Top ten things you need to know about doing business in China
Published by the Canada China Business Council
On this page
- Seeing is believing
- The big set-u
- Face time
- Location, location, location
- Manage your IP and it will be OK
- The communist party of china is your friend
- Watch this space: Chinese consumers are on the march
- Need cash? There is a Chinese person named Wang who wants to give you some
- Serve the people
- Hi, I’m from the federal government and I'm here to help you
1. Seeing is believing
For most Canadian business leaders, it takes just one look. Visit China once and they understand. Everyone knows the numbers: China is our second largest export market. Already the world’s largest market for cars, cell phones and seafood, it is the fastest growing market for luxury goods, air passengers and nuclear power. China has the most internet users and online game players, the longest high speed rail network and the busiest port. There are well over 100 cities in China with a population of more than one million and, according to the Economist Intelligence Unit, the economy will grow at rates of about eight per cent per annum for the next decade. In China’s case, seeing is believing. The greatest challenge faced by Canadians in China is, in fact, one of our own making—getting the attention and support of executives back home. You cannot navigate China without their support. If you or your CEO haven’t yet been to China, you need to go. The rest will follow.
“Despite how much press China is receiving in Canada, it never ceases to amaze me how wrong most Canadians’ perception of China is. For this reason, I make every effort to facilitate visits of our company management and directors…. Only by seeing for themselves can our companies truly appreciate the speed with which we need to penetrate and grow in this market or else be left behind.”
—Fred Kao, Vice President, Magna International China
2. The big set-U
To do business with China, you need to be there. Both to seize opportunities and maintain control. In China, when things happen, they happen fast. There may already be as many as 400 Canadian operations on the ground in China. Most of these grew up over the past 5-15 years. They came to China to source cheap products or inputs. As volumes grew, they opened representative offices and eventually started to manufacture for export. Today, most of these firms are focused on selling to China’s domestic market. And to be successful in this business, you really need a local presence. There are different ways that you can structure your China operations. Usually, the best choice is to establish a wholly owned foreign enterprise or WOFE. By far the most important thing is to hire a managing director whom you can trust. Never let a seemingly well connected Chinese entrepreneur start your China business for you, no matter what your fortune cookie says. Don’t send Canadians without China experience, unless you also give them some loyal Chinese-speaking support with enough seniority and sophistication to work local networks effectively. Grow your Chinese business on your own terms.
“If you take the time to nurture mutually beneficial partner relationships, they can help you navigate the often opaque ‘system’ in China. In turn, assist [your Chinese partners] with their goals in Canada.”
—Sean Goff, Managing Director Asia, CN Worldwide
3. Face time
Facebook may not be available in China, but face time is all-important. Take a personal interest in your Chinese clients and partners. Your company reps should be encouraged to spend time building professional relationships. This is part of doing business in China. Personal connections between company presidents are a useful fallback during any dispute to re-affirm common objectives and find practical workarounds. Chinese courts can be expensive time-wasters. Take a page from many Chinese companies and add an arbitration clause to your contracts. The China International Economic and Trade Arbitration Commission provides advice to foreign companies on their website. The key point is to create conditions ahead of time to resolve problems that might otherwise threaten your growing China business. And remember that personal connections bring opportunities. One executive recently noted: “A friend in Beijing introduced me to a retired party secretary responsible for the city where our factory is located. She arranged for me to meet the current vice mayor, who, as it turns out, is the neighbour of my marketing director. Now we’re negotiating a supply contract with the city.” Personal connections are key in China.
“Due diligence on partners and clients is critical to the forestry industry regarding China, as it is for any business. Our wood export members tend to only deal with major state-owned distributors and reputable private sector ones. Similarly, our focus regarding Chinese developers is to target the largest ones with proven track records. Protection from EDC, where appropriate, is advised.”
—Fred Spoke, Managing Director, Canada Wood China
4. Location, location, location
Know where you’re going in China. It’s a massive country. Smaller cities often present faster economic growth rates and less competition, and they may be just a few years away from reaching the same level of disposable income as cities such as Beijing or Guangzhou. Deciding where to focus in China is critical.
