Best Practices for Tech Companies When Dealing With China

Recently I sat in a presentation with some executives who were sharing best practices for tech companies when dealing with China and the world generally. These were companies that had great success at home and abroad but not surprisingly found China a more difficult market to tackle. Here are some of their tips, along with my gloss from a legal perspective.

Stay Home As Long As You Can

The first best practice for tech companies when dealing with China and considering going international is to stay home as long as you can. Prove your product in your home market and then acquire customers from the safety of your home country. This is especially true when dealing with China for a variety of reasons (see here and here). The great firewall is nearly impenetrable, but your success at acquiring Chinese users hinges on the type of technology and the type of industry you are in.

Many companies, including technology companies, are enamored with doing business internationally. This is especially true in my home state of Utah, but it has been true of the U.S. for many decades. The allure of many developing nations surrounds often lax regulations and cheap labor. These often contain the promise of rising middle classes that are hungry for goods and services with western quality standards.

Difficult Market but Attractive

China formerly fit all these categories, but the government continues to tighten regulations on foreign-owned enterprises. The labor market is increasingly less attractive than lower cost alternative countries with more favorable regulatory environments and a better than zero tolerance covid policy.

China still has an extremely large middle class, comprising approximately 707 million people, which is more than half its population. It is almost double the EU population and double the current U.S. population. That makes it extremely attractive to tech companies looking to do business in or with China. Technology lends itself to international expansion much faster than traditional products and services. In my experience, technology companies are often willing to ignore best practices when dealing with China and other international markets due to their fail fast, fail cheap mentality. This is not necessarily a bad way to expand, but the legal strategy is rarely part of the early discussions.

Go Where You Have Common Languages or Culture

The second best practice for tech companies when dealing with China and other international markets: use your strengths, especially when it comes to common languages or culture. U.S. tech companies with a majority of English speakers will probably go to Canada, the U.K., Australia, New Zealand, the E.U., Singapore, Malaysia, anglophone Africa, and the Middle East. Those with a strong Spanish culture will probably look to Spain and LatAm. Tech companies with a strong French culture will probably go to Quebec, France, and francophone Africa. Companies with a strong Chinese-derived culture will probably look to Hong Kong, Taiwan, or the Mainland.

And any of these companies may look to their diaspora affinity groups in their home country as a springboard to that international market. This strategy has been mentioned by more than one expert guest in our Global Law and Business Podcast. Having a common language means fewer ambiguities in your contractual relationships, and that can significantly streamline your legal operations.

Build Your Product For the Global Marketplace First

Third, some companies looking to do business globally will still want to build their product simply and quickly to fit their home market – again the fail fast, fail cheap method. These tech executives sharing their best practices suggested building your product for the global marketplace first and then fitting it to each market. With China that will probably mean significant technical revisions, so most tech companies will want to think about the China market early. Not building your product for one customer experience or customer base will require a greater, deeper cultural understanding, which leads to the next best practice.

 Making Your First Hire in a New International Market

We have written a slew of blog articles on China employment contracts and scenarios. Hiring in an international market is never simple or easy, even in the U.S.’s relatively business-friendly environment. These tech executives suggested hiring product people first and usually hiring them from your in-country competitor. Your product people will help with the product’s UI/UX localization. They will know what your competitor is doing. You should always be aware of the trade secrets laws and employment contract obligations that the potential employee is potentially affected by.

If your product is already ready, then you probably want to go ahead and hire your in-country marketing personnel. This may look like an employment agreement scenario, but often it is first some type of independent contractor scenario. From an employment law perspective, you are generally safest with hiring a sole proprietor who has her or his own business entity. But from a business success standpoint, you may want to hire from your competitor.

India Permutations

Even though China and India share some similarities in terms of population, tech workers, and tech consumers, India is not China. The tech executives suggested that in India you will need to hire a strong, seasoned local leader rather than move an executive from your home market. Otherwise, you will probably find it difficult to build a fully functional team, and Indians want to feel like they are 100% part of the team. Also keep in mind that Indian employees have to give their employer three months’ notice before they leave, which gives the employer a long time to renegotiate employment terms with a promising employee.

China Will Still Be Tough

One of the tech companies spent ten years trying to succeed in China before eventually succumbing to market forces and government regulation. And they also got burned by trying to take on Chinese JV partners and ending up with the partners undercutting their other international business. I attribute this directly to the tech company’s misunderstanding of their Chinese partners’ motivation to adhere to the rule or enforcement of law.

Chinese consumers like fully-enclosed tech platforms, and the government does not like foreign-owned tech platforms, especially not fully-enclosed foreign-owned tech platforms. Data privacy is on the rise in China, and its taxation on digital services and general uneven taxation will both pose problems for foreign tech companies.

These best practices for tech companies when dealing with China and the international business marketplace are not exhaustive, but they came from two seasoned tech executives in companies that are steeped in international business.

What have you learned?