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Emerging Business Opportunities in China offered by China’s 12th Five Year Plan


by Sara Cheng

China recently issued its 12th Five Year Plan. It is China’s absolute national strategy from 2011 to 2016 and will have profound impact on its economy and people and also China’s major trading partner.

This recent presentation of mine highlighted some key opportunities for foreign companies looking at entering the Chinese market.

Emerging Business Opportunities in China

Business Tips

March 23, 2011 1 comment

How Do You Choose Your China Business Consultant ?

by Sara Cheng

China is a hot button and probably also one of the most frequent headlines of Aussie media nowadays. Coming along with this are numerous China business consultants emerging like bamboo shoots in all colours and with various language and education backgrounds. Australian businesses eager to jump onto the wagon to do business with China are surrounded and bombarded by China business seminars, conferences, summits, cocktail functions and then tracked down by all these consultants both during and after functions and events.

Are these consultants adding value or rather a worthless upfront cost for businesses?

The answer is yes and no, depending on who you work with and how you work with them.

It seems cliché but sometimes some businesses do not use common sense when it comes to choosing consultants which are critical for achieving their business success in China. Bear in mind the 3 must-have characteristics of quality China business consultants when you chose whom to work with:

China commercial experiences and capabilities: The consultant is not carrying out an academic research for you. They should be able to breathe the depth and breadth of your business, grab the essence of your situation and needs in the shortest timeframe, put this in a broad but practical China business framework and get solutions for you. China is a country full of cultural nuances and operates under a different system. Without systematic business-related education background and extensive personal commercial experiences in China, a business consultant will not be able to possess such knowledge and expertise to navigate you through the system and achieve success in China.

Chinese language skills-this is common sense. Mandarin is the official language in China. Though there are dialects and accents in various regions, especially in East China and South China, Mandarin is well understood China wide. Without this language skill, your consultant will only obtain 2nd hand (might outdated as well) information when conducting research and will not be able to communicate with Chinese stakeholders on your behalf.

Most competent communication capabilities: Your China business consultants will communicate with your potential Chinese distributors, agents, manufacturing partners, suppliers, joint venture partners, Chinese government agencies and industry bodies on your behalf. Any small mistakes in such communications may damage your relationships with Chinese stakeholders or compromise the quality of the work they do for you. Assess your consultants’ communication capabilities before you enter into a service agreement with them.

Just having a quality China business consultant cannot guarantee you succeed in China. There are 2 must-know rules to make sure you achieve the most through your competent China business consultants:

Provide genuine information they require from you: In lots of cases, ethical and experienced consultants can straightaway let you know the ideal model for you to work with China or the potential of your products/services in China if you provide them genuine and comprehensive information on your business strategy, situation and needs. If you have little chance to succeed in China, they may be able to advise you the difficulties upfront and hence save your time, money and resources to work on mission impossible.

Provide inputs, monitor milestones and work closely with them: No matter how smart and experienced your consultants are, they do not have the knowledge on your business as you do. Hence do not just leave everything in their good hands. Require progress report, communicate with them regularly, provide feedbacks, ideas and information when required or necessary so that they will refine and tailor the approach during project delivery and achieve the best they can do.

With a competent consultant and work with them in the right way, you will get the most and best out of your China business consultant and achieve success doing business with China.

How to Speed Up Your China Business ?

December 21, 2010 Leave a comment

 

Having assisted many Australian companies to do business with China, I identified a few must- have attributes of companies doing business successfully with China.

First, these companies objectively assess their unique sustainable competitive advantage in the Chinese market, smartly dodge head-on competition through differentiation, and target the right market where there is a gap they can fill or which appreciates their unique selling points such as advanced technology, unique product functions or green image, etc.

Second, these companies may have ambitious long-term plan for China but adopt a focus strategy at the initial stage. Focus, focus, focus. They focus on the opportunities in their target niche market and not be a by the huge scale and diversities of China; they focus on key contacts and are not immersed by the cultural nuances; and they focus and devote resources to result-oriented activities. With this strategy, companies are able to use limited resources efficiently and achieve cash flower quicker to subsidize the expansion plan at next stage.

