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Twenty years ago, you could gauge the political climate in China by observing what cars officials drove. If the economic climate was opening up and trending towards reform, officials could be seen driving a Mercedes. During times of stress, tightened access, and political meetings, officials would be seen only in domestically made cars, like the ubiquitous Red Flag or the Shanghai-made Santana; during these times, the Mercedes were quietly garaged. Today's China is a lot more complex, which means the "official's auto" metric no longer applies since nearly all automotive manufacturers worldwide now have local production in the world's largest car market.
While the United States may be the world’s most open market, China remains the most competitive. It is also the second largest economy in the world and is still viewed by most U.S. and EU companies as the “last great opportunity for growth.” Many companies want to gain entry to the Chinese market share for their products or services. Thus, the competition for sales of products or services is correspondingly intense, which causes foreign companies to offer low prices, reducing normal or worldwide margins to gain a foothold. It also creates significant volatility for those engaged in sales forecasting.
Recently added to this complexity are turbulent trade tensions between the world's number one economy (U.S.) and the number two (China), so how can you navigate your business successfully through this landscape?
One of the first strategies is to be low key. Now is not the time to hold a global board meeting in China with a lot of fanfare, nor is it a good time to translate and publish locally your company’s commitment to the “make America great again” initiative. While that might seem relatively obvious, I have seen examples of this in the last three months. Quietly keeping focused on your core business is a key consideration.
Foreign participation in this current marketplace is under an increased level of open scrutiny. All foreign companies are facing this attention—not just Americans. Recently, for example, I received a notice from the bureau that approves work permits for foreign workers. The notice openly stated that "… going forward, it will be more difficult for you to receive a work permit." However, a different agency still includes the following on the Chinese equivalent of a W2 form in English stating that the bureau "… thanks you for your contribution to building China's economy." Complex indeed.
Along with keeping a low profile, your People’s Republic of China (PRC) entity and operations will need to be “squeaky clean” and in full accordance with “all relevant rules, laws, regulations, and customs of the PRC.” While this has always been the case, this lever is increasingly being used against foreign players, like Apple (excessive profits tax) and Google (content management /censorship).
Payment terms by Chinese companies have always been slow. Few adhere to a net-30 policy even when they have signed a contract to do so. Situations are considered fluid, and payment streams are affected. Plan for this eventuality. It’s not that Chinese customers won’t pay, it’s just that cash flow might be affected. This is especially true when payments are in U.S. dollars because there has been an 11% decline in the RMB(CNY)/USD value in the second half of 2018 alone. This means Chinese companies need to spend 11% more to buy the same thing in dollars. Volatility touches everything.
In this turbulence, it is important to position yourself as a global player wherever applicable. When your company can emphasize operations in the EU, factories in China (and the rest of Asia), R&D teams in Germany, etc., you can better avoid being pulled into a bilateral dispute in your external-facing Chinese language statements. Position your business as global.
New projects and undertakings will be easier outside the central business districts (CBDs) of big cities like Beijing, Shanghai, and Guangzhou/Shenzhen. Foreign businesses need an approved China business license to operate. While these licenses often define a narrow scope of permissible activities, services, and businesses, what isn’t widely known is that business licenses are locally approved but nationally applicable. Also, differences between locations can work to your company’s advantage.
Even in today’s complex and turbulent marketplace, second- and third-tier cities can offer and are offering incentives for new foreign investments in nearly all categories. Tax rebates, no-cost office spaces, or business license scopes similar to your company’s business model can all be negotiated in places like Chengdu, Zhengzhou, and Qingdao. These locations offer new airports with direct international flights and are connected to the 10,000-km domestic high-speed rail network. By population, these “smaller” cities are still larger than New York City and Chicago combined!
A crucial final strategy is to maintain cordial, strong relationships with the local government where you operate. Regular meetings with officials are a great use of your time and will bring long-term benefits, such as gaining an early notice of new infrastructure projects. Showing officials what you and your company are doing with regard to corporate social responsibility may help them fulfill requirements from central government. Similar to the Hawthorne effect, where subjects alter their behavior in a study due to an awareness that they’re being observed, such contacts will provide a face and recognition to key players and factors in your business’s success.
Even a turbulent China still offers great opportunities if you understand how to operate. China is the second largest economy worldwide and is now at the table on a global basis. The Chinese approach to business is unique; China will still be volatile and very competitive for the next few years. Being a bit low key, focusing on local-level relationships, and displaying cultural sensitivity will make this journey smoother and more successful.
Philip Carmichael is IPC President of Asia.