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China, with 1.3 billion people and a booming economy, is irresistible to most American companies. But a dream does not make reality - over the years many of have tried to crack the mysteries of the Chinese market and many have failed. If you talk to companies that have tried, including some of the most respected companies in America, the response is inevitably “It was very difficult.” The difficulties go beyond the typical issues that arise when doing business overseas, such as differences in language, culture, regulations, etc. In China, there is more to it.

These differences have become more obvious to me as I’ve spent more and more time doing business in China, and the rest of Asia, over the last five years. I’m lucky that I feel comfortable in both cultures - I was born in China but my family emigrated to the United States when I was in junior high and soon thereafter I became an American citizen.

So, from my experience, here are five unpleasant truths that a Western company must face to be successful.

1. Chinese don’t follow the rules - and in fact, will show enormous ingenuity finding ways around them. Next time you visit China, just walk down to a busy street corner and watch what unfolds. No one will pay attention to the traffic lights or signs, unless of course there is a policeman standing at the corner.

So beware of signing contractual agreements. American companies have an almost religious belief in legal contracts, such as Non-Disclosure Agreements (NDAs). With their typical hubris, American companies expect Chinese companies to sign NDAs written in English, and enforceable in US courts. Chinese companies are happy to oblige, unlike for example Japanese companies. On the positive side, they want to get down to business as soon as possible and can’t understand why Western companies waste so much time conferring with their lawyers. On the negative side, Chinese companies generally never have any intention of actually honoring the agreement.

2. Chinese will copy anything. As part of their frantic drive to overcome the disasters of the 20th century, Chinese thirst for knowledge. They take pride in learning how to do new things, and duplicating them quickly and cheaply. There is very little respect for intellectual property - either from the West or home grown. A typical saying among Chinese is that “once we figure out how to make something, we will never buy it from you again.”

What that means for Western companies is that the Chinese will be very humble at first and will ask for training sessions to help with “knowledge transfer.” Once they get a product, they will take it apart piece by piece and figure out exactly how it works. There is nothing surprising about that - there is a long and rich history of reverse engineering in Silicon Valley - its a cornerstone of good engineering. But Chinese do it with the full intention of copying the product - and any parts that they can’t copy they will try to clone or buy locally.

3. The trap of joint ventures. Chinese love doing joint ventures with foreign companies and will tell you how profitable its going to be for both parties. Their logic is compelling - the Western company provides the cash and know-how, the Chinese company provides access to the local market and cheap labor. But want to know the real reasons Chinese love joint ventures? Its three fold. First, they get access to Western technology. Second, they get an infusion of cash overseas. Third, they get a nice tax break from the Chinese government. Needless to say, almost all joint ventures fail.

4. Expectations of high margins. When doing business in Chinese, most American companies expect to make the same profit margin as they do at home. Hah! This muddled thinking causes their products to be many times more expensive than local products. And it doesn’t take much insight to figure out that is not the path to success.

Even accepting lower profit margins, American products will still be more expensive than local products. Chinese companies have lower cost structures, and in extreme cases, can compete by giving away products for free and making up the revenue via services. And American companies simply cannot compete on services since labor costs are so much cheaper in China. So to succeed, you must offer a superior product that is worth its additional cost, but you must accept the fact you will not make the same margins in China as in the United States.

5. Last, and I hate to be so blunt, but the brutal truth is that most Chinese consider Americans stupid. Another Chinese saying sums it up nicely - “Taiwanese are old fashioned, Hongkonese are heartless and Americans are stupid.” Of course, they’ll never tell that to your face. In fact, many Americans love doing business in China because the Chinese will entertain them in a way that they’ve never experienced in the US. But don’t believe you are becoming friends, you are not.

Obviously, there are host of other issues you’ll run into, but these are the ones that have really struck me.