Eight business rules for a changing China

China is rarely out of the headlines and with the visit ofPrime Minister David Cameron to China last week, Anglo-Chinese trade is firmlyin the spotlight.

China is experiencing a slowdown after years of rapidgrowth, but it is still producing a monthly growth equivalent of the annual GDPof Greece. In our recent publication ‘The Thoughts of Chairmen Now’, we asked14 CEOs from key Chinese companies for their views and they saw the slowdown asa chance to focus on profit and operational risk management rather than theconstant rapid-fire response required to years of rocketing growth. This is tobe seen as a positive sign for UK business seeking to expand to China.

As China remains a very competitive environment, witha very different business landscape to the West, it’s important to get the basics right. Here are our eight rules for doing business in a changing China.

1. Consider your strategy

It takes five hours to fly from one side of China to the other and is home to one-fifth of the world’s population. More than 100 million people live within an hour’s rail commute of central Shanghai. You need to have a very clear and coherent strategy about how you’re going to target the market. Doing your homework is critical if you are to succeed:

  • Consider how much time you would normally invest – then double it.

  • Talk with as many people as possible.

  • Get the inside track direct from The Thoughts of Chairmen Now – a book of interviews with 14 Chinese business leaders.

  • Keep up to date on China via our International Markets blog.

2. Do you need a partner?

An important decision is whether to go it alone – typically setting up a wholly foreign-owned enterprise (a so-called WFOE) – or whether to partner with an existing Chinese business, or even establish a franchise operation.

The organic route, of course, offers greater control, but do not underestimate the time and cost required to build a business from scratch. A partnership or franchise is typically quicker to market, offering access to local expertise and contracts, and joint ventures are becoming more common once again. However, proper due diligence and careful drafting of the legal documents is a must.

3. Choose the right structure

There are limitations to the types of structure a foreign business can use, and what they are licensed to do – particularly so in restricted industries, such as media and automotive. It is important to identify the right structure; it typically takes several months to set up in China, and getting it wrong can be a costly mistake. The most common structures are Rep Offices (which are limited to liaison activities), WFOEs and equity JVs.

Do you invest via Hong Kong? Once the gateway of choice, Hong Kong may no longer be the automatic route but it continues to offer good commercial and tax benefits for the right business.

4. How to keep good staff

China is growing very fast and there is fierce competition to attract talent – your business needs to stand out to attract the best and brightest. The key is to understand the workforce and their needs, and to treat them well.

Status is important for Chinese workers. They may well be coming from the countryside and just staying for the week, so providing them with good-quality accommodation will help retention. Status is important for management, too, so providing them with membership of the best clubs in the city is a valued perk.

Training is important – everyone wishes to develop their CV, so a rolling training programme will be appealing.

5. The culture of guanxi

There are some significant differences in business culture. Probably the most obvious is that the UK is fundamentally a culture that is driven by the rule of law. China is a culture that is driven by the power of long-term relationships, or ‘guanxi’. Building your relationships is really important, and be prepared to do the things the Chinese way.

The concept of Chinese ‘face’ is very, very important. Getting an answer can be hard as it’s difficult to understand when ‘yes’ means ‘yes’ and when ‘yes’ means ‘no’.

There are also several levels of meeting in China. There’s meeting without discussing, which is all about face-saving: ‘I met you but I’m not going to discuss anything.’ The next stage is to discuss but not decide: ‘I want to build a relationship with you, but I’m not prepared to commit at this stage.’ And then the third stage is decide but not act: ‘It’s very important to give you face, we have to make a decision but we don’t want to decide what we’re going to do so we’re not going to do anything.’ The next stage is action.

It is vital to know where you are in the decision process and understand a commitment to action when that has been agreed.

6. Learn from Oreo

Be prepared to tailor your product for the Chinese market. The Western version of the Oreo is a distinctive, round, chocolate biscuit that comes in packs of 14. After extensive consumer research the Chinese version was released. It often comes in small packs, and tastes totally different – the Chinese do not have the sweet tooth (or large waistline) of the West. It doesn’t look, taste or feel like an Oreo, as we know it, but it retains the name because everyone knows the Oreo brand.

7. Manage the regulation

High levels of bureaucracy top the list of concerns of UK investors in China. If you don’t get it right at the outset, you can get it very, very wrong. This is particularly relevant when drafting the business licence, and when injecting funds into or extracting funds out of China. The good news is that this is getting easier, but getting it wrong can be very expensive: unnecessary taxes, trapped funds or even suspension are real, but very avoidable, pitfalls.

8. Protect your asset

The recent press coverage around UK companies and bribery, and ongoing stories about the passing off of major consumer brands, highlights the need to have proper controls in place. IP protection is important, although it is perhaps lower on many companies’ list of worries than might be expected.

Good internal and external controls are vital. China is a diverse and complex country, a long way from the UK so it is important to have systems and procedures to act as your eyes and ears to prevent irregularities. For many companies, their Chinese operations are a jewel in their crown – it is important to polish, protect and nurture such an important asset to ensure it does not tarnish.

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