Thursday, February 26, 2009

Start-ups in China: Is the Government a Friend or a Foe?

Start-up ventures in industries heavily regulated by the Chinese government—the auto, financial and energy industries, for example—are risky, agreed four panelists at the Stanford Graduate School of Business 2009 Conference on Entrepreneurship.

Marguerite Gong Hancock, associate director of Stanford’s Program on Regions for Innovation and Entrepreneurship, moderated a panel on entrepreneurship in China. As the world’s most populated country, with a vast pool of labor and rising levels of education and disposal income, China is becoming a destination for outsourcing as well as entrepreneurial ventures. Gong, however, asked panelists about the challenges of dealing with the nation’s complex government regulations.

“Try to avoid them,” said David Chao, general partner at DCM, a venture capital firm that specializes in the Asia Pacific region. “Sectors and businesses where you have to interact a lot with the government are not the best ones for entrepreneurs.” Fledgling companies can get stuck in a quagmire of licensing requirements.

“If you can get those licenses, that’s great,” he said, “but for most startups and entrepreneurs, you’re best off avoiding those areas. You’re free to swim, and you don’t have to deal with all the fuss.” Chao cited one counter example, of a pharmaceutical outsourcing company that secured a $5 million grant from the Chinese government. Benefits of working with the Chinese government can include big tax breaks, better locations, and even three to five years of complete tax havens, Chao said.

“But on a net basis, if you’re going to go do something, do a business where you can avoid the government as much as possible. The government has ruined many startup companies for a variety of reasons.”

Kevin Fong, a managing director with GSR Ventures, takes a slightly different approach. “If you can avoid [the government], that’s great, but it’s really hard to avoid them,” he said. The government is particularly active in advertising, Internet and media, the semiconductor and clean tech industries, and in mobile networking. “They are really powerful and it’s hard to maneuver without cooperating with them,” he said.

Fong cited the example of the Chinese equivalent of YouTube, which ran into trouble recently when they posted content the government found offensive. The sites were shut down. “If you want to call that unpredictability, you can,” Fong said. “But I think that was predictable.” In China, the strategy of growing fast and dealing with obstacles as they come doesn’t work well, Fong said. The best things entrepreneurs new to the Chinese business landscape can do is learn how to navigate the system, keep in constant contact with government officials, know the regulations surrounding their industry, and be “on the ground” as much as possible, Fong said.

Dealing with the Chinese government can be especially problematic for business ventures managed by people unfamiliar with Chinese culture and customs. “We have Chinese and Caucasians on our team,” said Frank Wang, founder and vice president of engineering at Azalea Networks, Inc. “They all speak Chinese, but their perspective on life and work is very different…Western people don’t understand how the underbelly of business in China works. It can be lumpy and unpredictable… Sometimes government officials’ interests are not aligned with public interests. They may have personal wants and needs.”

Wang said that he has had both good and bad experiences dealing with the Chinese government. “If we deal with the government, we know things will be slow, but the benefit down the road could be huge,” he said. “The regulatory rules are quite unpredictable, but once you have the right relationship it can be a great advantage. Sometimes you have to do things that grease the wheels.”
Ketaki Gokhale
Stanford University
M.A. Journalism '09

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