There’s a post on China Law Blog here commenting on a new book on some of the peril’s of doing business in China called, “The China Twist”. I post here because Dan correctly implies that many of the problems encountered are well known to those who have done it before. And his example is precisely something I touched on in my last post.
Post transition get ready for inspections
As a parting gift, your GM or one his cronies may play informer for non-compliance. Worse, he may inform his pay-off buddy the well is drying up. Here are the big ones:
Labour contracts: If your contracts are not up to date, you can be subject to many penalties. Sometimes after 3 successive contracts, they enter an ‘open’ state, which makes termination and negotiation difficult. Check with your local labour lawyers. Great chinalawblog post here.
Get a handle on everyone on probation immediately and do a proper review before their contracts pass to permanent status. If you let these pass, you’ve just added considerable headache later.
There can be all kinds of hoops to jump through with finding alternate positions and GROSS violations before terminating someone. Incompetence is not necessarily strictly valid, especially if they’re off contract. You can assign a manager to janitor, so getting rid of her can be more annoying than long-term (it still can seem interminable to you). But what about the janitor?
On a practical level, many employees are ignorant or misinformed about their rights. They also are practical themselves unless you’ve turned it into a personal fight. It’s about the payout. But compliance is still necessary.
Overtime and pay: Hopefully you have an OT policy and actually pay it. There are however, strict OT caps at 36 hours/month. You may end up paying a penalty, and there’s no good way to avoid it. It’s really about planning to get into compliance in the future.
There’s also other issues such as the hot temperature subsidies that you must comply with. One note, don’t get suckered into paying it if you provide comfortable office conditions–it’s then about making employees happy, and convincing the local authorities of your exemption. (Good post on that here)
Software: Only a sucker or large corporation pays for software in China right? That’s certainly still the prevailing attitude. IT’s function is often not compliance but advanced piracy. Prepare for them to come calling. (article on Microsoft plans here) You probably have a relationship in the US or EU with these vendors. They can be a resource to help clear things up, but they’re also an avenue to come collect.
I advocate for compliance, but some advice for those who insist on doing it the China way: set aside funds and tally a ground-zero license requirement. Factor in a certain degree of back payments/penalties. They may go for as much as 22%/year/license plus penalties. You can usually negotiate, but if they decide to play hardball you can be in a tight spot if their relationships with the local business bureaus happen to be sufficient to lower the boom. Further, you need to demonstrate credible action: if you leave any hint in public that you’re knowingly trying to duck the fees, they can sniff it out and it can turn antagonistic fast.
Environmental & Regulatory compliance: If you emit or dispose of any hazardous waste or are subject to any specific regulations, get a jump on it. Make sure you follow rules stated in your internal manuals, particularly regarding safety. ISO can not be worth the paper it’s printed on, but if it’s valuable to your business, you should do a review. Product quality programs are probably most valuable to your operation and reputation.
Taxes: China can seem fanatical about collecting taxes with as much control and little efficiency as possible. (Article here on 发票 fapiao, or tax receipts.) However, if any money was being hidden, it may come out now, either from ‘anonymous sources’ or your own forensics. Just going to have to pay and fix it. This applies to import/export too.
These are some of the things that you may have to do by law. Next week I’d like to address what you may want to do because it’s just good leadership and how you right the ship.
Establishing control after dismissing your GM
I harped a bit on the legal rep issue and business office registration before, so I’ll focus on some other aspects now:
Personal seals/chops: Your GM may have used his personal seal for some admin functions. Make sure everyone who will have similar functions has one, and that your company chops are in good condition. There can be several chops in the company: the legal chop (法人章 farenzhang), company chop (公章 gongzhang) , financial chop (财务章 caiwuzhang) etc…
Banking: Make sure the right people are registered to have corresponding authority at each of your bank accounts. Getting your GM off the accounts (you know about) shouldn’t be that tricky as banks will err on the side of caution. Getting new people on can be harder and take time. Fix all your banking issues, even for small and dead accounts now, while the legal rep is in country. A cultural note here: your staff may tell you some things are not priority in order to lighten the work load. Inevitably something terribly important comes up later and you don’t have time to fix it because you went back home and are unreachable on your deep-sea fishing charter.
Spending limits: Your GM may have distributed authority, but in a smaller outfit it’s very likely she signed off on every bill. You want to set a clear policy with your Chinese accounting team on who can sign off on what to a) distribute the admin nightmare b) get a more granular view of the organization via relevant department heads. For example, your US buyer can take over raw materials purchasing and your engineering manager takes spend (training, hardware, software) for that department.
