Business in China: The Hidden Risks Nobody Talks About

Okay, [music] Alberto, tell us a little bit about yourself and where exactly you're from and what you do here in China. So, I came from sunny Italy, from Naples. This city is located in the southern part of the country. And I began to study China seriously and enthusiastically while I was still living in Italy and receiving higher education at a local university. So, let's say, I became an expert on China even before I came here. [music] My master's thesis was on China, its economic system, its social security system. Back in 2006-7, in 2014 I got acquainted with this company. They already had business with China, but there was no stable work and they had a lot of problems. So they came to me for consultations, and after that they said, "Okay, everything you say makes sense. Why do n't you do it for us?" And then they sent me here. So, essentially, since the end of 2015, I have been handling all of their activities here in China. So I am the general manager of this company. And now China is different. China is now much more internationalized. Many Chinese companies now sell goods abroad, so they have English-speaking employees on staff. And in general, everything seems much more open. That's why people think it's easier now. But it's not easier, it's just different. But some of the challenges you faced 15 years ago are still there. Because if you don't know the culture, if you don't know how Chinese companies do business, which is very different from other countries, then you may very well find yourself working on deals for a long time only to see them fall apart, even when it's very simple. For example, you just want to buy something. And so you're probably thinking, "Okay, I probably need exactly this product: "I have the money, so why can't I close the deal?" It's elementary, right? You know, they should be interested in selling, but in reality, even in this process, certain difficulties can arise, and in the end, it all just gradually fades away. And if you compare this to Europe, everything is completely different. The overall speed of this market is simply incomparable. Given the specifics of my business, the very first thing I did was establish a clear and stable supply chain, because there is one important thing that people sometimes do not understand in China, especially while in the past, many foreigners came here thinking that they have a chance to make a lot of money, but they only want to pump resources out of here. Buy very cheap, sell very expensive, not really caring about relationships with the Chinese, whereas Chinese companies prefer to have long-term relationships. They want to build relationships, friendships, they want you to understand their problems - it's part of the culture. They They want to communicate as equals. This is very important. While many people came here before with a lot of arrogance, back then many people weren't particularly keen on dealing with Chinese companies, and for some reason they did n't believe that China could grow so much and so amazingly fast. Of course, in this business, it's very important to find a truly reliable partner. Many of the people who worked here before, who worked with foreigners, were English-speaking people , but not necessarily experts in their market or product, or, in principle, interested in truly good relationships. They were agents, quickly moving from company to company, trying to sell everything to everyone. And you will need to calculate this yourself, and then exclude them from your business sphere, because they are not really interested in the process of building strong and long-term relationships. They are not particularly interested in creating serious companies. Their only goal is just to line their pockets as quickly as possible. For example, I want to buy designer lamps, LEDs from China. And I immediately find several good suppliers online who have this a really great product. Then I place an order, and then most likely one of two things will happen. Worst case scenario: the guy takes your money, sends something else, and then disappears. You'll never find him. You'll never get your money back. You'll never receive the product. Best case scenario: the guy sends you the product. But then, since you're setting up a business in your country, you have a company, you sell these things all the time, and you want to make a second order, but the guy can't give you the same thing . And it happens again, because he doesn't actually have his own store. He's not a factory at all, even though he claimed to be a manufacturer. No, he's just a middleman. Then you try, at first he finds some excuse. And if he can't convince you to buy something else, he's gone forever like that. And you have to start all over again. That's not a business at all . It's just, I don't know, something similar, but definitely not a real business. Tell me, what was the most expensive mistake you made at the time? I built a pretty complex and long-term work with one large company, which ultimately turned out to be a completely unreliable partner. And as a result, we accumulated a truly enormous amount of debt, which now needs to be paid off somehow, significant funds invested in these projects and, especially, in the purchase of goods. And they ultimately were unable to fulfill all the orders received. And since they did not want to lose the client, they did not say anything. And then, many, many months later, I think after seven or even months of constant and endless delays, when I finally managed to get them to tell the honest truth, they answered me: "Well, we simply cannot do this, since we have already lost our money. So we don't even have the money to make these products for you." And we're like, "Okay, maybe we should have said this 7 months ago, so we had to foot the bill for the mistake. You need to have your own face in the modern market." It wasn't that crucial before. Now I think that social media, having your own website, being active on social media, you need to make sure that the Chinese understand that your company is present here, and not just abroad. Foreign companies often think that the Chinese know the European market, the markets of other countries. And if you tell them, "Oh, we're really big in Italy," they're like, "Oh, wow." No, they don't know anything. And frankly, they don't care . The market here is much bigger. The average company here is probably bigger than many large organizations in Europe or those that consider themselves large in Europe. So you absolutely have to be able to get there and tell your story, make them understand that you're an interesting partner to work with, otherwise they won't waste a minute. And it doesn't matter if you're a buyer, it's