Chapter 4

Targeting the Right Customers . . . and Getting Paid

“If you are a small company, it is not a good position to be in. I didn’t understand how the game is played. We were a small, foreign, underfunded company, [so] some customers took the attitude: ‘Why do we have to pay them? If they go out of business, it doesn’t matter.’”

Eric Rongley (USA), Founder and CEO, Bleum

Introduction

Having battled to acquire the startup money and to win the necessary government approvals to launch your business, the next goal for most foreign entrepreneurs in China—as everywhere—is to start bringing in revenue. But achieving this goal in China involves some unique challenges. Here, startups face difficulties not only in attracting and keeping customers, but also in actually getting paid. In fact, “getting paid” was one of the most difficult challenges for many of the startups we profiled. Many had faced customers who disputed, delayed, dodged, or simply disregarded making payments. Two findings to note: first, the smaller the startup, the more acute their collection difficulties; and second, the problem was particularly acute among startups selling to Chinese customers and clients.

As young, small-scale newcomers to the market, many of our profiled entrepreneurs quickly learned the disadvantages of lacking clout—to the point where some saw their initial business models fail (as the opening quote describes).

This chapter covers two main topics:

Targeting the Right Customers

The first step in creating your business strategy in China is to identify your target market or markets. The 40 foreign entrepreneurs we interviewed had tried a wide range of strategies for finding the right clients or consumers. Here, we introduce the main target groups for foreign entrepreneurs in China, explaining the benefits and drawbacks of each.

Strategy #1: Export Your Products or Services Back Home

Among our interviewees, 13 had launched their business by targeting customers located outside China, and exporting back home or to other markets in which the entrepreneur had professional or personal connections. In other words, they set up business models based on sales to fellow foreigners. In many ways, this is a logical business model, since the entrepreneurs could take advantage of their insight into customers in their home country or other international markets to successfully find buyers. Many used their foreignness as an advantage over Chinese competitors.

Use your foreignness as an advantage over Chinese competitors. You can set up your business model to export back home or to other foreign markets where you have professional insight and connections.

One successful case in point is Solis Holdings Import & Export (SOLHIX). Co-founder Juan Martinez built the business by selling China-made products to buyers in his native Mexico. Today, 70% of the products traded by SOLHIX are China-sourced products—mainly fashion accessories such as bags, shoes, and jewelry, plus electronics, medical products, and promotional items—sold to buyers in Mexico, Latin America, the United States, and Europe. Over the past five years since the launch of the company in 2003, Martinez has built a strong enough customer base that his next goal is to focus on four to five main lines of business. “We have the customers now, so we need to improve the way we operate for those customers,” he says. Meanwhile, Martinez uses his network in Mexico to supply goods for import into China—the other 30% of SOLHIX’s business. The company sells specialty products of his hometown of Guanajuato, Mexico—leather, and Mexican food and beverages—and also promotes Chinese investment into Mexico.

Following a similar model of exporting out of China to his home country of Macedonia is Oto Petroski, who explains the business scope for his import/export company in this way: “I do general exporting of all kinds of commodities,” he says. “My market is Macedonia, a market of two million people. The market is too small to focus on any one area, so I am doing a lot of things, from everyday commodities to construction tools, equipment, logistics, to market research.” Petroski tells of one time when a Chinese supplier tried to cut his company out of a deal, in a bid to work directly with the Macedonian client. “Neither side could talk to each other, so after a while, both were crying,” he jokes. The buyer told Petroski about the incident and continued to do business with Petroski’s company.

Strategy #2: Target Foreigners in China

For suppliers of high-end products or services, another model followed by some of our interviewees is to target China-based foreigners. American real estate entrepreneur Bruce Robertson found success for his Shanghai-based company, Asia Pacific Real Estate, by renting luxury apartments and country-club memberships to upper-income expatriate families moving into Shanghai. The business model hinges on finding an unmet need among expat families in urban China. Robertson explains: “Our main customers are foreign families—especially the mother in the family. She is the person who makes the decisions [on family housing]. We are very focused on that market segment.”

Consider targeting China-based foreigners. Understand their needs, and develop products/ services aimed at meeting them.

