Trading Successfully with China

Related entries: Business Issues, General, Strategy, Trading

Trading with China has never been easy, and the UK experience is instructive. Problems were initially encountered by the hapless Lord McCartney, leader of the first British trade delegation in 1793. He refused to follow protocol, and was informed by the emperor that he saw no value in objects strange and mysterious  and had no use for your country’s manufactures.” We have come a long way since then, but in 2005 political and cultural issues still play an important role in China business, whether it is related to textiles, the arms trade, Japanese history books, or differing approaches to relationships and negotiation.

Despite the problems, in 1793 – as now – progress was still made, and by 1820 China accounted for almost one third of world trade. Today China is the third largest trading nation, with a trade value of US$1.16 trillion in 2004, an increase of 35.7% over 2003.

International businesses are increasingly looking to China as a manufacturing base  and more than half of Chinas exports are already produced by foreign-invested enterprises (FIEs ). Those that have not directly invested in China are seeking opportunities to cut costs by sourcing direct from the market, with typical savings over traditional sources in the range of 20-50 percent.

However, Chinese imports have also grown strongly, and China is an increasingly attractive export market – from the natural resources needed by Chinas industry, to the luxury consumer goods bought by the wealthy urban elite. The size of the opportunity is reflected by estimates that Chinese imports will exceed US$1 trillion by 2010.

It is not surprising, given the scale and speed of Chinas impact on world markets, that challenges have accompanied the opportunities. Among recent problems affecting US and EU trade relationships with China has been the textiles sector. Under WTO rules, textile quotas ended on January 1 2005. This led to a (not unexpected) surge in textile exports from China, and to (equally predicable) protests, as uncompetitive western textiles companies had to lay off workers. It is now the Chinese who are in a position to lecture on the role of market forces.

As Chinas Minister of Commerce, Bo Xilai, explained to a business group in France in May, the trade relationship is not restricted to textiles, and is not entirely in Chinas favour. He noted that while Chinas low-wage environment gives the country a competitive advantage in the manufacture of textiles, the EU has a similar advantage in high-tech industries such as aerospace. In both cases the products are exported, but China needs to sell 800 million shirts to buy 1 Airbus 380!

Companies seeking to take advantage of the opportunities offered by China, whether importing or exporting, need to prepare carefully, and implement their plans skillfully  and with the same common sense that they use when doing business elsewhere.

Many companies, when entering the market, fail to define China in a way that is meaningful for their business. It is clear to most people that China is too large and diverse to be seen as a single, unified market. But others continue to have a dangerously simplistic view. One large US multinational recently used per capita GDP (currently US$1,200) as the basis for a decision not to take a new product, costing just over US$100, into the market. Their conclusion was that it would be too expensive for local consumers. However, while many of Chinas 1.3 billion people are not yet wealthy enough, there is a developed middle class of willing and able consumers  an indicator of which is that over 300 million people already own a mobile phone.

Because of this reality, businesses tend to segment the market and to focus on key regions (e.g. the Bohai Rim in the north, the Yangtze River Delta in the east and the Pearl River Delta in the south), or on a limited number of primary cities where incomes are relatively high, and where the business infrastructure and markets are well developed. The major domestic markets for many imported goods can be found along the east coast, and especially in the big 3 cities of Beijing, Shanghai and Guangzhou. For some businesses China can be defined even more narrowly, with cities having such glamorous epithets as Sock City  (Datang, Zhejiang province), or Hometown of Welded Mesh  (Anping, Hebei province).

Once the market has been defined, a range of issues need to be addressed. One of the defining challenges is the high level of competition. Domestic industries were developed on a province-by-province basis, and remain fragmented despite attempts at consolidation. Many industries suffer from excess capacity and inefficient allocation of capital  especially in the state sector. In addition, many foreign investors have entered the market aggressively. In this environment competing on price is not enough, and foreign companies have to innovate, and leverage the value of their brands.

Policy and regulation are subject to frequent and rapid change, and it is important to adapt to new conditions. Carefully managed research can help companies to understand, and get the best from, the market. However, in such a fast-moving environment research results and business plans need regular review. Bilateral political issues can also have a negative impact – as was recently seen by Japanese companies. It is therefore important to be aware of the wider political context, and to be sensitive to current issues.

Intellectual property (IP) is a frequent area for concern, as abuses are common, and as enforcement through the courts can be difficult. Companies with significant IP are advised to develop strategies that focus on prevention rather than cure. Other risks can also be limited by conducting proper due diligence and credit checks, and by structuring deals sensibly (e.g. considering dispute resolution in China, where enforcement may be quicker than for an overseas award).

Foreign companies also need to understand the importance of relationships and guanxi . It takes time to develop trust  and certainly more than a few drinks at a banquet! Senior executives need to invest time to make regular visits, and to engage with their Chinese counterparts. Negotiations should be seen as part of this process of engagement, rather than a simple means to an end. In the same way, the signing of a contract, while being cause for celebration, should not be seen as the end of the road, but as another step towards a mutually-beneficial, trusting relationship.

While China can seem a daunting place in which to do business, it offers real benefits to those that are willing to be patient, develop a sensible strategy, and allocate sufficient resources. Thankfully it is now a market that welcomes the wests strange and mysterious  technologies and branded goods, and foreign traders – thanks to Lord McCartney and the many that followed him – have learnt that a little cultural understanding can go a long way.

Jeremy Gordon is Chief Executive of China Business Services Limited an independent, research-driven consultancy that uses expert local resources to deliver consolidated solutions to international companies in China. For further information please email: jg@ChinaBusinessServices.com, call +44 (0)20 7253 4590, or visit the website at: www.ChinaBusinessServices.com.

Online Resources for China Trade

1. China-Britain Business Council:
2. UK Trade & Investment/ British Embassy
3. Ministry of Commerce of China
4. China Council for Promotion of International Trade
5. Chinese Embassy in the UK
6. Hong Kong Trade Development Council
7. China Today
8. Alibaba
9. Made in China
10. ECTrade

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