It was Harry Tsao's first month doing business in China, and he had just made a serious blunder. Eager to get started, Tsao had hurriedly hired 10 engineers and editors for the Shanghai back office of Smarter.com, his e-commerce start-up based in Monrovia, California. Then he learned about China's exorbitant payroll taxes. According to Chinese law, his fledgling company would have to shoulder another 40 percent in expenses--$26,000--that wasn't exactly in the budget. "I had no choice," says Tsao, 36. "I had to take on those costs."
That was back in 2003, when Tsao and co-founder Talmadge O'Neill were launching their English-language comparison-shopping website. They knew that China's inexpensive labor could make the difference between reaping profits and shutting down. But Tsao quickly learned that cost-cutting comes at a price. Business owners expanding into China face legal hurdles, security issues, and a foreign workplace culture. Foreign executives often trip over government bureaucracy, fail to understand the culture, underestimate the local staff as well as the competition, or like Tsao, simply don't do their homework.
Tsao and O'Neill founded Smarter.com's parent, MeziMedia, in 2001. Their first website, CouponMountain.com, quickly attracted thousands of visitors looking for deals on everyday products. But the two men had bigger ideas and began laying the groundwork for Smarter.com, which would provide pricing information and reviews on hundreds of thousands of items--from musical instruments to electronics--sold by thousands of online retailers. In the past, MeziMedia had outsourced engineering tasks to the Ukraine. But this new project was beyond the capabilities of its employees there. So Tsao started hunting for a place with whip-smart, yet cheap, programmers.
China was a natural choice. Tsao's parents hailed from Shanghai and the family lived in Taipei for 16 years before emigrating to the United States in 1996. Tsao is fluent in Mandarin and Shanghaiese, the dialect spoken in China's largest city, and thought he knew how to navigate Eastern business culture. So while O'Neill managed the business in California, Tsao set up shop in China.
In many ways, the basic formula--go to China, save money--hit the mark. Chinese employees were a bargain, costing an average of $750 to $1,000 a month--a good $4,000 less than their U.S. counterparts. But recruiting and staff development proved to be a challenge. Tsao was shocked by the resumés that came across his desk. Almost all of them showed applicants flying through four to six jobs in just two years, reflecting the national mentality of Qi lu zhao ma, or "Ride a mule as you seek a horse." Turnover was high, and Tsao was constantly training new employees as staff took flight for posts at bigger companies. Surprisingly, the turnover worked to Tsao's advantage. That first crop of overpaid employees? They all left within months.
Tsao realized an American approach to talent management would not work in Shanghai. He started giving each employee a meal subsidy of about $26 a month, enough for a lavish lunch every day. He hired a staff trainer, who coaches the employees on everything from e-mail correspondence to sticking to timelines and making presentations. Each department also has a quarterly fun budget for managers to spend on staff skiing trips and karaoke outings--perks that MeziMedia doesn't offer in the U.S. but which are the norm for quality companies in China.
Meanwhile, Tsao discovered he needed to preach the entrepreneurial spirit. His workers, while adept at identifying problems and potential answers, wouldn't take initiative or make decisions on their own. Some even brought their mothers to job interviews. Shanghai, he realized, was no Silicon Valley. At first, Tsao ended staff meetings with a call for questions, but his workers almost never volunteered. These days, he picks on them one by one. "Then you get a lot of opinions," he says, "though you really have to pull it out of them." He tried to cultivate innovation with bonus incentives but discovered what worked best was publicly praising employees in group e-mails and in front of management.
In time, MeziMedia became more stallion than mule. Employee retention now hovers at 80 percent a year. Soon after Smarter.com launched in 2004, Tsao tapped two Chinese managers, both with experience in the United States and Canada, to run the Shanghai office. He cut his China trips to once a quarter--and started spending more time with his one-year-old twins. The company now has 125 employees in China, 25 in the United States, and five in Japan. Last year, MeziMedia hit $40 million in revenue. Tsao says the company is profitable, thanks largely to the savings generated in Shanghai.
The Shanghai office even has become a source of revenue. MeziMedia gained enough familiarity with the Asian market to launch Chinese, Japanese, and Korean versions of Smarter.com. And Tsao's reticent Chinese employees recently took the lead in building a new product--a metasearch engine, which sends queries to several search engines and returns the results from each one. The site launched last year and now draws four million visitors a month. Says Tsao: "You've just got to trust your local team and let them do their own thing."