Robertson realized in the late 1990s that the needs of many expat families were not being served. “It was a segment identified to me by the multinational companies 10 years ago, when Motorola faced a big problem—executives were turning over because their spouses didn’t want to live in China.” After investigating, Robertson found that the problem didn’t lie in the quality of the homes provided to expatriates in China, but in the lack of community available for the families of expatriate managers. “It wasn’t really a housing problem; it was more of a friendship problem,” says Robertson. “These people got off the airplane and they didn’t have a single friend in China. Their children could survive at school and could make friends, but the mother was really in trouble.” Robertson says that spouses—typically, wives—faced two main difficulties: lack of meaningful activities during the day, when the husband and children were away, and lack of wholesome recreation for the children after school. “The families were living in Chinese apartment buildings. When the kids came home after school, what could they do? There was nothing [the mom] could do but endure the next 12 hours until the kids went back to school,” says Robertson. “So, we solved that problem.”

The solution? In 1998, Asia Pacific Real Estate began marketing a newly built, expat-oriented gated community called the Shanghai Racquet Club. The development featured spacious, Western-style homes, plus a wide range of sports and leisure activities. Most importantly, the compound of 116 luxury apartments offers an environment in which families—especially the supporting spouses of expat managers—easily link up with an active social community. Robertson explains: “The Shanghai Racquet Club is building a community of mothers and children who can instantly establish friendships.”

He offers proof that the concept works. “We work a lot with the Shanghai American School. Before we opened the Racquet Club, the school turnover rate for teachers [all expatriates] was 33% per year. After we opened and 75 teachers moved in, the turnover rate went down to 6%. Now, the superintendent doesn’t even make a trip abroad to recruit teachers. He just reads applications coming to him. Shanghai American School has become the greatest place for foreign teachers to work in the world [in terms of benefits]. That’s a true story.”

Today, the Shanghai Racquet Club has mushroomed into one of the largest country clubs in the world. The compound has a waiting list of families for its rental apartments, and has also attracted more than 1,000 families to join the sports and leisure facilities—mostly the families of expat managers of multinational corporations (MNCs). Apartments rent for US$2,500 to US$7,000 monthly, and family memberships at the club are priced at US$4,000 annually.

Following a similar strategy of targeting the expat community in China is Sherpa’s. Co-founder Mark Secchia says the company actively targeted foreign families in Shanghai by offering home delivery of upscale restaurant cooking— especially non-Chinese foods, such as Mexican, Italian, and Indian meals. “We basically have foreign customers,” says Secchia. “If you sit in on our call center, you’ll hear that two-thirds of the calls are in English. One-third are in Chinese, but those callers will typically be ordering a double cheeseburger for RMB140 [US$20]. Not many Chinese customers would be interested in that kind of food, at that price, unless they had spent a long time overseas. So, we think that 80% of our customers are either overseas Chinese people or foreigners living here.”

Again, Sherpa’s has built its success based upon identifying and meeting a need among foreign customers in China. Says Secchia: “Our customer segment has money, but no time. So, we try to fill that niche.” Given that dynamic, Secchia knows his customers place a premium on convenience and efficiency. “We have seven people working in the call center even though three would be enough. We want to have more than enough people. We spend money to ensure that our service is quick.”

Taiwanese businesswoman Maggie Yu also targets incoming foreign companies seeking serviced offices and consulting assistance. Nearly 95% of her client firms are non-Chinese, with 30% coming from Japan, and the rest from “all over the world”—from Europe to Latin America to Southeast Asia. Her competitive advantage for Asian-Biz Center & Consulting is her understanding of the needs of small-scale foreign companies in terms of business facilities, administrative personnel, and consulting services.

The easiest, most logical target market for a foreign entrepreneur in China is buyers in your home country, or other overseas markets, or fellow expats in China.

Strategy #3: Target Chinese Customers

Among our 40 interviewees, fully half had built a business plan around targeting Chinese consumers or client companies. The interest of our profiled entrepreneurs in this market isn’t surprising; today, a growing percentage of foreign investors are in China for the China market, rather than to export out to other markets. For instance, among the nearly 300 American companies that participated in the 2007 China Business Report published by the American Chamber of Commerce in Shanghai, some 75% reported that their main business focus is “in China for the China market,” as opposed to exporting from China to other markets.

One group of foreign SMEs that is now streaming into China, says Technomic Asia consultant Steven Ganster, is suppliers serving major Western retail chains. “We also work with many SMEs who are coming [to China] to follow their customers. We are helping the companies that sell to Best Buy or Home Depot. These suppliers are under duress to come to China because their key customers are here. They need to have a presence here and some direct control. That’s kind of a new animal in the last few years.” Technomic Asia helps such foreign SME suppliers to “make the transition” into China and to improve operations, such as streamlining supply chain systems.

