China: Open for business
Business in China | Canada has strong historical and political relationships with China that makes both countries a natural place for Canadians to do business. There are many good reasons to do business in China, but like any venture, you need to go in prepared.
China’s premier Li Keqiang anticipates trade between Canada and China to double over the next ten years. In 2015, the country’s government-backed venture funds were valued at about $231 billion, making China the largest venture capital firm in the world. There is no question that this millennium's China is hungry for new business and big ideas.
Creating a successful venture in another country is not just about migrating a good idea born in one’s home country and culture. A solid business strategy needs to be coupled with a deep cultural understanding that will ensure your business will “translate” and increase the odds that you will be able to overcome the challenges that are unique to your target country.
Most of us know that culture is not just a decorative flourish, dictating what we wear to a business meeting and how (or if) we shake hands with our foreign counterparts. This may seem obvious, but in fact, the business world is rife with horror stories about corporate brands gone wrong.
Take beauty care giant Clairol’s unfortunate foray into the German market with their “mist stick” curling iron, which, when translated meant “manure stick.” P&G’s soap commercial deeply offended viewers in Japan because of their inappropriately intimate portrayal of a husband and wife. Common in these gaffes is a lack of understanding about how customer pains and gains need to be tailored to another culture. This includes everything from branding and style of packaging to pricing according to the target country’s standard of living, to meeting culturally-derived customer service expectations or understanding purchasing behaviours.
For example, we hear a lot about the rising middle class in China, but what does “middle class” really mean? The fact is, most Chinese still earn and spend much less than their North American counterparts. While one-third of the population is considered “middle class,” only two percent can afford to pay income tax. The average Chinese consumer spends just over 9 per cent of his or her income on recreation compared to their U.S. counterparts, who spend over 17 percent on recreational activities. These are just some of the important distinctions that must be fully considered when planning to do business in another country.
China: Pleasure before Business and Other Cultural Factors
Being culturally savvy means challenging our assumptions. Strategic planning tools such as a value proposition canvas design can help business startups map, test and adjust their value proposition to meet foreign customers’ needs. The business model canvas helps companies thoroughly examine their customer segments, channels, resources, cost structures and revenue streams. Additionally, the business model canvas works as a strategic tool for multiple companies in different sectors and has been reworked for each, such as with the Lean Canvas. Are the value propositions different for consumers in China than those in N. America? Of course, they are. Says Lambert Strategy Group Limited president Avi Lambert, “Considering the macroeconomic factors of a market is critical to answering how your value proposition will or will not meet the pains and gains of your target audience.”
While only you can measure your business or product against the needs of the global marketplace, there are some important things to remember when doing business in China.
Checklist for Canadians Doing Business in China
- Ensure your sector is open to foreign investment. While most sectors are open to foreign investment, there are some exclusions. As well, certain sectors or sub-sectors may be restricted to specific types of business structures such as joint ventures.
- Determine which business structure will best suit your enterprise. Wholly Foreign Owned Enterprise (WFOE), Representative Office (RO) and Joint Venture are just some of the options. A business service with expertise in China can help.
- Understand the history of the sector in the target country. Knowing the current landscape of your target industry can give you an advantage now. But developing a deeper understanding of the history of the sector will give you many valuable cultural insights and potential trajectories into future trends.
- Protect your IP. China is infamous for its knockoffs of popular products and brands. Concerns over intellectual property protection are consistently named as a top issue for businesses operating in China. Research, register – and regularly monitor – your trademarks. Be aware, however, that no protection is 100% foolproof.
- Look at regional differences when choosing your business’ location. China is a vast country with different infrastructure, utility access, and labour costs, depending on the region. Be aware also that local authorities often exercise more power than their counterparts in Canada.
- Network, network, network. To successfully do business in China, you must have “guanxi,” a network of mutually beneficial “relationships” or “connections.” While these networks can open doors, they also create obligations. In the West, we often associate this with patronage or nepotism, but in China, guanxi is a necessary tool for survival.
- Stay on top of government policies. While this is important in every jurisdiction, the state of China’s weighty top-down approach and many state-owned enterprises give it considerable influence over market performance. Keeping your ear to the ground on potential policy shifts and economic interventions will help you stay ahead of the curve.
- Don’t be afraid to lean on the experts. From the art of business negotiation to the advisability of gift-giving to wading through administrative and requirements, there are many complex cultural minefields to negotiate. A reputable business services organization with deep roots in China can be invaluable.
- Do thorough background checks to find qualified workers. Even with an MBA in hand, many applicants lack workplace-relevant skills. Job hopping is rampant, so you may need to offer incentives. Some companies develop alliances with business schools and government, which can raise your status and visibility - and improve the quality of applicants.
Despite the many hurdles associated with starting a business in China, there are also many potential rewards. Since China first became a member of the World Trade Organization (WTO) in 2001, it has continued to move towards a more open market. Even in the face of this decade’s global economic crisis, China has continued to emerge as a leading economic power, moving from the sixth biggest economy to the second in the world. The country has moved from reliance on industry and manufacturing to the integration of a service and consumption-driven model. While 2015 was a difficult year for China due to factors such as the housing sector slowdown and reduced global demand for steel and manufactured goods, some economists are now seeing signs of a rebound. The country is also making a concerted effort to reduce its greenhouse gas emissions, which is creating new opportunities in the green economy. While a decade ago only one in 10 in China was online, now nearly everyone is connected by a mobile device. Online shopping is immensely popular in China: Taobao is now China’s most valuable brand – and a potential platform for Canadian-made products.
As for where to start a business in China? With the strength of its infrastructure and human resources pool, Guangzhou has consistently ranked high on Forbes’ list of best cities for business. Giving Guangzhou a run for its money is Shenzhen, a tech hub also known for its inexpensive manufacturing space and robust supply chain infrastructure. There are many good places to start a business in China. Rounding out the top 10 in Forbes China’s 2015 list are Shanghai, Beijing, Hangzhou, Nanjing, Ningbo, Wuxi, Qingdao, and Chengdu.
Guanxi and Other Important Cultural Topics for Business in China
- Relationships are everything. In China, getting to know someone personally creates a foundation of trust. This must be in place before any business discussions can begin. You can expect your first visit to likely achieve nothing tangible. From a Western perspective, this can feel time-consuming, costly – and frustrating. Be patient. There are no short cuts to building trust.
- Saving face. “Face” is about honour, respect and preserving one’s reputation. Any form of outright refusal can cause the loss of face, which is why it’s important to be circumspect, indirect and respectful, even when the answer is “no.”
- Guanxi: You scratch my back, I’ll scratch yours. To do business in China, you must have “guanxi,” a network of mutually beneficial “relationships” or “connections.” While these networks create opportunities and open doors, they also create obligations. In the West, we often associate this with patronage or nepotism, all of which have negative associations, but in China, guanxi is a necessity.
- Socializing. Getting to know your business partners is as integral to a successful business as any meeting and is an important part of establishing “guanxi” (see above). In fact, business is often conducted during shared meals.
If you take the time to fully evaluate and understand the economic, as well as cultural, landscape, the benefits can be immense. Zhu ni hao yun - 祝你好運 – good luck – as you consider your foreign enterprise.