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When you think about doing business in China, do you see it as a challenge or opportunity? China represents the biggest market in the world. This alone would make any company want to operate here.
Succeeding in China’s business world also presents significant challenges. With a large amount of paperwork and legal requirements alongside heavy government oversight, your company may feel out of its element.
When you add the cultural differences, the whole endeavor seems more and more complex. But if you focus on the opportunities and arm yourself with enough information, you can position yourself and your company for a huge win.
Why do business in China?
For starters, China gives you access to a market comprised of a 1.4 billion population. Other reasons to do business in China include accessing one of the most lucrative global markets where economic restrictions are loosening.
China is home to:
- Leading artificial intelligence
- A third of the world’s corporate unicorns
- High GDP growth
In addition to this, China is also a global leader in renewable energy.
What are the pros and cons of doing business in China?
Even with all the advantages that China offers, your company will want to weigh the pros and cons of doing business in China before deciding to expand.
China is the second-largest global economy and is on the path to becoming No.1 by 2030. Its GDP grew 2.3 percent in 2020, making it the only major global economy that grew that year.
The Organization for Economic Cooperation and Development (OECD) says China is expected to return to its pre-pandemic trajectory with a growth of 8 percent in 2021.
China aims to become a “high income” nation by 2025 and advance to a “moderately developed nation” by 2035.China is the second-largest global economy and is on the path to becoming No.1 by 2030. Click To Tweet
Growing middle class
According to the Brookings Institution’s Global China project, “China already makes up the largest middle-class consumption market segment globally and is a priority market for major multinational firms.”
In 2020, China’s middle-class led global consumption with US$7.3 trillion. In addition, McKinsey predicts that three-fourths of China’s urban population will be middle class by 2022.
A great advantage of a growing middle-class is this group of consumers has a higher tendency for adopting digital trends.
According to the World Intellectual Property Organization (WIPO), Chinese businesses filed 473 of the 608 artificial intelligence patents and a third of all blockchain patents.
The Shanghai-based Hurun Research Institute’s Global Unicorn Index 2020 places China as the second global tech giant just behind the U.S. It also says that these two countries dominate the future of tech and are currently home to 79 percent of the world’s unicorns.
A 2020 World Investment Report states that China attracted US$138 billion in 2018 and US$141 billion in 2019 in foreign investment, respectively.
In addition, a report by the United Nations Conference on Trade and Development (UNCTAD) shows that China surpassed the U.S. as the largest recipient of foreign investment in 2020 with US$163 billion compared to $134 billion attracted by the U.S.
China is now in the top 10 of the World Bank Group’s Doing Business 2020 study. According to the World Bank Group, “China carried out a record eight business reforms” during 2020.
China’s reforms strengthened its position as one of the most efficient countries for contract enforcement.
“China has undertaken substantial efforts to improve the domestic business climate for small and medium-sized enterprises, maintaining an active pace of reforms,” said Martin Raiser, World Bank Country Director for China.
Abundance of talent
In 2019, around 7.6 million students graduated from undergraduate programs at public colleges and universities in China. Also, about 640 thousand students graduated with master’s and doctor’s degrees.
The number of graduates is expected to grow by 300 percent by 2030.
Despite the global pandemic, China remains the biggest trading partner for more than 120 countries, and multinationals in China continue to grow.
“Michael Lai, general manager of China operations at AstraZeneca, the British multinational pharmaceutical company, said despite the impact brought by the pandemic, the company realized double-digit growth in 2020.” China Daily
The tension between these two global economies has led to tariffs and sanctions that have discouraged some U.S. companies from doing business in China. Tariffs don’t affect every company; however, they have a more pronounced effect on national security and technology.
According to a survey conducted by the U.S.-China Business Council (USCBC), 52 percent of their members reduced or stopped planning investments in China due to uncertainties from U.S.-China relations.
Lack of transparency
According to the USCBC, regulatory transparency ranks as one of the top concerns for U.S. companies in China. In addition, China has strict rules about doing business and dealing with capital, and these rules can change rapidly and drastically.
“Firms are still struggling with unfavorable laws and regulations in China, with bureaucracy being top on the list. Furthermore, laws and regulations aren’t published, and it is still difficult to access the various state regulations. This lack of transparency makes foreign companies believe that they are being targeted and treated unfairly.” Justin J. Shrenger, attorney specialized in assisting U.S. companies in China.
A joint five-year study between Bain & Company and LinkedIn in 2019 found that China’s business leaders moved from multinational companies to local companies at more than five times the rate that they moved from local companies to multinationals.
This trend was significantly more pronounced with professionals under 35, who see national companies as more favorable for long-term growth.
Local companies in China enjoy a higher degree of freedom and market access than multinationals. The fact is that the government entirely or partially owns many Chinese companies.
“Another way the government is infiltrating the private sector is its increasing use of state-backed venture capitalist funds to invest in companies developing critical technologies, such as 5G and semiconductors.” foreignpolicy.com
One of the major concerns for companies doing business in China is IP protection. Throughout the years, companies have entered the Chinese market and exited early due to a lack of IP laws that protect their products from being copied and reproduced by national companies.