Unless you have a product or service aimed specifically at Chinese consumers, try using a progressive path. Begin by targeting more familiar foreign clients, then target Chinese customers as you gain more experience.

Several profiled entrepreneurs began with mainly foreign clients, then expanded into targeting Chinese customers. Unisono Fieldmarketing, founded by a 24-year China veteran, Dutchman Olaf Litjens, initially targeted only foreign companies with its China-based field marketing services. Customers were mainly foreign companies seeking to succeed in placing their products on the shelves of Chinese stores. Today, the company is also attracting a growing base of domestic clients. Litjens explains: “Now we are starting to work with Chinese companies. The Chinese companies traditionally do everything themselves, but more and more companies now are starting to outsource the marketing and inventory, and then they use our service.” Litjens’ customer split is now 80% foreign, 20% domestic Chinese companies, with the fastest growth occurring among the domestic firms.

Others among our interviewees are hoping to follow this strategy, gambling that launching with foreign clients will put them in an ideal position when the domestic market for their product develops. A case in point is accounting service provider Fumito Suzuki, who launched AOI Business Consultants in 2002 to target Japanese SMEs in China. This narrow-focus strategy worked well; within a year, the small firm of four employees was serving a pool of 15 client companies.

The company maintains an advantage over both Chinese competitors and Chinese intellectual property rights (IPR) thieves by emphasizing after-sale services. Says Suzuki: “We provide the accounting software with training and assistance, without which the software is useless. We train the employees of our clients in how to use our software. That way, we are not afraid of illegal copies because we are not selling just the software.” Another key to the success of AOI, Suzuki says, is that Chinese accounting software makers haven’t yet entered the field. “We don’t have Chinese competitors yet, because few Chinese companies issue professional accounting reports,” he says. Instead, domestic firms tend to “deliberately make their financial statements vague.”

By the time Chinese companies develop a need for professional, world-class accounting software, Suzuki hopes AOI will be well positioned to provide it. “At the moment, Chinese companies are enjoying the quick development brought to them by the high GDP growth. They haven’t realized the importance of financial statements for the internal management of the company. To them, the financial statements are prepared to meet the requirements of the government, which only asks for very rough reports. In the future, when China’s GDP growth rate finally slows down, domestic companies will pay more attention to internal management. Only at that time will they realize the importance of financial statements.” When that happens, AOI will be well positioned to break into an emerging domestic market, Suzuki hopes.

You may need to educate Chinese consumers before they appreciate the value of your product/service, and are willing to pay the price you expect.

Challenges of the China Consumer

Those among our foreign entrepreneurs who are targeting Chinese consumers faced several specific problems. First, those targeting Chinese end-users with higher-quality, but also higher-priced, products or services tended to face a steep learning curve in educating potential shoppers. In short, many faced initial reluctance from Chinese buyers to pay more, no matter how good the quality.

High-end retail display designer and manufacturer Susan Heffernan explains: “If Chinese companies are buying finished products such as chairs, they would look at my chairs, which feature high quality and minimalist design, and say, ‘Why does one chair cost RMB1,000 [US$140]? There’s nothing to it.’ That level of sophistication is still developing in China.”

But Heffernan was surprised to find that, among some commercial clients, there is already an appreciation for guaranteed quality. Shortly after the launch of her business, Soozar, Heffernan began being approached by Chinese companies—especially retailers—interested in hiring her company to oversee quality control for the interior products for new retail outlets. “In China, I have worked with a lot of architects and designers outfitting new stores who come to [my company] and say, ‘Can you spec all the carpets and sofas?’” In another case, Soozar was asked to produce all the stainless steel display products for a Chinese company constructing retail outlets for a U.S. retailer. “At first, it was kind of strange. Domestic firms have the capacity, so why are they coming to a foreign company? But then, I realized that they’ve seen our quality and they think we can guarantee them the same. So, I worked as a consultant between the two local companies for that project. Their client is a big American retailer that demands very good quality.” In other words, the local construction and design company felt that working through Soozar would deliver high quality with no cutting of corners—a service they were willing to pay for to ensure the satisfaction of the U.S. buyer.

