Doing Business in China: Local Deal Makers Fill Business Gap, but Sometimes Drop the Ball
(Beijing) — China may be known as the Middle Kingdom to many, but it seems few Westerners actually want to get caught in the middle when investing or setting up shop in a country that presents a minefield of linguistic, cultural and other barriers.
That gap has spawned a thriving business for third-party agents who have carved out a comfortable niche peddling business opportunities to foreigners, from selling fund-raising services to helping identify direct investment and joint-venture opportunities. These agents would probably be called deal-makers in the West, though they differ a bit from what many of us would typically think of as M&A specialists or investment bankers.
It’s probably an exaggeration to call these people snake-oil salesmen, which harkens back to a time when slicksters roamed countries like the U.S. peddling elixirs that could cure just about any ailment under the sun. Of course, we all know now that anyone foolish enough to buy such potions quickly discovered they were mostly a waste of money and useless, albeit otherwise harmless.
By comparison, many Chinese agents who seek out Western investors for Chinese projects aren’t necessarily out to dupe people. It’s just that they’re more interested in making a quick buck rather than putting together quality deals with long-term chances for success, according to people who deal with this kind of thing.
I should start with the disclaimer that the pair of contacts I surveyed for this week’s column both make a living advising Westerners on this kind of matter, and also in helping that same group try to limit the damage when deals go bad. There’s apparently plenty of work to keep them busy, since such efforts require a rare combination of creativity and tenacity that’s often difficult to find.
But for now let’s return to the issue of agents, who they are and things to watch out for. To get the full story, I turned to one of my more colorful contacts, Tim Clissold, whose 2005 book Mr. China is chock-full of personal horror stories about the perils of doing M&A deals with big state-owned enterprises. Since chasing such deals in the 1990s, Tim has move on to the equally intriguing and challenging business these days of helping foreign investors recover their money in China deals gone bad.
Formula for Headaches
“Unreasonable expectations + over-optimistic promises = raging fireball,” was Tim’s response to my original email when I contacted him saying I wanted to write on the topic. Obviously the best way to avoid problems in such matters is to cut out the intermediary altogether, though doing so requires lots of work and resources that most people don’t have.
Both Tim and my other contact who does some similar work gave relatively consistent accounts of what these agents look like. Many are ethnic Chinese, often with some overseas experience. To make themselves look more legitimate, most tend to operate in small groups, sometimes as associates but also as individuals who hire others to give the semblance of a full-fledged company.
I have my own experience working in just one such situation, dating back to the 1990s. At the time, one of my Chinese friends in Los Angeles had opened his own small shop as an agent helping mainland companies go public in New York. He asked me to come on one of his client trips to China even though I was working as a clerk in a bookstore at that time and didn’t have any relevant skills for his line of work. As it turned out, my main qualification was the color of my skin, and I was asked to go along simply to provide the cloak of legitimacy that these agents want.
Another such agent helped to set up a deal that’s behind one of Tim’s latest cases, which has him chasing a company in the Shandong city of Linyi. That deal is quite complex and doesn’t make for great reading, but the bottom line is that the agent helped the company, which sells ascorbic acid, ultimately go public in London. Nothing went according to plan after that, and now its London-based board is trying to privatize the firm, but the Linyi management isn’t going along.
Tim and others point out that the agents behind these deals aren’t necessarily out to create havoc, but rather are motivated by desire to quickly close the transaction and collect their fees. That doesn’t mesh well with Western investors and their partners, who have a much longer time frame, and therein the problem lies. One potential solution is to pay the agent with longer-term incentives like shares in a company going public, though apparently many agents may balk at such terms.
When there are multiple parties involved in a deal, the key to a solid foundation lies in making sure that everyone’s interests are aligned. That’s a theme you frequently hear from foreigners doing business in China, and one that I touched on previously in an earlier column on choosing local partners.
At the end of the day, there’s really no great substitute for direct contact between principals for any sort of major deal or investment. But if you really do need an agent, which is sometimes unavoidable, make sure to bring along your own independent translator, spend at least a few days getting to know your future partner, and don’t be afraid to ask difficult or sensitive questions, the experts say. Taking such steps at the outset could save mountains of headaches down the road by removing ambiguities and making sure all parties involved are on the same page.
Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com.
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