Archive for the ‘Doing Business in China’ Tag

Doing Business in China: Fish or Cut Bait?

Of course, you need to ‘fish’ in what is quickly becoming (trends permitting) the largest market in the World for most products and services.  However, companies need to be mindful that doing business in China in 2010 is still fraught with many challenges. The treatment of two industry leaders underscores the problems and risks. 

After facing government pressure and censorship in a dispute over its core values of freedom of information, Google decided to shut down its Chinese search engine and divert traffic to an offshore location. As well, many observers believe that State-sponsored hackers were behind attempts to penetrate Google’s webmail service. The mining giant Rio Tinto saw four of its employees charged with corruption and sentenced to lengthy prison terms, at the same time that the firm was in heated negotiations with the government over the price of iron ore and their participation in a deal with another Chinese company. 

These incidents are merely the latest chapter in a long history of Chinese government machinations. Over the years, many other  firms like Coca Cola and Unilever have complained about arbitrary government harassment, shifting legalities and unseemly business practices by partners.  According to a study commissioned by the American Chamber of Commerce in China, a large proportion of US companies claim to be victims of discrimination.  And, American firms are not the only victims.  The latest Corruption Perceptions Index, published by Transparency International, places China in 79th place out of 180 countries.   

China has been ‘open for business’ for over 25 years.  Luckily, there are now lessons for companies thinking of entering or expanding operations in this important market. For example:

 Lesson 1 – Success takes patience and deep pockets. 

Even large companies need a long runway before they start making money from their Chinese investments.  Getting to the point where you have boots and machinery on the ground often can take years of arduous effort and relationship building. After the doors open, firms need lots of time to get the business model right.  For example, P&G took 3 years to turn a profit, KFC 10 years.  Although labour and physical plant is relatively inexpensive, developing key local capabilities like marketing, service and distribution is not. Finally, China is experiencing significant wage and price inflation, particularly in major industrial zones, which can easily extend investment pay outs.

Lesson 2 – Think local, act local. 

China is a very unique market of markets, unlike from any place in the world.   China differs across every measure including political system, level of corruption, language, business philosophy and beliefs.  Most North Amercian companies can leverage little from their previous international experiences so they need to fully embrace local operations, needs and customs. The ideal market entry strategy is to: do your homework on the market, consumers, competitors etc; invest in deep relationships with key door-opening politicians & regulators and; show an exaggerated deference for Chinese business habits, pride and beliefs.

Lesson 3 – Joint ventures work best but carry longer term risks

In most cases where you need to manufacture locally, partnering with a Chinese firm (particularly one with senior government or army connections) has proven to be the best and lowest risk market entry model.  The Chinese government has tacitly and overtly encouraged this in order to: maintain some control over foreign enterprises; facilitate critical knowledge and skills transfer; support cronies in state-controlled partner firms and; buttress local companies from more efficient foreigners.  However, for foreigners JVs carry significant medium term business risks such as politically-motivated takeover, capricious government behavior, stolen IP and the germination of emerging Chinese competitors.

Despite the pain and suffering, many companies have finally turned the corner and are now reaping strong investment returns. The key question remains how long can this continue for.

For more information on our work and services, please visit the Quanta Consulting Inc. web site.

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