Belgian entrepreneur and consultant Jan Borgonjon agrees that home decoration and furnishings is a good industry in which to witness the dramatic changes that have been occurring in China’s consumer patterns. In addition to his consulting firm, Borgonjon started a furniture and home decoration distribution business in China. “Ten years ago, Chinese consumers would spend a fortune on bad furniture. Now they know much more about what is available internationally—there are magazines, and more people go abroad. It’s completely changed.” Most noticeable of all, Borgonjon says, the market for upscale, foreign-designed furniture in China has changed in terms of scale. “Obviously, there are more consumers interested in upscale furniture. Now you really have quite a big market—mostly in Shanghai and Beijing, but it is extending to other cities.” Changes in the furnishings sector reflect broader changes across Chinese consumers, he says. “Of course, Chinese consumers have become much more sophisticated. They know much better what is going on abroad. It’s day [versus] night compared to 10 years ago.”

“Of course, Chinese consumers have become much more sophisticated. They know much better what is going on abroad. It’s day [versus] night compared to 10 years ago.”

Jan Borgonjon (Belgium), President, InterChina Consulting

Changing Mindset, Growing Means

The central message that our consultant interviewees tell their clients planning to target Chinese consumers is that the consumer population is changing rapidly and dramatically in all categories. Says Italian consultant Ruggero Jenna: “The biggest change is that Chinese consumers are becoming richer. A fairly large number of people can afford mid- to high-end things now. Of course, this is creating business opportunities that didn’t exist before.”

Some of our interviewees have made a good business out of selling surprisingly “foreign” products and services to local clients. Brazilian-born Chinese entrerpreneur Winston Ling found success by introducing Brazilian food and drink products to the popular Brazilian barbeques in China. “It’s a natural channel for us, but it’s a channel with a lot of competition from other brands. Any Cachaqa [a Brazilian liquor made from distilled sugar cane juice] brand that wants to enter China would think about Brazilian barbeques. We want to sell to all the Brazilian barbeque restaurants, but this isn’t our main target. Our main target is the local Chinese consumer.”

“The biggest change is that Chinese consumers are becoming richer. A fairly large number of people can afford mid-to high-end things now. Of course, this is giving birth to a number of business opportunities that didn’t exist before.”

Ruggero Jenna (Italy), Managing Partner for Asia and Asia Pacific, Value Partners

Other foreign business founders were surprised by the interest from Chinese consumers in relatively high-priced, Western products or services. When British psychotherapist Mark Pum-mell opened a private practice in Shanghai for English-speaking clients, he found right from the start that 70% of his clients were Western-educated Chinese professionals. His practice grew quickly, mainly through word of mouth. One reason for this rapid growth is that Pummell had little competition locally, and filled a need among Western-educated clientele familiar with the benefits of psychotherapy. “Psychotherapy is extremely new here. There is still not much going on,” he explains. The Chinese government has recently acknowledged the need for psychotherapy, Pummell says, thus giving his business legitimacy.

Pummell, who has also opened an art gallery and an entertainment business, advises foreign entrepreneurs coming into China not to underestimate the sophistication—and the potential buying power—of urban Chinese consumers. His music booking agency organizes events and provides music for luxury-brand clients, including Ferrari. Says Pummell: “There are people with a lot of money here. They buy Ferraris and other beautiful things. If you were to ask me the difference between the promotion parties thrown in Shanghai and those thrown in New York and London, I’m not sure there is a difference.”

Parisian fashion retailer Valerie Touya successfully found a niche market for her upscale designer clothing when she opened her Curiosity Fashion Store boutiques in Shanghai and Suzhou. A full 80% of her clientele are Chinese nationals, a set she describes as “25- to 45-year-old women, working in creative jobs such as media. People who like fashion, like to get dressed up and go out, need a lot of clothes. Curious people who want to keep updated on new trends. Women who already have a European lifestyle.” Touya found enough of such domestic Chinese shoppers to expand, within the first year in business, from selling imported French designer wear to Chinese retailers to opening three of her own retail boutiques.

Touya is sticking with a business plan in which she finds clients for eclectic, high-quality, mid-priced designer clothing, rather than adapting European fashions to suit Chinese tastes. “I’m not trying to adapt my concept to the Chinese. I am very French with the style, the atmosphere in the store. This is my strength. I don’t want to adapt to the local market; I want to be very different, even the fashions—I won’t change the size, the cut of the sleeves, for example. If I did, I would not be selling a French brand!” Touya says the only aspect of her stores that she “localized” was the use of a frequent shopper VIP card offering discounts for repeat customers—a highly popular sales method among Chinese shoppers.

“There are people with a lot of money here. They buy Ferraris and other beautiful things. If you were to ask me the difference between the promotion parties thrown in Shanghai and those thrown in New York and London, I’m not sure there is a difference.”

