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Entrepreneurship General Topics and tips

Challenges for Expat Entrepreneurs in China

China, as everyone knows, is a business hub of the world. Every year, thousands a new companies and ventures are born here. The market and business activities have attracted many expat entrepreneurs as well. It has now become much easier to do business in China than it was a decade ago. Yet, doing business here does not mean everyone makes money. I have literally seen hundreds, if not thousands, of businesses starting and closing down in a short while. According to an article published in Forbes, about 90% of start-ups fail globally. As a result, only one out of ten turns out to be a prosperous and sustainable business. These numbers look even grimmer in China.

Entrepreneurs in China team meeting
Entrepreneurship in China brings fruits only with proper homework

Entrepreneurship is not just starting a new company or a business. It is a mechanism of recognizing opportunities, taking on new challenges, generating resources, and creating value for your customers. Whenever you take on a new challenge, you have to face a possibility of failure—and entrepreneurship is not different. Entrepreneurship is a name of taking a chance, where your chances of success heavily depend on how good your homework is. Being an expat entrepreneur in China adds new dimensions to this challenge.

COVID-19 is coming under better control in China. According to the accounting firm PwC, investments by private equity and venture capital firms in China’s technology industry are expected to grow strongly this year.

In 2018, the total venture capital surpassed $70 billion, only a stunning 4% of these start-ups successfully reached the D-Round and only 2% went public. More staggeringly, none of these start-ups were founded or co-founded by a foreign entrepreneur.

This article discusses the low-level, but high-impact challenges that most non-native new business owners are likely to face in China.

Proficiency with Local Language

The first and foremost requirement for doing any business in China is overcoming the language barrier between you and everyone you are going to meet and work here. There is no running away from this fact. The main language of communication in China is naturally Mandarin Chinese. English does not work here. You will constantly find yourself itching to be able to communicate with the people around you. The young generation nowadays have much better understanding of English than it was a decade ago. Even then, you will still need the Chinese language to get through your day, any day.

Language barrier keeps you away from the pleasure and satisfaction of success. At times, it gets quite frustrating when you are wanting to communicate with your staff, with someone at the bank, or with a clerk behind the desk at some government office.

If you are stepping into a technology business, then you have high chances of finding the staff that could communicate with you enough using English. However, if your area of business is anything else, such as hospitality (restaurant/eatery/cafe), manufacturing, trading and so on, then your 98% of communication will require at least some level of proficiency in Chinese language. Therefore, gaining language proficiency for the entrepreneurs in China is very important.

Use translation applications for small and quick tasks

There are several translation applications available to translate pictures. These applications can save you from reading Chinese, but talking would still remain a handicap. To translate text and pictures, you can install the online “Baidu Translate” application on your mobile phone. In offline dictionaries, the phone applications named “Pleco Chinese Dictionary” and “Hanping Chinese Dictionary” are among the best.

Documentation, Legal Work, Bureaucratic Hurdles

Getting your business registered and obtaining a business license requires quite a bit of deliberation. It may not require mentioning that you must complete all the legal requirements and procedures before you entertain your first client. Starting operations without completing all the requirements may have some sort of consequences. These consequences may range from simple warning to deportation from the country, depending on the level of violation.

To register your business, you may have to visit several different government offices. You will also need to make frequent visits to some of these or other offices for routine business operations. In many cases, you will need to fill many forms (read: too many). You will also need to follow notices, and talk to the staff to get the things done. The good part of it is that, most of the staff in these offices will help you by going out of their way. In fact, in my personal experience, most of the staff here in these offices are quite welcoming and helping. If you are that lucky, the staff would guide you in your next steps as well, which will make things much easier for you.

Financing

If you are looking to raise finances from inside China, then it can turn out to be quite a challenge. Most entrepreneurs in China are either not eligible to secure loans from banks. Generally speaking, it is easier for a local investor to trust their fellow citizen than to a foreigner. I believe this phenomenon is not unique to China, but lack of understanding of each other’s culture is principally the cause. Some Chinese universities do offer financing programs and incubation centers for young entrepreneurs in China. So if you are a fresh graduate budding out of a Chinese university, you would definitely want to get a shot at your luck.

Hiring Staff

First thing first: It is illegal to hire employees for entrepreneurs in China for a non-registered entity. Make sure you have already completed your company registration process before you hire your first employee.

Hiring and staffing has a cost in China. If you are starting with little funds, it can be challenging to hire employees for your business. Still, it is worthwhile to hire staff through a Professional Employment Organization (PEO) or an employment agency.

