China in your hand

Jeffrey Malaihollo, managing director of Central China Goldfields, offers advice to fellow entrepreneurs on how to follow in his footsteps of doing business in China.

China is expected to become the industrial powerhouse of the future so it is no wonder British businessmen are falling over each other to exploit opportunities in the country. But what awaits them? What cultural shocks can they expect? And how many frustrations must they endure before they finally clinch a deal?

Business people across Europe have woken up to the huge opportunities in China. Economists predict that by 2030 it will be the world’s largest economy. No wonder there is a conveyor belt of industrialists heading out to China to do business.

Just look around your own home and see where everyday products such as pots and pans and electrical goods and dresses and coats and even cars were made – yes, you know already, the answer is China.

There are massive opportunities – not least in mining, my own sector, where metal prices have been driven through the roof by China’s need for raw materials to keep its factories working round the clock.

China is the fourth largest gold producer in the world yet only a mere one per cent of global exploration dollars are spent in the country. The reasons are not difficult to discover – the bureaucratic nature of the society had stifled entrepreneurial activity and decisions aimed at exploiting possible mineral deposits could take months if not years to be made.

As a result the industry became fragmented, under-explored, under-developed, most certainly under-financed and badly in need of technical assistance. The Chinese government recognised this and has opened the door to encourage investment in the mining industry, as it had done earlier in other industrial sectors.

Let us be quite clear, China is not a straightforward country in which to establish yourself, but neither is it a closed and impenetrable state run by blinkered and ideological bureaucrats. The fundamental drivers for business and entrepreneurs are the same as they are in the West – the approach to the end result however is quite different.

As a first step, ensure that the team you have assembled are as acquainted as possible with conditions in China and how business needs to be conducted.

As I have said, my experience relates to mining but the same advice could be applied to anyone setting up a venture in retailing, pharmaceuticals or catering. The most important thing, as in any other country, is to carry out lots of due diligence. Knowing what you want, how that fits the local environment and the specific opportunity on the table is key. There are too many people who are so mesmerised by the size and lack of transparency that they forget the simple lessons learned elsewhere. You only have to read Tim Clissold’s book Mr China to find good examples.

Don't imagine you can go to China, set up a business, transfer funds from the UK, and then start work. You can’t. It is often far easier to enter into a partnership or joint venture with the appropriate administrative authority for the region in which you wish to operate. This will involve the establishment of a tailor-made vehicle for the project you have in mind with the authority, typically, holding a stake of around 30%.

Such ventures are not easy to manage though. When you become a joint venture partner in China it is not only that you have to sleep in the same bed but you also have to dream the same dream. "Same bed – different dreams" is often quoted by experienced or bruised investors!

Negotiating these corporate joint ventures can be lengthy and tiresome – a 50 page document is almost standard – and obviously at some stage you will need to employ a competent legal advisor. But my advice is keep the lawyers out of the way for as long as possible. They find it intrusive and leads them to believe that you do not fully trust them.

Try to get to know your Chinese partners on a social level. Take them out to dinner, share a few drinks, go to karaoke. Build trust. A joint venture is a bit like a marriage. You sign the contract on your wedding day and after that you take each day as it comes negotiating your way through life.

The next step is to apply for a Business Licence. Once you have received your Business Licence, it means your venture is now approved and recognised by the central, provincial and county governments and enshrines your rights to conduct business in the country.

The Licence is only granted after being passed down through layers of state and local government officials. Sometimes dealing with four layers of bureaucracy (Central, Provincial, Municipal, Local) is akin to riding four bicycles at once – but it can be done!

One of the best places to go to for advice with this process is a body called the China Britain Business Council (www.cbbc.org) which is part funded by the British government.

Once you are free to start business then you have to face the task of hiring a competent workforce. There is a plentiful supply of labour but highly specialised people can be difficult to find. That will change. Chinese universities are churning out highly competent graduates, many of whom have taken a second degree abroad.

The current crop of western businessmen in China see themselves very much like the old Wild West pioneers who migrated to the west coast of America to find rich pickings in mining, railroad development and farming in the 1800s.

But just like the old Wild West, China can be a hazardous place for the unwary.