In this episode of China paradigm, Matthieu David interviews Stephan Grand, Founder & CEO at S.J Grand financial and tax advisory (sjgrand.cn) since 2002. From Taipei, where he is opening a new office, our guest tells us how he started his business in a very regulated industry and what can be done to help clients to manage their accounting. Thanks to Stephan Grand you will discover what are the common mistakes when it comes to accounting in China and what can be learned from the history of S.J Grand.
China paradigm is a podcast is sponsored by daxue consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.
Matthieu David: Hello everyone. Today we’re coming Stephan Grand from the company S.J. Grand you are the founder and still CEO of the company. You have started the company in 2002 if I recall on the internet and you’re a company currently has 4 offices in greater China one in Hong Kong, 3 in China. You are running an Accounting firm, think a bit more in accounting and having to go through that together you are also doing M and A, you have launched a software to help your clients manage accounting. And I’m especially interested to know how you started because it seems to be a very regulated industry to do accounting in China and how difficult it is to start in a regulated industry.
I’d be very interested to know more about what you’ve seen in China, what you have seen among people who came to you. What you have seen about the mistakes to do. What to do and what not to do. Stephan, thanks for being here and welcome to the show.
Stephane Grand: Well, thank you very much for inviting me and I am delighted that you would be interested in hearing about accountancy actually it’s probably the most boring thing on earth. Accountants have this really bad reputation, but it is a very very interesting thing to do in China.
Matthieu: For the audience, it could be very interesting to understand, how to organize their accounting before they do some mistakes? Because it is going to impact their valuation. But I’ll let you continue on what you are saying.
Stephane: So today is also a very interesting day because we are talking, I am currently in Taipei, I am opening our 5th office.
Matthieu: Well in Taipei.
Stephane: In Taipei exactly. And so the next one should be in Singapore which I am hoping to open the end of next month. I actually started this business, it was a one-man show for the 1st year over 15 years ago now and I had no intention of focusing that much on accounting, rather, I wanted to do M and A, used to be a Lawyer and that was more interested in the transactions side of things and I chose accounting which I believed had little value added and in fact I was wrong. Accounting has tremendous value-added and just as you said earlier too, it seems that you’ve done your research. Foreign companies that operate in China all come against the same Snags and very often bad accounting that are bad transparency are causing some major issues into these company.
So yeah again it is useful.
Matthieu: it’s useful for the exits as well. You talked about M and A. So let’s begin with some numbers can you give us some ideas about where you stand in terms of team revenues, a location, we already talked about it for the final today 6 in the coming month could you give us a sense of where you stand.
Stephane: we have about 40 people and somewhere between 2/300 open active customers. We have been getting quite stable around this number over the last 2/3 years which is interesting in a certain way because the growth in number of customers is very linked to the growth in number of new arrivals on the market in China and there have not been as many new arrivals as what we were used to in the 90s or in the early 2000s.
Matthieu: So talking about accounting right, the accounting part you not including the M and having 200/300 clients, ok.
Stephane: I would love to have 200/300 clients in M and A.
Matthieu: That would be a lot.
Stephane: That would be a lot. Purely accounting, we have about 2/300 more at the moment closer to 300 actually and a much is have been improving over the last few years because our customers are buying higher value-added services from us. Less purely accounting more transformation work, more….. I hate to use the word but say you know fraud investigations, forensic accounting like this, so it’s really the technical level of our services, the services we sell our customers has gone up a bit.
Matthieu: Okay. I am writing down a couple of things you just said because I want to go back on it in a little while. So you were saying you are suffering higher value-added fund stagnation. What is the list of services you’re providing?
Stephane: Technically, I would give you the 15 seconds, on the pitch of the firm. We have 3 layers and another silo, so for the 3 layers basically, we do everything around the set up apart from creating companies in certain particular areas in which we use our trusted partners but for very simple work we do create the companies ourselves, in Hong Kong, for example, a lot of our business is creating and operating companies that creating companies and doing monthly accounting and tax work for our customers. And so we do this work, we do a limited review, Tax declarations, payroll everything that a normal an accounting firm will do in the west and we do some audit preparation work.
