With Stanley Chao, author of Selling to China: A Guide to Doing Business in China for Small- and Medium-Sized Companies, and Managing Director of All In Consulting
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President Trump recently announced a second round of tariffs on China. China, as expected, retaliated in kind. To understand Trump’s strategy and the end game, Steve speaks with Stanley Chao, author of Selling to China: A Guide to Doing Business in China for Small- and Medium-Sized Companies. Stanley is also the Managing Director of All In Consulting.
Saber rattling from both sides is wreaking havoc on the stock market and is slowing China’s economy. Western businesses are wondering if they should postpone their entry into China. U.S. investors are wondering if they should play it safe and curtail their investments in China.
Stay In China, With Mid-Course Corrections
Amidst this turmoil, Stanley’s advice is the same as what he said 20 years ago, after the Tiananmen massacre: Continue selling to China but shift your strategy to factor in the tariff war.
For example, exporting to China isn’t a good long-term play right now. You have to be local in China to maintain your sales there.
But Trump’s pushback has yielded some results. China has relaxed some of its trade laws. Case in point: Tesla will be the first U.S. automaker to have a 100% owned subsidiary in China; they won’t have to do a joint venture anymore, unlike before.
Just as foreign companies, like Toyota, manufacture in America, American companies can manufacture in China and sell to Chinese consumers. While this reduces manufacturing jobs in the U.S., American companies can repatriate profits and invest in value-added investments such as higher-paying research and development jobs in the U.S.
The IP Dilemma
Speaking of R&D, one of the chief complaints about China is their demand that intellectual property (IP) be shared and accusations that they have stolen IP.
From being in this business a long time, Stanley sees it differently. He notes that over the past 20 or 30 years, foreign companies have formed joint ventures and literally handed over their trade secrets to the Chinese so they could jointly do R&D. He believes this IP handover was driven by the greed of selling to China’s huge market of 1.4 billion people.
So American companies bear a lot of the blame, says Stanley.
Unwinding Bad Deals
Another problem with selling to China is that business contracts aren’t as iron-clad as in the U.S. In China, partnerships often go sour. As a result, Stanley spends about 40% of his time unwinding bad joint venture relationships.
But with the joint venture requirement scrapped, the tide appears to be turning.
The Risk Of Selling To China
Another risk with China is that rules aren’t always strongly enforced and can change quickly.
To manage these risks, companies shouldn’t overly rely on contracts. Instead, they should diversify their investments in China and be street-smart about doing business there.
The Current State Of China’s Economy
Americans should also know that Trump’s tariff war has caused China’s stock market to drop significantly. Additionally, its economic growth has slowed to a little over 6%. While 6% may sound like a lot, it is relatively low for a developing country as big and as dynamic as China.
Economic data aside, Stanley sees a lot of strength in China’s economy, with its 300 million strong middle-class ready to spend. As an example, a New York chocolate fudge maker now does half of its sales with China, and an Oregon company that crafts fly fishing rods has seen China sales go through the roof.
Making Inroads Into China’s Markets
In closing, Stanley notes that selling to China isn’t that different from selling anywhere else. You’ve got to make a trip there, visit relevant trade shows, and speak to distributors to get things going.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: As everyone knows, President Trump has announced a second round of tariffs on China, and China, as expected, has retaliated in kind. All this back and forth saber-rattling is wreaking havoc on the stock market, leaving Western companies as well as Chinese ones, in a state of turmoil.
Western business people are asking: do we postpone our entry into China? Should we curtail our China investments? What’s our long-term strategy? Well, these are the types of questions Stanley Chao, author of Selling to China: A Guide for Small and Medium-Sized Businesses, will help us answer, and he joins me right now.
Stanley, welcome to the show.
Stanley Chao: Thank you, Steve. Thank you for inviting me today.
Steve Pomeranz: My pleasure. You must be fielding a lot of calls from clients and others who are wondering what to do right now. Concerned that all this uncertainty will cause a China recession and adversely affect their local China operations and sales. What are you telling them?
Stanley Chao: Well, I’m telling them—like I told them 20 years ago after the Tiananmen massacres—you need to continue to do business in China, but you may need to shift your strategy a little bit more differently or carefully. For example, I don’t think exporting to China is really a good long-term play now.
You almost have to be local in China to be able to maintain your sales now.
Steve Pomeranz: Mh-mm, interesting. So, Tesla, for example, is going to be manufacturing cars in China. That’s what you’re talking about?
Stanley Chao: Exactly, exactly, and China, in part due to Trump’s pushing, they are relaxing a lot of the laws.
A lot of industries now can go into China and start an independent company, like Tesla. You don’t have to do a joint venture anymore.
Steve Pomeranz: I see.
Stanley Chao: So I am promoting now, any company now that wants to do business, first look to start a 100%-owned subsidiary.
Steve Pomeranz: Now, why is that beneficial? I know there are a lot of foreign companies, let’s say like Toyota or Daimler, that build factories here and make cars and so on. The profits go back to those respective countries, but it builds employment in America and so on. I’m sure the reverse happens as well in China. How does that benefit America?
Stanley Chao: Eventually, if you’re a Ford or an American company and you establish yourself in China, manufacturing in China and then selling into China, your profits are eventually going to come back to the US. Now, I’m not necessarily promoting that you have to move your headquarters to China or you have to move all your R&D to China, but the physical item that you’re selling has to be in China.
Now, yeah, you’re going to give up manufacturing jobs, but you’re also going to promote other types of jobs in the US, and I think you’re going to promote higher paying jobs. Engineering, R&D-
Steve Pomeranz: Yeah, the value added.
