Comparing Chinese Entrepreneurs to Their Foreign Counterparts by Becky DeStigter @IntlEntreprenr

Part 4 of 5 - today

Part 3 of 5 - published Wednesday, May 18

Part 2 of 5 published Tuesday, May 17

Part 1 of 5 published Monday, May 16

(Series to run Monday, May 16 - Friday, May 20)

In comparing Chinese entrepreneurs to their Western counterparts, there are distinct differences between Chinese entrepreneurs operating in the formal versus the informal economy. Also, when analyzing Chinese entrepreneurs and China’s business environment, it is imperative to use current information. The Chinese economy is changing so quickly that to read books written even a few years ago on this subject seem to be describing a completely different business environment from today’s China. What used to be Chinese business strengths, such as relatively low labor costs, are eroding more each year. At the same time, past weaknesses such as low standards of customer service, are improving. There is also a dramatic difference in entrepreneurial environments in the major cities and eastern provinces compared to rural and western provinces. Since all of my contacts and travels have been in major cities in eastern provinces, this analysis focuses exclusively on these areas of China.

Entrepreneurial Leadership

In the formal Chinese economy, there may be leaders of entrepreneurial companies who do not actually possess entrepreneurial leadership characteristics, especially the risk-taking trait. State-owned companies did not need to be entrepreneurial when the Chinese economy was closed to outside competition. Privatized spin-off companies may be led by their former division leaders, who have extensive knowledge about their business line and markets, but not necessarily have any experience, training, or natural characteristics of an entrepreneur.

Sea Turtles may have had experience working for a start-up company abroad, but this would not necessarily give them entrepreneurial leadership skills in every case. Often Sea Turtles have experience working in science, engineering or other technology-related fields. One way for science and technology-related professionals who may have excellent business ideas along with a desire to start a company is to find an entrepreneurial partner with the right leadership skills. Such a partnership can be a powerful alliance.

Decision Making

Leadership traits for entrepreneurs seem relatively universal. But there are some uniquely Chinese characteristics in entrepreneurial leadership. First, according to consultant, Paul Taylor, the Chinese leader is usually the sole decision maker. While this strong decision-making role is expected of a Chinese entrepreneur, it also assumes that the CEO is a good decision maker, collecting all necessary facts and decisions to make a well-informed and optimal decision. Western entrepreneurs tend to collect information and perspectives from their staff, customers, investors and mentors before making a major decision. The advantages for the Chinese entrepreneur are generally faster decision making and a clearer connection between the decision and the entrepreneur’s vision for the company. One potential disadvantage for Chinese entrepreneurs is that the decision may have been made without key information or perspectives and thus potentially less than optimal.

Risk Taking Behavior

Entrepreneurs require risk taking behavior and a willingness to fail. During and after the Cultural Revolution, Chinese workers were often assigned to various jobs in the government, or state-owned factories and farms. Independent risk taking was discouraged. Today, Chinese families still advise their children to take a less risky career path that is still prestigious and lucrative. Businessman Daniel Wu in Nanjing spoke of this when he told me about his daughter who was studying to become a doctor. A state-owned company or government job means a high chance for financial success and prestige. In contrast, an entrepreneur may become much more successful than his or her employed counterparts, but s/he risks failure at a much higher rate to achieve it. A failed company could cause the entrepreneur and his whole family to lose face with friends and neighbors, not to mention the family’s financial gamble. The stigma of failure is much greater than especially in the U.S. After hearing presentations by Helen Jiang and Paul Taylor, I think that the Chinese balance the higher risk by accepting failure less readily than their Western counterparts. Chinese seem to work much longer hours each week than their Western peers. Since start-up money to finance the business often comes from the family, there is even more motivation to do literally everything possible to keep the business alive and make it successful.