Hiring through PEO or an employment agency makes it so much easier and quicker for you to find the required local talent. These agencies usually charge a portion of the hired staff’s salary. Even so, this cost is really worth it in a longer term.

You may also want to attempt hiring the staff directly by yourself. Job vacancies in China are usually propagated through social media applications, HR applications and HR websites. However, these HR applications and websites require an 18-digit Chinese ID card number, and the scan of your business license. Only then they allow you to post an ad on their platform. Moreover, the Chinese ID card number must be of the same person whose name is written on the business license. This regulation makes it impractical for a foreigner to use these hiring resources. Let’s hope these websites and applications will soon allow registration with foreigner’s passport as well. Until that does not happen, I would resort to employment agencies for hiring my staff any time.

Keep into account the mandatory benefits and compensations

In China, employees usually expect certain benefits from the company. Most companies offer year-end bonuses or 13-month salary in a calendar year. In addition, these companies also offer health, housing and other benefits. You must register for the employees Social Security Program with the government. China’s Social Security Program consists of the following 5 mandatory insurance schemes:

  • Pension fund
  • Medical insurance 
  • Industrial injury insurance
  • Unemployment insurance
  • Maternity insurance
  • Housing fund

Different cities and provinces have different policies of employee payroll, taxation, and mandatory benefits and compensations. Moreover, these policies keep on changing. Therefore, you must keep abreast of the latest policies throughout the year.

Sales and Marketing

Chinese buyers are mostly influenced by social approval and recommendations. They have faced many problems with the quality of local products. Due to these problems, those who afford, would prefer a branded product over a non-branded one. In China, branding is everything.A brand name that is well-known indicates the endorsement of its quality, and therefore, its credibility. 

However, quality and reliability are not the only reasons for Chinese buyers to choose a well-known brand item. Generally, Chinese people desire to be seen as exquisite, elegant and higher in status. They choose product based on product’s social acceptance, rather than its personal appeal. Therefore, only those name brand items that carry an exponential amount of value with their name are mostly embraced here. 

Chinese buyers almost entirely rely on recommendations and product reviews. In a report by Forbes, more than 300 million Chinese people report on only moving forward with a purchase after getting consent from their peers on social media.

Focus more on marketing around your brand name and its quality

This buying culture that revolves around brand, social approval and recommendations makes it a challenge for a new start-up to break into the market with new products. When marketing an item in China, you will need to focus more on marketing around the name brand and the quality of that name. Social media marketing in China is of paramount importance to build your brand reputation and awareness among locals. You would definitely want to stay active on local social media applications or hire a staff or a marketing agency to do that on your behalf.

Understanding Local Culture and Etiquette 

Chinese culture differs tremendously in some aspects from other parts of the world. New entrepreneurs in China are usually unaware of most of the local culture and etiquette. Hoping to run a business without the proper understanding of the local culture could be catastrophic for your business. This topic warrants a separate article of its own, but a brief mentioning of local culture and general etiquette would suffice here.

Guanxi (关系) plays a great role in Chinese culture

Guanxi (关系) is your relationship between you and others, and the favors owed between you and them. It is essential to form friendships and alliances with your staff, clients, suppliers and other business owners to get the things done. The Chinese usually make use of gifts, dinners, sports and other social activities to maintain their relationship networks. On the other hand, causing the loss of face can be dangerous in China, as it strains relationships. If you are already good at making relationships, then it is good for your business. Otherwise, you would need to develop this skill in order to bring success to your business.

Meeting culture in China is also a bit different, as it is based on Guanxi

When meeting new people, the Chinese would want to get to know them more as a person, rather than getting down to business immediately. In other parts of the world, business is usually discussed first, and dinners or other social activities follow. However, it is the opposite in China. It is common to gather around a dinner table to eat and drink for hours, before finally talking about business. Sometimes, Chinese people do not even discuss the business in the first couple of meetings. They usually discuss business after developing some sort of comfort with the counterparts.

Communication gap between low and high ranked staff

When working with other companies, you may feel frustrated over a communication gap among their staff. The low ranked staff in China are supposed to maintain a “power distance” from the high ranked staff, and usually do not mingle or talk freely with each other. Also, the Chinese companies usually do not discuss the course of action with their low ranked staff. Here, orders are not debatable, and are expected to be carried out on an “as is” basis. 

Conclusion

If you are an expat in China and aspiring to be a business owner, then learning the Chinese language should be your first step towards greatness.

To become a successful entrepreneur, you must keep more focus on working on your business, and not working in your business.

If you are a young entrepreneur, you would want to find a mentor in business. A good mentor would be the one who understands China, its culture, and Chinese business at large. As an alternative, it may be a good idea to start with a job that matches your business goals. This job can provide you the enough opportunity to learn whatever you will need to become a successful business owner.

