Entrepreneurship in China

by Julian Righetti on October 15,2012 in China Trade ,

I love discussing entrepreneurship in China but is it easy to be an entrepreneur in China? Recently, a lot of expats and entrepreneurs have discussed China’s changing political situation and how that has affected their China business plans.

When I first read Mark Kitto’s article, his struggles in the face of the Chinese state/business community resonated a lot with me (http://www.prospectmagazine.co.uk/politics/mark-kitto-youll-never-be-chinese-leaving-china/).

I first came to China in 2002 and was similarly fascinated by China. After graduating, I wanted to create a business in China and make things happen here. However, one major obstacle for entrepreneurs and me in China is that for many business ideas, it’s necessary to have a Chinese partner. There are few industries where small-time, non-Chinese entrepreneurs can hope to scale the massive walls protecting the Chinese economy. The legal system is like a disease that affects everyone and leaves them semi-functional. At any given time, you could keel over and die or you might last another 20 years. Even Chinese-Americans face difficulties developing businesses in China as they do not have the “guanxi” or local connections and are more likely to be usurped by the local partner.

A number of American citizens remain in Chinese prisons on questionable charges, including Xue Feng, a geologist serving eight years for industrial espionage. Another naturalized American, Hu Zhicheng, has been blocked from leaving the country while he battles accusations of commercial espionage lodged by a former business associate. Mr. Hu spent a year and a half in jail but was released after Chinese prosecutors acknowledged that the case had no merit.

“Having an American or an Australian passport and having Chinese blood puts you at a disadvantage to those who are white,” said Wang Songlian.”

http://www.nytimes.com/2012/02/14/world/asia/american-active-on-internet-recounts-beating-in-china.html

I can name a handful of Western “China” entrepreneurs who have made it. They have businesses in sourcing, media (surprising, I know), consulting, medical tech, and HR. They all have partners (or wives) who act as their intermediary to some extent, regardless of whether they speak perfect Chinese or not.

For entrepreneurship in China, I think it’s extremely important to consider:

  • How much inherent leverage do you have over your partner?
  • How important is your non-capital contribution to the success of the business?
  • How much involvement does the government have in your business? How reliant are you on approvals, permission forms, customs, etc. to do business?

Many large US and multinationals love China. They get through all the red-tape relatively easily and can dominate markets against poorly managed, disorganized local competitors. However, for entrepreneurs without significant capital backing, it can be extremely difficult-waiting years for approvals.

For example, an American friend partnered with some Chinese friends of mine to develop a touch-screen business. Their model was to install touchscreens in KTV’s (Karoake Bars), malls, and general public places similar to the touchscreens in taxi cabs all over China. They would then sell ad’s through those machines, targeting very wealthy demographic groups who can afford 6000RMB KTV rooms.

This was in 2007, so the ipad wasn’t so popular as it is now; they had some initial success and raised a little financing, but ultimately bombed when they needed approval from the local government to actually get the machines in anywhere.

So, to make this clear: IF YOUR BUSINESS DEPENDS ON LOCAL GOVERNMENT APPROVAL and someone who “knows” people can make that happen-DON”T DO IT!

Even if this “person” can make things happen, expedite approvals, you still ultimately leave the keys to the shop in his/her hands.

Foreign owner Bauer loses his restaurant:

http://www.thebeijinger.com/blog/2010/05/12/Kro-Out-But-Not-Down

Texas BBQ restaurant

http://reportingtexas.com/texan%E2%80%99s-bbq-takes-on-beijing/

If you want to try your hand at entrepreneurship in China, I think it’s important to understand what value you have and what to avoid:

  1. Strong control over your local partner (relationships, wife/husband, deep connections that raise the costs to escaping from the relationship for both parties)
  2. Assets that your Chinese partner can’t easily obtain (relationships, sales channels, distribution, retail outlets, etc.)
  3. If you model depends on government
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    approval, then be careful. You may not have a problem at first, but later on, who knows….I have met so many people who claim to know a guy who knows a guy who can get whatever we need approved….but you should realize, even if this is true……

Many government positions last only 2-3 years and then officials are rotated to another position. Your connections can dry up with the promotion. Besides this is probably illegal!

Even if you have a great idea and you want to start something, there are so many better places to go than China.

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Innovation is a major bust here. Copying is rife. Any IP protection is a joke. Of the few incubators, why hassle with all the red tape and ghoulish security oversight?

If you want to go big, then you should recognize the essential role the state plays in all aspects of economic life here. Whereas in the US, entrepreneurs succeed in spite of the government, here they succeed because of it.

There are conflicting trends as to whether China will embrace US style innovation development and legal reform or continue to infect every aspect of life through the long-arm of the state. It can be done, but it’s a lot easier in the West IMO. If you love China, you may want to reconsider setting up long-term here.

http://www.pingeast.com/2012/06/08/a-profound-signal-china-startups-incubators-got-governments-strong-interest/

http://pandodaily.com/2012/08/13/chinese-entrepreneurs-care-more-about-making-money-than-changing-the-world-says-kaifu-lee/

http://genychina.com/2012/06/the-future-of-china%E2%80%99s-startup-incubators/

Incubators in China:

http://en.chuangxin.com/

 

 

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