Managing and controlling your China operations from abroad.

Greetings from Shanghai!  

Today, we explore a challenge that many businesses with operations in China face: how to effectively manage and control your China operations whilst being based abroad.  

Navigating the complexities of international business can be challenging, but with the right strategies and by understanding the local mindset, you can overcome these hurdles and ensure the success of your overseas operations.  

Here are some of the challenges that may arise when managing your China entity from abroad, and how best to address them:  

Soft actors

Understanding Chinese business culture (manage Guanxi): 

The business culture in China differs significantly from most other markets, so it’s important to develop an understanding of business etiquette and communication styles. This sensitivity to cultural nuances will help you build strong relationships and navigate local business dynamics more effectively. Guanxi is one of the key actors in China’s daily life and business. If refers to relationships or connections, originating from Confucian philosophy that emphasizes harmony, loyalty, reciprocity and mutual obligations among people in a community. Guanxi is not just about having contacts, but about having trust and respect with them. Guanxi can be seen as a gateway to access resources, opportunities, information and favours, through one’s social network. It can also create moral expectations and responsibilities to maintain and reciprocate the relationship. Given that Guanxi is built through long-term community participations (extended family, neighbourhoods, schools, universities, buildings, local communities) that prosper a mutual feeling of solidarity, belongness, and trust, it is extremely difficult for non-Chinese and/or temporary ‘visitors’ to build Guanxi.   

Guanxi is very important in Chinese culture and business, as it can influence one’s reputation, status, success, and even survival. Having good guanxi may also facilitate to get things done faster, easier, cheaper, or at all. 

Dealing with local business practices: 

Similarly, local business practices in China may differ from what you’re accustomed to. Familiarize yourself with local regulations, negotiation tactics, and business customs to navigate the environment successfully. Building relationships with local partners who have a deep understanding of these practices can be invaluable. One key element to consider is the role that Guanxi plays in trust. In the Western world, trust in business is typically given based on an objective assessment of fact or tangible actions (such as company history, reputation, capability, previous contact, historic delivery) and can be lost.  In contrary, in China, (oversimplified) trust is typically not given but can be earned yet at a slow pace and through a more complex set of facts and actions. If a business relationship comes through Guanxi, trust is much more easily earned and less easy to lose.

Hard actors

Mitigating legal risks: 

Identifying legal risks in China is crucial. China is a very regulated country, so non-compliance is one of the key challenges. Working with a local compliance partner can help you navigate potential risks and find affordable solutions that align with your business objectives. Key areas of concern and thus attention are: licensing, employment, environmental, and taxes.   

Maintaining seamless integration with HQ 

Effective coordination between your China entity and your headquarters is essential. Thus, investing in dotted-line reporting and reporting systems to bridge the gap between locations is key. Regular communication and a shared understanding of goals and expectations will foster a sense of belonging, collaboration and alignment. Implementing such integration also limits your dependency on local management and the feelings that local staff is working for an overseas company as opposed to a local manager only, allowing you to control your China organization better from overseas.

Controlling implementation: 

Maintaining control over the implementation of your strategies and policies can be challenging from afar, especially if local management has other views, colliding personal interests, or low motivation. It’s essential to clearly define roles, responsibilities, and decision–making processes within your China entity. Regularly monitor your progress and performance indicators to ensure alignment with your global objectives.  

Best Practices

Now that we’ve covered some of the main challenges, I will delve into three (3) best practices to manage your China entity from abroad:  

Best practice 1: controlling stamps and financial authorizations:  

China places high importance on company stamps. At the same time, organizing local payments is challenging due to language barriers and time-limitation (every must be paid ‘now’), leading to payment authorization bank tokens often being left with management due to convenience reasons. However, shortcutting company policies and checks & balances for the benefit of operations is often not a good idea. Establishing clear protocols and control mechanisms to regulate the use of stamps and bank tokens within your China entity is key. Oftentimes, this means 4 eyes principles, preferably including a third-party that cannot exercise pressure over the holder of these company assets. This helps mitigate the potential risks of fraud and unauthorized actions. 

Best practice 2: reporting systems: 

Implementing robust reporting systems to facilitate transparency and accountability within your China entity is crucial. Regular reporting provides insights into performance and supports informed and especially tough decision making, which is often challenging for local management that might struggle to make unpopular decisions.  

Best practice 3: external audits:

Engage external auditors to conduct periodic internal audits of your China operations. These audits offer an independent assessment of compliance, financial controls, and overall performance.  

By implementing these best practices, you can enhance your management approach and maintain control without compromising on your China objectives. Some elements are key: establishing a strong legal foundation, building a local network, embracing technology, and implementing robust communication channels. These elements form the backbone of effectively managing and controlling your China entity from abroad.  

By being mindful of the challenges, implementing best corporate practices, and leveraging the key strategies highlighted above, you can successfully navigate the complexities and unlock the full potential of your China project.  

I hope you have found these insights valuable. If you have any questions or would like to share your experiences, please feel free to reach out.  

Robin