Paul’s Ten Commandments

Paul O’Brien admitted he was somewhat apprehensive about revealing his ‘Chinese Ten Commandments’ at a break-out session for this year’s Go Global conference. The former CEO of Easiyo, now consulting to Douglas Manufacturing, wasn’t sure if any Chinese in the room would be offended. A majority of the conference attendees wanted to be at the China session, such is the current level of interest in that market. “I apologised in advance. I said this is not ‘PC’, it may sound quite aggressive, but I’m here to save you money.”

He needn’t have worried; feedback was positive – Chinese attendees confirmed his Commandments were accurate. They liked his strength of conviction; the Chinese admire strength, he tells Exporter. He offered some other hard truths around the tough business climate in China too, one in which ‘family’ always comes first. 

Drawing on his many years experience in the China markets through Easiyo, Good Health and Australian pharmaceutical wholesaler API, here are Paul’s Ten Commandments:

 

“They’re a waste of time for two reasons. Firstly, in Chinese culture there are no contracts; deals are agreed upon verbally, face-to-face.” He remembers one particular gentleman who pointed out that just because the contract was signed last year, it didn’t mean it was applicable this year. “The Chinese see the contract as a precursor to intense negotiation, whereas we see it as the end deal. They rarely stick to a contract – and you have no way of enforcing it,” says Paul.

He believes a Memorandum of Understanding is smarter. Draw a line down the middle of the page (or whiteboard), on one side write what you will do; on the other what they need to do. Then debate the lists and apply your ‘chop’ or company seal (which the Chinese value). Add both signatures and each side retain a copy. It may not be legally binding, explains Paul, but if the relationship endures, that MoU can later be turned into a legal document and formalised.

“Another advantage of the ‘trial’ MoU is that, if after a few months your Chinese partner is not performing, you can move on without losing any money.”

 

This is the one Paul thought would be a little controversial. “Basically don’t believe anything out of China, because ‘saving face’ is a well known behaviour in Chinese culture. Lies are not really lies in many instances, they are simply stories made up to save face. And if you accuse them of lying, they will be insulted. “[If a situation like that arises] you must allow them to save face,” explains Paul, “Protocol and etiquette is still important.”

He says it’s imperative that you check everything that your Chinese partner presents to you – whether it’s certificates, receipts, or other documents – because many can be fake. Get them translated. “Even if they said they’ve put up a billboard on a Shanghai highway. Have it checked out.”

 

This commandment focuses on three key tips around payments. The first is that the Kiwi dollar is still preferable over the RMB for transactions. “Generally there’s never a problem with that, and why would you take on that exchange risk [with the RMB]?”

The second tip is to avoid LCs (Letters of Credit) “because they fall over too easily”. Paul prefers Telegraphic Transfers, which are also cheaper. 

“In other words, you stick your money in my bank and I’ll send you the goods.”

The third is to never give credit – it’s not something the Chinese would do either.

 

Particularly for food and beverage – price your product at a premium and never, ever discount. “Better to after, say, three or six months offer a rebate based on their sales performance. Perhaps in the next quarter offer, say, ten percent back in product, five percent in cash – but insist on seeing what marketing initiatives they have planned. That way you’re subsidising the branding.” 

That premium price creates a ‘war chest’, adds Paul. “So if your Chinese partner’s not successful after the first or second quarter, you can give that war chest to someone else.”

Approach every relationship as if it’s going to fail, he advises. And another tip: never let the Chinese register your product, including any intellectual property. “Because then you can’t sack them. The product’s now registered in their name. Say you’ll pay for the registration, and it must be in your name. You can always get NZTE to check it for you.”

Visit the distributor’s warehouse too – Paul says you may find there’s no stock at all, or the opposite – they’re stockpiling in anticipation of a price increase. Talk to retailers to get feedback on the distributor’s performance (retailers can also be non-existent, as often it’s easier for distributors to simply shift stock online).

 

The typical Kiwi scattergun approach won’t work in China. “Pick a tier two or tier three city, such as Nanjing, Shenzen, Hangzhou, any of the satellite cities outside Shanghai, and get good at that market. Thanks to a lower cost of living, and distance from Beijing, there’s more money in those cities, says Paul. Overheads are also lower “For example, a nice four-star hotel in Hangzhou cost me just $90 a night. Compare that to a five-star Shanghai hotel for $300 to $500 per night.”

Distributors in China are totally regional focused as well. “Many say China is a lot like Europe, with all its different countries. That’s how you must look at China.”

 

The majority of Chinese can’t understand English, so the trick when taking a multi-lingual approach with your packaging, is to make it look Kiwi and not like a Chinese-made product. Understand the psyche of the people – their tastes, likes, sense of humour. “They like big, bold, loud, colourful ‘in your face’ packaging,” explains Paul. He says using original product packaging with stickers legitimising it as a Kiwi product may be fine to start with – “but as you mature you’ll need to think about who you’re missing”.

Route to market is also critical. Paul advises avoiding the little ports in China, where officials go by the ‘letter of the law’ and things can get held up unnecessarily.

 

This is a no brainer, says Paul. “If you go through one distributor and he stops ordering, what do you do?” I learnt more by having multiple distributors, because if something dodgy happened with one – I’d ask another what’s going on. If I kept asking I’d get to the truth in the end, because they’re quite happy to pot each other.”

 

This goes without saying – the Chinese love premium Western products. They love to show off leading brands (its called conspicuous consumption) – whether its cars, phones, handbags, clothes, and yes, food and beverages. And the most expensive product in any sector is the most desired. So think PREMIUM!

 

“The size of China’s online market truly surprised me; its way bigger than I thought,” admits Paul. With Easiyo, pre the botulism scare, 80 percent of sales were happening online, with just 20 percent retail – not the other way round, as had been predicted.

Online can be the smart way to go – couriers are cheap and efficient in China, he says. But get your products on the flagship malls, such as Taobao; watch out for website theft and non-approved sites; and remember, blogging sites can provide inexpensive PR. 

Paul’s best tip is to make use of Auckland University’s International Business department students to monitor your online activity in China. Their reporting keeps you right up with what the various sites are doing with your product, and was by far one of the best investments he made.

 

This is critical, particularly around food and beverage – build it around your USP.

Utilise NZTE wherever possible, they are there to help. And Paul’s top tip is to subsidise distributor trips back to New Zealand so they can breathe the culture here. Perhaps offer the trips as incentives; make them part of the aforementioned rebates.

“When they come to New Zealand they become missionaries [for the country]; they go home enthusiastic, with photos of them with your staff, which they then blog to their friends. It does a lot for your exposure and reputation.”