Compliance

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.

Chinese work contract

HR Manual. Know it for options on firing and compliance on your own rules.

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.

VAT fapiao

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.

First week priorities

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…

Company seals

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.

Banker’s Acceptance plus transfer. Many are not worth the paper they’re printed on.

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.

Pocketing scrap metal could double even your GM’s salary

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.

Don’t be this guy.