December 10, 2007


Chinese Telecommunications companies, much like any of the larger businesses on the mainland have a barrier of the “old guard,” which makes doing business in China a rather tedious and foreign process for most Westerners. The center of this “Old Guard” are the government ministers, governors, and party members that are tied to the business practices of the past (though they are getting fewer). The middle circle consists of the industry leaders/billionaires whose decisions affect the country much like the government. The outer circle or front line, are the many smaller industry players. Whose sum is greater than the individuals that make up the parts. It is this front line that most westerners need to seduce or compete against, in order to break into the Chinese market. They are a clever and self-protective group of individuals; who’s suspicious and competitive nature against foreign companies is equaled by their suspicious and competitive nature against each other. I guess in many ways the biggest enemy of the Chinese are the Chinese.

One of the companies I am involved with has been working closely with a local partner to handle China Mobile and China Unicom. They chose this partner based of a strategic importance when we started in china almost 2 years ago, since which many things have changed. By a rather interesting twist of fate, there was a bit of shake up in the partnership, which has led our company towards a path that has a much brighter outcome. To simplify a rather complex deal- what originally started as a partnership with a 60/40 profit split between the Chinese partners and our company (respectively), suddenly became a 65/35 profit split + PRC expenses paid + $2.5 million entry to China cost PER telecommunication subscriber. While the sums involved would not necessarily be unreasonable if you consider the Chinese market, our basic metrics proved that paying large sums upfront, plus an immediate application of the 65/35 profit split in the first year would make this business structure a rather infeasible and largely one sided deal. For any startup, risks need to be taken by each side—you cannot have your cake and eat it too!

This is an example of a rather frequent occurrence in China, where this front line of Chinese businesses are so terrified of being cut out (because they know professionally, pound for pound, they cannot compare) or just used to large foreign businesses throwing money their way, that they forget about the rest of the players who have excellent ideas, models and companies, but are presently not at the scale of a Wallmart or Toyota. Many of these business owners would rather have quick cash now, then more of it later. In a way, perhaps they are right. With heavy competition in and out of the country, the corruption police right around the corner (read last post), and an influx of foreign companies that may or may not be good for the long term, sometimes you wonder if they are right. Better to rest on tens of millions now, then hundreds of millions of promises tomorrow. It just makes it difficult for those of us that genuinely want to do business and succeed in the mainland.

Sitting with glass of bourbon and a nice cigar, I find that while irritating, this sudden shift in the playing field has brought a new perspective and opportunity for business in China. I am just grateful that this partnership friction happened now and not closer to the signing of any deal. After all, if things come too easily it wouldn’t be fun.

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