If you are already an experienced business owner, and want to break into the Chinese market, then you may want to consider partnering with a local Chinese company. It would also be a good idea to engage with a local lawyer, hiring agency and a financial management agency. These agencies would help you in keeping all your practices always in-line with the current regulations. 

Many entrepreneurs in China are unaware of the intellectual property (IP) legal landscape and why their IP loss happens. We did a summary analysis of the 6 more common mistakes most companies and entrepreneurs in China make. Losing intellectual property would usually result in losing chances of potential growth for entrepreneurs in China.

If you are able to overcome the challenges discussed in this article, then doing business in China could be quite rewarding.

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GFW; How does it work?

Great wall like the GFW
Chinese Great wall inspired the GFW.

GFW or the Great Firewall of the China is the subject of this article. As you might guess we will discuss the basics you need to understand of how it works. After reading this you should be able have a discussion about the GFW. Aside you will be able to continue a deeper research on how to avoid colliding with it head on.

Update: June 8, 2021

How do you know about this GFW thing?

If you are from the western world or anywhere but china mainland. Likes are that you never dealt much with anything similar to the GFW. Well unless your employer wanted to block social media or something like that. Saving the differences.

I as a “young and naive” engineer moved to China. Then the firs thing I did at landing time was try to message my family and friends using a regular western Social media App. To my surprise It was “not possible”. Then after a day or two I figured it out. The Chinese Governement created this BEAST they call the GFW (The great firewall of China), the job of this “machine” is to block stuff that they do not want Chinese people to access.

What is blocked by the Chinese GFW?

Well, if you had the control freak boss trying to get you not to use FB during work. You know more or less what the GFW is, it differs from the the regular little bit controlling employers wanting to block some website(s). Meaning that I later learned many things about how the Chinese networks and internet policies work. In fact it has the full power and resources of the Chinese government behind. There are researchers and security engineers working full-time, has current AI algorithms to adapt and figure out where people are going why and make decisions on the fly. Finally not to make it too long it’s a sophisticated machine.

What is blocked by the GFW?

A few million websites, but more most known include the following; Facebook, Google, Twitter, Youtube, Netflix, ALL The biggest international newspapers in the world that are not controlled and protected by the Chinese government. This includes part of our cloud storage, file sharing and collaboration systems and more even when we are no youtube and well OOOH!!! SO MUCH MORE…

This post

To be clear in this article, I would like to explain how Chinese Mainland is controlling their Internet. As I would call it, Chinese Mainland is running a “Mainland Intranet” which is protected by The Great Firewall of China (GFW).

At Sesame Disk / Nihao Cloud we have had a long history of dealing with this “Beast” called the GFW. Give us a try.

Mini Office Firewall

We can compare this with your office or home where your router protects your computers. Meaning the router has local “Parental” like settings that gives access to the Internet. Aside it also controls or blocks websites with possible harmful content for your kids. At least that’s how some companies block Facebook during office hours as well.

Bigger Router- Bigger Wall

The GFW works similar but on a much larger scale. Instead of just dealing with your small office, the GFW is filtering much of the traffic going in and out of Chinese Mainland.

here I will explain how Internet Traffic works in a short and simple way. By the way you don’t need to be a geek to understand it :).

Understanding Internet Traffic Rules.

Traffic on internet
Cities in China

Question like. So how does an actual E-Mail gets sent or received over the Internet? Furthermore, how can we browse websites or stream movies?

What happens is more or less the following. First when you request a site or service or movie to load; the data to travel fast back and forth it has to follow Internet traffic rules. Second, using these rules all the data gets divided then sent and delivered in “little” IP packets. Where IP is like a packaging mechanism for internet communications. For instance, lets imagine we want to look at a funny cat video on Youtube. Right away we click to load the video. Internally Youtube server dissembles that video into thousands of little packets and sends it to your laptop, PC or mobile. Then these packets get reassembled back into a video again. This happens very fast, that is why you normally do not notice.

All you need to know from this, that all Internet Traffic travels in little packets.

IP Address
local host joke
IP Addresses

So how did Youtube know where to send those little packets? On the Internet every destination: computer, website or cellphone has to have an IP Address to send and receive data on the Internet. Google for “my IP” and you can see your own IP address. IP addresses are a bunch of numbers because computers can then convert them into 1’s and 0’s but we need domain names so we can memorise it.

Otherwise, instead of sesamedisk.com, you would see 52.79.32.36. Not the most memorable web address right?

Whats is DNS?

