China offers
profits and pitfalls

A Hawaii delegation learns
of possible perils in establishing
business ties in China

SHANGHAI » After a draining trip across the Pacific, members of a Hawaii trade mission were greeted here with what amounted to a bucket of ice-cold water in the face.

In a series of informational briefings, the mission's three dozen or so companies, most of which harbor China business hopes, were told what awaits them in this booming economy.

Massive copyright piracy. Unreliable legal systems and financial information. Partners that can turn on you, and an all-around lack of aloha in the business climate.

"It's a viciously competitive market. You have to be extra, extra careful about choosing who you do business with," Dean Ho, a Shanghai-based consultant to foreign businesses, told the Hawaii group.

The introductory briefings late last week were organized by the state Department of Business, Economic Development and Tourism and served as a wake-up call for the jet-lagged delegation, as well as for the state's hopes for local firms in China.

"I had no idea it was that tough here. It's really overwhelming," said George Hurd, who runs tropical fish and aquarium gear distributor Aloha Aquatics and is seeking a reliable Chinese tank supplier.

A mixed bag of about three dozen or so Hawaii companies are taking part in the trip, which also will take in Beijing, southern China and South Korea, and is being led by Gov. Linda Lingle.

Its welcome to this throbbing city of 18 million wasn't all doom and gloom.

U.S. government officials and private entrepreneurs said the business climate in China is improving. The American Chamber of Commerce of Shanghai said 75 percent of its membership is now profitable in China.

But the increasing buzz surrounding China masks longstanding pitfalls that can derail a business plan.

"There is a saying here among foreign businesses: The China market has vast long-term potential and always will," said Ira Kasoff, chief commercial officer with the U.S. consulate in Shanghai.

The key, participants were told, is finding the right Chinese business partner. Many of the Hawaii firms were to take part in meetings with potential partners arranged by DBEDT and Chinese commercial authorities.

"That's the most crucial issue. Most of the problems brought to us have to do with a partnership gone sour," Kasoff said.

If that happens, foreign companies are at the mercy of an unpredictable legal system in which application of laws can vary from day to day.

Business disputes are often decided in favor of the well-connected.

"China is transitioning to a system of rule of law, but for a very long time it was a system of rule of man," Kasoff said.

The malleable legal system serves to encourage fudging of corporate financial data, compounding the difficulty in assessing good partners.

"Whenever you are presented with a set of numbers, don't believe it," Ronald Chao, a corporate finance specialist with Deloitte, told the delegation.

"You have to look at it, look underneath it, look behind it, over it, under it and right through it," he said.

Care is required in any business venture, but the issue is magnified in China, said Dale Madden, president and chief executive officer of the Madden Corp., which owns Island Heritage and other Hawaiiana lines.

"It's critical," said Madden, who first moved production to Hong Kong in the 1980s, later shifting to southern China.

The company has grown into a $25 million-a-year concern, employing 175 people in Hawaii. Madden says that wouldn't have happened without the benefits of manufacturing in China, but stresses that the shift was gradual and careful.

"Too many people are just rushing in there without taking the time to understand the market and know who they're dealing with. I like to see the whites of their eyes," he said.

Not even the biggest companies are immune to the risks. General Motors is now suing a Chinese automaker for allegedly pirating an entire car, right down to the hubcaps, Kasoff said.

So for Hawaii companies, patience is a virtue, said Ho, son of late Hawaii financier and real estate developer Chinn Ho.

Despite all the interest in China now, he said it might actually be "too early" for Hawaii's typically small companies to benefit.

Chinese industry has been steadily slimming down from massive and inefficient state-owned giants in the direction of smaller private companies that might make better partners for Hawaii firms.

"The size and scale is coming down to Hawaii's level. But it's not quite there yet," he said.

China Business Dos and Don'ts State materials on the China trade mission include the following tips for Hawaii business people meeting prospective Chinese partners. » Negative replies are considered impolite. Instead of saying "no," answer "maybe," "I'll think about it," or "We'll see." » If the subject of Taiwan comes up, never refer to it as the "Republic of China" or "Nationalist China." » Unless you're a communist, never refer to someone as "comrade." » The Chinese will decline a gift three times before finally accepting. You will have to continue to insist. » Do not wrap gifts in yellow paper with black writing. These colors are for gifts offered to the dead. » Empirical evidence and objective facts are accepted only if they jibe with the Communist Party line. » Do not put your hands in your mouth. It is considered vulgar. » Avoid unusual facial expressions. Source: State of Hawaii

Gov meets with
mayor of Shanghai

SHANGHAI » Gov. Linda Lingle called on powerful Shanghai Mayor Han Zheng yesterday in a meeting during which they commiserated over the societal impact of high real estate prices.

The half-hour meeting was the first of several scheduled between Lingle and top Chinese leaders during the governor's eight-day swing through China on a trade mission.

No official business was discussed during the courtesy call, but state officials hope the governor's visit will help lure more Chinese tourists to Hawaii and boost the profile of Hawaii companies seeking business opportunities here.

Speaking through interpreters, Lingle told Han she hopes for direct air links between Shanghai and Honolulu someday to increase Chinese visitor arrivals.

Alluding to Shanghai's enormous population density -- it has about 18 million people -- Han quipped: "I'd be happy to send some of my people to Hawaii."

They also discussed the challenge of high property prices. Shanghai has experienced a property boom that roughly mirrors Hawaii's, with prices growing around 60 percent over the past two years.

The 51-year-old Han is considered an up-and-coming Chinese leader. The mayorship of Shanghai -- China's industrial and financial hub -- is a traditional launching pad for national leadership and its past mayors include former President Jiang Zemin.

The trade mission departs today for Beijing.