China: China M&A: Assembling an Effective Team for a China Transaction Part II

Last Updated: 1 September 2010
Article by Mark Schaub
This article is part of a series: Click China M&A: Assembling an Effective Team for a China Transaction Part I for the previous article.

Most companies engaging in a China project will likely need support from external consultants. However, selecting the external team is often more difficult than assembling the internal team — who do you need? How do you find good ones? And what role should they play? This portion highlights the infamous China consultant. What kind of role do they play and do you actually need them?

The unsuspecting foreign investor will be surprised to find how helpful everyone is in China. Indeed, it often seems that China's biggest sector after manufacturing is consulting service in relation to China. A Google search of "China consultants" resulted in over 20 million results. Googling "ethical consultants in China" resulted in two million results — more than expected!).

One of the reasons that multinationals do relatively well in China is the depth of their management. Medium-sized companies will often need external support for their China projects, and there are so many consultants to choose from in a myriad variety of types and sizes. The usual suspects (ie types of consultants) are listed below.

The China Consultant — Jack of all Trades

"Russia is a riddle wrapped in a mystery inside an enigma." — Winston Churchill

"China is much more complicated than that!" — China consultant

The China Consultant can be a blessing to an inexperienced China investor. However, it is extremely important to choose one that understands you and what you wish to do. Further, it is important to ensure that the investor remains deeply involved in the project — responsibility cannot be outsourced. If it is your investment project and it fails, it will not help to blame the hired hands, ie the consultants.

The generalist China consultant — the "zhongguo tong" or old China hand can play an important role.

In many cases, these consultants have little knowledge (many people believe the sentence could end at this point) far less than the client of the industry in which the client is operating. They rely to a great degree on their "China knowledge" and "guanxi".

China is clearly different in many ways from Europe or the US. However, it is not the unfathomable enigma made out by many China consultants. Naturally unscrupulous consultants wish to make China more mysterious than it actually is in order to maintain their role in a project. If a consultant states to you that he is a crucial part of the project (as opposed to becoming crucial by doing a good job), well then, it is probably time to find a different consultant.

However, it would be unfair to dismiss the China consultants out of hand. Consultants can and do play important roles. It is important for foreign investors to select a consultant with whom they feel comfortable and who can cover manpower or expertise shortcomings within their own organization.

Crucial criteria for selecting a consultant include:

The consultant has your interests at heart - For many consultants, it is not the success or failure of the project that matters, rather, it is whether the project proceeds that is important. In many cases, unscrupulous consultants prepare feasibility studies which have best case scenarios based on the assumption that "if every Chinese added one inch to his shirt tail", and worst case scenarios which are only slightly less pessimistic, such as "if every Chinese added two-thirds of one inch to his shirt tail".

Case study: The Intermediary

In the Harvard Business Review on Doing Business with China (Graham, John L. and Lam, N. Mark, "The Chinese Negotiation", in Harvard Business Review on Doing Business in China (Boston MA: Harvard Business School Press, 2004).), an article entitled "Chinese Negotiation" by John L. Graham and N. Mark Lam lays great importance on the role of the "intermediary" (zhongjian ren) (In Chinese: 中间人). Basically the intermediary is a person who can bridge the two sides and intercede when there is conflict. The authors advise that the intermediary plays an indispensable" role in such discussions:

"Only a native Chinese speaker can read and explain the moods, intonations, facial expressions, and body language Chinese negotiators exhibit during a formal negotiation session. Frequently only the zhongjian ren can determine what's going on. ... the zhongjian ren can step in because he is an interpreter not so much of words as of cultures." (Graham, John L. and Lam, N. Mark, "The Chinese Negotiation", in Harvard Business Review on Doing Business in China, p 41)

Experience, at least mine, has shown that if in order to communicate with the Chinese partner on the other side you need someone to analyse his "moods, intonations, facial expressions, and body language", well, it is probably time to look for another Chinese partner who is less difficult to deal with. One should also bear in mind that the mission is not accomplished with the signing of a contract — it is the establishment of a successful project. At the time of project implementation, the zhongjian ren will no doubt be off brokering deals elsewhere while you will be sitting with Chairman Liu, trying to work out what he means when he crosses his arms and speaks with a slightly higher than normal lilt.

However, I may be wrong as John L. Graham and N. Mark Lam even helpfully provide an example of intermediary "magic":

"Indeed, we have seen more than one zhongjian ren successfully deal with divisive disagreements. The following is one such case.

