs) and Chinese cities like Shanghai, Shenzhen, Suzhou, Hangzhou, and Beijing having emerged as "international business centers that have been pulling in cross-cultural entrepreneurs for the past decade," why do these sorts of trips persist? 

Mincing no words, Hupert then expresses his view of forming business relationships based on such a trip: 

I have lived in China for 5 years, speak reasonable Chinese and have achieved a certain familiarity with the Chinese operating environment. There's NO WAY I would advice a client to start his China business by entering into a JV with a local Zibo company that was arranged by the local government.

Looking on the bright side, Hupert then remarks that such trips do not "end in tears for everyone" as "a lot of new Chinese JV partners in NE China will be laughing all the way to bank brokerage within 6 months."  I would add that the politicians who go on these all expense paid trips likely will not ever spill a tear over them either.

Serious Question: What gives someone the idea that the mayor of Peoria, working with the mayor of Zibo, should be the conduit for finding them a business partner in China?