Mark Pummell (England), Founder and CEO, ChinArt, Sinapse, and Music Pavilion

One lesson that Touya has learned the hard way is that what works in Shanghai may not work outside the megacity. Touya opened a boutique in Suzhou, a major foreign investment destination just a two-hour drive from Shanghai. But while sales in Shanghai were hitting targets of RMB50,000 to RMB100,000 (US$7,140 to US$14,285) per month for her small boutiques, sales in Suzhou were one-tenth to one-twentieth that amount. “In Suzhou, on some days we might have no sales. I recently totaled RMB4,000 [US$570] for a whole month.” Touya, who came to China with years of experience with French retailer Printemps, says the problem wasn’t so much the location as the mindset of consumers. “In Suzhou, we are located in a good area for foot traffic, but the consumers in that part of town have a mindset that is too mass market,” she says. “It is not the right place for my customer. My customer exists in Suzhou, but she doesn’t go to that part of town. I need to make an effort to go and get the customer. The local and expat customer in Suzhou is more traditional, not trendy.”

Since Touya had paid a full year’s rent in advance on her boutique, moving to a different part of Suzhou wasn’t an option. To boost the low sales volume, she had to undertake expensive promotional efforts that hadn’t been necessary in Shanghai, such as hosting a fashion show in a hotel and nightclub, which attracted 400 people plus media coverage. Her underlying message for entrepreneurs: don’t move into China’s second-and third-tier cities too quickly.

Our other interviewees agreed that consumer sophistication, tastes, and buying patterns vary widely across different regions of China. This means that what works in one part of the country may fail in other areas—a fact that some of our entrepreneurs learned the hard way. Turkish startup owner Onder Oztunali, founder of Globe Stone Corp., explains how he addresses the divergent markets for his stone business within China. “My clients are mostly Chinese, but I never talk about one China, but many different Chinas. Different parts of the country have different cultures, customs, ethics—many things are different.” For example, Ozuntali says his first China experiences were in Beijing, where he quickly came to appreciate the culture and business pace. But when he traveled to the southeast province of Fujian, he found a very different culture among the local people. “When I came to Beijing, I said: ‘This is much different than I expected. Beijing people are into culture, and hip and trendy things. They are big-picture people.’ But the Fujianese are completely different. They are so focused on making money all the time. I think they are the toughest customers in China. They don’t really care about the big picture; just now.”

Be aware of the diversity of demographics in China. If you are targeting sophisticated consumers, don’t rush into the second- and third-tier cities. What works in Shanghai may flop elsewhere.

While designer clothing, Ferraris, and even psychotherapy finds a market in the urban centers, other high-priced imported products and services are not yet attracting Chinese consumers, our interviewees warn. “Able to spend” doesn’t mean “ready to spend.” Our consultants warned against entering the China market armed only with data on rising salaries. Entrepreneur Jordan Zilber explains a case in point. He recently helped an Israeli company eager to introduce to China a high-end product for the dental market that had been very successful in the United States, Japan, and Europe. Zilber says the China market wasn’t ready for the product, but the Israeli company was impatient. “The market in China isn’t yet prepared for such a product, but they aren’t open to hearing this. They think their Chinese partner understands the Chinese market. The president came here for three days and he believed he knew China better than I do,” says Zilber. “The Chinese aren’t willing to pay so much for dental services even though they can afford a BMW. Things will change, but now is just the beginning. You have to lower prices, change the marketing— do everything differently.”

One common message, loudly voiced by our interviewees, is: look before you leap. Those who jumped into the China market without fully understanding the customer base—especially the difficulties inherent not just in finding customers, but also in actually getting paid—got burned. Consider the following case of Bleum, which nearly went bankrupt after following a disastrous initial business plan (see In Search of Paying Customers, next page).

Don’t jump into the China market without fully understanding the particular customer base you are targeting.

Getting Your Customers to Pay You

Identifying the right customers for the products or services of your China-based operations is only half the battle. The other half—often the most difficult—is getting those customers to pay you. Many of our interviewees reported facing anywhere from a slight to a serious problem with not being paid on time, not being paid in full, or not being paid at all.

Retail display designer and manufacturer Susan Heffernan first experienced payment difficulties when she started selling to the China market. “Selling locally is very different from the export business, which is very clean. In the China market, you may have to revise the quotation 50 times, and getting payment is very difficult.”