Third, they find and leverage external complementary skills and resources to speed up the market expansion in China. They leverage established and committed distributors’ existing networks to tap into the China market; they hire Chinese managers or China business consultants to gain China market insight and capabilities to handle various tough situations in China; and they leverage joint venture partners’ financial resources to upscale their operation in China.

Fourth, these companies are flexible, nimble and quick to the changes in the Chinese market. Things which may take 5 years to happen in a mature western economy may get done in the Socialist Free Market in China within a year. Successful companies do not wait and see, but quickly navigate through the complicated Chinese market to grasp the opportunities.

Last but perhaps most importantly, these companies understand the drivers in the Chinese social, political and economic environment, understand the game rule and know the little things which make a big difference. Reading The Art of War, appreciating Chinese traditional paintings, being able to greet with a few Mandarin words and reciting a line of Chinese poem will be an absolute plus to glue relationships in China. While face and Guanxi (relationship) are must-knows, lots of successful companies even go the extra miles to further learn and grasp the fundamental philosophies mainstreams in China believe and appreciate. They are more like insiders and adapt their strategy to work more efficiently and effectively in China.

Strategies and Methods to Protect Intellectural Property in China

December 13, 2010 2 comments

I recently presented on IP protection in China at a business conference. Here are my notes on some strategies and methods I used as a reference at the presentation, which might be useful for those who are seeking commercial mechanism rather than legal actions to protect IP in China.

 Large companies: Being an industry leader and one-stop solution provider:
-Keep innovating to keep a leading position in the industry. It is a costly approach and work well with large companies;
-Bundle core products/services with non-core but related products/services so that you offer a one stop solution or a whole package for your customers. The demand for your core products/services will drive the growth for non-core business, as your customer will find switching cost or operation cost is to high if they use your core services while using someone else other services.
-Also you may charge for the products/services which are hard to be copied while providing for free other products/services which could be easily copied so that you will take all the market shares your IP infringer may get;
-Build the IP protection in the R& D or product development phase;
-Get involved in the process in industry standard or quality standard development and drafting. Chinese companies are most good at this to protect their IP and monopolize the market.

Vertical integration or horizontal integration: backward acquire your supplier to control the core knowhow or forward integrate with your clients to share risks and cost and better control your IP; or alternatively you enter related industry sectors by acquiring or being partially acquired so you provide a broader range of related products and services to lock in your customers and hence protect your IP;
Target the “right” market, .e.g Microsoft China focused on the market segments which are so concerned about their brand, legal position and market image and also those who could be easily tracked, such as Fortune 500’s subsidies, large Chinese private companies and Chinese government-owned enterprises.
Technical ways, such as dingo for software, online service delivery rather than providing it in the form of softcopy;
Internal IP protection through technical methods:
-Track your sales by offer free membership and free complementary services to your clients so they will not switch to others while you can track your sales and market;
-Firewall, monitoring of emails, back up of materials, etc;
-Leverage media especially online monitoring by brand promotion, online forums, blogs etc.
-Give incentives and retain your key staff who mater your core knowhow;
Protect IP from your stakeholders and Build a network of stakeholders who assist you to protect IP

-In lots of cases, your clients or suppliers are IP infringers so put certain terms and conditions in your contract with them to protect your IP or at least warn them the potential penalty of IP infringement;
-Sharing some knowledge while keeping the core knowhow so rather than taking the risk to infringe IP, potential IP infringers will focus on maximising the benefits as a “peripheral” partner. Microsoft adopted this approach;
-Leverage stakeholders such as clients, suppliers, media, end customers etc to monitor the market and potential IP infringement.
-Get more people to work with you on your IP protection by licensing the IPs or more creative way mutual licensing or multi-cross licensing so you work with a network of organizations to protect and benefit from each others’ IP.
Focusing and giving strategy:
-Look at the cycle of your products and services. If it is at the later stage of product cycle, you may consider the option to share the knowledge for free to beat the market share your IP infringers may get, and hence reduce their profit margins and dampen financial viabilities;
-Last but not least, if you have limited resources, focus on IP protection of your core technology knowhow or in the most important market, the one which you are most advanced, which is hard to be copied and which you can get the best profit margin.

