Friday, February 03, 2006

We have been talking in the past few podcasts about doing a China acquisition & alliance deal - what we call A&A. I have used a number of analogies - from boat captains to dating relationships - to describe the process and outcomes of China A&A. Today, I would like to add another analogy: gardening.

Imagine putting a seed in the ground and never watering it, weeding it, fertilizing it or making sure it got plenty of sunshine. What do you think would happen? Well, to be honest, I am not really sure because I possess not an OUNCE of a green thumb, so I wouldn’t know. But from what I have seen on TV and read about in books, if you treated a seed with such a cavalier attitude, the chances are it would not do very well. It would die before ever sprouting.

Unfortunately, partnership deals in China are often treated with the same distain. Planting a seed is like a foreign company making the first visit to a potential China partner. It is often exciting and it seems a good start. But then, to extend the analogy, instead of providing what the seed needs to grow, foreign firms will instead send it notes of encouragement, photos of what other successful plants look like when coming to maturity, a legal agreement that states - in no uncertain terms - just how much they are willing to reimburse the plant for the fruit it is sure to grow.

In today’s podcast, I will address the first area of cultivation: due diligence. In our market strategy consulting practice, we talk about doing the 6 D’s in China: “due diligence, due diligence, due diligence.” In the West, we think of “due diligence” primarily in the financial and legal sense: checking out a company to make sure that their financial books are in order and that they have not committed (or are not in the process of committing) an egregious legal infraction. In China, these two things certainly need to be done, and there are very competent legal and financial professionals there to assist you. But just doing this type of due diligence is not enough. In fact, it can often mask deep-seated problems and make you feel OK when, in reality, you should be very nervous.


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