the same thing. And if you really want to sell to the Chinese, this becomes an even more important factor for you. Well, it seems to me that, first of all, First, we need to really understand how the market works. I don't even know how best to express it. Habits probably come to mind, but every market is unique. Companies behave differently. It's a bit like people in different countries. People behave differently. Markets behave differently. So in China, companies have their own habits, customers have their own habits, the way you communicate with people, with your employees. All of these things make the current market landscape completely different. And that, in my opinion, is one of the most important things to understand. The environment you operate in is precisely what guanxi is. As the Chinese themselves call it, special relationships between companies that actually shape this market. Often, companies continue to interact, buy from you, because you have a good relationship with them. Although perhaps they could buy the same product from someone else , maybe a little cheaper, but they will still value the relationship with you. So all of these things matter, they make you feel like you're in China. After all, you You know, you couldn't do it in another country. The thing that always amazes everyone is how incredibly quickly everything changes. Various business projects arise and quickly close, sometimes after only a few months. And you're always amazed by this amazing phenomenon, because sometimes you just don't have time to fully comprehend what's happening. After all, the modern market picks up any new trends very quickly. The Chinese immediately see these trends and instantly jump on them sometimes. And it even seems a little crazy. I don't know for sure whether it will work, but they try, and something completely new regularly appears . And you always have to closely monitor what's happening and try to understand what's changing now. After all, everything changes very quickly. Even in just one year, completely new things and new trends can appear. For example, we've been working on the project for JFK for a whole month or seven months now. Even a little longer, because we really want to do everything right, open our online sales channel. And that's when I seriously started working on this important project, one of the things I was collecting data on, There was logistics. And I managed to find out, for example, that there are currently companies that handle your ongoing daily logistics directly from your warehouse. That is, essentially, you get the opportunity to create a small automated warehouse, managed by someone else, designed for full-fledged fulfillment. You give them all the goods, they have all the operations under control, they ship the goods daily, and you just pay a commission. For us right now, this is not the best option. We will do it differently, on our own. But this is incredible, because this means that if you have even a small product that you create, for example, a product to order, and then you want to sell it, not wanting to deal with hundreds of your daily shipments, a variety of small parcels through, I don’t even know, the Shunfn service or any other couriers who come to you literally every minute. They will simply ask you for a percentage. There are several points. The first point is that some people, they don’t actively try to analyze the market situation in advance, so they practically do not collect the necessary information. They They don't check the legal framework, they don't check how everything is set up, how to run the business. So they're completely in the dark. And then they just start buying up everything that someone else advises them to . It's very risky. A lot of people still do that. And they really do invest money somewhere without really knowing what's going on. I think that's a huge mistake. If you have a business, you need to know what's going on and what you're doing. At another company, the consulting company RedBCKS, which my partner and I have, I tell my clients, that's not the case. We need a clear action plan. You can't just not think everything through in advance, like just show up and see what happens. No, we need at least a minimal plan, and you need to understand how much money you want to invest, the scale of the operation you want to build. So let's first refine the idea and figure out how to bring it to market, because otherwise you can spend a ton of money and get absolutely nothing at the end. And I say this because I have an example. a big company that came here with real money, 1-2 million euros, to get started. They just take this accumulated money and hand it over to someone else. Then they create some new little structure of their own, without any understanding or knowledge of how it works, what the boundaries of all this are, where they were going. And then after a whole year, they just screw it all up, get absolutely zero return. And in the end they say, "Okay, China, yeah, this is clearly not our market." But no, man, not really. It's not about China at all . It's all about you. You just did something that didn't make any sense. You need to be more structured than the local market right here, within it. On the other hand, here in China, it's still very important that you follow certain rules when meeting people that seem stupid to some. But here it's still extremely important. Whereas in Italy, everything is becoming much more impersonal, people want to send an email and want to get an answer, because actually there It's just a guy at the computer doing his job, and he says, "Why should I worry about all this other stuff?" But on the other hand, there's a company that, if you want a closer relationship, and he wants to see you in person, and when things get really important, they want you to come to China to visit them, discuss things, do some common things, go out to lunch together, try to establish at least some kind of contact. They want to understand what your main end goal is in this market, what your prospects are, for example, the direction of investment with them, whether they are interested in this client or not. And then a lot of people will say, "Like, why should we even do this?" I mean, in Italy we don't need that at all. Maintaining all these personal, face-to-face relationships. In the world around us, everything is becoming more impersonal. But here it's still incredibly important and meaningful. So you definitely need to have a whole baggage of things that you did n't need before. But still, when it comes directly to culture, you need to deeply understand the Chinese. This will help you in in your affairs, and at the same time, it will allow you to avoid potential troubles, not to make annoying