Guide to Doing Business in China

China has grown and developed at an extraordinary rate over the past 30 years. American businesses large and small are developing China strategies to explore how they can break into this expanding and promising market.

To be successful in China requires understanding of the potential opportunities and risks that a country as diverse as China offers. In particular you will need to consider the significant time and resources your company will need to commit and the very competitive nature of the Chinese market. To meet these challenges will require both a clear plan and an ability to respond quickly to changes in the market.

In order to offer a resource to your company as it considers doing business in China, we offer below advice and suggestions about operating in China based on what we have learned over the years.

Reasons to Invest and Sell in China

1) China’s Growing Economy

China’s recent growth has catapulted it to the position of the world’s third largest economy. In coming years, China is expected to overtake Japan as the second largest economy and within fifteen years it is expected to surpass the United States. With this rapid growth, China has gained a far greater importance in international economic and political arenas.

Even as the rest of the world’s economy has slowed as a result of the world financial crisis, China has continued to develop. China is on pace toachieve 8 percent GDP growth in 2009, according to government statistics. While it is possible that China’s economic may slow in the next year it is clear that China is on the path to be an increasingly important player in the global economy.

2) An Enormous Market

China’s population of 1.3 billion people is appealing to any business. While it is unlikely that you will be able to sell to this entire market, even if you can reach just a part of it you will have access to an enormous number of people. In order to reach the right part of the market it is crucial to do research and understand the different segments of the Chinese market. China’s market is divided on such factors as age, geography and income. Knowing which part of the market you are trying to reach will be key to your company’s success in China.

3) Labor Costs

China has earned a reputation of as a place with a large supply of cheap labor. The low cost of labor in China has made it the location for many companies to outsource their products, which has brought down the price of goods internationally. Nonetheless, the price of labor has increased in recent years due to limits on the labor supply and new labor and environmental policies. Indeed, China’s success in manufacturing is not solely attributable to low-cost labor. Other countries in Asia are able to produce goods with even lower labor costs than China but have not achieved China’s success in manufacturing. This means China’s manufacturing success is also due to the efficiency of its factories and its well-developed infrastructure.

4) Growth of the Middle-Class

China’s economic growth has created an expanding middle class, especially among its younger generation. Even though China is known for its high savings rate, its younger generation is showing a greater willingness to spend their earnings. That’s why retailers for Versace to KFC are planning to expand throughout China in the coming years. At the same time that its youth are consuming more, China is also to become increasingly urbanized in coming years, which will create an even larger market for western goods.

5) Chinese Offshore Investment

With its large reserves of foreign currency, China has promoted outbound investment among Chinese companies. The development of Chinese outbound investment presents both an opportunity and a challenge for US companies. These investments can bring new competition to western companies but also opportunities for cooperation with Chinese counterparts.

6) Innovation

China is not currently known as a center of innovation but instead for its ability to mass produce goods on a large scale. Nonetheless, more companies have been choosing China as a site for their R&D. As the country that invented a wide-range of goods from fireworks to porcelain, China may be reclaiming its position as center of innovation. With an increasingly educated population in a more and more open economy, China is likely to become increasingly innovative.

As China becomes more of a center of innovation it will also become a place where more high-end products can be made. While, China may have built its manufacturing base by producing low-cost goods, it is now beginning to create more sophisticated products.

Chinese Business Culture

Doing business in China is on many levels similar to that doing it in many western countries. However, its business culture and practices are so unique that it is imperative to understand them so as to ensure success for your business there. The following points deserve special attention:

1) Dealing with Bureaucracy and Cultivating Relationships

You need to deal with bureaucracies and cultivate relationships (Guanxi) on many levels in China. What makes it more difficult is that China’s bureaucracy is not homogeneous and more and more decisions are being delegated to provincial and municipal authorities. The Chinese legal and regulatory environment is still in its initial development stage, which increases the scope for inconsistent explanations and decisions that local bureaucrats can choose to make out of the vague laws and regulations. However, with time, people can expect a more transparent, more predictable and more mature framework as China’s involvement with world economy intensifies and as it tries to implement its commitment to the WTO. Work with government circles, as they will become very helpful in helping you navigate through the regulatory jungle and the local markets.

