Caroline Cook asks, how difficult is it to expand your business into China?
As with all new business ventures, it’s important to know exactly what you’re getting into. China has often been the victim of derogatory business remarks and there may well be some companies that have discouraging experiences in the country – but this doesn’t mean all Chinese companies should be treated with caution.
China has nurtured one of the sturdiest economies of the last few years. Despite the global recession, the International Monetary Fund’s World Economic Outlook (WEO) shows that China’s gross domestic product (GDP) has remained on the increase, growing 9.3% and 7.8% in 2011 and 2012, respectively. When compared to advanced economies such as the US (1.8% and 2.3%) and the UK (0.9% and -0.2%), China appears to have remained largely unaffected by the global crisis.
Furthermore, the WEO suggests that it will remain ahead of the Chinese Government’s national target of 7.5% annual growth, forecasting 8.2% in 2013 and 8.5% in 2014.
Economic success also applies to the Chinese civil aviation industry, which has seen double-digit growth for 30 years. “The whole industry is driven by global aspects,” says Peter Budd, Global Aviation Business Leader at Arup, a firm established in China since the 1970s. “The country’s civil aviation safety record is extremely robust for that sort of growth.”
According to the Doing Business 2013 economy profile of China, a co-publication of The World Bank and the International Finance Corporation, the nation achieved a Doing Business (DB) ranking of 91 out of 185 economies, with the regional average for East Asia and the Pacific region scoring 86.
In particular, China ranks well for enforcing business contracts (19 out of 185), registering property (44) and trading across borders (68), but falls behind other economies in starting a business (151) and dealing with construction permits (181).
The report states that starting a business in China requires 13 procedures, takes 33 days, costs 2.1% of income per capita (IPC) and requires paid-in minimum capital of 85.7% IPC. Compared to Australia (DB ranking 2) and the US (13), it would suggest that China is perhaps not the best place to start your business, but it is improving. In 2004, starting a business in China took 48 days, cost 17.8% IPC and required paid-in minimum capital of a staggering 1,236.5% IPC. The latter in particular dropped to around 200% IPC in 2007.
Similarly, dealing with construction permits is becoming an easier task if you are looking to build a factory in China. In 2005, the process took 32 procedures (now down to 28) and 416 days (currently 270). The previous cost of 1,242.1% IPC has also decreased gradually to meet the present 375.3% IPC. Since 2008, cities like Beijing and Shanghai have allowed the process to be undertaken electronically and, more recently, national pre-construction approvals have been streamlined and centralised to make permit applications much easier.
Perhaps most importantly for foreign companies, trading across borders is one of China’s strong points. The profile states: “Exporting a standard container of goods requires eight documents, takes 21 days and costs US$580. Importing the same container of goods requires five documents, takes 24 days and costs $615.”
Although costs for importing and exporting have risen, China’s DB ranking for the process is still ahead of the regional average (76) and other developing countries, such as Brazil (123), India (127) and the Russian Federation (162).
Some critics may also be surprised that Doing Business ranks China at 19 out of 185 economies for enforcing a contract, which reportedly takes 406 days, costs 11.1% of the value of the claim and requires 37 procedures. The government has tightened its rules on enforcement, restricting the ways in which a debtor can hide behind their assets.
For a company keen to break into the Chinese industry, there are countless websites and guides to help and the task doesn’t seem as daunting as it first appears.
The China Business Guide by UK Trade & Investment (UKTI), in partnership with China-Britain Business Council, was produced to advise British companies on first steps into the Chinese industry. The document can be of use to almost any business around the world.
It suggests that before approaching any project in China, a company must know its own unique selling points. It’s important to identify any legal barriers and business risks in a specific line of work and to ensure the right amount of resources are available. Basic facts must be known: where to locate and who will lead the project?
Additionally, it describes visiting China as “an invaluable part of the process of market entry. This is essential, but will be much more effective with careful planning.”
Peter Budd agrees: “If you want to do business in China, you’ve got to visit and get to know the country and the people. You need to get the [metaphorical] sniper out, not the shotgun, so that you can focus on a limited number of well-researched opportunities rather than targeting everything. Even if you don’t get the project that you want, you could still end up with something just as interesting.”
Dan Wu, Exhibition Director at Mack Brooks, the company that has run the inter airport China trade show for almost a decade, pushes the point further: “Be outside of the box. Most European companies play it safe and use cities like Hong Kong and Singapore as doorsteps into China. This isn’t the way – you need to come to ‘real’ China and see the smaller cities. Be brave! For Western companies, it is never too late to enter the market.
“The most important thing is to have an understanding of China, and not from what you see on television. You need to know how the Chinese market works and how you can fit into it,” he adds.
Above all, UKTI advises that the best way to trade in China is with “careful business planning and execution”. As well as seeking professional advice for any legal needs, hiring an experienced translator or interpreter will elicit the best outcome for any business, particularly for company literature and meetings with Chinese clients. Business cards should also be translated.
The China Business Guide even recommends getting a Chinese name for your company, but warns against losing global consistency. For example, soft drink Coca-Cola is known in China as “Kekou-Kele”, which translates as “tasty and joyful”, whereas search engine Google is known as “Gu Ge”, with the rather bizarre translation of “song of millet”!
The First Project
Mr Wu believes there are three key approaches to starting to trade in China. He comments: “It is important to gain the interest of the key purchasers and decision-makers who are based in cities like Beijing and Shanghai – these are big key cities.
“You can find a local partner who can act as an agent for you; you can set up a joint venture with a Chinese company; or you can build a factory in China.”
It’s possible to appoint an agent or distributor before deciding whether to have a permanent presence in China. The UKTI guide adds: “Representative offices can conduct market research, customer liaison and support, business visits from company headquarters, public relations and local administration, but not sales activities.”
Some businesses may feel that a joint venture in partnership with a Chinese company is the best way forward, and Mr Wu claims many former competitors now share a stand at the inter airport trade shows. As with all businesses, due diligence checks on companies are advisable before signing any documentation.
For Mr Budd, persistence is vital for breaking into the Chinese airport industry. He says: “When selecting designers for major airport development in China, the modus operandi is that foreign companies get invited in to participate in a structured competition, which is assessed technically, although the final decision tends to have a political dimension.”
However, he warns: “You are unlikely to get the contract on your first visit. The market is driven by personal contacts – not company to company, but individual to individual – and the challenge is in getting follow-on work.”
Above all, communication is key. As well as ensuring an adequate translator is available for both meetings and contracts, it is important that both parties understand what any deal entails to ensure that business is not lost through misunderstandings.
Chinese businesses work differently to those in the west – many companies in China will expect a personal one-to-one relationship to develop before any contract is signed. “Expect to spend a lot of time at meetings and banquets with your potential Chinese partners,” advises UKTI, adding: “Remember that taking the time to cultivate personal connections as the Chinese do is an excellent opportunity to get to know the people you will be working with.”
The China Business Guide continues: “It is common for negotiation to continue after a contract is signed in China.” Note that Chinese numerals are different to the western-used Arabic numerals, so make certain that all figures are double-checked.
However, business in China is worth the wait. Mr Budd say: “The market is hugely interesting and as a designer, the fruits of your labour are very quickly turned into reality, which is extremely satisfying. Once a choice is made, projects move quicker than anywhere in the developed world.”