Accounts Receivable: A huge problem in China. You need to put together a picture of what’s not collectible, how much is on credit, and what’s been ‘paid’ via banker’s acceptance (承兑汇票 chengduihuipiao). I may write a short post on this later, but your bookkeeper should be able to fill you in on the problems related to this. You may need to set some firm policy right away to stop accepting low-quality ones.
Accounts Payable: A lot of foreign-owned companies pay their bills, but if things are starting to go sideways, this is an easy place to hide. Moreover, you need to figure out what are patronage accounts: contractors, outsourced functions, projects, consulting, etc…all may be friends of your GM. Worse still, with kickbacks baked in. The rumour mill should turn up a lot of info on this. (maybe a post in the future on how to better tap into it) Bring someone from Chicago: they’ll be able to sniff it out even with the language barriers.
Petty cash & scrap: Find out what’s paid/received in cash and why. Find out how the scrap/waste is sold and where the money goes. A common way to pocket money, a good friend of mine has been threatened more than once trying to bring things above board.
Inventory: No one’s going to like it, but everyone will understand it (what does that tell you?) If you can, take a physical inventory. If possible, do it on a weekend, and have your whole foreign team help out. What are the controls on high-value, easily traded goods? Tighten it up at the expense of some efficiency until you’re able to address it comprehensively.
HR: You need a temp org chart ASAP, and present it to everyone. Err on the side of taking too much responsibility with your foreign team to give you flexibility later. Start compensation and contract reviews immediately, as well as tallying up overtime hours. Compliance headaches are going to materialize soon (next post). Get your department heads to at least give an oral review of their key staff. It tells you as much about them as their team. Make sure your foreign team is included in any team building, even if they just sit there not understanding anything. It still builds rapport.
PR: Get ahead of this. Without a replacement it’s going to be hard to sell it as a normal transition, but if you can paint it as the GM moving on with your blessing at least you have messaging. DO NOT SHUT DOWN EVEN FOR ONE DAY. One photo of your place shuttered with workers outside and you’re toast on Weibo and other networks. Plus a pretty good way to get trapped inside by your staff, who will no longer believe you have plans to stay or pay them.
Image Management: A general issue, but your whole team is going to be particularly on display during this time. My main advice here is: suck it up and work twice as hard as anyone there: first in, last out. There is definitely a perception that the foreign masters are fat, ignorant cats who put in 6-hour days and find it a hardship. Don’t show up in state of the art filter masks if your whole team is working smelting rare earths with a wet towel over their face at best. A couple weeks won’t give you black lung, but can definitely burn Zoolander into their memory forever.
For many great ideas thought up in the West, a Chinese brand rises quickly to dominate that market. Does it have to be that way?
I saw yet another article today on the “Chinese Airbnb” tujia.com right after reading a piece on the “Chinese Netflix” TMall Box Office, announced by Alibaba. So I thought I’d take a breather from my leadership transition pieces to ask if it must be so?
A much more important example, I became aware of WeChat before I heard of Whats App (in fact, because of who introduced me to it, I thought it was some weird Euro thing, the way xing is to LinkedIn.) WeChat was and is much better developed. A great example of taking a great idea and making it better as well as localizing. I wish my English-speaking friends would just all switch :-p
China is a peculiar problem because of its rapid adoption, being the manufacturing bed, and opacity to foreigners. I’m still reasonably comfortable you could go into India or even Australia a bit late and do alright with a burgeoning brand. In China, you might be fighting for the #4 spot, assuming you’re #1 in your home market.
Even if you’re disrupting a mature infrastructure with your crazy new business model, if you developed with the end in mind (global dominance) and made some early course corrections, why fight for #4 three years later when you can fight for #1 now?
You don’t want to give away much equity, you can’t afford to pay that much, and you just don’t trust that some girl who LinkedIn stalked you can be trusted.
So you need a well-connected partner that funds foreign market development, either taking on risk in exchange for equity, or a hired gun to just do it if you have dilution concerns.
I’d be very interested in comments on this one. Also contact me if you need this. I know a guy.
Tactics and preparation for letting go of your general manager.
So you have your board resolutions, banking info clear, retained a law firm with China experience and affiliates, drafted a severance deal, a forensic accountant on board perhaps: time to plan your trip over.
Timing: go near the beginning of the month so you have time to stabilize before bills and payroll come due. Ever seen a million RMB? I have because I once helped take out a grey-market cash loan to make payroll because we went mid-month and couldn’t access the accounts in time. Do it Monday or Tuesday, and have lots of lunches and dinners with the staff throughout the week.
