Archives October 2006

5 tips to invest and do business in China

1. Have clear understanding of China

It is essential to understand the culture of the country before investing in it. Understanding China is vital as China is a land of vast diversity. As such it is important for the company to understand the culture and the society’s values before establishing operations in China. Only through understanding the culture and values strong foundations can be built and higher chance of success can thus be achieved.

2. Understand local business practices

Given China’s distinct culture differences from the rest of the world, understanding China’s business culture is extremely crucial. What works in one’s country will not be applicable at all in China. Understanding how the local people think and their business practices can allow one to engage better and faster with them. Original organizational culture and practices may have to change in order to accustom to China’s practices. Thus flexibility and adaptability is the key for any organization to be successful in China.

3. Acquire local knowledge and establish local presence

Establishing a representative office in conjunction with a strong domestic private sector partner that has access to all necessary information and contacts in their field is the widely practiced formula practiced by foreign firms who already enjoyed success in China. Another way will be through setting up joint venture. Most importantly it has to be the selection of the correct partner. Finding the right partner may require more time, patience and experience but it is never a hassle to spend more efforts in choosing the partner because a wrong partner will definitely guarantees failure. Chinese expertise and local talent must also be incorporated into management or consulted during decision-making since local knowledge is essential as a source of information, access to networks and social and cultural learning, especially in China.

4. Need for establishing business relationships

Guanxi (relationship) is an important element in achieving successful business in China. Top management must learn to nurture close relationships with their local counterparts. This not only helps them to understand the Chinese domestic market, but also creates avenues for help in times of trouble or in need of assistance. Building strong relationships with business partners can aid in mitigating strategic and operational risks.

5. Establish close relations with government officials

Because the China government plays an important role in influencing market movement and administering foreign investments, a strong government relationship remains an important factor to do business successfully in China. Fewer hiccups may be met during paperwork applications or achieving local authorization if a strong relationship with government officials is in place.

How to export to China

Mainly there are 3 ways whereby one can export his/her goods in China:

1. Distribute your goods directly
2. Establish a joint venture
3. Find a qualified agent or distributor with a vast sales network

Before exporting your goods into China or choosing a Chinese partner, it is advised for you to conduct thorough market research and due diligence. Companies should be mindful of possible problems in export rights, regulations and intellectual property rights protection. If the company decides to distribute the goods directly, then it will have to be aware of the distribution rights and understand the licensing process in China.

Distributing your goods directly may be a complicated and time-consuming process as one may not be familiar with China’s business practices and government regulations. Application for distribution rights and establishment of own distribution channels will be difficult. Chances of failure will be higher as a result. Establishing a joint venture will thus be a better option. Establishing cooperation with a local partner can allow you to have faster access into China’s market and with the local partner’s knowledge and experiences of China’s market, your success rate will be higher and goods can be better distributed. Acquiring help from a local partner does give you many advantages in penetrating the China’s market. A side issue to note will be that joint venture usually requires large amount of capital and China’s government may have capital control towards outflow of funds should one transfer his/her funds back to his/her home country. The government will also need to assess the potential economic benefits that it can bring to China, e.g. does it create job opportunities for the local population before approving it.

For small and medium sized companies, the best way to enter the China market is through a reputable or well-known agent or distributor. These companies are located regionally and typically have large sales network. Thus they will be able to have a better understanding of the China’s market and can provide assistance in developing distribution strategies in China and the region. In this way, new products can be launched easier into the market and distribution network can be set up rapidly without any problems dealing with distribution rights and licensing.

Besides all these, the most important step that one must take before exporting his/her products into China will be have a thorough understanding China’s customs, regulations and controls towards imported goods. A sound market entry strategy is also necessary in order to penetrate the China’s market. An assessment of your goods’ strengths, weakness, opportunities and threats can allow you to promote and distribute your products better. Understanding the profitability and marketability of your products in the China’s market is thus vital before exporting your products into China.

Doing Business in China

The Chinese economy is roaring. But what does it take for foreign investors to succeed when doing business there?

Foreign investment in China has surged dramatically in the past few decades—from a few billion dollars per year in the 1980s and early ’90s to tens of billions of dollars per year in the past decade. Despite this, doing business in or with China doesn’t come easily to most Westerners. For those who neglect their homework, failure can come easily. Huge and not readily defined, China is as diverse as its many regions and languages and is currently in the throes of rapid change. Fueled by tremendous economic growth, Chinese people have on the whole become richer. Yet the income gap between the wealthier Chinese, who tend to live in urban areas, and the poor, who tend to live in rural areas, is growing ever wider. And while the Chinese people recognize that foreign investment can help their economic situation, they are also steeped in an entirely different culture than are Westerners.

