Trade and commercial desk

1-CASE 1 Understanding Entry modes into the Chinese market

China became a member of the World Trade Organization (WTO) on December 11, 2001 and is currently in the process of completing a seven-year transitional period. Overall, the Chinese economy has shown exceptional economic growth over the last five years, closely associated with China’s increased integration with the global economy.

With a population exceeding 1.3 billion, continued economic growth and a large supply of inexpensive and productive labour, China lures businesses from around the world. China’s population is approximately 23 per cent of the world’s total. China’s integration into the global economy is fueling accelerated change in many markets and global economic growth. It is likely that China will continue to grow at a rapid pace for some time. In 2005 and 2006 China’s economy increased by nearly 10 per cent each year. Despite tremendous progress, China remains a developing country, albeit one with vast potential. Spread over a population of 1.3 billion, China’s 2 trillion USD economy (2005) does not represent a large amount of disposable income for each person. Per capita income in China is approximately USD 1,538 (2005).

However, the income distribution within the country is highly uneven with urban centres, such as Beijing, enjoying a per capita income of almost USD 5,000. China’s middle class, those with per capita income over USD 8,000 is estimated at over 200 million. At the same time, the Chinese government estimates that several million Chinese are very poor with per capita income of USD 300 or less.

Corruption remains widespread in China. Although the government continues to emphasize anti-corruption campaigns, these efforts are hampered by the lack of truly independent investigative bodies. Despite these criticisms of its unwieldy bureaucracy or lack of disclosure of corporate accounting practices and governance, most global companies agree that companies cannot be globally successful if they ignore this huge emerging market.

Companies considering doing business with China, have first to determine the best way to enter the market. Most foreign firms utilize some form of collaborative arrangement with local firms when entering China.

In this segment, we will discuss about how companies can enter the Chinese market; the various factors they need to consider if they enter into a collaborative arrangement and some of the tactical steps they need to take in the early stages of their Chinese operations.

There are four key ways to enter the Chinese market:

• Exporting to China (externalization)
• Licensing, including franchising (intermediate modes)
• Equity joint ventures (intermediate modes)
• Wholly owned foreign enterprises (WOFEs or Woofies ) (internalization)

These are not mutually exclusive ways to enter.

Independently whichever entry model you choose personal relationships (‘guanxi’ in Chinese)in business are critical. Guanxi is deeply rooted in Chinese culture and is basically ‘a tool to get business’ and ‘a way of getting things done’. It often takes months, perhaps even a year or more,

to establish guanxi. It is important for exporters, importers and investors to establish and

maintain close relationships with their Chinese counterparts and relevant government agencies. It is equally important that exporters encourage strong guanxi between their Chinese agents or distributors and the buyers and end-users. A web of strong personal relationships can often help ensure expedited governmental procedures and the smoother development of business in China.Though Chinese customers welcome products in general and especially in high-tech related areas, they still prefer to have localized customer support from a manufacturer, such as on-site training, service centres in China, local representatives, as well as catalogues and user manuals in Chinese etc.

It is clear for those experienced in dealing with China that there is not one best way to enter China. Companies have to consider a number of financial, operational and resource factors. For example, some companies start by considering how much control they wish to retain while for others, the primary concern is how much of their own resources they are willing to commit. As companies develop more experience doing business with China, they are likely to reassess the way they do business in the country, particularly in terms of collaborative arrangements.

Companies that aim to have a stronger and more profitable presence in the Chinese market need to increase their commitment of resources.

Regardless of which entry strategy a company chooses, several factors are always important.

• Cultural and linguistic differences – these affect all relationships and interactions inside

the company, with customers and with the government. Understanding the local

business culture is critical to success

• Quality and training of local contacts and/or employees – evaluating the skill sets and

determining if the local staff is qualified is a key factor for success

• Political and economic issues – policy can change frequently and companies need to

determine what level of investment they are willing to make, what is required to make

this investment and how much of earnings they can repatriate

• Experience of the partner company – assessing the experience of the Chinese company

in the market, with the product and in dealing with foreign companies is essential in

selecting the right local partner

Selecting an entry strategy for China is easier said than done. Overall, foreign companies need to:

• Research the Chinese market thoroughly and learn about the country and its culture
• Understand the unique business and regulatory relationships that impact their industry,

whether its consumer products, mining or forestry

• Use the Internet to identify and communicate with appropriate foreign trade

corporations in China or their own government’s embassy in China.

• Each embassy has its own trade and commercial desk. These resources are best for

smaller companies. Larger companies who have more money and resources usually hire

top consultants to do this for them. They are also able to have a dedicated team assigned

to China who can travel there frequently in the beginning of the relationship to meet

with government representatives.

Once a company has decided to enter the Chinese market, it needs to spend some time to

understand the local business culture and how to operate within it.

Questions:

1. What factors do companies consider when determining the best form of operation to use when entering the Chinese market?
2. What have been the challenges and opportunities for foreign companies in establishing collaborative arrangements in China?
3. How have Chinese government policies and attitudes towards foreign businesses evolved?

4-How have these changes affected foreign companies’ forms of operations in China?