Who goes: The legal rep, controller, legal, managers with good relations with staff, especially if there’s a diagonal-line relationship, and as much executive as you can spare. You may need to get local translation assets in place for such a large team. If you’re privately held, as many stakeholders as possible.You have to both fill a massive leadership void and convey confidence that you’re doubling down, not pulling up stakes.
At this point, if you still think he doesn’t see it coming, book everything yourself, make sure visas are all good from a previous trip, and advertise the trip as a small team for normal review/relationship building. Include the legal rep and person with firing authority on the ‘official’ itinerary. If you’ve tipped your hand the important thing is to get on the ground ASAP.
Here you may feel how unprepared you really are. Do you even know how to get to the plant without the company driver? Your local consultants, be they lawyers, accountants what have you, can help. The unannounced team can be meeting with them while the official party moves on to meet with the GM.
Have you decided on a transition period or to escort her out the building? A promotion to SVP of international corporate identity? Depends on the relationship and situation. However if you’re afraid of shenanigans and don’t have a locally capable asset to constantly watch what she’s doing, you may have to make it abrupt for safety, and also to lift the pall of fear off the local staff.
Regardless of the deal, the main point is that the payout doesn’t happen until you’ve verified you have full control of all accounts and other administrative functions. Also make sure China HR requirements are met in addition to corporate governance. I’m assuming you’re offering much more than necessary, but she may still want time to confer with her resources. Make it clear she’s leaving the building today either case. This is tricky, because you may not have all the legal firepower, but you have the practical power, so as long as you’re not antagonistic you should be able to get her out. Wait it out if you have too; don’t even have security touch her unless she’s belligerent.
If she’s fundamentally playing ball, while I urge you to keep your guard up, you should have a reasonable path ahead of you. Mainly watch out that who she’s recommending really has the goods and is not a patronage appointment.
So I’ll continue assuming you escorted her out of the building at about 4:30 PM. Standard deal, email, cell phone, etc…cut off. Have a good understanding of how your IT works so they don’t have remote access. That includes making it clear to your personnel who they now work for. If she controls the corporate WeChat, QQ, etc…make sure that’s transitioned.
Don’t hide. Make sure the bosses sort of walk her out as she says goodbye, along with someone who understands what she’s saying. Keep an eye on her cronies the whole time. Video coverage is good. I’ve seen people steal laptops and samples on their behalf. Smile and make it seem as mutually beneficial as possible. She’ll have no incentive to make it worse. Shake hands outside the building and wish her well if you feel that’s what she wants. If she wants to anonymously disappear that can also work for you, but be wary as to why. Assign someone on your team so she can come back and pack her things after everyone else has left unless you can do it for her.
If you don’t have security, consider temporarily hiring some or lock the place down at night with someone manning front desk during the day with the nerve to keep her out.Your staff likely won’t. An expensive but convenient option for Westerners to work with would be someone like Hill & Associates who will do local contracting for you as well as give practical advice. Your call on whether it’s necessary or not. If you don’t really understand the overall situation, it may help you sleep better.
At 4:45 assemble the factory and release a statement with a translator, delivered by the highest-ranking owner. Main points are pretty standard copy but here you go:
– Mr. xxx has taken us through an incredible period of growth, and we appreciate all he has done
– We feel that in this next phase of development a different skill set and background will better serve the company and our prospects, and wish him well in his next endeavors in a new industry (because with what you paid him, it included a non-compete right?)
– Many of you are worried about the changes (read terminations). We will be evaluating things from top to bottom and expect a period of continued change until we achieve stability (You know more is coming down the pipe. Be up front and honest about it; it may help things settle faster.)
– Our search for a new general manager is well underway, and we hope to announce that shortly
– Our vision is greater co-operation and support between our entities. Respecting your local needs and sensitivities but making us a more globally unified company, and to be the number 1 company in our field.
– We are NOT reducing investment, but expanding, which is why we have decided a new kind of leadership is required. There will be opportunity for advancement and training, so let your managers and directors know your ambitions. We are also offering cash bonuses for ideas that save the company money or make more revenue.
In the meantime, daily business will continue, with reporting temporarily working like this: xxx
Make sure there’s an org chart. They love and respect org charts, and understand that temporary promotions can’t turn into demotions later without trouble.
You need senior leadership to stay on the ground for a few reasons:
– Continuity and confidence
– Assess what is lacking that your new GM has to bring
– Sort out the admin and legacy
A lot of information is going to shake loose, and you need as much of your staff there as possible to absorb it. So next time let’s look at the first two weeks after.
Practical China 