Another common payment problem, Eric Rongley says, is that Chinese companies tend to be very political, meaning that many different parties may be involved in (and possibly creating obstacles to) your payment request. “Everybody along the payment path [in a Chinese client company] has to be made happy. You need to invite them to dinner and give them gifts—do things for them. If any one of the people along that path doesn’t feel they were treated right, they will exercise their right to hold up payment.” Thus, companies selling to Chinese clients spend a lot of time and effort chasing payments. “Companies that do a lot of local business here have large sales teams and spend a lot of money on payment collection,” says Rongley. “More importantly, they spend a lot of energy on this—energy that should go into productive things.”

“Everybody along the payment path [in a Chinese client company] has to be made happy. You need to invite them to dinner and give them gifts—do things for them. Because if any one of the people along that path doesn’t feel they were treated right, they will exercise their right to hold up payment.”

Eric Rongley (USA), Founder and CEO, Bleum

Putting the challenges into perspective, American entrepreneur and consultant Steven Ganster says the issue has improved over time. “Five to 10 years ago, getting paid was a horrendous issue. I would say that, today, it’s not so much about not collecting payment, but about financing the 120 days it takes to get paid.” In other words, the China market has grown more sophisticated and more in line with international practices. “In the mid-1990s, people lost a lot of money—they never collected at all.” By contrast, today, while the issue varies in importance from industry to industry, Ganster’s clients generally spend less time chasing payments. “It’s an issue that our clients still suffer from, but it’s not in the top list anymore.”

Below, our interviewees offer their China-tested methods of coping with payment issues.

Payment Tactic #1: Cash Only, No Delays

The advice on payments provided most often by our China-based international entrepreneurs and consultants was simple: insist on cash only, and don’t tolerate delays. Veterans of the China market said while such a policy may make getting started difficult, it is not impossible. The alternative, they stressed, is serious cash flow problems.

American entrepreneur Mark Secchia explains why Sherpa’s operates on a cash-only basis for his meal delivery and other services: “We take cash on delivery. We don’t do credit cards. We don’t do accounts receivable. Nothing.” This policy ensures money in the bank at the end of each month, which Sherpa’s can use to pay suppliers and employees. “It’s all a matter of cash flow. Profit really doesn’t matter. You can be a very profitable company, but if your customers never pay you, you will go bankrupt.”

Nic Pannekeet, a business development entrepreneur with 18 years in the China market, also insists on a prepaid, cash-only model for his company. “We always ask the customers to pay cash. This is our rule.” He warns foreigners entering the market not to allow credit payments or delayed payment in their eagerness to break into China. “There are certain principles, and I stick to them. If you let it go, one month’s credit becomes two and three, and you create a problem for yourself. Some people are so eager to get into a certain business that they forget the principle of the business: cash is the most important thing in a society like this one.” Because the Chinese market allows for fast growth, companies with loose payment systems can quickly suffer from cash-flow troubles. “If you don’t manage your cash, and the business grows fast, you face problems. Many businesses [in China] grow 30–40% a year, or even more. In that situation, you will have a problem if you aren’t careful with your cash.

Insist on cash only, and don’t tolerate delays. The alternative can be a serious—even disastrous—cashflow problem for your business.

Based on “quite a few” bad experiences (see box, pages 94–95), software executive Eric Rongley also warns startups in China against offering special discounts and delays, even in the early stages. “As an entrepreneur starting [in China], especially if you are trying to break into an open market and your company is unknown, customers will keep saying: ‘You need your first reference account, so make us a good deal—do it for free or for a little money, and we’ll pay you a year later.’ Don’t fall for any of that because it very seldom works out,” he says. “It’s very much like in [the U.S. cartoon strip] Peanuts, when Lucy is holding the football and Charlie Brown is kicking it. Don’t believe it.”

“It’s all a matter of cash flow. Profit really doesn’t matter. You can be a very profitable company, but if your customers never pay you, you will go bankrupt.”

Mark Secchia (USA), Founder, Sherpa’s

Rongley advises startups to hold their ground, not offering first-time discounts or allowing payment delays. “If you are weak, [customers] will never be generous. One piece of advice is: if the [customer] isn’t going to pay a reasonable amount— trading value for value—and pay upfront, don’t deal with them. There will always be another sucker behind you who will fall for that trick.”

Importer Juan Martinez, founder of SOLHIX, also warns against offering credit. “It’s difficult to collect payment here. We had some bad cases. The first time, I gave two pallets of leather to a company and they never paid us. We understood the lesson very well: don’t work on credit.” Until you have built trust with customers, he says, it is critical to insist on upfront payment. “My suggestion is to get payment in advance, cash on delivery, or a letter of credit. It might become a nightmare if they owe you a lot of money. At the beginning, don’t give credit. It’s bad to think that people would cheat you, but some people would actually do it. It’s better to take measures to avoid it.”