High Energy and Motivation

Chinese entrepreneurs and workers in general I have met seem to possess high energy levels and motivation. This is an important trait for entrepreneurs. Entrepreneurs share a passion for their companies, especially if the company produces something the entrepreneur considers personally compelling. While entrepreneurs may work harder than the average employed professional, it is socially more acceptable for Chinese professionals to work longer hours. We learned at the Confucius Temple that traditional Confucius values include working hard and education. This was echoed at Sunny Capital who chose the buffalo as their company logo because the buffalo is known to work very hard. The company motto is: “Never Give Up”, which seems to speak directly to traditional Chinese and entrepreneurial characteristics of hard work and resourcefulness.

Networking Skills

The entrepreneurial need for strong networking skills fits the Chinese culture very well. Paul Taylor explained that an individual’s network (Guanxi) in China is more complex and bonds are often much stronger than in Western countries. This is an inherent entrepreneurial advantage for the Chinese. Entrepreneurs must also be able to develop new contacts and resources potentially unrelated to the current network but critical to the business’ success. It is less clear if this is also a Chinese cultural trait. Formally state-owned companies have a likely advantage of contacts in key government positions. Small companies are less likely to have such inroads to government officials.

Business Acumen

Business expertise used to be one of Western companies’ greatest advantages over their Chinese counterparts. Now in many areas, the Chinese have neutralized this advantage and in some cases already surpassed Western companies.

Production Management

After China opened to foreign investment, Western and Asian companies partnered with Chinese companies to produce a wide variety of products mainly in the manufacturing and textiles sectors. As Carl Walter of JP Morgan pointed out, at this point the Chinese have learned all they needed to know about foreign business practices. This should be of great concern to companies like General Motors, who invested heavily in China and has shared so much of its business practices with Chinese partner SAIC. Company technological secrets can also leave a company through an employee who quits their job and starts their own company. Since investment in manufacturing has focused in China for the past decade, the state-of-the-art technology and equipment is already in China.

Procurement (Availability of Suppliers)

For decades, it was hard or nearly impossible to find certain types of suppliers for materials, component, equipment and services in China. Importing key supplies and services from abroad would be cost prohibitive to cash-strapped entrepreneurs. Entrepreneurial suppliers have stepped in to provide these supplies and services. An example is Daniel Wu’s company, DaXiang, which provides chemicals for certain manufacturing processes imported and then sold in China.

Regulatory Compliance

The financial, energy and time costs of complying with Chinese government regulations varies greatly between the formal and informal economies. Registering a company costs over $20,000 and it often takes 2-3 years to work through the registration process. In contrast, it costs $50.00 to register a company with the Colorado Secretary of State’s Office and can be completed on-line in under an hour. Some entrepreneurs have even taken this Chinese governmental hurdle as an opportunity and offer a service to help companies navigate through this cumbersome registration process.

Formal economy companies have to pay corporate taxes and follow government regulations. The formal economy also provides more protections of the company’s assets, intellectual property, and rights. The informal economy’s companies have as little to do with the government as possible. They pay no corporate taxes and do not necessarily follow government regulations. This is a tremendous cost advantage in a country where purchasing decisions can often be made on price. In turn, informal economy companies are vulnerable to asset repossession, intellectual property infringement and other protections that would otherwise be given to these companies.

Talent Management

十年樹木，百年樹人。(shí nián shù mù, bǎi nián shù rén)

Grow a tree for ten years; grow men for a hundred (Nurturing and educating human talent is the key to prosperity.)

Talent management is becoming an issue throughout Asia, but particularly in Eastern China. If multinational corporations like Emerson are having difficulties retaining middle managers, how can entrepreneurs with fewer financial resources possibly compete for talent? This is a significant issue for Chinese start-up companies. Recruiting and retaining quality staff may require a greater financial share if the company is successful, as well as individually-tailored benefits packages. Developing staff is of greater risk to entrepreneurs than their state or foreign-owned counterparts because any investment in a staff member may make them more attractive to companies with deeper financial resources to hire them away. This is always a problem for entrepreneurs in a tight labor market, regardless of country.