Although protections are increasing due to the growth of national tech companies, according to USCBC, “responses from several companies indicate that the impact of IP rights enforcement limits their products manufactured, licensed, and sold in China, in addition to their R&D activities.”One of the major concerns for companies doing business in China is IP protection. Click To Tweet
China’s Cybersecurity Law, which went into effect in 2017, features many regulations that have yet to be finalized. According to USCBC, companies’ concern for information flow and technology security policies increased to 84 percent in 2020, from 76 percent in 2019.
What can you learn from an international company that succeeded in China?
KFC, or Kentucky Fried Chicken, is a remarkable example of success across cultures. The American fast-food company managed to become the most popular fast-food chain in China.
What crucial steps did KFC take in China?
1. Adapt: The company didn’t just try to sell fried chicken to Chinese consumers; they created products that are exclusive to China and researched what the locals wanted.
2. Become digital: KFC created an app that rewards loyalty and offers consumers the chance to obtain coupons and gift cards. The fast-food chain has also opened a digital store on TMall, China’s most popular eCommerce site.
3. Show they care: Yes, KFC sells a little of the “American experience” in China. They also show an enormous amount of interest in the local costumer and make Chinese people feel like they are getting an experience only available in their country. For example, they offer menu items that are based on traditional Chinese dishes and exclusive promotions as well.
What are some tips for doing business in China?
Consider your competitors
According to Forbes, “a common cause of losses in China is that foreign firms are so focused on market growth rates that they neglect the basics of competitive analysis.”
Yes, the market is enormous and you must keep global competitors on your radar, but remember that there are also many local competitors and local governments supporting them.
It may sometimes seem like the government in China is centralized. While the government in the capital of Beijing has the final say, local governments have a lot of power and can even decide your company’s future.
Make sure you develop a respectful and transparent relationship with local governments. Yes, you will have to compete with local companies, but there are just as many local governments and businesses that will be happy to work with you.
GMA, a digital agency located in Shanghai, uses the example of Airbnb to illustrate how a company can work with local officials to increase tourism and help each other.
Think beyond manufacturing
According to the World Bank, “China’s high growth based on resource-intensive manufacturing, exports, and low-paid labor has largely reached its limits and has led to economic, social, and environmental imbalances.”
In 2020, Chinese manufacturing was hit by “a perfect storm” that led to a downfall in demand. Manufacturing has shifted to countries like Vietnam and Thailand.
Adapt to the Chinese market
As a rule, never assume that any two markets are alike. China is no exception. What has made you successful in your local market won’t translate.
You need to experience the country in person and hire experts who can guide you through the lay of the land.
Speaking Mandarin is key
Language is more than just a form of communication — it is the vessel for cultural nuances and complexities that can only be shared through the local language.
Hire translators, local experts, and learn a few words in Mandarin. This effort will help you send the message that you are interested in the country and not just the dollars and cents.
Use Chinese social media
In China, you need to forget about Facebook and Twitter. The social media platforms in the country are Weibo and WeChat.
You must understand the importance of WeChat since it is your direct line to consumers through which you can communicate with customers and create integrated campaigns.
Be online and be mobile
According to a China Internet Network Information Center (CINIC) report, as of June 2020, China had 939.84 million internet users. Of these, 932.36 million were mobile internet users.
It’s easy to get caught up in the online market size, but keep in mind that e-commerce is also different in China. Use local platforms to reach the largest number of customers.
Be strategic, manage your expectations, and know why you are there
Government oversight is not the end of the world. However, you will probably have to align your company message with government policy to show your commitment.
Don’t conduct business with the hope that government policies or regulations will change in your favor. If you encounter a challenging policy during market entry, assume the policy won’t change and the challenge will continue unless you take action.
“Be clear if you are in China for the opportunity in China, or if you are in China for the opportunity that China creates for you in the rest of the world. This can lead to a very different presence in China.” McKinsey
Hold on to your employees
Chinese professionals are highly educated and business-focused, which means that they are looking to join serious companies.
As we have previously mentioned, international companies are losing employees to local companies in China. If you want to avoid becoming a part of this trend, you need to understand everything from Chinese labor laws to cultural nuances and traditions before hiring employees.
How can you hire employees in China?
A huge market is also a market that requires preparation before entry. The key to your success relies on your ability to be nimble and use your resources in the best way.
When it comes to global expansion and hiring international employees, the process of setting up an international entity seems somewhat outdated when compared to the pace and risk of the modern business world.
When your company expands into China, you might see a considerable upside. Still, you are also taking on significant risks, such as investing a large amount of capital and resources without the assurance of success.
Companies that work with international partners, such as an Employer of Record (EOR), can significantly reduce these risks and become more agile.
An EOR allows you to hire international employees without the need to set up an entity. With a compliant entity already in place, an EOR serves as the legal employer, handling payroll, taxes, benefits, and HR functions.
The EOR is responsible for the logistics of in-country compliance while you retain the complete management of your employees. In addition, the EOR has a team of local experts on the ground to assist you.
If your company wants to do business in China while staying nimble and saving resources, we invite you to learn more about an EOR and how it can help your global expansion.