Overseas Markets: What About China?

A discussion of doing business overseas wouldnít be complete without focusing on doing business in China. Itís hard to pick up a business newspaper these days without reading about the growing influence of China on the world business and economic landscape.

The statistics are undeniable: Since 1978, Chinaís GDP has increased six-fold, with average annual GDP growth of almost 10 percent over this time. Per capita output has more than quadrupled since 1991. China is now the number three import nation in the world and the worldís fourth largest economy (behind the U.S., Japan and Germany). In addition, bilateral trade between the U.S. and China has almost tripled (to $328 billion) since China joined the World Trade Organization five years ago.

The China Challenges
Thereís no question that Chinaís huge population (currently more than 1.3 billion people) and growing middle class hold great promise for many U.S. exporters. In addition, Chinaís low-cost labor force may make it attractive as a production base, whether this means setting up a manufacturing plant there or sourcing production to other companies based in China.

But the decision to formulate a ìChina strategyî should be based on more than just jumping on the latest business bandwagon. There are significant challenges to doing business in China, whether as a manufacturer or exporter, and especially for companies new to the region.

Even more so than in most countries, the research and due diligence required to do business successfully in China are enormous. Economic, regulatory and political conditions change rapidly, and tax policies regarding inter-provincial trade and travel are complex. Tax incentives are frequently offered to foreign companies, for example, but these differ among provinces and regions, which are often pitted against one another by the central government in competition for economic growth and development.

In fact, one big mistake many companies make is viewing ìChinaî as one huge entity. To the contrary, China is an enormous country with as much or more diversity as you would find between the west and east coasts of the United States. There are vast differences between various regions: As many as 30 different ethnic groups speak several hundred dialects, and some 60 percent of Chinaís population remains rural, despite the emergence of Shanghai and Beijing as major international business centers.

Cultural Differences
It would be foolish to embark on a China strategy for your company without careful consideration of the cultural differences between our countries. Two good examples:

1. It is not uncommon for Chinese to exaggerate their resources, capabilities and authority. (For example, all property is government owned, regardless of what a Chinese businessperson may tell you.) This makes it critical to verify credentials and confirm details through independent sources before finalizing any deals or agreements.
2. Developing trust with overseas partners is extremely important to Chinese businesspeople. They usually want to spend a lot of time together with potential partners in social situations just getting to know each other before discussing the business deal itself, so a great deal of patience is required.

Also keep in mind that Chinaís business environment is highly regulated, and thus extremely bureaucratic and slow moving. Although foreigners are considered guests in China, they are expected to comply with all Chinese government rules and regulations.

On The Ground
For any company serious about doing business in China, there is simply no substitute for spending time ìon the groundî there. A minimum of one week in the country, accompanied by an interpreter and an international consultant experienced in doing business in China, is recommended. The consultant can help identify and select contacts you should meet with (potential clients, partners, suppliers, regulators, etc.), set up these meetings and serve as a general go-between.

Closer to Home?
If doing business in a distant country seems a little intimidating, you might want to consider somewhere closer to home instead ó like Mexico.

With about 108 million inhabitants, Mexico is the 11th most populous country in the world. It has a free market economy and is firmly established as an upper middle-income country, with the highest per capita income in Latin America. Average labor costs in Mexico (in 2003) were $2.45 (USD) per hour (with benefits) and are projected to rise to $3.28 per hour in 2009. Nearly 90 percent of Mexican exports go to the United States and Canada, and 55 percent of its imports come from these two countries.

In 2006, U.S. companies exported a total of $134 billion worth of goods to Mexico. Vehicle parts and accessories, computer accessories, semiconductors, plastics, industrial machines and supplies, and petroleum products were the top exports.