China represents a 120 to 150 billion pound market. It is the second-largest market in the world, and it is rapidly growing as the country develops. Companies in China report some of the highest profit margins in the world, too. That’s reason enough to consider doing business here. However, this opportunity comes with challenges you may not find elsewhere. Here are seven unique challenges to doing business in China.
The Legal Climate
Firms doing business in China face some of the same challenges they do everywhere else. This includes finding qualified people quickly. You also have to deal with the overhead expenses that come with being a Chinese employer.
This is because a litany of taxes is being applied to foreign companies. China has been billing foreign companies for education, construction, and urban maintenance taxes, among others. Furthermore, companies doing business in China have had to pay for insurance for their staff since 2011.
If you plan on doing business in China, we suggest you check out this piece by New Horizons. It runs down some of the basics of starting a business in China, including the best areas in the country to establish one, intellectual property rights, and how to choose the right legal structure. Hew Horizons offers professional employment organization and employer of record services to businesses thinking of starting a business in China.
Working with a PEO like New Horizons allows you to rapidly set up operations in China without having to partner with a local Chinese firm or going through the process of creating a company in China. The PEO will ensure that you remain compliant with Chinese employment law. They can also hire managers who are familiar with the local culture.
Bureaucracy is also a major issue when doing business in China. This is in part because the Chinese government has put many rules in place to protect Chinese interests.
For example, China has prohibited foreign investment in certain sectors, though it incentivizes it in others. This is why outside companies are not on an equal playing field when they’re entering the Chinese market. You face competition from Chinese firms that aren’t bound by the same investment restrictions.
Chinese firms are favored in project bids, and they’re allowed a much larger scope of work. You may not be allowed to expand as fast in areas where a favored domestic supplier is already doing business. It is harder to get administrative licensing and product approvals, as well.
Another factor to consider is how many companies and assets are actually owned by the Chinese government. This can make joint-ventures hard to establish because you’re partnering with the Chinese government in some way. In other cases, you’re simply negotiating with state-owned enterprises, and that slows everything down. Yet your business will probably be competing with state-owned enterprises. Three-quarters of foreign companies working in China say they are.
China is a country with a several thousand-year-old culture, and business culture is very different from what most are used to in the West. While you may assume that the pace of life would make for faster business, you’d be sorely mistaken.
Business can seem to move surprisingly slow once you get on the ground. This is in large part because business is personal here, as it is in much of Asia. You will need to take the time to accept invitations, go through introductions, address people by their titles, and sit through meetings that are as much ritual as business. This is why you should accept an invitation to go to lunch with everyone and know that they may extend several such invitations.
Chinese firms want to establish a relationship before they do business. In this regard, trying to rush through the formalities to get down to business can cost you the business opportunity. You also have to understand how important it is to show deference to the right people. Chinese people need to maintain and protect their reputation or “face”. Directly questioning or contradicting a manager is considered offensive and failing to give credit is a major mistake.
There are many other unique cultural factors to take into account when selling to the Chinese market. Most companies don’t take these into account, and this results in up to 40% of product launches failing. This is why you must understand these rules in-depth before you leave.
This is also where having a savvy team handling the hiring of managers will be essential instead of trying to bring in your own team. While you can bring some of them, it’s more important to have managers that understand the work climate in the country so that your people can adapt and learn as they go.
The Economics of Doing Business in China
China has attracted businesses eager to take advantage of its low cost of labor, though many are also trying to gain access to the massive Chinese market growing at 7% a year. This means that many companies are dealing with inflation between 5% and 10%. This leads to increasing prices for raw materials and labor.
The demand for skilled labor is also far higher than the supply. That is why you may see a 20% to 30% percent wage hikes for experienced managers. You will have to have a plan in place to keep qualified workers, given that they have their choice of employers.
Many investors coming to China also seem to misunderstand how much the consumer market has changed in the country. The consumer environment is much more diverse than it once was, and those seeking expansion in the country need to be aware of that. The market is also very isolated from other markets in the world, which can make it even more difficult to decipher.
Working in China means working with the Chinese government at every turn. That’s just the nature of business in China. And corruption is something that exists in China, though new leaders are trying to take steps to reduce it. This is coming from a need to show more transparency to the people who are increasingly growing weary of party leaders clinging on to power to enrich themselves.
Intellectual property theft is a huge problem in China, and the principle is not very well understood in the country. However, while there was and still are plenty of issues when it comes to protecting IP rights, things are slowly changing, partly due to public pressure again.
While western companies seem to have been the ones complaining the most about IP rights in China, a growing number of local businesses are also asking for more protection. The US ambassador to China, John Locke, said that for every foreign company asking for their IP rights to be respected and protected, more Chinese companies are asking for the same. We can expect things to get better, but they’re still not perfect, so you’ll have to be especially careful when dealing with things like copyrights and patents when dealing in the country
China is on track to become the largest consumer market on the planet. This alone makes it worthwhile to consider doing business here, though there are several challenges you need to overcome to do so.