The 2nd layer is more invasive, a consulting services for example, as we were saying earlier fraud the investigations, Value added due diligence work, a commercial due diligence and working capital optimization. Working capital optimization, for example, is the art of funding money inside of companies. A lot of foreign companies have financing issues and lots of those financing issues come from the poor management of working capital. The thing is that for a lot of foreign managers coming into China, they have to interface with the Chinese market through Chinese staff and the Chinese staff very often try to keep things done as they’ve always been done, that is very much when it comes to managing the suppliers, they will pay them immediately and management of the clients they will give them very good payment terms and so on and so forth. So helping companies manage this goes beyond just taking care of the suppliers and the customers, you have a lot of cycles to put in place, a lot of procedures and protocols to in place inside of companies to train the people, to check that things are done properly and so on and so forth. But myself have some actually amazing results because companies have money in them and we just help them free this money.
Stephane: And it’s a country I’m in, correct me if I’m wrong but where banks on the financing SME, so where managing the working capital is key.
Matthieu: Absolutely. In spite of what you would hear when you talk to bankers, the bankers actually do not extend credit to SME’s very often or when they do extend credit, they would just as the case at the moment so for some customers of ours that would extend working capital loans that have to be read it in full before they’re extended again. For instance I work in capital loan of say two million Dollars $2,000,000.00, the equivalent of their offered is around $12/$13,000.000.00 RMB. And you have to repay it completely before it is extended again. You will have trouble at that point At that point we actually do. We do lend money to our customers. Because we know them well. We know where they live and we help them bridge this but in most cases they could completely avoid all these problems by having sensible management of working capital.
Matthieu: The least you mention advising on, I think, working Capital, forensic investigation, is it a product to conserve? Is it something you do agree too, the checks and so on or is it really tailor-made for every client?
Stephane: It is tailor-made for every client except to say in terms of working capital optimization, for example, you have some parts that are you know ready to work, the basic training explaining people want to do this is very straightforward. Giving the training to the companies, to the staff of the companies is very straightforward, it’s very easy, we have everything in place. Now implementing it is more complicated but working capital optimization would be to start with a training, we give teams of our Customers, explain to them what this is all about and how they actually can work altogether. Make all the cycles work in the same direction. Very often in the company you know for example salespeople will do anything to get their commissions, therefore they will push to sell through as quickly as possible, manufacturing will have a different approach. People in charge of acquiring the supplies will have a different approach again. So this way you push people to do all the work in the same direction. And together with the top management and this is actually extremely helpful; It goes beyond this, in the sense that it will also help customers get out of organizational pickles, in the case where say that is a…. What I called the done on a situation where you are having a major issue with your Chinese partner or with some of your Chinese partner or with some of your Chinese staff, you can regain control and by making people working together, it’s actually a side effect it’s very very positive thing. But this … after the training and the coaching and the follow-up, this is really very very tailored.
Matthieu: What difference do you see in working capital in China and the west? Do you see some specific differences, because I feel that workshop you’re talking about could actually be useful for companies to the world, is there a specific aspect for China? I know the faculty system has been sometimes it mixing what is selling and revenue with the rate of income, other specificities.
Stephane: It is hard to even get started on this because on paper there shouldn’t be any specificities maybe you know some legal differences here and some regulatory differences. The reality of things is that people think very differently in China. They think very differently in the sense that, for example, the relationships are more important than contracts and this has a direct impact on the way business is managed. as we were saying earlier you know for example managing a customer or managing a supplier with whom you have existing relationships or with whom you build a relationship, might cause a……. what we foreigners, we westerners would consider being undue softness. So this is this could cause a lot of issues In terms of for reporting proper………. There are some impacts of 2 things I think, 2 importance of social dimensions, the 1st one is that; there is no very clear truth in China and therefore 2 different ways of looking at things will be just as true as one as the other. And the other thing is that and I’m talking here for example for your accountants mixing up cash and the cruel. Or not an ending really what’s a cruel means and this is a terrible thing I’m actually seeing it, I hate to say that but not just with the local accountants that I’ve been trained locally but also sometimes Chinese accountants who at their accounting diploma from a European or Australian university. I’m saying European Australian because as I saw the cases in both of these cases. And another thing obviously is that because of the hierarchical structure or the very strongly hierarchical structure of Chinese society. The accountants will basically say what the Accountants believes that the boss wants to hear. and therefore a new truth will be created and this is this is very dangerous. This is causing a lot of trouble, it works perfectly well in Chinese society and it’s not a problem at all it’s just a problem where when you have you know the clash between the Western need for reporting saying and the Chinese society.