In matters of business, the differences are sometimes subtle, sometimes not—but either way, they can have a considerable impact. NEWSWEEK’s Laura Fording interviewed Peter Liu, cofounder and chairman of WI Harper, a U.S.-based high-tech venture-capital firm, whose goal is to bring Silicon Valley and Chinese—as well as Hong Kong and Taiwanese—businesses together. The interview was conducted by e-mail. Excerpts:

NEWSWEEK: What is most on Chinese government officials’ minds these days?
Peter Liu: The potential impact of rising unemployment, especially in rural areas of China. Also some of the white-hot growth sectors, which may be leading indicators and contributors to a possible hard landing: real estate, raw materials such as cement and steel and, of course, commercial lending.

I’ve heard that the chances that a foreign business will fail in China are high—that it’s easy to invest there but much more difficult to bring the money back home. Why?
In general, this is true. Most foreign companies are handicapped by a lack of cultural understanding and patience to see [their projects] through. The most difficult thing is finding the right and trusted partner with shared interests in China. Often senior executives in these foreign companies underestimate how complex and frustrating doing business in China can be at times.

People are investing in computers and telecom. What other areas have the potential to do well in China?
Semiconductor, fabless IC design and outsourcing service sectors can be high-growth areas. Outsourcing and technology-enabled service companies, especially, will see high growth, given China’s unique features. Often cutting-edge technology isn’t what wins the day in China; rather, it’s practical applications which can address an immediate need and are directly or indirectly linked to the mass consumer. We are less enthusiastic about enterprise [software companies] such as ERP, CRM, as they tend to have very, very long sale cycles and [a] high level of customization. The investment horizon in the West is normally two to five years, but in China, it is five to eight years.

Do larger companies have advantages over smaller start-ups when doing business in China?
To certain extent, yes, as larger companies tend to have the provincial [or] central government’s support. But this is changing as smaller start-ups, equipped with foreign capital and better senior-management teams, become more and more competitive. These types of companies can change strategies quickly to better align themselves with the rapidly evolving technology-market conditions in China.

What are the some of the major obstacles encountered when doing business there?
Lack of a complete legal framework, lack of a viable and proven exit strategy and a channel for venture-capital investors, lack of strong corporate governance and, still, a lack of quality and experienced local managers with international and well-rounded skill sets.

Can you give some examples of how cultural differences affect relationships between Chinese and American businesspeople?
One example is the issue of currency [revaluation]: the more Americans push, the more difficult it is for the Chinese government to agree. There is clearly a lack of cultural understanding from Americans, if you put aside all the economic reasons for and against a revaluation.

Are products made by American companies too expensive for most Chinese people to afford?
In general, the answer is yes. American companies simply can’t compete with China on manufacturing-based operations. In my mind, there are three things American companies can do to survive: 1.) Have a China strategy and find manufacturing partners in China. 2.) Innovate and differentiate with cutting-edge R&D at the same time. 3.) Localize product lines or services with local partners.

What is the typical reaction of the Chinese government to foreigners trying to do business in their country? Do they welcome it? Do the Chinese people welcome it?
The short answer is yes and yes. The Chinese government, both at the central and the provincial level, welcomes foreign investments in China and often has many preferential taxation treatments and better regulations to promote it. As for Chinese people, foreign investment often results in more jobs and they certainly are in favor of that, as well.

I’ve heard businesspeople say that the legal system in China is not particularly supportive of foreign business. What’s your take?
The legal system in China still has a lot of room to improve in general, not that it is particularly unsupportive of foreign business. In general, our take is: proceed with caution and work with trusted partners to prevent or lessen the chance of legal matters down the road. A company can only increase its odds of succeeding in China by doing that and doing it early to prevent an unhappy situation from happening at all. If such an unhappy situation happens, China is rapidly improving its legal and mediation system. But the process of taking legal actions in China is very long and painful, still.

What about piracy? I’ve heard it’s a huge problem in China. Is there any way to curb it?
Yes, piracy remains a huge issue, and it will NEVER go away. Instead of taking a combative and rigid attitude, one should find innovative ways to make sure the maximum benefit can be generated, given this environment. In order to operate in China, the issue of piracy needs to be taken into consideration as part of the core business strategy and dealt with in a practical way. Look at Microsoft as an example of not dealing with the issue right and now suffering from declining market shares year after year. We try to assist U.S. companies, for instance, in dealing with piracy issues. For instance, Hollywood can share their experiences with their Chinese [counterparts]. Then they can try to understand the professional way to project intellectual property. By doing so, government can support their act to balance the piracy issues between Hollywood and China.

