A recent trip through Zhejiang Province reinforced for me the observation that the more things change in China the more they stay the same. I was accompanying a group of clients to open discussions with a couple of Chinese companies on the possibility of the Western company acquiring one or the other. The first target was really out in the middle of nowhere: it’s first factory was in a town that had only a few hundred thousand inhabitants. That’s very small by Chinese standards. The owners of the operation were affable and capable young men who were clearly interested in a cooperation of one sort or another with the Westerners, specifically – they said openly – for technology and management processes.

I had explained to the Westerners before the meeting that most Chinese companies keep two sets of accounting records: one for themselves, and one for the local tax authorities. The first company, though, surprised me in two ways: they were honest about their duplicity, and explained in detail where numbers in the books were just for government consumption; and they had only one set of books – the ones they offered to the tax authorities. All other numbers the Chinese partners kept in their heads and freely related to the Western businessmen. However, when the Western managers asked questions about revenues and profits and depreciation and the like, the foreign executives found themselves quickly frustrated with the lack of clear answers.

A far more mature acquisition target we visited nearer Ningbo wasn’t too much different. Despite how much better-developed its facilities were (taking up nearly 80,000 square meters) than that of the partnership we had just visited, and how well entrenched it was in Western markets, it too had two sets of books. The second set, though, was at least in book form, so the owner could identify line by line in the report to the tax man what lines were true and which were bogus.

Another revelation for the Western team was just how low taxes and social benefits appeared in the books for employees: healthcare, retirement, maternity leave, disability and the like. Instead of the thirty- to forty-percent additional expense to base salary across many provinces, the two companies were paying around three percent. “There are ways to keep these costs low,” the owner of the second factory said without blushing. “Don’t worry,” he encouraged, “you won’t have to pay more than this amount for the employees if you buy the factory.” Of course, I encouraged the client to worry about it.

To Err is Human; Due Diligence is Divine.