Matthieu: So, the first line of service accounting single line is specific, so this is the chance of working capital optimization, funding instigation. You talked about the 3rd, did I miss it or have you mentioned it?
Stephane: One would be called good finance, it’s been very straightforward, it’s mergers and acquisitions, capital raises and capital restructuring. The parallel silo is software. A few year’s back, When trying to, I realized when I was trying to open an office in Southern China that we would have trouble finding somebody who would be sufficiently independent to run the office there and one of my associates said,” I guess it’s not a problem we’re just going to recruit and an assistant will do get the information, the vouchers or the fapiao from the customers you will drop them and fax them to us”. So we’re still talking about faxing and so it’s read 10 years ago. And the 1st thing that came to my mind is that what a waste of time. Why don’t we just create a new interface that’s allows the clients to input their figures within the process of production in their company that is basically an interface that allows them to enter the vouchers instead of doing it on Excel, instead of creating an Excel spreadsheets that they send by e-mail which was the case at the time which is still the case today actually and causes a lot of different problems. One problem is the quality of the data because when you fill an Excel spreadsheet, your hand is not so that sufficiently tight you might actually format the data in ways sometimes people instead of saying you know 30,000 we’ll write some month with the Chinese character. If you don’t have 30,000 written in the spreadsheet where you have some months at some point and then say 2,500 you know that the cell, the data is not clean enough to actually use automatically. And the other thing that you sending emails, you sending new versions of the documents, the names are not necessarily updated, if they’re updated great, the document goes all over the place. So we created this interface that would feed a database and centralize the approval systems, they saved the salespersons and Xi’an will fill his vouchers that get verified by somebody in Chinese or by somebody in Shenzhen and then gets send to the management that will open them in French, English, Italian, German and or Spanish anywhere in the world, with the internet as long as they’re using this interface. So this is what we created and from this, we added a level of reporting of detection of out layers and I’m adding a level of mesh and learning now on top of this.
Matthieu: The name is O.B.K. right?
Stephane: The name exactly. I’m happy that this is becoming a very famous solution. The name is indeed O.B.K. because it started actually as online bookkeeping before it started growing out of its league, 10 years ago it was an online bookkeeping system.
Matthieu: Based on what you said that, it’s very difficult to change the practices of people, who are used to work in some specific way. Have you and your clients and people, maybe it’s beyond your clients, used the software or they’re still reluctant to use it? How implemented is it?
Stephane: It is quite well implemented. It and the clients usually love it. When I’m saying the clients, I mean the management because the management gets to level of transparency they cannot get without it and they get to a level of control that they cannot get without it either. Another thing is the payroll is also managed by O.B.K. and the new generation of O.B.K. that will be completely web-based, due to the improvement of technology and more security now that you can obtain directly through the process. The new version will also help, bringing extra layers of visualization of all manners of tools of control for the bosses.
There are 2 ways very much to make people use it and in the old times if I may say, the last few years we’ve been using mainly one which is coercion and I hate to say that but the bosses love it, so you just have to put in their hands something they love and they will force their people to use O.B.K. The new generation of O.B. K. will be gamified. That is taking advantage of the natural desire for a good game so the users will earn points. Badges will be on the leaderboard, will compete against one another for their speed and the quality and the accuracy of the data they put in O.B.K.
Matthieu: Okay, I try to visualize how O.B.K. is working. Is it an app people use on the phone and then take pictures, invoicing and so on and then it’s putting things online? Is it on the desktop? Can you tell us more about how you interact with the software?