China Snapshot

September 16, 2010 Leave a comment

There are 1.3 billion people in China. While a population of this size might sound like an exciting opportunity for your product or service, it is important to understand the demographics of China to identify your actual potential customers.

  • China is situated in eastern Asia, bounded by the Pacific in the east and Russia and Mongolia to the north.
  • The third largest country in the world, next to Canada and Russia, it has an area of 9.6 million square kilometres, or one-fifteenth of the world’s land mass.
  • A one-party state, it is dominated by the Chinese Communist Party (CCP).
  • Its capital is Beijing.
  • Head of State is President Hu Jintao.
  • Premier, Wen Jiabao, heads the State Council, the most important administrative body of the Central Government.
  • The CCP’s Politburo also plays a key decision-making role in relation to reforms affecting the commercial environment.
  • Has the world’s highest population of 1.3 billion. The eastern part of China is densely populated, while the western part is sparsely peopled.
  • Is the world’s third biggest economy.
  • Has one of the world’s oldest continuous histories and civilisations.
  • It has a rich and diversified culture and is also known for its great historical and engineering achievements – The Great Wall of China, The Grand Canal and the Karez irrigation system. It is the birthplace of papermaking and printing, gunpowder and the compass.
  • Its people have a strong sense of pride based on their country’s history and ancient culture.
  • More than 90 percent of China is comprised of the Han Chinese. The rest are minority groups.
  • Around 60 percent of its population live in rural areas.
  • Mandarin, also known as putonghua or the common language, is the official language and is spoken by all but a minority. It is the language taught in schools and supported by the government. Mandarin is one of the official working languages at the United Nations. Other dialects of the 55 minority nationalities are heard throughout China.
  • China’s currency is the reminbi (RMB) which means the people’s money. The unit currency of the RMB is called the yuan.

Succeed in Doing Business with China

September 16, 2010 Leave a comment

The following tips can help you to successfully do business in and with China:

1. Develop a strategic approach
Remember to start small. China is a large, diverse and complex market so it is recommended that you initially establish and focus yourself in one province or even one city. Once you understand the regulations and practices in that region, you can begin to expand one region at a time.
Businesses, both large and small, should select the right region for them based on considerations including long and short term business development needs for infrastructure, skilled labour, customer contact and government incentives.

2.Understand China’s business culture

  • Be prepared for a very different business environment – China’s business relationships are generally established for the long term. Negotiations can seem slow at the beginning, as your potential partner gets to know you in order to determine if you both can commit long-term.
  • Visit China and meet your potential partners if you can. This will help you develop comfortable business relationships.
  • Respect ceremonies such as giving gifts and hosting meals. These ceremonies, though they may appear casual, are traditionally very important and still highly respected by the Chinese.
  • Appreciate that in China, life is business and business is life. Chinese business people work long hours and many social activities revolve around business networking. When establishing a relationship with a Chinese company it will not be unusual for them to request a meeting in the evening or on a weekend.
  • Language will be a barrier to establishing relationships. English is not widely spoken and you need to be ready for the challenge. However, in contrast to popular opinion, Chinese people are not easy to offend. If you make an attempt to learn the language and stumble, they will appreciate your efforts more often than become offended. A good way to minimise the effects of cultural differences is to employ staff or an advisor with Chinese experience or background.

3. If you are exporting/consider to export, understand your market entry options
You must thoroughly consider the different market entry options before engaging with China. These may take the form of:

  • Direct exportation
  • A representative office
  • Local representation as offered by a third party (eg a local distributor/agent/secretary/representation service company)
  • A co-operative joint venture (CJV)
  • An equity joint venture (EJV)
  • A wholly foreign-owned enterprise (WFOE)

Your entry model depends on your business objectives & strategy, resources, time frame, industry practice & legislation, competitive landscape and the market situation.