Any advice for someone who has an idea for starting a business in China, or a business relationship with someone in China?
Be practical, set realistic and achievable goals, work with TRUSTED partners, and most importantly have a long-term view and BE PATIENT. “Patience, Patience and Patience.”

Airbus plans China assembly plant

Airbus signed a framework agreement with the Chinese authorities on Thursday to build its first aircraft assembly plant outside Europe, at Tianjin in eastern China.

It also agreed a preliminary deal for its biggest single order from China, for 170 aircraft, which could eventually be worth about $14bn (€11bn) at list prices, before heavy discounts.

Airbus, a subsidiary of EADS, Europe’s leading aerospace and defence group, is seeking to extend its industrial operations beyond its European base in France, Germany, Spain and the UK, and has made China a priority target both for increased sales and industrial co-operation.

It has failed to make much progress in breaking into the Japanese market, where Boeing, its US rival, has an entrenched position both in sales and as an industrial partner, and the European group is seeking to develop a counterweight presence in China.

Thursday’s deals provided a temporary respite for EADS and Airbus from the prolonged crisis triggered by mounting industrial and management problems, including the costly two-year delays in early deliveries of the A380 superjumbo and a recent €4.8bn profits warning.

Airbus said it had signed a framework agreement to assemble its successful A320 family of single-aisle, short-haul jets at a plant in the coastal city of Tianjin, east of Beijing. The plant is expected to be located in the huge Binhai development zone, which China’s government expects to rival manufacturing centres such as Shanghai and parts of the southern Pearl River delta.

Airbus said it would begin assembling aircraft in China in early 2009 with the aim of increasing production to four a month by 2011.

Louis Gallois, co-chief executive of EADS and chief executive of Airbus, said the aircraft sections for the A320 would continue to be produced in Europe but would be shipped to Tianjin for final assembly.

The Chinese consortium involved in establishing the plant will be led by the Tianjin Free Trade Zone and will include China Aviation Industry Corporation I (Avic I) and China Aviation Industry Corporation II (Avic II).

Olivier Andries, Airbus executive vice-president strategy, said Airbus would hold a 51 per cent stake in the joint venture and would appoint the general manager. It would invest €100m-€150m. “The main rationale in starting assembly is to build our presence in the Chinese market,” he said.

The deal was signed during a visit to Beijing by French President Jacques Chirac, France’s president, and still needs formal approval by the EADS board and Beijing.

It was supported by a general terms agreement for China to buy 150 A320 aircraft. Beijing also backed Airbus plans to develop the A350XWB, a new family of long-range, medium-capacity jets, by signing a letter of intent for 20 aircraft.

Separately Airbus said it had signed a firm contract for the purchase of 65 Airbus A319 aircraft with Skybus, a US lowcost, startup airline based in Columbus, Ohio. The airline is aiming to start operations in early 2007.

Ford to double China procurement

Ford is set almost to double the value of components it buys in China this year, becoming the latest global carmaker to tap low-cost Chinese parts producers to cut costs.

Bill Ford, executive chairman, said in Beijing on Thursday that the group aimed to source $2.5bn-$3bn worth of parts from China, up from $1.6bn-$1.7bn last year.

Mr Ford’s comments are the latest indication that Chinese component makers, which have long been keenly competitive on price, are now also meeting the quality levels required by multinational carmakers. Chinese manufacturers’ labour costs are about 5 per cent of those in Germany and 20 per cent of rival factories in eastern Europe.

Ford’s announcement follows Volkswagen’s move this year to raise the value of its Chinese parts imports from $100m in 2005 to $1bn. DaimlerChrysler is also sourcing more from China.

Analysts said General Motors was poised to follow suit, although the company would not comment on Thursday.

Goldman Sachs estimates that Chinese net exports of car parts will rise from $5.4bn in 2005 to $21bn in 2010 as Chinese products become more accepted overseas.

China still imports large volumes of more technologically sophisticated parts such as gearboxes and steering systems but it has become a big exporter of tyres, wheels, electronic components and glass.

Yale Zhang, analyst at the Shanghai office of CSM Worldwide, an industry consultancy, said the quality of Chinese-made components had improved thanks to increased competition and pressure from multinational carmakers that had established operations in China. The US, European Union and Canada asked the WTO last month to open a formal investigation into the tariffs China levied on foreign-made components.