Stephane: It is both. That is, for example, you need to have a desktop that you have access to, full-size visualizations, you have to have access to full-size reporting? It’s much, it’s much easier, much clearer on a desktop. However, for daily use using your cell phone app, that allows you to shoot a picture of a fapiao, of a tax receipt, upload this into the cloud and recognize the sums on it, it’s the way most people actually interface with the machine itself, through their cell phones.
Matthieu: I see it’s recognizing even the number you don’t have to put a number, it’s recognizing by itself numbers but you may have to allocate in which category you put the numbers.
Stephane: Categories and obviously there may be some you know, you have to also check but yeah, the O.C.R. technology is working very well. We are we did not invent it although I would love to say so we are licensing the technology for this.
Matthieu: Yeah, sure, sure, understand. Okay, got it, so you have this infrastructure software infrastructure which is mainly inviting your accounting services right? Because it is mainly for accounting services.
Stephane: This is for the accounting services. The thing is, for us with this, we are providing better quality services. We’re really taking out a layer. We’re taking out the middleman here, you know typically the accountant that will receive a shoebox filled with vouchers and I’m actually not joking. This is a very, very common thing, so we’re just taking that out. The accountant, Thomas Jake Grand that is a user of O.B.K. is virtually sitting in your office with you and you can share many dates with him through the desktop interface, as if the person was actually sitting in the office with you, through a chat system.
Matthieu: I see. I’m thinking about it. It’s also a way for you actually to get close to a client and get better attention right? Because using a software makes them very dependent on you.
Stephane: It goes beyond this. The problem that most firms are seeing today is client acquisition. Client acquisition is actually extremely expensive. And you know if you’re, if you’re an accounting firm and you’re trying to sell accounting services to a company, you need to find them at the exact moment when their accountant has died, has said that she was pregnant, or has just been caught stealing or resigned.
Matthieu: You’ve got these cases?
Stephane: We’ve had all of them. Especially the caught stealing and the getting pregnant. If you catch the 3 days before, they will have forgotten when the switching event happens. If you catch them 3 days later, they will already have found another accountant. So for us having O.B.K. allows us to contact companies and propose to them something that is actually a lot better than what they have and does not need them to change their accountant. And we already
Matthieu: I see.
Stephane: And then, we can actually change the, replace the accountant when the time comes, or replace the Chinese firm we’ve been using, which is also something we’ve done a lot, is replacing Chinese firms or very cheap foreign firms. Very often foreign companies, foreign business people, might actually very often entrepreneurs because they’re the ones they are the most likely to want to take risks, will save on accounting because you know accounting doesn’t make money. You think that there are, you know, there are many ways to do accounting and basically you’re taking a substandard accountant but he has those good relations with the tax authorities, so you’re very happy with them and alright fine, he doesn’t speak much English or French or whatever but it doesn’t matter because you’re, some Chinese person from your office will manage that person. Well this is a recipe for disaster and basically, you have no idea of what’s going on inside of your firm, you have no idea of your actual financials. You’re permanently driving an aircraft in the fog without having instruments on, without having instruments and this is really a problem that most foreign companies are seeing today is that they’re too reliant on people who don’t have a very clear idea of what to expect from them. A lot of Chinese accountants are basically, I am going to say that, as politically correct a fashion as possible, but let’s say there are conduits to carry out discussions with the tax authorities.
Matthieu: I feel that a lot of companies, people, local companies, people working there, have been able to interact with the intention of companies, not because of their core skills but because they were able to speak English. And actually to me to accounting, I mean a skilled interest in this and this field. I want to go back to the beginning, beginning of S.J. Grand. What brought you to the start of S.J Grand and how did you start? As I mentioned in the introduction, with my feeling, when someone is telling me I’m going to start an accounting firm and thinking immediately, wow, it should be a lot of paperwork, should be, it’s very regulated. How did you start, how did you start and how did you make it happen?