4. If you want to set up your own presence in China, understand legislation and other set-up rules.
If you are setting up a business in China, you must be aware of the following factors:

  • Understand legislation, laws, rules and regulations governing your chosen industry: Each Chinese industry has very specific laws, regulations and policies as well as government restrictions and incentives, some which can restrict the activities of your business. For instance, though the market is freeing up, wholly-owned foreign enterprises (WOFEs) are still not permitted in all industries.
    Ensure:
     Your business case meets all local requirements from the outset – this thorough preparation will streamline the application and approval process
     You explore the restrictions on investing parties
     You understand what business structures are allowed, especially who is permitted to be your business’s legal representative
     You understand your potential tax liabilities and explore the legitimate mechanisms to reduce tax liabilities
     You are aware of government incentives, including tax holidays and special treaties offered by different regions.
  • Further, it is very important to define your business category and scope as China National Development and Reform Commission may prohibit, restrict, permit or encourage your business set-up based on your business categorisation and scope. By carefully defining your business scope and category, you ensure you do not breach legislation or restrict the options available to you.
  • Confirm the minimum registered capital requirement: Confirm the minimum registered capital for your China operation, as the Chinese government requires certain minimum registered capital for various types of businesses. However, be aware that local industry and commerce administrations may still decide on your minimum registered capital based on their judgement of your business scope and operation scale.
    You need to confirm with local government agencies the minimum registered capital through local contacts before taking any other actions in case they require an amount far above your financial resources available for the China operation.
  • Fully understand employers’ responsibilities and liabilities in China: If you are employing local Chinese, be aware that China’s labour contract law, in effect from 1 January 2008, specifies issues relating to the employment contract, redundancy, etc. Without preliminary knowledge of this law, you could end up spending a huge amount of time and money terminating the contracts of any under-performing employees. You also need to be aware of mandatory employee welfare and benefits so as to include such costs in your budget.
  • Develop a comprehensive local employee management system: Recruiting the right staff in a foreign country is a hard job. It is even harder to effectively manage the local staff in a foreign country. A comprehensive employee management system will encourage the engagement and commitment of local staff and avoid potential risks. You could include reporting and communication policies, staff training, performance assessment, remuneration, career management and an employee management manual in the system.
  • Form a relationship with the regional government: By building a strategic relationship with the regional government, you will be able to access excellent advice on local policies and regulations – this link may also open access to other business networks.
  • Integrate commercial clauses in the Articles of Association to maximise profit repatriation into Australia: You may have commercial arrangements between your headquarters in Australia and your subsidiary in China in order to guarantee maximum profit repatriation. However, some arrangements must be included as part of the Articles of Association to be valid. The Articles of Association is to be submitted to local government agencies for approval and filing during business licence registration. Hence, you must incorporate necessary clauses in the Articles of Association in the first instance.

5. If you consider outsource manufacturing to China , you need to be aware of following issues:
Before deciding, you need to:
• assess the outsourcing opportunity
• select manufacturing partners
• protect your intellectual property
• guarantee quality supply and,
• secure a long-term commitment from your manufacturing partners?

You also need to consider the following:

  • Take a strategic approach
    Outsourcing your manufacturing should be a strategic decision to enhance your international competency and create scales of economy so that you can harness your financial and human capital to concentrate on your core business and its competitive advantage.
    Before making the decision to outsource you need to:
    • Determine the costs of outsourcing vs. in-house production / product purchasing
    • Assess your corporate goals when it comes to ownership, strategic fit, core competency, expansion plans, long term vision and business strategy
    • Look closely at your operations in particular performance controls, logistics, IP protection, what to outsource
    • Review your organisation and how outsourcing will affect your control, management efficiency, staff issues.
  • Choose the right cooperation model
    Here are some options:
    • Buyer-OEM manufacturer: you simply outsource manufacturing to the manufacturer.
    • Strategic alliance: through commercial arrangement, you and your manufacturing partner share the production risks and profits.
    • Joint-venture: set up a contractual or equity joint venture with your manufacturing partner in China. Hence you partially own the manufacturer to better manage the manufacturing overseas.
  • Build a robust outsourcing contract
    Contracts are crucial and need to be scrutinised.
    • Terms of payment: most popular terms include L/C, bank guarantee, D/A, D/P, down payment plus L/C or D/A or D/P. Letter of credit is a comparatively safer and fair term to start with.
    • Specify the requirements for quality and inspection authority: Chinese government agency conducts pre-shipment inspection by random sampling. However, many companies prefer to outsource to SGS or other third parties to conduct pre-shipment inspection on their behalf.
    • Legal arrangements for disputes: include in the contract the clause that International Chamber of Commerce rather than local industry bodies or government agencies in China will be the arbitrator in case of any disputes.
  • Protect your intellectual property!
    Don’t rely on legal actions on IP to work for you in China! Be proactive and protective:
    • Keep core products/technology manufactured in-house.
    • Position yourself as leading innovator and brand. Keep ahead of your competitors in technology.
    • Split manufacturing tasks to 2 or 3 un-related manufactures in China. Have a back up for each current manufacturing partner.
    • IP registration in Australia does not mean you are automatically registered with China. Register your patent, copyright, design and trademark in China.
    • Invest in un-tangible assets: brand, business process, people and corporate culture.
  • Don’t compromise product quality
    It’s common sense but lots of companies don’t apply for it: Put your QA system into place. The manufacturer manufactures for you and is supposed to do it to your standard. Ask yourself: does their QA meet your requirement? You need to have your own quality assurance system in place to monitor the manufacturing and conduct pre-shipment inspection. Fortunately, it may not be as expensive as you assume. Get a local QA service provider monitor your manufacturing partner on your behalf today.
  • Above all, be committed!
    It’s common sense and here are some tips:
    • Conduct due diligence on manufacturing partners
    • Update information on the partners, competitors and the industry
    • Visit China and review situation often
    • Maintain your manufacturing partners’ commitment through frequent communication, profits/benefits sharing and steadily growing orders
    • Look for complementary resources and create synergies
    • Seek win-win solutions
    • Take advantage of the partner’s complementary resources
    • Maintain your own competitive advantage
    • Seek to evolve the relationship
    • Drive long-term strategy and growth

6. If you are working/will work with Chinese business partners, don’t neglect due diligence.
Conducting research into potential Chinese partners (agents, distributors, joint venture partners, manufacturing partners, suppliers, major clients) can be difficult, but this should not prevent it from happening. Though language barriers can impede your ability to find quality advice, you should not rely on information sourced from the internet alone.

Understand that your partners may not be what they claim to be. China’s business culture customarily appears outwardly affluent. Hence your Chinese business partners may look financially viable and well connected but, as a matter of fact, live on bank loans and personal debts.

7. Seek help
China is a large and complex country with varying laws and regulations depending on the industry category and region and this patchwork of information can be quite confusing for the uninitiated. Further, importing from/exporting to China is a project that requires financial and time commitments, business management knowledge and China expertise.
It is recommended that you consider acquiring a competent consultant to assist to manage the process which may be a cost and time effective way to avoid potential pitfalls.

For furhter information on doing business with China, email Sara   sara.cheng@australianbusiness.com.au

Engage China

September 16, 2010 Leave a comment

With the pace and dynamism of its growth and development, China today presents a good test bed for studying business performance. Despite the global economic crisis and come formidable internal challenges to growth, China has so far proven remarkably resilient. It seems that the force of China’s demand during its epoch making transformation into a modern industrialised economy will be a key source of world economic growth for decades to come. China has and will continue to have a profound impact on Australia, given Australia’s resources base and its small market influenced by global trends and shifts in world production patterns. Australia’s growth is likely to be tightly coupled with China’s. It is important to understand the most effective models of business engagement with China that can enhance Australia’s competitiveness and prosperity.

With this backdrop, the Australian Business Foundation undertook a study examining the current realities for Australian firms doing business with China. I was fortunate to work together with other three authors on the book, be responsible for the analysis of findings from 25 in-depth case studies and also contribute to the insight and conclusion of this study.

The experiences of the case study participants highlight the following significant issues impacting on business performance for Australian enterprises in China. They cover factors impacting the business environment in China, the management and operations for the business themselves and the nature of business opportunities and strategies.

Key findings are summaries as follows:

Business Environment : three issues stand out – culture, relationships and government.

• Culture saturates all aspects of business engagement in China at a level, depth and saturation point that is different from other markets. The cultural dimension is central to the execution of the business strategy and to achieving a return on investment in China.

