China: A different hat

Photo / Getty Images

The lure is compelling - a market of 1.4 billion people, growing daily in size and affluence, with a thirst for New Zealand-made produce and expertise.

Newcomers can find the overtures to doing business in China quite seductive - the hospitality and gift-giving that goes with guanxi, the concept of relationship-building.

But our biggest and supposedly brightest keep coming unstuck in China - Fonterra and Zespri being the highest-profile recent examples.

Hardened observers of the Far East market portray a Wild-West environment where lies, bribes, rorts and rip-offs are a "normal" part of business culture. The message: if getting into bed with China, throw off Kiwi concepts of business ethics and rules.

"There are some really hard stories that are not hitting the press."says Joanne Doolan, who chairs Ernst and Young's NZ-China group. "We still see the same basic mistakes cropping up."

Doolan advises firms travelling on John Key's coat-tails to treat this month's trade mission as "only a slight opening of the door.

"Consider it a starting point, they will need to build on those foundations."

The failure rate for New Zealand firms entering China is high, linked to regulatory hurdles, legal uncertainties, unclear financials and governance, she says. Language and cultural barriers come on top of that. More vexing is that so many experts consider rorting the system to be standard business practice in China.

"It's completely normal to have multiple sets of books," says Greg James, a tax consultant with WHK, who spent six years in China. "Tax and Customs evasion, bribery, etc, - it's really just the way business is done in China and many other parts of the world.

"With a Western hat on, it's wrong. However, for locals it is just a way to make more money - it makes commercial sense."

But it doesn't have to be that way and the potential $11 million judgment against Zespri over kiwifruit import duty evasion should sound the siren that things are changing. New premier Li Keqiang has reaffirmed commitment to the anti-corruption campaign launched by predecessor Wen Jiabao, although James suggests the revolution will not be quick. "There's hundreds of years of culture saying 'this is how it's done'."

The risks cut both ways - whether manufacturing in or importing goods from China.

Rod Duke, of consumer goods importer Briscoes, says it boils down to being pedantic. "Always take your quality control people into factories. Check and double-check everything. If you start to trust the integrity of every factory that you do business with, it's fraught with danger."

The Zespri and Fonterra scandals have left veterans shaking their heads over how such well-resourced companies, whose executives command huge salaries, could be so naive and trusting. At the root of the tainted milk powder disaster (six babies died, thousands fell ill; Fonterra lost $200 million) was a lack of oversight of joint venture partner Sanlu. In Zespri's import duty rort, head office relied on what it was told - that a dual invoice system was acceptable to China Customs. It didn't help that at least two of its own staff were involved.

Doolan says taking the "she'll be right" approach that works here to China can be fatal. "If you are not of the size that enables you to get proper advice then China may not be the place for you.

Foreign firms tend to need joint ventures or at least third-party representation to get started.

"Based on our research, only 20 to 30 per cent of the signed letters of intent make it through to a final contract," she says. "To get to that point can take a year to 18 months and it can then take another two years to get a business operational."Geoff Cumming