Stephane: So I had run an accounting firm before. I had run actually a large network in China for a couple of years and it wasn’t a 1st for me. I used to work in law firms, I was a management consultant before, and I did not have a very high opinion of accountants in terms of the value they were adding to companies. When I started running that accounting firm, I realized that there was actually a lot more value delivered, not just because of the advisory work, also because you need accounting. Accounting is not a matter of you know, of having it a lot, It’s a matter of life or death for companies. So after the experience with the other accounting firm which I decided to leave and start my own outfit, I started by what I could do and for once I actually got immediately the licenses and it was tax advice. Something I could do myself. I would say I was a tax lawyer before I had created the fairly large tax practice for my old firm and I decided to start doing this, basically, tax advisory for companies and we had some really very, very nice clients at the time. It took a very long time to get started and the thing is that I got started in the last days of 2002, after a clash with my old company leaving them and slamming the door pretty hard. Since it was a large firm, obviously you know, entrepreneurs, especially in France and in the French world, entrepreneurs are not considered to be heroes. They’re more people who cannot succeed in large firms. When I, when I left this firm and decided against being in touch with any of my former clients, that was not you know, I didn’t start it with an existing business. The only thing I had was an existing name because people already knew me. I had been a lawyer, I had been operating in China since ’91, so I saw you know, my name was amongst those of the valuable tax advisors.
Matthieu: Which city was it?
Stephane: That was in Beijing. I was in Beijing for a very long time because some 25 years ago, this is the place where you had to be. There was some business in Shanghai of course but all the decisions were made in Beijing, or the headquarters were made in Beijing because you had to go and talk. If you’re running a company that you had to go and talk to, say you’re running a pharmaceutical company, you would need to have your C.E.O. or your legal rep, go and talk to the people of the Minister of Health all the time.
Matthieu: Was it before 2001 more centralized, or it was because of the Chinese culture?
Stephane: It’s because of Chinese culture. I hate to say that but I have not seen a tremendous change in China since the WTO. We were announced a tremendous change and I remember seeing these hundreds of people from the Trade Department in the State or the European Union equivalents, coming and living in Beijing for 2, 3 years from negotiations with everybody about everything and the thing is that in the end, I have not seen much of an actual change.
Matthieu: So you said you arrived in China 25 years ago right? Which year was it?
Stephane: ’91. I was actually.
Stephane: Finishing law school, yes and I had a part-time job selling medical equipment. And my employer sent me to China for 6 weeks and here I am, 2018, still there.
Matthieu: ‘91 is when a lot of companies left, both companies left China 2 years before right, so you when China when the most international companies, so you were in China when international
companies were beginning to come back right, to China.
Stephane: They were beginning to come back. France had some issues at the time too because there was a political issue with selling military equipment to a, I don’t know how to say it without causing trouble but let’s say the French companies were blacklisted for a while, which was very difficult but those were very, very interesting years, in particular because there were a lot of infrastructure contracts being signed and those were the heydays of the B.O.T. of Build Operate Transfer Systems and working in a very politically connected law firm, we had all the big clients and we were drafting a lot, a lot, a lot, of very complex contracts for our plants, water plants, power transmission systems, etc. And that was, it was a very, very interesting time.
Matthieu: Yeah, you were used to it all I guess, during the time, the industries of China and the change of China, the opening of China, yeah, they were very, very exciting times.
Stephane: Did my fair share of the time spent in 2nd tier cities, in the winters of Heilongjiang and the summers of the Southern Provinces. I’ve seen a lot of it. I’ve seen a lot of it.
Matthieu: So you begin the firm because from your past experience, you saw that there was a lot more value in accounting or what you thought and you had this experience in China, within another firm to do accounting?
Stephane: Absolutely had experience in a consulting firm and I acquired all the licenses needed to operate you know, bookkeeping, a tax advisory training activity, as the activity won’t allow, we just kept on acquiring because.
Matthieu: Okay, I see. How long did it take?
Stephane: Well it depends on the moment you’re asking for that. It depends on the needs of the country, of the political situation, all of that. I would say in general to obtain a license, if you have, if you fill in the requirements,
it will take 3 to 6 months if you’re lucky.
Stephane: About as much time as it takes to bring the investor in the business.
Matthieu: When you get the licenses, I mean what do you need to do to show that you are able to do tax advisory and to do accounting? Do you have to pass some tests, do you have to show that you are able to do it? How does it, how do you get them?
Stephane: You do not have to do this. Actually, I am not licensed to do things, My firm is licensed to provide those services. You have to prove that you have the requisite number of people with a diploma necessary.
