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Doing Business in China—What are the Chances?

Succeeding in China—What Are the Chances?

There is an old axiom to doing business in China, “Reaching an acceptable agreement to do anything … is not an end,” so says Mike Saxson, author of An America’s Guide to Doing Business in China. Murphy’s Law certainly seems applicable where “Everything takes longer than you think, nothing is as easy as it seems, and if something can go wrong, it will.” 

For the uninitiated, doing business in China conjures up images of the 49er’s Gold Rush, unlimited profit potential and the undying American dream to nurture high-risk entrepreneurialism. Compared to the United States’ dismal one percent growth in 2009, and negative two-and-a-half percent growth in 2010, China’s GDP grew an astounding nine percent in 2009, and 10 percent in 2010. Prospects for U.S growth in 2011 will be shy of three percent, while China will continue its climb toward double digits at nine-and-a-half percent, according to “Doing Business in China 2011 Country Commercial Guide for U.S. Companies,” a report generated by the U.S. & Foreign Commercial Service (FCS) and the U.S. Department of State.

China ranks just behind Japan and the United States as the third largest market for luxury goods, as stated in the FCS and State Department report. More than 200 million citizens now have per capita income of $8,000 compared to only $1,630 in 2002. This is impressive growth considering 345 million people are expected to migrate from rural to urban areas in the next 25 years, even though the per capita income may be low by U.S standards. Most economists predict the emergence of a true middle class in China with this type of growth. Some compare the migration and per capita improvements to the Industrial Revolution, which, it’s worth noting, took more than 100 years.

Challenges
Yet, with all of this change, China remains a developing country mired in rural and urban division where 150 million desperately poor migrant workers toil in the fields. Ken Gerth, author of As China Goes, So Goes the World, said in a recent interview that “the question remains … whether China can create a middle class as broad as the United States did after World War II. Or will China continue to create a two-tier society: elite with resources to consume unlimited luxury goods and vast majority living on much less?”

Although many multinational companies have established strong economic footprints with impressive returns, for most it has not been without market challenges. Success in China involves due diligence similar to investment opportunity in other countries. According to the FCS, however, opportunities must be thoroughly investigated to understand product standards and contract differences to minimize misunderstandings. Companies need to understand that China’s regulatory and legal environment is inconsistent and often arbitrary.

Disputes often arose between China and the United States because of inadequate intellectual property protection and enforcement as foreign trade opened up. China’s recent entry into the World Trade Organization has helped; however, problems remain and continue to damage foreign investment. Also, China’s highly bureaucratic, multi-level republic applies market-oriented principles inconsistently. For example, state-run industry, in some sectors, prevents free-market competition, limiting imports through high tariffs or unfair trade practices while encouraging state-supported exports. As companies weigh the challenges of investing and operating in developing countries, they need to evaluate the costs versus the benefits.

In 2006 Google entered into an agreement with China agreeing in principle to support the government’s censorship provision in exchange for operating on the mainland. As reported in The New York Times® Google has closed search operations in China, re-directing users to Hong Kong. Google, which has only one-third of the search market, has made a decision to no longer support the government’s position of Internet control. Other factors in play include China’s broader business environment which supports Baidu, the state-run search engine provider, which has 60 percent of the market and is apparently not prone to power outages, like Google. In addition, according to a recent article in The Wall Street Journal® by Joseph Strernberg, the revenues are relatively small in comparison to Google’s market position in other markets.

Opportunities
In October of 2000, President Clinton signed into law the U.S.-China Relations Act of 2000, opening China’s mammoth market to U.S. business. Critics argued that normalizing relations would accelerate the trade deficit at the expense of U.S. jobs. Although the U.S. trade deficit with China has ballooned from $83 billion in 2000 to a whopping $252 billion in 2010, American exports to China have also risen by a record 468 percent to $91.9 billion. China is now the fasting growing export business in the United States, according to the trade group, U.S.-China Business Counsel. In fact, China is expected to pass the United States and become the world’s biggest importer, according to Don Brasher, who runs Global Trade Information Services. China imports include U.S. grain and cotton, due to shrinking arable land and limited natural resources, as well as computer components, microchips, aircraft and automobiles.

One success story that parallels this rising tide of imports into China is the former bankrupt behemoth GM. In 2000 GM sold 31,794 cars in China. Nine years later its market share rose to 13.4 per cent with sales of 1.8 million units, according to the Internet Auto Guide’s Auto Blog posted April 25, 2010. Although early entry into the market, along with some good luck, a shrewd partnership with Shanghai Automotive Industry Corp. Group certainly didn’t hurt.  According to GM President of International Operations Tim Lee, speaking at the 2010 Beijing auto show, “No Western automaker can make it alone in China. Our formula: understand the market, support the brands, and execute very carefully.” 

Successful Tips
Through a combination of luck, careful planning and nurtured, strategic relationships, many companies have found success doing business in China. To avoid mistakes, author of the book, China in Motion, Mia Doucet offers the following tips:

• Build relationships based on trust
• Practice the same due diligence as in the West
• Work logically, methodically and avoid pressing for quick decisions
• Prepare for an uneven negotiation process, while stating your case clearly and concisely
• Avoid confrontation, even with members of your own team, to respect “face”
• Listen more than you talk
• Structure sentences more than one way to avoid misunderstanding
• Present your ideas visually, in steps, and document everything in precise detail
• Prepare thoroughly for every meeting and interaction
• Make sure your facts are accurate with research to back you up
• Understand cross-cultural differences and make sure your staff is educated

Still, according to Mike Saxon, your ability to succeed in China is more difficult than in the U.S. and, if you do succeed, most likely it will have been your second or third attempt.

Accordingly, the Chinese proverb, “With time and patience the mulberry leaf becomes a silk gown,” may be improved with one caveat—maybe.