A fast-emerging and lucrative market, China presents many challenges, from its culture to its business and political structure.
To provide a snapshot into China's economic and investment environment, on June 14, ACG Vancouver and Grant Thornton LLP featured a roundtable discussion with two members from Grant Thornton's Beijing office.
Wilfred Chiu, partner for Grant Thornton in China responsible for overseeing the Beijing tax team, along with Carol Cheng, director, transaction advisory services in China, shared how to explore the local market and understand the critical nature of exercising due diligence while building trust.
An attendee, Brian Martin, managing director for Performance Capital Advisors, a firm that specializes in mergers and acquisitions in the junior venture, said that when they work with Chinese corporations and executives, there's a lot more relationship building and fact-finding before the presentation of the first term sheet than with North American corporations.
"If you're going to do business on the ground in China, you have to have a local presence, someone who makes sure that you're dealing with honest brokers to form a joint venture that's going to be there for the long run," Martin said.
Eric Gaunder, president of Hayden Diamond Bit Industries Ltd., a Richmond-based manufacturing company, said when you're doing business in China, "you always have to keep risks in mind."
Hayden first opened a plant in China in 2008 and made frequent visits there and had someone on the ground to build relationships and ensure the plant had a quality workflow system in place through proper training.
"Find a good lawyer and accountant familiar with China and stay on top of the books, ensuring you do an audit once a year," Gaunder cautioned. "Everyone will say yes, but at the bottom, you don't know what's going on. Don't trust the manual system."
He also sees that the cost of operating a business is increasing in China due to employees' increasing benefit demands, and he estimates that production costs will rise in the next five years to eventually balance with manufacturing in the U.S. or Canada.
Kirk Hamilton, Elan Tactical Management president, said his firm came across an operation in China as an acquisition (where they hadn't actually made the investment themselves) but eventually came to the decision to either sell it or exit from it.
"It's fine to buy a business and make the investment and grow it, and be able to repatriate some of the profitability, but at some point, you want to exit," Hamilton said. "You have to make sure that you have an ability to do that in any business investment that you're looking at."
However, shutting down a business is not as simple and inexpensive as it is in Canada or North America or even Europe.
"It was a long, protracted process to shut down a business in China," Hamilton said. "Part of your due diligence is that you have to understand what your exit costs would be in China. To me, they were surprisingly different for the size of the operation.
"It didn't matter whether you were talking about a five-person organization or larger, you had some pretty significant costs and a reputation that you had to consider, as a result of that. With extensive audits by the tax and certification authorities, it took more than 18 months to exit."
Toby Chu, president and CEO of CIBT Education Group Inc., has been in business for 19 years in China, starting with his first school in Beijing in 1995, and notes how the market has changed.
"People were simpler, as compared to today," Chu said. "Now, more competition is going in, and the local business people are becoming smarter. In the past, it was less capitalistic. People wanted to do something, more as an honour. And now, people just want to make money, lots of it.
He recommends that if you're going to invest in an existing business in China, put the money in by stages, instead of all at once, to give the investor time to know the environment.
"Relationship backing is very important," Chu said. "If you don't have any local government backing of your transaction, you can be down the toilet pretty quick."
Another reason that personal relationships are so important, according to Chu, is because Chinese government officials must retire at 60.
"When we start a relationship with a university president when he's 58, our clock starts counting," Chu said. "In two years, he'll be out. And when the new president comes in, he may completely ignore the deal. He can shut us down. He can create all kinds of obstacles and bring in his friends from the U.K. or Australia. It happens. He can make your life miserable."
He adds that the rules are a lot clearer now "with a book you can follow, whereas 20 years ago, it was like a blank paper."
He has four golden rules to summarize business in China:
1. Nothing is ever easy.
2. Anything is possible.
3. When things are going well, think of rule number 1.
4. When things are going bad, think of rule number 2.
"In China, you can negotiate your way out. Having the government back your deal can get you into a very profitable position," Chu said. "The volume is huge. There's no doubt about it. Once you've got the right product and aggressive marketing, what you can sell 10 times in Canada, you can do a million times in China." •
