Chasing the dragon? Setting up in China

So, as the ‘white wine’-induced hangover wears off, I realise that I have a new addiction: China.

China is a heady drug for anyone involved in biotech, cleantech or IT, representing a massive potential market, a source of significant funding – both in terms of grant and investment – and offering the potential for rapid product development. It is also a frightening, challenging, bureaucratic, unknown business environment with alien culture and, at first sight, inpenetrable language.

This series of blogs will chart my progress or otherwise in China. It won’t quite be an Asian version of ‘A year in Provence’, the famous 1985 autobiographical novel by Peter Mayle, because family commitments prevent me from actually moving out to Wuhan but this series will, I hope, give you a flavour of the journey and perhaps even provide a few useful hints along the way. So what else is it not? Well, despite the title, it is not I hope about an accelerating chase towards an unachievable perfect high. I hope not, that is, but time will tell. Also, it is not about the ‘why’ but is more about the ‘how’.

So first of all let’s recap on the place itself. China in 2012:

  • Where is it?
  • Who lives there?
  • How do I get started?

China today: Where is it?

This sounds like a daft question. But go look at the map and the link below and you will probably have a surprise or two. Check out the North East boundary with Russia through to the South Western boundary with India and Pakistan. Singapore, off the map south of Thailand but firmly in Asia to a western eye, is actually some 5 hours flight time away from Beijing, in the North East – a similar flight time for London to Boston. North Korea, South Korea and Japan are apparently minor limbs projected from the North Eastern shores. (see here for a wider picture of where China fits:

China today: Who lives there?

The population is massive, as we all know: the current population is estimated at about 1.3bn to 1.4bn, just ahead of neighbours India. But these Chinese multitudes live in a country almost exactly the same size as the USA (slightly bigger if one includes Mongolia, but slightly smaller if not) and around half the size of Russia. The USA and Russia have respective populations of around 300m and 140m. To any biotech CEO, 1.3bn is a lot of patients. Without the famous one-child policy implemented in 1979 the population would probably have been some 300m or 400m more.

But the population spread is far from even with the majority living on the East and Coastal regions (apparently because of the historic value of access to water). Over 50% of China’s total population lives in rural areas, there are more men than women, and the population is both ageing and succumbing to ‘western’ diseases (heart disease etc). Inadequate heathcare access and the prevalence of a Chinese phenotype make application of Western medicines more difficult than one might expect. Meanwhile continued reliance on smoking (perhaps linking to the TB issue) and growing obesity and heart disease problems make reform of the healthcare system an ongoing priority.

China today: So how do I get started?

Well this is where my story really begins. I have taken on an interim CEO role for a company for whom I was raising funds. The CEO was forced by illness to step down long term and Yours Truly was asked to step up. Initial relationships and the prospect of product development for a number of diagnostics was already in the pipeline when my involvement began. But my immediate task was simple: to see if the relationships were with Chinese parties whom we could trust, and to assess what form of entity to establish in China (don’t forget: I am not revisiting the ‘why’ here).

We can ponder trust in a moment or two, but first: what about structure?

These days there are a number of possible forms of business structure in China that one can consider. The primary option, however, is either to use a joint venture or to create a Chinese subsidiary (a JV or a WOFE – Wholly Owned Foreign Enterprise). I am pondering this choice now, with the help of various UK-based Chinese intermediaries and China-based lawyers, and it seems to boil down to:

  • if you plan to exploit local grant funding as your primary funding benefit then work through a joint venture, attracting grants because of the involvement of your local partner
  • if you seek to raise significant equity investment from Chinese sources, then set up a company via the WOFE approach

After the reams of advise that I have been given on the topic this seems unnaturally simplistic. But it is how I see it right now, meaning that we will set up a WOFE (which takes about three months and involves a greater degree of form filling, side letter preparation, proposals to local officials and provision of signatures than one could ever imagine possible). This also throws up an interesting test: whilst we might arrogantly assume that the global language of business is English one can expect to find that all contracts are in Chinese, perhaps with English translation alongside.

Simplified diagram of how to register your new subsidiary

How do you feel about signing such documents? If you get a translation, how do you know that the translation is accurate? Furthermore Anglo Saxon contracts tend to define as many details as possible, addressing potential consequences and buttoning down all material items. Chinese contracts appear benign by comparison, incorporating positive statements but few facts.

So far we have progressed without issue. We have verified translations. We have details inserted in contracts where we wanted them. And we have the promise of investment money flowing in to accounts where and when it should. All I have to do now … is sign.

Which of course brings us to: the issue of trust.

If one goes ahead with setup of a new operation in China as a JV, a WOFE or in some other format then one is going to have local partners. These folks will be your eyes and ears on the ground, at least until you can appoint local staff. One hears many stories of an apparently trustworthy local partner suddenly revealing their true colours and disappearing with the cash/IP/products/customers etc (fill in whichever Key Asset relates to your situation). Of course many such stories are also recounted in the UK about setting up in the US in ‘the old days’. The fact of the matter is that one needs to mitigate the risks:

- IP and technology: our technology involves the analysis of large data sets but, with a bit of work, we can do this remote from the data collection. That means we can keep the technology in head office in the UK. We will need to disguise the analysis that is undertaken in China to hamper reverse engineering of the product. And we need to remember that IP is typically lost in the head of a departing employee rather than in the form of a blueprint in the pocket of an outside thief.

- Motive: we are all out to make a profit. Some seek to do so without consideration for ethics. In our case we are lucky that our Chinese partner is currently engaging in a major US deal and needs to establish exceptional credibility through its honest actions. We know that losing ‘face’ in China is important in the business culture and our partner has much to lose if they slip up on our relationship.

- relationship per se: if it feels bad but sounds good well … find another partner. In the end I have to put a considerable value on interpersonal relations. We have taken time to visit our partner and to get them over to London. We have spoken to reference sources AND listened to what they have told us. References matter (particularly if you pick the references) but I still trust my own instinct after years of team building. What else can one do?

The answer of course is: drink the wine – the clear, fiery, 50% proof distilled variety. There will be many toasts to come, I am told. More headaches. But for now I step boldly forward, pen ready. Optimistic. Very comfortable with our chosen partner. And trusting. (Phew! It is a long time since I have been so hyped in business).

China here I come.

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