Matthieu: Okay, I see, I see.
Stephane: So you guys have to have the diploma and you have to have enough of them. And then you have to fill out a metric ton of forms, take them to the relevant administrations that will give you approvals, that you have to take to other administrations and so on.
Matthieu: Okay, okay, I see. You expanded then from Beijing to Shanghai and now you have 5 offices. Could you tell us more about how you expanded your business, difficulties, or how easy it is, or how difficult it can be because people may not realize that China is that big, it’s a Continent and that you may have to yeah, you may have to open in different locations. And also because business is different in different locations can you tell us more about it?
Stephane: Absolutely. The thing is that it is very difficult to serve. Adequately, markets that are 2, 3 hours flights from your, from your base for accounting in particular. If you could when it comes to saying, restructuring services or consulting, you do not need to have an office where things are happening. You need to send people but if you have services you’re selling over the course of several years in a very recurring basis, you need to have an office that, it is as you said you know, China is a very large country, it’s just something that’s best not, that is not recognized easily because you’re thinking that you can actually take a bus between Beijing and Shanghai. Yes, you can take a bus to Beijing and Shanghai. It’s just going to take you a day, so it’s not feasible to operate businesses, recurring businesses remotely.
At the 2nd location, Beijing was where I was, so this is where the business started and again as I was saying earlier you know, the business started at the same time as the SARS Crisis and the SARS Crisis basically kills the economic activity very much in the city, for a long time. For maybe 8, 9 months, you couldn’t get a meeting. You were not invited to meetings, people were afraid of even letting you into buildings.
Matthieu: When was it again?
Stephane: That was in 2003.
Matthieu: 2003? Just when you started?
Stephane: Just when I started. I was very, very lucky. I started right at the time when the Good Lord decided to test whether I was tough enough and well obviously I was but it was extremely hard for, I think carried through 2004 so 2003, 2004 were very, very difficult years. It was very hard to even have a meeting. I remember having a meeting, having a series of meetings with the C.F.O. of Lafarge at the time and he couldn’t get me into the building, so we found a building that was not as well defended and that had a Starbucks, Starbucks cafe there, so we would go there and have our meetings at the Starbucks.
Matthieu: For the opening, do you think it was an important day for you to get this meeting, with very high-level people, when all the firms may not be able to send competitors?
Stephane: I wish it was the case because I really stayed when all the other expats were gone but that was the thing. All the other expats were gone. There was nobody to meet with. People were all on a business trip and they were on these very lengthy business trips outside of China. And indeed it was a very, very hard time. We had a lot of trouble finding the 1st clients but I had already invested in offices, already had stuff and they kept on pushing but it was a very good test of willpower.
Matthieu: Yeah, some people forget but I’m asking you these questions about competition and how it could actually ease your ability to catch opportunities. Because we forget that the prime minister of France, Raphahat, was the only prime minister to come to China and that’s why he began to have a question with China and even if he doesn’t speak any word of Chinese and he doesn’t know much about China at the beginning, so you that’s how important it is.
I’d like to, we still have 5 minutes. I’d like to have your insights on the most common questions, you have to answer to people who start a business in China. The most common questions that your clients have been asking you when they enter China for the 1st time and that is the 3 most frequent questions.
Stephane: This is a very tough question to answer because actually a lot of people come and do business into China thinking 2 different things and thinking them at the same time. One is that China is chaos. China is you know, 1920’s Africa and therefore you can do basically all you want in China. And at the same time, they think that they can solve every problem the same way they do in the West. That is you know by common sense and using a lawyer. Well, this causes a lot of, a lot of problems for foreign companies. First of all, China is not as chaotic as it looks. It’s actually a very organized country. The way the Chinese people think, being different, the organization, the way of organizing things is also different and therefore for a lot of foreign companies, it is, it is a bit complicated for them to organize things and I would say that this causes say after that coming to China, two main questions.
