Doing business in China can be a seriously infuriating ordeal.
I'm only thankful that I've never had to do it alone. My wife's family has some serious connections and it has taken out most of the pain of doing business here.
Without a seriously connected or savy Chinese business partner to help smooth things out then it can be an ordeal that has brought down many competent business plans.
But the problem is finding one that is interested. Usually most will have enough on their plate that risking what they have to get into a serious long term business with a foreigner isn't really worth the exposure.
So then it leaves the young and the hungry, a good option if it's all you have. However establishing a network that is reliable is expensive and exhausting.
As for finding competent staff..... wow that's a hard one. I've never hired one that I didn't know, usually I get them through friends or recommendations. Unfortunately even that doesn't work sometimes, imagine what happens when a recommendation comes down from your uncle in law for some idiot nephew of a friend that is both incompetent and expects a high salary with lots of benefits. THAT'S a hard one to get out of.
I've run into a lot of foreign companies and individuals that have chosen the wrong partner. The kind that will try to steal your clients from you, the kind that will hide revenue from their partner, the kind that will steal your ideas and set up another operation on the cheap, and ruin you because they are selling really cheap Chinese versions of your products.
I once ran into a partner company for a very respected and international Australian brand product that tried to steal all of our clients and cut us out completely, the Australian company had very little idea of who they were working with (aside from a few near meaningless checks on their finances etc) and as such the product has had a lot of difficulty here in China. It's a dangerous game to say the least
Having a network is critical, without one you will always be on the outside looking in. Getting one is the difficult part. And without a dead on Chinese partner you can trust then I would say close to impossible.
All of our business comes from this social network, without it there would be nothing.
The fact is that most smaller to medium sized businesses are in some way cleaning houses. They don't WANT to get bigger, being bigger means more attention and more scrutiny. If you look at most medium sized business they are in fact made up of a number of smaller businesses. What will look like departments are in fact smaller businesses. Each that post it's own profit and loss.
The idea that there is a casual investment strategy is pretty much bang on. Often it's family and other times it's other businesses within that group that put the cash in. Sometimes it's other companies that you have relationships with in a "you do it for me I'll do it for you" type of arrangement.
Add in creative ways to turn a profit into a loss like reporting all dividends and money that goes to investors as losses and there is on paper a real need to keep the business at the level that it is. Because most of theses companies will on paper report a loss each year there is no massive push by authorities to force these companies to expand and increase their responsibility.
Cleaning money that comes from other grey and black means is the name of the game and to avoid as much tax as possible.
The fact that it doesn't seem to concern factories that they are not working and will only take the largest orders they can get their hands on is quite common. When they get a huge order it's easier to blur the lines from the genuine income to the streams or other income that are coming in.
When the state enterprises were privatized it was done in such a way that whoever ran the thing afterwards was extremely well connected. What would happen as I understand it was that the plan to privatize was known well in advance (say a year or two before it would happen) and the manager would deliberately run the place into the ground. Make it unprofitable on paper and simply a disaster for anyone looking to buy it. Then the local official's mate would come in and scoop the whole thing up for cents on the dollar. Thus leaving it open for any type of investment or funneling it pleased.
As for labor, it's still pretty damned cheap. But for specialized or experienced personnel...well they are very hard to find and not cheap at all.
Take my wife as an example. Education in the UK, six years working experience overseas, three here running her own business plus consulting work etc At the moment she works 2 or 3 days a week for another company (another small appendage business of another business) running it. She makes more than 8,000rmb a month just working those few days a week. The reason is simple, there are precious few others that could do it. Her boss (longtime friend of the family) wants someone that can run, maintain and train staff in a westernized business practice. Bigger still he wanted someone he could trust and that is the rarest commodity of all.
Our city is a second tier city and there are at most only a handful of staff that could do what she does and she knows it. So she charged him an arm and a leg for it as well as some other arrangements for our business etc etc
Even so when she was interested in looking for a job last year she received a large number of offers in first tier cities for 15,000rmb+ a month and we were considering moving but then decided to concentrate on the business and make a real go of it.
So finding someone skilled AND able to work outside the box is extremely rare as the education here tends to kill most of their braincells well before they enter the job market.
What I've seen some of the German companies do is take non college graduates and put a lot of effort into training them. It works ok but is pretty labour intensive and time consuming so probably only viable for a very large company with a good structure.