• The importance of relationships is at the heart of Chinese culture. This is the concept of “guanxi” which literally means “relationship”. Relationships have primacy over rules. Unlike in Western culture, the social relationship more often than not precedes the commercial relationship. Demonstrating commitment and establishing trust happens first; only then moving onto business formalities likes contracts and agreements.

• Government means business in China. Governments administer and regulate almost all areas of China’s commercial environment, but their role and how the rules are applied are not always detailed, documented and transparent. This can be a constraint to business. But equally government can be instrumental in business growth, e.g. some case study companies aligned their business strategies with helping government achieve national priorities for technological innovation or training in new skills.

Business Operations: the study produced insights about key features of business operations in China, covering skills, quality, finances, intellectual property, communications, partners and customers, as follows:

• Talent and Skills: There is an indispensible need for the right mix of skills and for the local Chinese manager.

• Quality: Managing quality issues in China requires understanding of the trade-offs between quality and cost often implicit in the approach of many Chinese partners and suppliers. As perceptions and appreciation of the value of quality can differ between China and Australia, it is vital to communicate clearly about quality requirements and to manage expectations.

• Finance: China needs the usual due diligence to ensure the smooth operations of financial and banking transactions, including companies getting paid and being able to repatriate profits.

• Intellectual Property: Minimize intellectual property infringement by being a market leader and competing on design and innovation. This is a more effective alternative to legal redress.

• Communication: Effective communication is a vital tool of trade, not only for managing people in the business, but for productive relationships with suppliers, customers, and partners. It goes beyond access to specialist and competent language and translation services to understanding the social and cultural context of doing business.

• Partners: selecting the right partner is essential and challenging. It requires investment of time and due diligence to ensure that partners are legitimate and compatible with the business.

• Customers and Clients: Selecting the right customer is as crucial as selecting the right partner. Unlike in Western consumer markets where traditional customer segmentation and marketing campaigns are the norm, in China customers are often found through relationships and connections, both internal and external to the company.

Business Opportunities :Insights from the study questioned stereotypes about both manufacturing and services and produced some common threads on the business strategies that drive success.

• Manufacturing: While cost considerations are important, manufacturers are in China for other strategies advantages, not just low cost. Manufacturers are going to China to seek new customers as the Australian market matures, to source products at the right quality and price points, or in response to structural change in their industry as a result of globalization.

• Services: Services are an important and growing part of the Australian export success story, but are often unrecognized and overshadowed by large trade volumes in other sectors like resources. Many Australian service companies are proving themselves capable competitors in China. They have pioneered successful strategic alliances with Chinese partners, positioned their business offerings to align with and support China’s national priorities, and secured first mover advantage by adapting Western concepts of quality and standards to the needs of Chinese end-users. These are potential competitive opportunities for Australia to expand on in its future business engagement with China.

• Strategy: The following success factors are common threads in business strategy proving effective in Chinese markets:

– Engagement in the Chinese market is for the long-term. It requires a strategy for persistence and resilience in the face of potential problems and failures.

– Business strategies need to be focused, whether on a specific region, specialisation or niche business offering. This is vital to avoid being caught in the headlights of the Chinese market’s diversity and huge potential.

– If adopting a strategy as a niche player, make sure that the business offering is ‘best of breed’ with the specialist expertise and value to perform better than competitors.

– Agility, adaptability and an exceptional ability to learn, together with a tailored and well informed business plan, are mission-critical to successful business strategies for both large and small enterprises.

Overall, the main insight from the experiences reported by Australian businesses in China is that success comes from capitalizing on China’s massive change, diversity and scale with agility and fast learning. In particular:

• Whatever the particular business approach, enterprises must be able to deal with cultural differences, relationships and an ambiguous, complex and volatile environment.

• Enterprises must also provide ‘best of breed’ business offerings that are capably and efficiently managed and that present real value to Chinese customers and clients.

• Enterprises must be adaptable, but simultaneously, they must operate to their own well-informed business strategy and put in place all the fundamentals of doing business – operations, sales, management and finances. This makes it more likely that enterprises can secure a return from China’s substantial and growing demand and opportunities.

If you have any feedbacks or issues/questions in regard to doing business with China, please send your feedback/request to Sara Cheng, Manager-Greater China, Australian Business .

Email: sara.cheng@australianbusiness.com.au

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