The first one is how much money do I have to invest in my logistics capital? And the second one is, how do I get money out of the country? And this is, this is typical. Two questions, how do I get, how much do I have to invest and how do I get money out of the country, so the problem with figuring out how much investment you should be putting into your company in China, is that most foreign companies think in very Western terms. They think that there is not enough investment it would be easy to turn to a bank. For that to take a few days to wire money into their accounts in China, and it is not true in either of the cases. The first thing is that you will not be able to get financing from a bank. Some companies are able to, but in most cases, they’re not able to, especially as SMEs. You will not be able to. And even if you met and being able to, the healthy way to think about it is to not expect the money to be readily available. Bring as much money as you’re gonna need, based on your business plan, your revised business plan because if it’s your 1st business in China take your business plan, push the income 6 months in the future and double the expenses and then. then you have your real business plan. This is how it’s going to work.
Matthieu: You postpone the first volume for 6 months because it’s going to be slower to start, I see.
Stephane: And the expenses are going to be higher than you think.
Stephane: There are a lot of people think that you know, they will look at the levels of salaries in China, say 3 or 4 years back and say oh well it’s much less than in France, you know France or Belgium or the United States have social security systems and this and that and we probably won’t have all that in China. Well first thing yes, you will have them. Second thing, you know the old, the old saying, “if you pay peanuts you get monkeys”, so if you want to have good people, you’re going to need to pay them and so when we’re talking about management, if you want to have good people, you are going to need to pay them the same thing as you would pay them in New York, not New York State, Downtown Manhattan. This is, this is way more expensive than what most people realize.
Also, the real estate, for example, has started catching up with the West in places like Shanghai for example and the real estate is actually extremely expensive. Running an office in Shanghai is a very, very expensive game. You want to have people who work well, who have some sort of exposure to Western Cultures, who speak well foreign languages, will be very expensive people that you would put in a very expensive office. So all these, everything is becoming really expensive. This, this has a ripple effect. It’s not just you know, your office in Shanghai and your people there. It’s also that the salaries have been rising all over the country and therefore everything is becoming more expensive and the money people are making, it gets invested in real estate and therefore everything, everything really becomes more expensive in China. And the reason why the cells don’t come as fast, it’s usually doubled. The first one is that people still make, foreign investors still make the mistake they’ve always made, which is you know, if every Chinese person buys one of my products, I will be selling 1.5 billion products. Well you have a lot of competition out there and not everybody is interested in your products and also China is a really big country. You have to take the products and services to the people for you to have a chance to compete. So things are really not as easy as they seem to be seen from abroad.
Another thing is that we foreigners, we Westerners, have a tendency to think that the Chinese are just poor Westerners. First thing, smell the coffee.. They’re not poor anymore. The second thing they’re not Westerners either and they will not become Westerners because they have more disposable income, so it’s difficult. It’s a way for foreign companies to actually look at the Chinese markets in a very realistic and reasonable way.
Matthieu: I see, so a lack of understanding
Stephane: A lack of understanding. Another thing is that we see China through a very small keyhole, and most companies which you’re talking to if they’ve done their homework, they will ask which district of Shanghai? Most companies you’re talking to, if they have done their homework, will ask you in which district of Shanghai they have to establish their business and the thing is that, are you going to sell your products and services in Shanghai? Is this, do you think it’s the right place to have a factory producing tires? It’s difficult. People, people will for foreign matters, have this very small keyhole through which they see China. They see it that’s Shanghai, and China is not China and a lot of the Chinese money is actually not in 1 or 2 cities. It’s not only on the other coast. You have to go where your customers are, you have to go where your suppliers are, you have to think of all these things. It is, it is a very important thing to have a look at the logistics of your business, from whom you’re buying your supplies and to whom you’re selling your products. And obviously, in some cases, it will be Shanghai for example, for establishing a law firm or service firm. It is a very good place because you have a lot of universities that will provide you with your, with your staff and a lot of your clients will be around so it might, at times, make a lot of sense.
Matthieu: I see. We’re coming to the end of the interview. Thank you very much, Stephane. How did you like it?
Stephane: I loved it. It was a pleasure talking to you Matthieu, thank you very much. It was very interesting actually, to do this you know, a walk down memory lane.
Matthieu: Yeah we always realize looking back that we did much more than what we actually think. Thanks, Stephane again.
Stephane: Thank you. A real pleasure talking to you.