How To Do Business In China|Life and Learning in HK, China

Since tomorrow marks the first anniversary of our public launch, I wanted to share some things I’ve learned in the past year. Not about how to learn Chinese so much as on the business side of starting and operating an Internet business in China as a foreigner. There is not a lot written about this since it does not seem to be a very common thing to do. I think that will change.

For all of you considering taking the plunge, here are the five most important things I’ve learned in the past year:

1. Hong Kong is your friend: in addition to being a truly first-class city, Hong Kong is your best choice for incorporating your new company assuming you can’t do it in the States. Having a legal Hong Kong address will make it easier to set up a corporate bank account, integrate Paypal, and even brand into the mainland. It also gives you access to the new quasi-legal systems sprouting up that offer RMB billing for international companies. We incorporated in the British Virgin Islands and while it’s been great for some things, it was a nightmare when it came to setting up our payment systems. Which brings me to the next point….

2. China is Crazy: but you still shouldn’t let that delay your launch. At risk of sounding negative, setting up our payment systems took more time and money than I’d expected. We ended up in a situation where everything was ready for launch but we were waiting on a payment processor.

After a few frustrating weeks in business purgatory, we just launched with an incomplete payment system that looked and behaved like the real thing, but gave anyone who clicked on our Pay button full premium access. We lost some sales before “plugging the leak”, but it was the right move. It also taught me an important lesson: get stuff done and don’t let bureaucratic issues impede you from making progress. This is especially important since you’ll run into a lot of them – international money laundering and other such regulations make life really inconvenient if your business requires handling international payments.

3. The Pacific Ocean Hates You: we’ve had at least one major trans-Pacific Internet backbone disruption every year for the past three years. People in China are aware (and forgiving) when these incidents happen because it affects their access to everything and the entire Internet grinds to a halt.

People abroad aren’t as forgiving. If a decent chunk of your users are outside China keep your servers close to them even if it is slower for you. You can get cheaper hosting locally but it isn’t worth it having to register your server and get hit up by the local government for e-commerce registration (cough: extortion) fees. The only advantage I can think of to hosting in China is if you ever need to take a steel-encased server with red and yellow interior wiring on a cross-country flight. I don’t think they let you do that in the States.

4. Avoid the Temptation to Undercut on Price: you will have costs that are at least an order of magnitude lower than potential competitors. This means you’re going to face the temptation to get business by competing on price. Resist that temptation.

Let me qualify that. Taking advantage of your cost structure is probably a great long term move. We’ve finally built up our business enough to lower our prices to $49.99 for an annual subscription, for instance, which makes our product the cost of a regular textbook and an absolute no-brainer for anyone serious about gaining fluency in mandarin. That said, it took us a year to get to this point.

If you’re going to be operating in China and working for yourself you will have a pretty decisive cost advantage over anyone who is not living and working here, and a decisive cost advantage over most Chinese companies too . But you’ll need to bootstrap your way to profitability, since it’s going to be difficult to impossible to get funding support if you need it. Market rates are your friend. They are why the outsourcing industry exists in Chongqing. Love them.

5. Don’t Count on Investment: I’ve been in China for about seven years and would not count myself an old-hand. Still, almost all of the funded companies I’ve seen here secured funding before coming to China. Couple this with the fact that very few Western investors speak mandarin or really understand what is happening here and you have a situation which is not conducive to starting a free web app that goes for growth first. Twitter won’t happen in China.

That’s it for now since it’s getting late and I’ve got our monthly newsletter to get to. In the meantime, if you’re interested in keeping up on Web developments in China that involve foreigners I think the best site right now is CNReviews.com. On the odd chance you’re looking for outsourced software development, I’d suggest skipping Chongqing and contacting Qingxi Labs too. We’re not affiliated but we do know John and know they do good work.

p.s.a final caveat: none of this is relevant if you want to start a company that is technically registered in China and bills in RMB. If you need to do that find someone who has done it and buy them a drink. No-one posts about their pseudo-legal registration hacks on the Internet but the expat community in both Beijing and Shanghai is pretty supportive and the successful entrepreneurs I’ve met here have been incredibly grounded and very open to sharing their stories and trying to help out others.

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