China Foreign Investment Advice: When In Doubt, Use Common Sense
For the past several days, I’ve been reading columns and blog posts commenting on one of the usual “China business horror story” articles, this time from the FT.
I wasn’t going to write about it because there is nothing at all new or interesting in the original article, although I suppose the story is amusing as it relates the antics of a very naive German manager who made some very stupid decisions managing a foreign-invested enterprise in China (i.e., he was chasing girls around instead of doing his job; or to put it another way, he was doing way too much thinking with his schwanz).
I’m not even sure what the point of the FT article was. It was subtitled “A Cautionary Tale,” which I suppose means that one should read all about what this German guy did wrong and then not do any of those things. Oh yeah, one should also thank the FT for giving us this inside information.
Right. Additionally, after the article was published, you had all the usual China business consultants coming out of the woodwork and explaining the situation in greater detail (i.e., “this is probably what was really going on, based on my years of experience in country”). The message here: hire a good business consultant so you don’t make the same mistakes as this poor unfortunate German guy whose employees ripped him off.
What’s wrong with this picture? Thus far, the voice of reason on this story has been Dan Harris at CLB, who says:
So what did the German company in the FT.com article do wrong? It was not wrong for it to go into China and it was not wrong for it to put a local Chinese in charge. Its mistake appears to have been putting way too much trust in a small core of employees, shutting out the lines of communication to the other employees, and failing to engage in even basic monitoring of the business. Setting up and running a business in China (or anywhere overseas for that matter) completely remotely is a classic path to problems.
It was also wrong for the German owner to allow his libido to get involved in his business.
Anyway, the moral of the FT.com story is really rather basic. If you mismanage your business in China (or anywhere else) you will probably end up with some pretty newsworthy problems.
Well, yeah. If you set up a company and don’t really manage it, there is a risk that people will screw you over. If your manager prefers to spend his time fucking around, as opposed to doing his job, something might go wrong.
Don’t need the FT to educate us on that, nor do we need expensive consultants to guide us around these pitfalls.
Lesson to foreign investors (anywhere): either manage your company competantly or consider another business model (e.g. a license with strong audit rights).
China Briefing also ran the story Stan, and additionally provided intelligent advice from Dezan Shira on specifically how to avoid getting into those sorts of problems. “Keeping Your China Partner Honest” – it’s here: http://www.china-briefing.com/news/2009/07/31/keeping-your-chinese-partners-honest.html. It seems more an accounting management issue than a legal one to be honest.
The CB piece was mostly on auditing, and it kind of approaches what happens when a company has suspicions that something weird is going on. Some good points on how to track down and deal with this kind of problem. This is slightly different, however, than what I was talking about.
While the CB piece focuses on existing problems, I was basically saying that companies/managers could avoid all this in the first place by using common sense.
This is indeed not really a legal issue. It’s a management problem, and a simple one (at the outset). If you do not apply common sense to your management, then later on you will definitely need the help of accountants and lawyers!
Stan.
What pains me about this story is that all the accountants in the world would not have been able to save him because his belief in people was so strong.
I had a friend go through nearly this exact same story. He built a China platform, entrusted a single up and coming guy, and that guy went out and set up parallel business within the business. He believed in his people wholly, even when EVERYONE around him was telling him otherwise, and in the end he lost everything.
From my view, I don’t see a reason to stop believing in people, nor trusting them, however there must be barriers. It is simply unrealistic to think that you can hand over a 50 million USD firm to a 28 year old after a few years and they NOT find a way to better their position in some manner… and that is true no matter where you are.
FYI – one of the best guides on due diligence in China is coming out from the UK Chamber. 35 pages of information (download here)
R
Trust but verify.
These are sad stories, because for every one of these guys, there is an asshole manager who doesn’t trust anyone. Both situations are disasters.
Trust people, but don’t trust only one or two senior executives. Don’t let the one/two cut your communication with the ‘less important people’ who have been working for your company.