Stanley Chao: Right, high value.
Steve Pomeranz: Yeah, you mentioned R&D, so one of the chief complaints about China is their confiscation or they’re demanding that intellectual property be shared and been accused of stealing intellectual property. From inside, I mean, you’ve been in this business a long time. How do you see that charge?
Stanley Chao: Yeah, I don’t agree with that at all. Yes, China has been using US technologies, but I tell you, the technology was literally given to the Chinese.
Over the past 20, 30 years, I don’t know how many foreign companies have gone to China, have formed a joint venture. And literally handed over the keys to the trade secrets to the Chinese so they could jointly do R&D. And that’s caused by greed. American companies go there and they see, boy, 1.4 billion people, I’ll do whatever I need to do to get a share of that market.
So American companies have a lot to blame. And I spend about 40% of my time unwinding these bad relationships of American companies just giving away their trade secrets.
Steve Pomeranz: How do you unwind? I mean, you don’t have to mention the names of companies, but does anything come to mind, like how you have to go in and unwind something like that?
Stanley Chao: It’s extremely difficult. The joint venture laws state that you need 100% board approval to be able to unwind a joint venture legally. So the Chinese company partner literally handcuffs the American company, makes them pay to get 100% votes, makes them invest more. So in the long run, they’ll vote to unwind this joint venture.
Really, American companies got themselves in a lot of trouble when they established these JVs. And it’s very difficult to unwind, it’s a long process.
Steve Pomeranz: So, you see the tide changing to some degree, that now companies can go over and be 100% owned, they don’t have to form a JV?
Stanley Chao: Yes, starting next year, and you’ve brought up Tesla, automotive companies do not have to form a joint venture. Up until today, every foreign auto company in China, BMW, Ford, Volkswagen, are all joint ventures. Tesla is going to be the first independently foreign-owned company. So we’re starting to see positives coming out of China today.
Steve Pomeranz: Speaking with Stanley Chao, the author of Selling To China: A Guide For Small and Medium Sized Businesses. And he’s the Managing Director of All-in Consulting, which assists Western companies in their Asia and China developments. His clients include Intel, Emerson Electrics, Baxter Healthcare, and dozens of small and medium-sized businesses.
Doing business in a country like the United States, it’s a country of laws. And yet, China seems to be a much more autocratic country in light of the fact that rules can change really kind of quickly from the top down. How safe or how risky is it for US companies to go to China knowing that the rules can change haphazardly sometimes?
Stanley Chao: Yeah, it is still pretty risky. There are many laws in China, just like in the US. The only problem is, as you said, they’re not enforced, A, and B, they can be changed literally tomorrow. So I always tell companies, you have to kind of plan step by step.
Don’t put all your eggs in one basket. Don’t think that a contract is going to save you at the end. So you’ll always have to protect yourself day to day.
Steve Pomeranz: Yeah, so you can’t just go in there, get some solid-looking contracts, and then if something really goes awry, hope to just get them enforced. It’s a different world over there, so you better really be a lot more street-smart on a day-to-day basis, yeah.
Stanley Chao: Right, right, and I tell my clients, signing a contract is not the end of the relationship. It’s not where things are final. It’s actually the beginning. That’s when the trouble starts.
You have to expect that your Chinese partner is going to renege on that contract.
Steve Pomeranz: Yeah, wow.
Stanley Chao: Yeah.
Steve Pomeranz: So how is business in China? We hear that the stock market is down dramatically, the economy is growing at a little over 6%. Which sounds like a lot to us, but it’s relatively low for a developing country as big and as dynamic as China.
But looking inside, because those are those big numbers, they are a lot of averages. You can’t really tell what’s going on underneath the hood, so to speak. So what’s your sense of the health of business conditions in China?
Stanley Chao: I’m seeing things very, very strong. China is trying to boost consumer spending, and you have 300 million middle-class Chinese that have money to spend.
I am introducing lots of small businesses to China that are just exploding. There’s a New York chocolate fudge making company and half their sales now are to China. There’s an Oregon company that crafts fly fishing rods, and their sales to China are just exploding. So I mean, yeah, the macro numbers seem to be declining, but when I go there and I see what’s going on, I just see lots and lots of spending going on. It’s doing very well.
Steve Pomeranz: So how does a company like a fly-fishing company—and we don’t really have that much time—but how do they enter a market like that, get the marketing, get the exposure that they need so even the Chinese people know that they exist?
Stanley Chao: Yeah, first thing to do is you have to take a trip to China, and you have to plan that trip to visit possibly, for example, a sports trade show. You have to visit some people who distribute your products, but ultimately, you have to visit China.
Steve Pomeranz: Okay, yeah, so it’s like anything else.
You really got to work it, and you got to work it hard, right?
Stanley Chao: Right, right.
Steve Pomeranz: My guest, Stanley Chao, author of Selling to China: A Guide for Small and Medium-Sized Businesses. And I think we got a pretty good sense of what’s going on. If you’re looking to do business in China, get that book, Selling to China: A Guide for Small and Medium-Sized Businesses.
Stanley Chao, thanks so much for joining us.
Stanley Chao: Okay, thank you for having me, Steve.
Steve Pomeranz: And to hear this and any interview again, or if you even have a question about what we’ve discussed here, visit our website at StevePomeranz.com and join the conversation. And also, while you’re there, sign up for our weekly update, where you will get a brief rundown on the important topics we’ve covered that week, straight to your inbox.