If you are going to China for an existing client, proximity to their operations makes the location decision a no-brainer. If you are producing for export, consider smaller, newly upgraded port cities with lower costs than, say, Shanghai. High-tech and industrial parks abound. Be prepared to negotiate a price for every detail, from water to electricity rates and grid hook-ups. Negotiate options in advance for your future needs. Inland provinces such as Sichuan offer greater incentives than others places. Remember that Canadian companies on the ground can be good allies. They are often happy to bring you in because it helps them win favour (and secure better deals) with local governments. And don’t forget about Hong Kong. Transparency, rule of law, a fully convertible currency and sophisticated financial sector all still make this city a good launching pad for your China strategy.
“1.3 billion customers with a large and growing middle class — this must mean there is a huge customer base for my company, right? Quite possibly, no. You need to get into the details to truly understand your potential customer base and can’t rely upon big numbers and Western assumptions.”
—Fareed Ansari, Vice President Asia Pacific, Canadian Tire
5. Manage your IP and it will be OK
Every firm should implement a strategy to protect their intellectual property rights in China, and that starts with registering IP: patents, trademarks and copyrights. China has modern regulations, but enforcement is still lacking. The good news is that for most firms, a successful IP strategy is possible, and there are many examples. It almost always includes registration. If you don’t register, chances are that a Chinese firm will do it for you in order to collect the government subsidy currently on offer. Once you patent your technology in China, it is easier and cheaper to seek redress, sometimes without even turning to the courts. Every strategy should also include practical, non-legal measures designed to avoid the courtroom altogether. For some, the strategy includes withholding core technology manufactured elsewhere, or physically separating manufacturing lines and employees. As Chinese companies battle one another over IP rights, domestic pressure for better enforcement is mounting. Canada’s Trade Commissioner Service offers some useful online tools for firms looking to protect their IPR in China.
“Leave the lawyers at home. They simply frustrate and slow down business negotiations in China without the expected benefit. This is a tough sell in big western board rooms whose directors are held accountable for ensuring that prudence and wisdom are followed in all transactions. But, western business norms just don’t work in China….prudence is best gain by using local accounting and legal people who are well seasoned in Chinese business practices.”
—Ron Ball, Managing Director, EHC Global
6. The Communist Party of China is your friend
China is a Party, with a capital “P.” State-owned companies control much of the economy. The central government sets targets for everything from reductions in energy use per unit of GDP to the supply of hogs. These targets filter down from Beijing to the provinces, to city governments, counties and townships. State owed enterprises, which exist at national and sub-national levels, are often ordered to help meet such targets. Sometimes, Chinese decision-makers in these firms don’t appear to be making rational business decisions, which can be frustrating for Canadian suppliers. But meeting national targets and supporting local development plans are an essential part of the game. It pays to understand these plans and the pressures under which state-run firms operate. It pays to develop good relations and to present the right solutions. Lunch with a vice mayor and the chair of the local public utility may be exactly what you need. Once you are an established part of the local supply chain, business will flow.
“The Chinese government still plays a central role in business decisions in China. Your Chinese business partners often assume that the Canadian government plays a similar role. Your counterparts will feel much more like transacting if they know the Canadian government is on your side. Take full advantage of our considerable Canadian government presence and expertise in China. Keep them informed and visibly on your side.”
—Robert Martin, founder of Robert Martin and Associates and former Head of Asia, BMO Financial Group
7. Watch this space: Chinese consumers are on the march
Most Canadian consumer products are priced too high for mass consumption in China and, with a few exceptions, do not carry enough global status to appeal to China’s super rich. Complex distribution systems cut into margins (and available shelf space). However, there are signs that things are changing. Urbanization rates continue to expand the ranks of the middle class. The country’s most recent five-year economic development plan aims to boost consumerism. New retail models are in development.
Whether expanding a franchise or selling products, here are three things to think about: (A) Localize your offerings. Western goods appeal to the Chinese, but sell much better when they conform to local tastes. Study those who have been successful. On your next trip to China, eat at a KFC. (B) The Canada brand is positive, especially for Canadian-made health food products, which sell at a premium. These are items that should not be re-packaged or else risk losing their competitive edge over local food products. (C) Remember that most Chinese consumers spend time to save money and not the other way around.