If a new customer isn’t going to pay a reasonable amount and pay upfront, don’t deal with them.

Retail display designer Susan Heffernan explains the challenges she faced in demanding a cash-before-delivery system. “In the very beginning, I was very strict with my payment terms—50% deposit, and 50% before delivery.” She says the strategy was accepted by offshore customers, but not by local domestic buyers. “I lost jobs because of this,” she says, but adds that sticking to her rule was worth it. “My advice is to stick to your rule, and stick to it more and more and more. People would say, ‘If I pay you 50% of the payment before delivery, what if something happened and you cannot deliver?’ Now I say the delivery isn’t included. ‘You can come to my warehouse, and inspect everything on the site. You can use my delivery company, but that fee is extra. My deal ends with the production of the product. If something happens on the delivery, you can make a claim.’ ” She says taking a tough line is necessary. “My strict payment terms are what have made me so successful.”

“At the beginning, don’t give credit. It’s bad to think that people would cheat you, but some people would actually do it. It’s better to take measures to avoid it.”

Juan Martinez (Mexico), Founder and Director, SOLHIX

Refusal to pay isn’t a problem only experienced by foreigners. “At the beginning, I thought the Chinese were playing games with me because I am a foreigner,” says importer/exporter Oto Petroski. “But when I discovered the problems they experience between themselves, I found it is 10 times worse.”

Finally, China veteran Olaf Litjens stresses that, in many cases, when Chinese buyers fail to pay, they are suffering from their own cash-flow problems. “Oftentimes, it’s not because the Chinese buyers don’t want to pay, but they don’t have money themselves. Financing for them is also a problem.”

Payment Tactic #2: Choose Your Customers Carefully

Several of our entrepreneur interviewees stress that taking the time to research major customers before selling to them is time well spent. When selling for his music and entertainment companies, British entrepreneur Mark Pummell says he and his business partner are “definitely very selective about who we do business with.” He explains: “We put a lot of energy into whom we choose—we are very relationship focused.” He says that, at a typical trade fair, he may end up making sales to one or two companies. “We go slowly and we choose people carefully. If we feel that someone isn’t being fair with us, we take the view that we have more than one business and there are many options here in China, and we just politely walk away.” When in doubt that a new customer or client will pay, says Pummell, “We say, ‘Good luck in your business. Bye bye.’ ”

“In my experience, dealing with small companies is more risky. They can just shut down in one day and disappear with the money.”

Juan Martinez (Mexico), Founder and Director, SOLHIX

Import/export trader Juan Martinez agrees, adding that he and his business partners at SOLHIX are especially wary of selling to smaller businesses. Says Martinez: “In my experience, dealing with small companies is more risky. They can just shut down in one day and disappear with the money.”

Japanese consultant Hiroshi Shoda comments that it is easier now to choose larger and more reliable Chinese partners—and to use more sophisticated payment systems—because many industries have matured. For instance, he witnessed a transformation in the retail home appliance industry in China during his previous job as president of Sony China. “The market [in China] has also changed. In 1993 or 1994, there were some aggressive small (home appliance retailers) like Guomei. Now, Guomei is a big retail chain and a big success. Back then, we collected cash-on-delivery from Guomei, but as their ordering volume grew, we granted them credit,” he says. “In the past 10 years, the retail system has changed. Small shops are gone and only big chain stores like Guomei and Suning have survived. They have big business now, so we changed our policy accordingly.”

Payment Tactic #3: Build up Guanxi

Business development founder Jordan Zilber offers this advice for small companies struggling to get paid: “You can control it in different ways. First, you must have strong guanxi with [your customers], so they have strong interest in paying you. Second, don’t give them everything at the first stage; wait until they pay.” Zilber adds that while most Chinese companies are “serious” and “70% of all payments are okay,” he still takes extra precautions because collecting missing payments is very difficult. “You do have to be aware that the legal system is not as good as in the West.”

Don’t rely on the Chinese legal system to help you claim payment; it is immature and still not very efficient. Better to spend time upfront forming a strong working relationship before you begin doing business.