2) A Changing Marketplace

The great opportunity and risk of doing business in China lies in the extraordinary pace at which the Chinese market is changing. Some industries and parts of the country are going through fundamental transformations in a short period of time. The rapidity at which the Chinese market is changing demonstrates why it is so important to have a local presence in China to observe up-close how the market is changing. Trying to understand China from the United States is impossible because of the complexity and size of China. It is almost impossible for any enterprise that does not have a local representative to succeed in the Chinese market.

3) The Language

The Chinese language is often seen as one of the great barriers to effectively conducting business in China. While there are increasing numbers of Chinese who are fluent in English, a far smaller number of foreigners are proficient in Chinese. This fact means that if you are not fluent in Chinese, Chinese will always be able to understand you but you will have to rely on translations and interpretations in order to understand the other side.

If your company does not have an employee is fluent in Chinese, it is necessary to hire a trustworthy translator. Before hiring a translator, ensure that they are reliable and have previously worked with foreign companies.

4) Human Resources

As is true anywhere, having a capable and talented team is crucial to achieving business success. However, it can be a great challenge to find the right talent in the China market. The problem is most severe for middle and senior level managers who often lack the experience and skills which are needed to succeed at a foreign company. While some companies have hired overseas Chinese for such positions, this method has also created a problem because of cultural differences between mainland China and Chinese from other parts of the world.

A high employee turnover rate is another issue that companies face in China. Talented young people will often move from one company to another in order to gain business experience and for better pay and positions. This problem has been particularly pronounced for SMEs.

One solution to this problem is to create an international team. By doing this, employees will be able to learn about best practices from different parts of the world and companies can encourage a more creative work environment. Training and development is another important method for retaining employees. The primary reason many local employees choose to leave foreign companies is because they feel they cannot advance within the organization. Creating a team where all of your employees feel they have an opportunity for advancement is another way to retain employees.

5) Quality Control

There have been a number of high-profile cases of poor quality control in China in the past few years. These incidents have raised question about how US companies can ensure that products that they produce in or source from China meet basic health and safety requirements.

While Chinese companies generally make products that are safe, it is still critical that companies conduct due diligence. It is important to be clear with your suppliers so that they are aware of the health and standards you expect. Building good relationships are also important so that you can clearly express your standards.
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Companies should be engaged with safety inspection through each step of the supply chain. By doing so you will not ensure the safety of your products but also educate your suppliers on how to ensure their products are safe.

6) Intellectual Property

It is no secret that IP infringement is rampant in China, and it is one of the major concerns facing foreign investors. The government has largely followed through on its WTO commitments on IP protection by creating stronger IP policies. However, implementation and enforcement of the policies are not quite satisfactory. Companies should register their trademarks and patents in China and prosecute IP violators. However, strategic and operational actions should also be taken before the theft of IP occurs, which will also lower the cost of litigation. Such strategies can include building sensitive components offshore and leaving final assembly in China, keeping critical technologies out of China or embedding security features.

Establishing Your Presence in China

You will encounter many moving parts and surprises when setting up in China, so you must be able to accept and be comfortable with a lengthy timetable. After you have a basic idea, investigate Chinese laws and regulations and decide which business model is the most appropriate approach to establish your company. Also, you need to be realistic about your commitment and resources.

There are four main choices for establishing a presence in China:

1) Representative Office (RO): It is an extension of your corporate presence in China which can function as liaison with Chinese suppliers/clients, and conduct market research and promotional activities for its home product/services. The advantage with this arrangement is that there is no registered capital required, while the disadvantage is that its business scope is restricted to a “rep office”, meaning it cannot actually sell product/services or receive any income in China.

2) Wholly Owned Foreign Enterprise (WOFE): Establishing a WFOE will allow you to sell your products and services in China and maintain the full function of a company. However, the initial investment is much larger, and the amount can vary depending on the type of industry and scope of business.

3) Joint Venture (JV): As its name suggests, it is an entity to be formed with a Chinese partner. The main advantage being that the right partner can accelerate penetration of local markets through their knowledge, experience and connections. However, the trade off would be less control of the business and an increase of the risk on IP infringement.

4) Presence without Registration: A company can set up a presence without registration in China by engaging a company
that is established in China to market and sell its products and services there. For US SMEs, this option offers a much simpler
and more effective means of tapping into China’s tremendous potential, while significantly minimizing the initial investment, risk and
time. The success of this kind of arrangement solely depends on engaging the right company to assist your business in the China
market. USPRI's ChinaOffice Program is specifically designed to effectively serve this purpose.