“Don’t assume that just because your product is popular in your home market or other markets that adaptation (beyond packaging and labeling changes) will not be required…. If you have to re-engineer your product, do so from the bottom up rather than removing features from the top down.”
—Jackie Greenizan, Marketing Director, McCain Foods Ltd., China
8. Need cash? There is a Chinese person named Wang who wants to give you some
If you need to re-invest in your company, China is a great place for partners. The country’s economic growth has led to the emergence of a wealthy elite with few easy investment options at home. Volatility in Chinese stock markets, government measures to curb real estate speculation and an underdeveloped financial market have encouraged some to look abroad. Many Chinese already have personal connections with Canada through resident family members or dependents studying at Canadian schools. They are interested and ready to diversify. The key is to present a concrete project proposal. The most popular investments in Canada continue to be mines, sawmills, commercial real estate and tourism developments. So how do you find your Mr. Wang? Good communications are a bridge. Use your China business network. Let it be known that you have an opportunity. Organizations like CCBC can help. Canadian banks who work with Chinese immigrant investors can help make the connection. Whether it is $300,000, $3 million or $30 million that you need, finding Mr. Wang is easier than you might think.
“…One thing that is constantly overlooked or misunderstood is the importance of clear and precise communications.... Keep your dialogue simple and to the point, and ask … them to confirm what they understand. That way you will know if they really grasp all the details. This method will eliminate second guessing from your interlocutor and avoid many problems.”
—Marcel Morin, Restaurant Operator, Julie’s Bistro, Shanghai
9. Serve the people
Human resources needs to be part of your China strategy. China has a lot of people but they’re getting hard to find. One of the greatest obstacles to doing business has been hiring and retaining skilled employees, according to the American Chamber of Commerce in Shanghai. Annual wage increases of around 10 per cent have been commonplace in East China. At the upper end of the labour market, increases of 20 per cent are more common. Think twice about your new plant’s location. Satisfy yourself that the engineers and scientists you need to hire will be happy to move their families there. Some Canadian companies have developed successful internship programs with local technical institutes. Managing directors frequently complain about a local education system that graduates brilliant mathematicians who have difficulty solving real life problems. Some take advantage of North American MBA programs delivered in China. With more than 60,000 Chinese students studying in Canada, consider taking your recruitment efforts to Canadian campuses. Once you are staffed up, remember that building staff loyalty through personal gestures and deference to local culture are key to managing successfully in China.
“When recruiting senior level executives… consider bringing finalist candidates for advanced discussions to the home office. This will allow relationship-building with the successful candidate to begin early in the process. Balance the long-term goal of localization with the realities of where your business is today: keep an open mind to individuals from outside China who have been on the ground for a while.”
—David Nagy, Executive Vice President, Industrial Practice Leader Asia-Pacific, DHR International
10. Hi, I’m from the federal government and I'm here to help you
Canada’s greatest competitive advantage is our natural resources. In China, it’s also the federal government. Canada’s trade commissioners are often China experts who speak the language. In a country where more than half the economy is state-run, they can open doors, gather intelligence, set up meetings and fix problems. The Trade Commissioner Service has 11 points of service in China, and it’s free. Get these people working for you. Make a habit of stopping by to see them. Work with the ones you like. Ask lots of questions. If the information you receive isn’t useful, tell them. Trade commissioners like working with companies that are committed to the market. In China, our offices work together like a network. That’s a lot of free knowledge and resources. They also work closely with provincial offices on the ground. And don’t forget about other Canadian institutions such as the Business Development Bank of Canada, Canadian Commercial Corporation and Export Development Canada (EDC). EDC, in particular, is very active in China with staff in Beijing and Shanghai. They offer credit checks on Chinese buyers and provide an increasingly creative array of financing solutions in support of business. They also offer insurance solutions and bonding services to help free up working capital. Knowledgeable representatives from all of these federal organizations are out there now, waiting for your email.
The Canada China Business Council (CCBC) is a private, not-for-profit business association that provides insight into Sino-Canadian trade and investment issues and develops connections that ensure its members’ business success. CCBC has offices in Toronto, Vancouver, Montreal, Beijing and Shanghai.
Date Modified: 2017-07-20
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