Starting a Business in China: What you need to know
For this article, China Focus Staff Writer Thomas Murphey sat down with two entrepreneurs focused on business in China. Thomas Yao is a founding partner of Immersion Ventures, based in the United States. His company provides seed investment to virtual reality/artificial intelligence start-ups, with a focus on Chinese companies. Yao holds a master’s in management from Stanford. Ted Zhou is a business owner in Shanghai which develops software solutions and provides consulting services to customers in China. He holds an MBA from the University of Michigan.
Entrepreneurship in China
The Chinese business model is often characterized as a giant factory, with endless rows of workers tediously fitting together pieces to satiate the world’s appetite for cheap goods. However, this characterization overlooks the entrepreneurial spirit which has existed in China for centuries, and which has already begun to drive the next stage of Chinese growth. Traditional China before 1949 was marked by an economy organized around small household businesses. Markets were competitive, and households sold their wares for profit. This system, which existed for centuries, was replaced under Mao by central planning and state organization of all economic activity. However, over the course of the last three decades, China’s economy has gradually liberalized. With this liberalization, the traditional household economy has begun to make a comeback in the form of start-ups and entrepreneurship. Between 2000 and 2013, state-owned enterprise revenues increased by a factor of 6; by contrast, during the same period, private sector revenues increased 18-fold. Many Chinese have embraced this entrepreneurial spirit. Just as the United States admires Bill Gates and Steve Jobs, Chinese entrepreneurs such as Jack Ma (Alibaba) and Lei Jun (Xiaomi) are increasingly in the spotlight.
“It’s a place with a lot of uncertainty but limitless opportunities”.
Thomas Yao is a founding partner of Immersion Ventures, an American-based early stage fund which focuses heavily on tech entrepreneurs in China. Yao, who was born in China but pursued graduate studies in the United States, believes the Chinese market is attractive by sheer volume, especially the rising middle class. According to Yao, “it’s a place with a lot of uncertainty but limitless opportunities”. Ted Zhou is a business owner based in Shanghai. Like Yao, he was educated in the United States, but chose to focus his energies on the Chinese market. Zhou believes the tech industry in particular is extremely promising. “The people in China are eager to learn and adapt new technologies and products”, Zhou says. “To apply America’s technologies onto a growing market is the idea that attracts a lot of people”.
“When legal contracts are unenforceable”, Yao says, “one would need to leverage his or her 关系 to keep a partnership going or simply to pursue payment”
Challenges with Chinese Characteristics
However, market size and consumer potential should not overshadow the difficulties of starting a business in China. Navigating China’s legal system can be especially difficult for outsiders. In the tech industry, theft of intellectual property is a particular concern. Yao believes that the question of contract enforcement is one of the major issues entrepreneurs struggle with in China. In the United States, firms can credibly commit to contracts knowing that the legal system will reinforce them. Firms can market their ideas knowing that in the event of a dispute, they will have the option of appealing for compensation. In China, however, the legal system is beholden to the Communist Party, fraught with corruption, extralegal coercion, and arbitrariness (for more on China’s legal system, click here). This is why the concept of 关系, or relationships, is so important in doing business in China. “When legal contracts are unenforceable”, Yao says, “one would need to leverage his or her 关系 to keep a partnership going or simply to pursue payment”. Naturally, this is especially challenging for entrepreneurs; they are unlikely to have the necessary relationships in place to get a fair shake in the eyes of the law. The problem is further compounded for non-Chinese entrepreneurs bringing new technology into China. These entrepreneurs’ Chinese network may be very limited, and the risk of their technology being copied or expropriated without legal recourse is especially high.
So should entrepreneurs stay out of China? Clearly, both Yao and Zhou have chosen otherwise. However, anyone interested in doing business in China should carefully consider how they can adapt their business model to fit the Chinese environment. Zhou believes that would-be entrepreneurs should first understand that despite decades of liberalization, central planning still plays a huge role in China’s economy. Rather than go against the tide, Zhou advises entrepreneurs to “align their strategy with the government development plans”. This requires careful consideration of the central government’s strategy, and how it trickles down to the local government level. While careful planning is essential, timely decision making is also vital. Yao’s advice for those looking to do business in China is to “move fast and break things”. The Chinese economy moves quickly, and entrepreneurs need to be on their toes, always ready for changing government regulations.