mistakes and not to make the wrong financial investments. But if you already have the opportunity to notice such things, they will help you understand what is going on. We are having dinner with all these people. Now there are a lot of them. Before, I was talking to two people, and now we are sitting at this dinner, and there are more than thirteen of them here. So, for example, understanding who exactly these people are sitting there, why they are there and what they are saying. It can be useful to better understand all this, what position the company puts you in, why you invite these people. Maybe they are just friends who came to have a drink with you, but sometimes you find yourself next to the mayor of the city, the chief of police, and I'm like, "Okay, why? Maybe it's because the boss who's doing business with you wants to show off and say, " I have an important client here. Our company is growing, so he really needs to show it off now ." Why? Because they might have some pretty significant government financial investment in the company, and maybe knowing that would be helpful. Okay. Now, what about trust and commitment here? It's a different culture, a different mentality, and everything else, let's say. It's one of those specific things where you have to be extremely careful. So in traditional Chinese culture, especially in the provinces outside of Shanghai, that's how it is because it's conditioned by local traditions. Shanghai is a little different, but outside of Shanghai, that's exactly how it is, 100%. In Chinese culture, it's impolite to say no . So, if you ask me for something and we already have a relationship, I need to try to find some way to help you with that, even. Although I can, I'm perfectly I realize from the start that I can't really help. I might just be stalling for time until I, I don't know, come up with some kind of answer. This could lead to so many, you know, serious problems. We somehow need to find a solution to be, you know, let's be honest with each other. So I'm going to tell you the whole truth 100%, and I expect absolutely the same from you. Let him know that it's okay to tell me things, even if they're not what I want to hear, because I need to know the whole truth. And in business, you just can't lead me by the nose for weeks, because it can make a huge difference. At the beginning of 2019, like, at the end of '18, early '19, I said to my boss, "Listen, we need to expand. " A representative office is fine, but there's a lot we can't do." There are a lot of potential opportunities that we could miss. And he was like, "Yeah, yeah, okay, let's open our own company." And we began the long process of opening a company. And by mid-2019, we had opened a new company, and the representative office was about to close. At that point, everything was going very well. We had already started doing even better deals with our suppliers than before. Because, in fact, when you have a real operating structure here for a Chinese company, it's very good, because they understand perfectly well that if they need to ask for something, the company exists. After all, when you're abroad and you place an order, if you don't pay them, they simply have no way of reaching you. But if you're here and you conduct your business, your commercial activity from here, then they can go to the market supervision authorities and say, "These people aren't paying me money. They can sue you." So it makes them feel like, oh, okay, these people are serious. They also have local employees, people who will understand me 100%. I know that Albert understands me, but if something is unclear, I can talk to Poly, I can talk to Vin, I can talk to Eva or someone else, that is, with people who are Chinese like me, they start to build closer relationships with you, with your company, they become more open. And at that moment, I thought: "Okay, things are finally going in the right direction." China has 100% entered a completely new era of its development, let's say. Now we finally see that China is 100% a fully mature and formed market. If before, say, back in 2018 or 2019, the situation was still different, there were some features of the market that still resembled an emerging market, now it is It's a 100% mature economy. So the same business principles you encounter everywhere come into play here. Take Germany, for example. The point is that the market is n't as open as it used to be. You need a lot more money just to enter it. And you need to be much more serious, because now you can't even think that without a good communications campaign , without a strong and recognizable brand, you can just throw some product on the market and immediately sell it all out? No, that won't work. And even if you're a very well-known and successful brand abroad, you need to be constantly present in the market according to its rules. Gucci, which is incredibly famous absolutely everywhere. But still, in China, your activities must look Chinese to the local consumer, because that's what they want. And if you do that, the market will definitely reward you. But if you don't do that and decide to go in a completely different direction and start doing everything your own way, well, half-heartedly, as if everything is fine. Okay, we have an amazing product, everyone will buy it? No, you'll just be throwing money away on a truly colossal and incredible scale. In my personal opinion, there's no sector or market right now that's impossible to enter successfully. You just need to know exactly where you're going to enter and what the state of that market is. Knowing and understanding the legal framework plays a crucial role. This isn't the place to be if you're counting on very quick and easy dividends from your investments. It's important to realize that you need to carefully plan and consistently implement a strategy that will take at least a couple of years. to build something meaningful. Maybe 15 or 20 years ago, it was perfectly acceptable to say, "I'm investing $100,000." That investment will earn me about 12% a year. So, okay, I'll put $100,000 here instead of putting it in a trust fund. Things are different now. And people who do that, for example, do it in other I know about Vietnam, the Philippines, and Malaysia, because they still have it that way: lower taxes, lower entry barriers if you want to invest quickly . But I definitely wouldn't recommend China for building a serious business; in my opinion, it's not the right place. Thank you for your advice, your experience, and thank you so much for your willingness to share this with people who see this video. I truly believe this is very useful information for people looking to enter the Chinese market. I wish your business every success. And thank you very much personally. เฮ