A vice president of a New York-based software company went to Beijing to negotiate a distribution contract with a Chinese research institute. Having attended meetings arranged by the intermediary — a former senior executive with the institute — the VP was pleased with the progress during the first two days. But on the third day, the two sides became embroiled in a fruitless debate over intellectual property rights. Feeling they were losing face, the Chinese ended the meeting. That night, the VP and the China country manager met with the intermediary. The following day, the intermediary called the head of the institute and worked his magic. In the end, both sides agreed that the intellectual property rights were to be jointly owned, and the contract was signed." (Graham, John L. and Lam, N. Mark, "The Chinese Negotiation", in Harvard Business Review on Doing Business in China, p 42)

And that indeed sums up the problems with using intermediaries in China.

Intermediaries normally convince the unsuspecting foreigner to agree to what the Chinese counterpart wants. The above passage even admits that the intermediary was "a former senior executive with the institute". It is unlikely that he would switch allegiance to the US company based on some nice dinners (according to the authors, "Expensive meals in nice places are key"). In my experience, the intermediary (especially one with links to the Chinese partner) grants the Chinese partner an enormous advantage in negotiations. The intermediary will allow the Chinese side to know what the foreign side is thinking and will normally push for the easiest way to an agreement. This is normally to convince the foreign partner that "this is China" and to agree to the proposal on the table.

The "magic" solution outlined above was that the New York software company agreed to joint ownership of the intellectual property rights of its software with a Chinese distributor. Leaving aside the fact that it would seem strange to grant a distributor intellectual property rights, the even greater question is: what was the "magic"? Did the Chinese distributor want sole ownership of the software? I do not think I would grant a distributor ownership of software.

The consultant is realistic about China and himself - Many China consultants have a vested interest in making China a mysterious, unfathomable, and almost dangerous place. Only with their guidance and even more importantly, their highly placed contacts, could your medium-sized company hope to navigate the behemoth which is China. This is obviously over the top. Some things are different in China, but most things that make sense overseas also make sense here. Contacts do help as is the case everywhere, but they are not the only factor.

In addition, one should be wary of consultants who claim "they have unrivalled contacts in China", "my father was a foreign minister in post-liberation China" (indeed the writer has met three consultants who have made this claim — but they well have been telling the truth as they all proved to be crooks and may have been related) etc.

The consultant should not care too much - Naturally it is important for your consultant to care but it is also important that he does not care too much.

This can be best illustrated by the following case:

Case study: There is no place like Home

A company from Austria was interested in manufacturing cane chairs in China. Basically, the design was made in Austria. Cane would need to be sourced in China and some assembly work was required. The production would then be exported. All in all, a small project.

As the company was small and had little overseas experience, it came across an Austrian entrepreneur living in China. This Austrian entrepreneur had a factory located in Xiaoshi, a small village in Liaoning province in the Northeast of China. The Austrian entrepreneur had convinced the Austrian company that he was an extremely successful businessman in China and was running a number of factories very successfully. That this successful businessman was willing to take time out of his hectic schedule to assist in locating an ideal place to assemble some cane chairs did not seem to raise any alarm bells.

In any event, consult he did. The conservative Austrian company requested a feasibility study on the location of the facility. The Austrian consultant went off and conducted his investigation. Now, a layman may think that the obvious location for a small assembly plant for export would be near a port, a railway connection or some other form of transport. Alternatively, it would make sense to have the facility located near the raw materials.

You would be wrong. The feasibility report concluded that the perfect location for the assembly would be Xiaoshi — despite being located far from rail, sea or port; despite being four hours from the nearest airport; despite being possibly one of the only places in China where bamboo refuses to grow.

However, if the consultant surprised with the general location of the proposed facility, he was able to exceed all expectations in relation to the level of specification. The consultant had been able to pinpoint a factory on a street near his current factory. Further good news abounded in the feasibility study. In addition to finding an optimal assembly location, the consultant had been able to drum up support with the local party secretary. The report proudly stated that "Xiaoshi's party secretary supports the establishment of a cane chair production facility". In addition, he would give his support to the Austrian company to use the state-owned factory provided the Austrian company was able to meet certain investment and tax requirements. The consultant was also willing to take a share in the new venture to "smoothen things".

The Austrian company decided to set up a simple assembly plant in Suzhou and has been successfully assembling and exporting chairs for several years without high-level political support.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click China M&A: Assembling an Effective Team for a China Transaction Part I for the previous article.
This article is part of a series: Click China M&A: Assembling an Effective Team for a China Transaction Part III for the next article.
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