You Think Philly’s Corrupt? Try Doing Business in China

A powerful government official becomes involved in a murder scandal that threatens the Chinese hierarchy. A blind activist shines light on the country’s harsh human rights policies. These are two of the big stories about China in the headlines. And they’re important. But not as important as this little story, particularly if you’re a business looking to do business in China.

Last week, the New York Times revealed a few of the challenges that American movie studios were facing with the Chinese after reports surfaced that “officials in the United States” were “examining whether American film companies have violated domestic law by making illegal payments to officials in China.”

Illegal payments? In China? From Hollywood? To do business? I’m sure that we’re all shocked by this. Talk about two parties with the highest level of ethics.

The controversy surrounds the China Film Group, which is run by the mysterious (and powerful) Han Sanping. The group has been compared to “a pair of major studios, the Motion Picture Association of America trade group, and America’s largest theater chain, but with the added authority of a government franchise.” In Chinese film circles, Mr. Han’s name requires little explanation. He is called “Master Han” or “the godfather of the Chinese movie industry.” Sorry, Hollywood. Not even The Avengers are going to rescue you from this little pickle.

Because this is what you’re in for when you want to do business in China. And this is why so many small- and medium-sized clients of mine say, “no thanks.”

No one can deny the temptation. We recognize China is the most populous country on the planet. We understand that China’s economic growth is presently more than three times that of ours. According to China Today, there are more than 900 million mobile phone users and more than 338 million Internet users, and the country recently passed the U.S. as the world’s top energy consumer. Imagine what China Tomorrow will be reporting. This is a country that puts its high-school students on IV drips during exam time for God’s sake.

American companies certainly want, and some are even taking, a piece of that action. Wary of rising default risks in Europe, U.S. investors have recently been redirecting capital to China. Companies like General Electric, Apple and Walmart are sinking millions into partnerships with Chinese companies, or just building their own. This is all well and good for larger companies with billions in assets that can afford to risk a few hundred million here and there without putting their entire livelihood in jeopardy. This is fine when you’ve got the international resources to staff yourself with smart people fluent in Mandarin or native to the local area. This is just great if you’ve got suitcases full of money and refrigerators full of expensive wine to pay off one corrupt Chinese official after another.

Because doing business in China means doing business with the Chinese government. Not some of the time. All of the time. And the Chinese government has thousands of Master Hans on the payroll looking for their piece of the action too.

Risks of Doing Business in China

If you’re a typical small- or medium-sized business, your business is not subsidized by the U.S. government. It’s no secret that the relationship between the Chinese government and many of its top industries is more than a little cozy. Only recently, for example, has the government announced a slowdown in subsidizing the Chinese solar industry, and this is only because of a decline in prices. In last week’s trade talks, China has promised reforms.

“U.S. officials are starting to see “real progress” in Chinese reforms aimed at making state companies more market-oriented and reducing support for them such as privileged access to bank loans,” one U.S. official said in an Associated Press report.

Still, the report continued that “foreign governments and business groups complain Beijing is hampering market access and trying to shield Chinese companies in promising industries such as renewable energy despite its market-opening pledges.” And even while making promises, the Chinese government continues to dismiss other U.S. accusations on government subsidy claims, particularly in steel exports. It’s bad enough competing against American companies. It’s worse competing against Chinese companies. It’s downright impossible to compete against Chinese companies controlled by Master Hans.

And to be sure, you will face many Master Hans. China’s still a pretty corrupt place. George Washington University’s Susan Ariel Aaronson recently writes: “Corruption is embedded in China’s unique approach to economic and political governance. When China began to experiment with capitalism in the late 20th century, many government officials became entrepreneurs. The Communist Party also encouraged local officials to compete for investment. These local officials gained enormous power, which they used to demand bribes, distribute resources and provide favors. Some of these officials believed they were above the law. Corruption and China’s failure to consistently enforce the rule of law is undermining its economic and social progress.”

Cleo Paskal of the Royal Institute of International Affairs affirms at the Huffington Post that “ … corruption is literally built into the foundations of modern China. The construction and infrastructure sectors are two of the most corrupt in country, putting at risk China’s vaunted development, and also potentially endangering its neighbors.” I’m from Philadelphia so I’m used to corruption. But this place is on an entirely different level.

Be careful about your property, because it will also be at risk. Don’t believe me? The Wall Street Journal reports that “China remained on the annual U.S. watch list of the most egregious violators of intellectual property rights.” Granted, this list includes countries like Israel and Canada (I have relatives in Israel, so this comes as no surprise). Copyright violations continue to run rampant, so get ready to share your brilliant ideas with lots of people in China … for free. Intellectual property aside, I would be concerned about my real property too. Assets. Real estate. Machinery and equipment. Hubcaps. Forty percent of U.S. companies surveyed were concerned with China’s “inconsistent regulatory interpretations or unclear laws.” And who are you going to hire? A Chinese lawyer who has been required to state this oath as part of his profession? I’d rather hire Jackie Chiles.

Have I mentioned the always and ever-present threat of a trade war that could result in excessive tariffs on goods if our two countries don’t get along? Our country’s reliance on China because they are the largest holder of our national debt? Potential legal issues if we exercise too much freedom of speech with our business partners? And the growing distrust between our two countries as we vie for resources around the world? (If you don’t believe me, try to guess which country was one of the first to examine that downed Apache helicopter within minutes of the bin Laden raid in Pakistan. Just curious, I suppose.) China just makes me nervous.

Still Want to Do Business in China? Follow This Advice

Still want to do business in China? Still can’t resist that huge potential market? The U.S. isn’t big enough? Well, good for you. You’re a greedy, money-hungry entrepreneur. I like that. Plus there are so many good, smart people in China who want to work hard and succeed and do well for their families, despite the challenges posed by their unelected government. Here are a couple of thoughts on how a small- or medium-sized business can make a few bucks off the Chinese without actually going there.

1. Export, don’t build. Keep your assets here. Sell your products there. Hire a good lawyer or spend some time with federal organizations like the Export-Import Bank (assuming they survive) or the Small Business Administration. Or work with your state. For example the Commonwealth of Pennsylvania (if you can believe this) has actual trade representatives in countries all around the world including China. Or contact your local Small Business Development Center, and they’ll put you in touch with a state organization that does the same. Or Google any number of firms that specialize in consulting with businesses who want to do business in China. Once you get the paperwork taken care of, hire a couple of young Chinese expats here in the U.S. who can work the phones and travel the world on your behalf. Give them leads. Educate them on your products. And let them help you sell.

2. Do business with bigger companies doing business in China. Find those companies that are taking that risk and profit from their growth. I’ve named just a few earlier in this piece, and here are a few more. Sell to them. Partner with them. Work with them. That way, as they succeed in China, you’ll get some of the benefits too. Without risking too much.

Look, I was raised in a house where my dad was afraid to get on a plane. So just the fact that I go to Disney once in a while is a big deal for me. But doing business overseas? Especially in China? I’m not going there. It’s takeout for me.