DNS systems
DNS – Domain Name Server

For the “Internet” to understand those Domains names, we have Domain Name Service (DNS). DNS servers translate domain names back into an IP addresses.

Meaning (sesamedisk.com → 13.124.52.38). There are thousands of those DNS Servers that translate Domain Names into IP Addresses. How it works internally is not that important now.

OK, enough of dry and boring theory and back to how does the Great Firewall of China and how it works.

DNS Spoofing

The first and most efficient way to block websites is by DNS spoofing or “Domain name system poisoning”.

DNS poisoning
DNS Poisoning

So let’s go back to our cat video. When we type youtube.com on the browser, DNS Server receives a request to check what youtube.com means and send you to the right IP address. This process happens to any Internet communication like web browsing etc.

Now, DNS requests for websites outside of Chinese Mainland will be taken to a Deep Package Inspection (DPI) by the GFW. This means, that each little IP Package will be opened and checked for the content like a customs control.

If any pattern found in that Package matches unwanted content, domains like the list of services provided before. Then the GFW returns a bogus IP Address and therefore the Website will not open.

That’s why if you are in China and try to reach Youtube.com you will receive this website:

Result of the GFW in action
Result of the DNS poisoning done by the GFW.

What they do in many cases is that they take your request for let say nihaocloud.com and resend it to another IP that is also in their list of DNS poisoning like Facebook, then the FB site tells you that this nihaocloud.com is not there.
This is a very simplified way to explain it, but it has the basics.

VPN & Encrypted Traffic

VPN technology
VPN Technology

Even though GFW knows that this traffic is encrypted but it can only can guess what is inside. Here lies one of the biggest opportunity to get the traffic across the GFW. Now, GFW is UNCERTAIN, whether this is a simple Youtube access which can be blocked, or this is the most important connection for the financial transactions where by cutting this connection could cause huge damage to the economy. Sometimes they get happy trigger and just block much of what is encrypted, but then they have to relax it afterwards for the economy. This tends to happen when there are protests, commemorations of historical events that are not to be talked about in China, etc.

In other words you need an encryption that is good enough not to be penetrated by current algorithms, as the GFW has deep inspection algorithms. Uses AI to “guess” what is inside packages, etc.

UNCERTAINTY- that’s the biggest headache for the GFW.

The keyword here is “Collateral Damage” which could be caused by blocking encrypted packets. This Collateral Damage has to be kept to a minimum.

  • understand collateral damage as the term invented by the Americans to describe questionable things that happened under their watch in the Middle East.

So what is the GFW is doing with this?

As we can imagine the staff behind the GFW are not stupid and came up with an “Active Probing” mechanism. The GFW is now looking for the encrypted traffic and guessing the encryption / VPN Protocols.

Then a Probing Servers at GFW takes encrypted packets and forwards the Package to the receiver then waits for the reply. From those replies, the GFW can decide what to do with that Package, drop it or let it go through. This decisions are sometimes evaluated with historical data, response data, volumes and many other metrics. Later on all the data is taken and analyzed in some cases by an AI algorithm that decides what is to be done ultimately.

So to sum it up the GFW is working in 2 ways:

DNS Poisoning

Active Probing

One more interesting thing to know is that different networks in Chinese Mainland are running through different filtering. While public Networks like China Unicom or Telecom have strongest filters, Networks for Universities (eg the CERNet – China Education and Research Network) is filtered less harshly.

We should keep in mind that the GFW is a very dynamic Beast. It is always trying to find the optimal balance between Collateral Damage and efficiently blocking the Internet. So some Services can be blocked today, but not tomorrow and again blocked the day after.

After word

Those who live in Chinese Mainland know that during big public events or holidays the GFW is controlling much tougher than usual. Also, the GFW is learning and being constantly developed and improved. So what we understand today might change tomorrow. The Chinese Government invests on it as if their lives dependents on it. At the end… Who knows?

All we know can be found by research and testing but nobody will explain how it really works. I would also like to mention that this article is not only based on our accumulated years IT experience in Chinese Mainland but also on a Research, presented at the annual Conference of the CCC –Chaos Computer Club Hamburg

So there will be always a battle between the GFW and VPN Providers and there will always be the problem of Collateral Damage and nobody wants to hurt the economy. Notice that is valid to mention that the GFW has also created an alternative economy that grows year after year.

The GFW is well prepared and will always be as far as the Chinese government is concerned. Also, do not forget that Chinese Mainland also has placed legal notices to fight this battle offline. 

UPDATE: Sesame Disk / NiHao Cloud was interviewed by BBC Business daily, about China’s Internet Privacy Clampdown. You can listen to the full episode here

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