The great haul of China

China’s ambition to be “the workshop of the world” is well on its way to
being realised. A single factory in the country’s southern province of
Guangdong, for example, manufactures around 40% of the world’s microwave ovens.
As for
Chinese consumers, there is a huge appetite for products taking in everything
from L’Oréal shampoo to IKEA furniture.

There has been a shift in the growth agenda in China, however. John
Stuttard, a member of the China-Britain Business Council and an adviser to

PricewaterhouseCoopers, says that the outlook is still for 10%-plus growth.

But the Chinese Communist Party authorities are increasingly concerned
about the lack of investment and growth in some of the more rural or moribund
rustbelt areas of China.

Political and regulatory environment

With China’s membership of the World Trade Organization (WTO), the political
leadership is working to embrace free market economic reform within what is
still emphatically a communist system. But even now, to navigate all the state
and local laws successfully it is imperative for a business to use local
experts.

One significant change in China in the last few years is that the court
system has improved considerably. Tim Clissold, author of the best-selling (and
highly recommended) book Mr China, says that, in the event of a legal
dispute with a trade partner, “You’re much more likely to get a fair judgement
these days than you would have done five or six years ago.”

Clissold adds that the government is dealing “robustly” with the problem of
corruption, whether in the business world or government.

Doing business there

One of the most important words in the Chinese business lexicon is
guanxi. It means relationships, and the significance of it is that to
succeed in business it is necessary to build up the right relationships with the
right people.

In most industries it is possible to establish a “wholly foreign owned
enterprise” (WFOE). That doesn’t necessarily mean that it is always a good idea
to do so. Many businesses enter into joint ventures so as to be able to work
with local companies that have the necessary guanxi with business and
government.

“Despite their drawbacks, joint ventures are likely to remain as the most
viable entry option,” according to a KPMG report on the Chinese machine tool
industry. The WFOE structure, though, is “likely to become more common after
foreign companies become more experienced in China”.

The currency – variously known as the renminbi, RMB or the yuan – is not
freely convertible on the capital account, but under the WTO agreement it should
be possible to get dividends out of the country.

“If you can’t it’s probably because of some administrative procedure that
hasn’t received local approval,” says Stuttard.

The RMB slightly loosened its link to the dollar last year to placate US
concerns that the exchange rate was too skewed in favour of China’s exporters.

Management/accountancy staff

The influx of western and Japanese businesses into China has significantly
raised the overall quality of local managers who have been trained in the ways
of modern business methods and financial controls. But although there is still a
shortage, incoming businesses generally recognise the importance of having
Chinese managers.

“We don’t see clients send a whole team to China to manage their business,”
says Jeffrey Wang of Business Development Asia, which is associated with Close
Brothers investment bank. Wang advises western businesses looking to acquire
Chinese companies. “We typically see them send one guy. Occasionally, they send
a team of people to come to support on a short-term basis or financial people
helping them to run the system for a couple of months.”

Making a success of business

Be patient. Decision-making can be a slow process, particularly if government
officials are involved. The culture is based around deference to superiors and
hence a reluctance to make a decision.

Good due diligence is vital, as not only is the quality of financial
reporting variable, but “related party transactions” can create problems for the
unwary. One way to improve your success rate is to be prepared to own less than
100%of a business. This can help you “structure a company in such a way that it
can still motivate the local team so that their interests are tied up very much
with your interests”, says Maggie Eather in PwC’s Shanghai office.

Understand the importance of not causing someone to lose face. Your Chinese
opposite number may haggle, but will rarely embarrass you by saying no, and it
can be easy to misinterpret as yes a comment that was not necessarily meant to
be encouraging.

Don’t expect to make a quick buck. “People are taking a much longer-term view
than they have done in the past,” says Stuttard. “It might take you 10 years to
make a profit.”

Case study: Drinking buddies

Inflows and outflows