Too Many Chefs Spoiling the Plot

Foreign investors piling into China face a surfeit of under-qualified business consultants.

By MARK GODFREY

A rising glut of under-qualified business consultants is worrying foreign investors seeking assistance in establishing wholly foreign owned enterprises or joint ventures in China, according to an established Beijing-based consultant. Mediocre consultants in China must be weeded out by government regulations, says Chris Devonshire Ellis, managing partner of Dezan Shira & Associates, which claims to be China’s largest independent business consultancy. “A number of regulatory issues need to be tightened up. The authorities don’t always clamp down on sub-standard professional firms unregistered here because they see them as a channel for bringing business into the mainland, which is unfair to firms who pay top dollar to obtain the required licences. It also creates a credibility gap for the industries concerned, whereby businesses new to China do not always know whether a firm is legitimate or not.” Consultants earn their fees by assisting clients with due diligence, as well as accounting, auditing and filing tax returns in China. They're also called on to guide foreign firms in local mergers and acquisitions.

Cut-throat competition among China's consultancy companies.

Lack of regulation in the sector is indirectly encouraging deceit, according to Devonshire Ellis. “There are plenty of wide boys here taking advantage of this scenario and giving poor service.” Deceit has been the common experience of investors in China when hiring a consultant. “China is a tough place to do business,” says Jim Jennings, whose firm Delta Electronics is a typical of the average client of consultancy firms in China. Delta, which assembles electronics and antennae equipment in southern China, didn't settle easily in China after opening its Shenzhen plant in 2000. “On top of competition getting increasingly fierce, investors are also hobbled by restrictions and legal gray areas.” A Guangzhou-based consultancy proved less than capable of keeping its promise to assist the company through this gray sea and negotiate contracts with suppliers. “Small and medium-sized enterprises in particular have a rotten time trying to establish credit records and reliability of local partner, and failure to obtain proper permissions and licenses means being shut down. Good guanxi (connections) helps when the going gets tough, but our experience is that consultants have no where near the knowledge or connections they intimate at the outset.”

There are many advantages to hiring a quality consultancy company, says Devonshire Ellis. Experience allows consultants to help their clients avoid the mistakes made earlier by other businesses. “A good consultant is aware of pitfalls and steers you away from them.” The biggest benefit a consultant can bring is time saved in registering and operating a business. “China is highly bureaucratic. A massive workforce is absorbed in the administrative system and whoever deals with it needs to understand it.” About 40 percent of Dezan Shira’s work is in handling the registration of foreign-invested companies, and another 40 percent of the firm’s earnings comes from tax planning, filings and audits. The balance of staff time is spent on handling mergers and acquisitions as well as due diligence. Consultants help save money as well as make it, explains Devonshire Ellis. Smart embedded profit repatriation techniques can save up to 13 percent of profits if tax planning is catered for correctly...” says Devonshire Ellis, whose firm retains around 1,500 clients in China, 40 percent of them North American and another 40 percent European.

A good quality consultant can make a difference between success and failure, suggests Jennings, but investors can also do much of the work alone. “Mediocre consultants make easy money off the ignorance of a client who, if they've done their homework and due diligence, should be able to look after most of the accounting, audits and tax returns in-house.” “A good consultant provides all of these and give you peace of mind in the knowledge that you are will continue to be looked after in China.”

A “huge gap” exists in the quality of consultancy services offered to China-bound investors, according to Devonshire Ellis. Chinese-owned business consultancies operate alongside internationally known firms, and there are also what Devonshire Ellis calls “hybrids” -- firms that claim to be one or the other when it suits them. “There are cheap one-man bands with limited resources claiming to be experts after two years in China, smaller firms and national firms. The one-man band has few overheads, but a firm with professional staff and national coverage with research capabilities that does a better job generates higher overheads.” Fees vary according to credibility. “A good test as to a firm’s credibility is to ask if they can bill in RMB. If they can, they at least have some sort of legal entity here. If not, the firm is not a China-registered entity and has no proper legal entity in China, which is risky for the client. There is a happy medium in fees, but cheap options equate to cheap service. You get what you pay for here.”

Foreign investors searching for a good consultancy company should consult widely, suggests Jim Jennings. “Spend the time before you invest with a consultant or agency. Better still, consult your common sense. See the office and feel entitled to get suspicious if the company doesn’t have its own website or email system. But be wary too of the consultant that claims great wisdom and insight. Many have dined out on the China factor. Many more have made a living out of explaining the mysterious ways of doing business in China. They tempt foreign investors with promises of connections to the highest powers and add to the illusions of a smoke-and-mirror China. China works in a different way from other countries but usual rules of business and economics still apply. Foreigners usually fail here for the same reasons they fail in Europe - lousy market research, loose management and wildly overenthusiastic projections as to return on investment.”

Investors can easily conduct a background check before engaging a consultant, suggests Dezan Shira's Devonshire Ellis. “You can tell from the quality of websites and so on. Another way is to run searches on the partners’ names - are they well known and high profile with China experience or not? That establishes whether there is real expertise behind the company rather than just a nice website facade. Experience is most important - that is what getting it right in China is all about.”