What are the dangers of doing business in China?
While there are many opportunities, doing business in China is not a walk in the park — unless one is careful it might be more like a midnight walk in New York’s Central Park. If you appear to be naive or too trusting, or you don’t know how to negotiate your way, you could become a victim. Over-trusting a Chinese partner is one of the major mistakes U.S. businesses make going into China. Your bank should not discourage you from doing business with China, but it should provide guidance as to how to do it safely. It’s no different from jumping from a 15-foot diving board into a pool without checking to see if there is water. If your banker has international expertise, he or she can help you brainstorm, and when you want to execute a strategy, the banker can provide solutions and assistance so you are not walking in mine fields all by yourself.
How can companies protect themselves, whether they are importing or exporting?
When companies do business with companies from other nations, they take on additional risks. There are different laws, different banking systems, currencies — all those things are magnified when it comes to doing business with Asia, because the distance is so much greater and the opportunity right now is so much bigger.
Protection has a few different ramifications. First of all, there is a credit aspect. If you are giving someone your product, what are you going to get in return to ensure you get your money? If you are selling on open account, that means you will send your buyer an invoice and expect in the future you will get paid. If that is the way you are selling, what will you do to make sure that payment does eventually come?
In our business, there is a fundamental protection tool called the letter of credit. Companies can receive a letter of credit to ensure they will get paid for what they are selling before they release it to the buyer. Or they can issue a letter of credit to ensure they get what they are expecting to get before they pay for it. The letter of credit is used significantly more in Asia than anywhere else in the world. It is an ingrained trade tool that Asian countries use more effectively and more often than we see in America, Europe or South America.
People who are doing business in Asia need to have a tremendous grasp of letter of credit principles because the parties they are dealing with in almost every Asian country know how to use this tool. If they don’t, people they are doing business with can use their ingrained knowledge to their advantage and to a U.S. businessperson’s disadvantage if he or she isn’t paying attention.
Alfred ho is an International Correspondent Banking Manager with FirstMerit Bank. Reach him at [email protected] or (330) 996-8011.