Dutch flower exporter Nic Pannekeet agrees that the best protection against not getting paid is to build a trusting relationship with clients. “It can be difficult to get the money from the customers sometimes—extremely difficult. Chinese customers are very demanding and suspicious; they have no trust in the supplier, especially when it is a new one.” Before working with a new client, he says, his company does “rounds and rounds of negotiations—the procedure can be very complicated.” The only solution, he says, is taking the time to build up a win-win relationship. Pannekeet says he also uses his long experience in China and his Mandarin language skills to win clients’ trust. “Now, everybody in this flower industry knows me, a Dutch guy speaking Chinese. It is an advantage to be a foreigner, as you are conspicuous. Once people know you, they are willing to do business with you.” Pannekeet says that, in recent years, the trust built with Chinese clients has served his company well. “We have had some [payment] problems, but are lucky enough to have them solved over time.”

“Chinese customers are very demanding and suspicious; they have no trust in the supplier, especially when it is a new one.”

Nic Pannekeet (Netherlands), Founder, CHC Business Development

Once guanxi is built up, our interviewees said, relations with clients, suppliers, and buyers can sometimes be even stronger and more reliable than is standard elsewhere. Dutch businessman Olaf Litjens tells of a case in point. In 1997, he and his business partner had made a business of importing a brand of milk powder—called Dutch Dairy Cow—from Europe to sell in China. Litjens explains the incident: “From 1997 to 2000, we sold this milk powder brand. In 1999, there was some incident in Belgium regarding the contamination of the animals’ feed, and the problem affected our brand. Belgium, Netherlands, Germany, and France were all affected. We appeared in every newspaper and on every Chinese TV station for about two months. The locals took advantage of the situation to claim that foreign brands were no good. We learned a bit about crisis management at that time. We lost all the money we had made up until then in just six months.”

“This is the incredible thing about the Chinese people: if the relationship is there, the trust is there, they do incredible things for you. People complain that they don’t pay, but [Chinese business people] can also really help you when you need it.”

Olaf Litjens (Netherlands), Founder and CEO, Unisono Fieldmarketing (Shanghai)

Litjens’ products were blocked from store shelves for two months. “I had imported 80 containers-worth, and now I had to pay warehouse time—a huge amount of money,” says Litjens. When he explained his predicament to his wholesaler, with whom he had done business for many years, an unexpected thing happened. “He just gave me the money—unbelievable!” says Litjens. “Because of the relationship we had built up for so many years, he understood us and helped me get through it. That would never happen in the West. Never.” He stresses that such deep loyalty is more common in China than in Europe or the U.S. “This is the incredible thing about the Chinese people: if the relationship is there, the trust is there, they do incredible things for you. People complain that they don’t pay, but they can also really help you when you need it.”

One reason you can stick to insisting on cash payments is that Chinese companies often demand such a transaction themselves, especially when dealing with a new customer. Says Italian consultant Ruggero Jenna: “The first time you work with wholesalers in China, they demand cash payment. After a while, they will allow some financing. After the relationship is built, they will accept if you can have some delayed payments, or something like that. Again, you are building a track record. It’s fundamental.”

Payment Tactic #4: If Necessary, Go Collecting

As a last resort, our entrepreneurs stress that they sometimes must go collecting in order to get paid. Some even hire employees specifically for this task. Mark Pummell demands a 50% deposit when arranging events and booking music, but he still has had to go collecting personally in some cases. “You have to be extremely firm. Payment is one of the areas where I must be very hands-on. I will go and knock on the door and make people very uncomfortable,” says Pummell. “I make it very clear that if you are going to do business with us, you have to pay. We have a 50% deposit model, which I think is a good method.”

Don’t give up when a client defaults on payment. Be persistent until they pay.

Conclusion

Our foreign entrepreneurs found that they can sometimes turn their foreignness into an advantage. A usual path is to start their business model by selling products and services to fellow foreigners in China, or by exporting/importing to/from their home countries. An export/import business seems to be a natural option for many of our entrepreneurs. From that initial business, they can expand their range of products and services and eventually start selling to Chinese customers. This gradual approach seems to be a usual pattern among our entrepreneurs.

One key factor stressed by our interviewees is payment collection. Success, they say, isn’t about generating profits but about managing your cash flow. Startups should be aware of unscrupulous buyers that may take advantage of the startup’s strong desire to sell. An easy sale can become a death sentence. It is better to refuse a sale when the conditions are unfair. One repeated warning is to ask for cash payments until a level of trust with the buyer has been built.

SUMMARY OF TIPS

TARGETING THE RIGHT CUSTOMERS... AND GETTING PAID