Marketing

As with other business functions, marketing is changing quickly for Chinese entrepreneurs. Foreign-owned businesses and even American entrepreneurs like Mark Spitainik may still regard aspects of marketing such as product quality, limited distribution channels, and customer service as current Chinese business weaknesses. But deficits in these areas are shrinking fast and it may be naïve to assume that these will be weaknesses at all in the future. Entrepreneurs in the informal market have dominated the low-cost niche of every industry in China. But some entrepreneurs like Bing Wu of Helix Micro, Inc. (Milpitas, CA and Hangzhou, China) are playing for biotech markets where demand is less elastic. In a 2006 study from Duke University, researchers found that China is producing almost three times as many baccalaureate level engineers as the United States. With homegrown technology and scientific know-how, we should soon expect more direct competition in all technology sector niches.

Chinese entrepreneurs especially in consumer markets have been studying brand development for years. In order to develop a successful brand, the product or service must have consistent levels of quality, value for the client, and be recognizable from the competition. In China, even industrial products like air conditioner parts have to contend with counterfeiting from some Chinese competitors. For high-end consumer products like Louis Vuitton, up to 95% of products with their logo in China can be counterfeits. But the branding gap is narrowing too. Lenovo computers are now not only an accepted brand throughout China, but also across the world. Some entrepreneurial designers are breaking through internationally with their brands as well. While counterfeiting continues to be lucrative, it will persist in China. But I expect brand development from Chinese entrepreneurs to continue to grow stronger in the coming years.

In the past twenty years, China has transformed from extremely poor transportation infrastructure to one where people and goods travel more easily (at least in the eastern provinces and cities we visited). Unlike the United States where transportation infrastructure is largely neglected, the Chinese government is actively working to build new highways and rail lines to connect China internally as well as to ports to abroad. For entrepreneurs, this gives tremendous flexibility to set up company operations away from expensive cities and instead invest in locations that optimize talent recruitment and operational costs.

Chinese communism equated service with servitude, which went against the concept of egalitarianism. Chinese companies are generally regarded as weak on customer service compared to their foreign counterparts. When foreign companies like hotel chains including Hyatt and Ritz-Carlton invested in China in the 1990’s and early 2000’s, service training programs needed to be significantly adapted to take into account the differences in expectations and culture. But I see a shift in service expectations in China. In May 2008 when I stayed at the Jinling Star Metropole Hotel in Nanjing and then the Park Hotel in Shanghai, I found service and professionalism to be in league with any other 4-star hotels I have stayed at in other countries. Chinese entrepreneurial success story, GOME Electronics, implemented a marketing campaign called the “GOME Service Project”. This included a money-back guarantee, a lowest price guarantee, and a household appliances hospital to make repairs on broken products. As Chinese entrepreneurs spread farther away from the lowest-price niche, I would anticipate a shift to higher service expectations in the same way that Japanese or Western customers do.

Preparation and Reaction to Outside Factors

见风转舵 (jian feng zhuang duo)

See the wind, turn the rudder (Change one's position when sees difficulties)

Mark Spitainik pointed out: once the Chinese market sees a new concept proven, competitors quickly jump in to the new market. The specific example Mark gave was that of Super 8 Motels. Rapid adaptation to new opportunities is an incredible advantage for entrepreneurs, at least if it is faster than the competition. Not all Chinese entrepreneurs changed course soon enough to avoid their factories to be closed and moved to countries with lower production costs. This trend started and then moved quickly especially in areas like Guangzhou. CCTV (English broadcast) showed entrepreneurs, who days before had survived the Sichuan earthquake, setting up restaurants and barbershops in tents. This is an extreme example, but generally I think the Chinese people are resilient and make the most out of their circumstances.

Financing

Options and availability of financing for Chinese entrepreneurs varies greatly between the formal and the informal economies. Several speakers during our trip to China talked about finance, but their comments often seemed to contradict each other until context made it clear to which of the two economies they were referring. Before comparing the formal and informal economies, it is important to note that financing and capitalizing entrepreneurial ventures is much more widely available in the United States and other Western countries than in either Chinese economy. This gives Western entrepreneurs a great advantage over their Chinese counterparts in both domestic and global markets.