BBC Capital

The best ways to set up a business in China

Scaling The Great Wall (Neil Webb/Debut Art)

Scaling The Great Wall (Neil Webb/Debut Art)

The business world is looking east for new opportunities, even as China’s stellar economic performance begins to slow.

But setting up shop in China is not as simple as hanging your hat in Hangzou: a truism underlined by expensive mistakes from retail giants Kraft and supermarket Tesco. A complex market and myriad regulations continue to confound even the most experienced China specialists.

But there are ways to access the world’s biggest consumer market—so long as you watch out for the pitfalls.

Foot in the door

When foreign managers want to start a Chinese business unit, their first port of call is often a Joint Venture (JV), a partnership with a Chinese company. This can offer the inside-track on the local market, an established office infrastructure plus on-the-ground knowledge of the labyrinthine governmental regulations and red tape that may be encountered.

In short, the right JV takes away many of the headaches associated with arriving in the country ‘blind.’

Principal Financial Group, a global financial company and parent of asset manager Principal Global Investors set up its JV in 2005. The entity, CCB Principal Asset Management, is partnered with the world’s second-largest bank by market value, the China Construction Bank (CCB). Principal offers mutual funds and asset management services to individuals and corporations in China through CCB.

For companies eager to establish a foothold in the country, there are a number of other ways to build market presence, including an offshore – or fly-in — strategy. In addition to, or sometimes as an alternative to JVs, companies can also set up representative offices, which are owned by the overseas company but not able to generate revenue in China.

Setting up a WOFE –a wholly owned foreign enterprise – is a mechanism that’s also gaining popularity and starting to become more feasible. But this structure, essentially going it alone, remains unproven for companies in the financial sector, said Andrea Muller, Chief Executive, Asia of Principal Global Investors. For the time-being, therefore, a WOFE is perceived as higher risk for foreign firms.

On the ground

However a company sets up in China, there is no substitute for having your own company’s people in the country.

“It’s a mistake to focus on offshoring and not having people on the ground,” said Muller’s colleague Zeid Ayer, special assistant general manager at CCB Principal (the name of the JV between Principal and CCB) who is based in Beijing. “It’s key, especially in a country like China, to establish those relationships.”

That’s in large part because contact with the regulators when it comes to key market events and developments make “being there” crucial to “understanding local markets better, investor appetite, which products work best”, Ayer said.

Some of the most strikingly unfamiliar territory for overseas business people in China involves meeting new partners. Chinese business culture is social: foreign partners are often expected to eat heartily and drink heavily as part of the business arrangement. And endless rounds of baijiu alcohol can seem like a daunting endurance test for those unfamiliar with Chinese social business conventions.

Strict hierarchies can also lead to misunderstandings – there is often little of the directness foreigners might be accustomed to and a lack of deference towards a potential partner may swiftly end any talks, for example due to a lack of understanding of the concepts of guanxi or face.

 Proceed with caution

Given the country’s track record with issues like corruption – it scores a lowly 40 out of 100 on Transparency International’s Corruption Index . By sharp contrast Japan, the nation China leapt over to become the world’s second largest economy scores 74 and the US gets a mark of 73.International firms are warned to tread particularly carefully around supply chain-related issues and hiring under-qualified staff.

As foreign direct investment has increased exponentially, so has the need for well-trained, internationally-minded managers. Training and keeping these employees is crucial for business growth but job-hopping and impromptu demands for higher wages are on the rise.

“The business opportunities in China are enormous but experience shows us that [multinationals] need to keep their eyes wide open,” said Violet Ho, senior managing director at Kroll, a global risk consultancy.

It’s critical for companies to establish a strong anti-corruption process starting with due diligence on third-party partners such as distributors, deal-brokers or suppliers, where there is a “clearly understood potential for fraud”, Ho said. That includes advertising agencies, travel agents or even event organisers — all suppliers that would typically be considered low risk in other countries for instances fraud or money laundering in most developed markets.

Good taste

Sensitivity to different consumer tastes is also crucial to survival, said Richard Barton, managing partner, Newgate Communications in Hong Kong. Barton said companies that try to shoehorn existing marketing strategies in to the Chinese market often find nothing but failure.

“This has especially been true of the food and beverage sector, where tastes aren't just different nationally, but regionally and locally, too,” he said.

Food manufacturer, Kraft failed to penetrate the Chinese cookie market, until it altered the size, shape and flavour of its Oreo cookies and made them less sweet. Other companies have spent significant sums developing locally relevant flavours: Frito-Lay, now sells crisps in ‘Fermented Beancurd’, ‘Numb and Spicy Hot Pot,’ ‘Cheese Lobster’ and ‘Hot & Sour Fish Soup flavours.’

While challenging, taking the time to get it right can be extremely lucrative. As the world’s second-largest economy China continues to develop and the rewards for securing an established presence as the country’s market – and spending power – are huge. Retail sales amounted to 16.88 trillion yuan, (around $2.77 trillion) according to China’s National Bureau of Statistics.

 “The benefit [for us] of actually getting it right is the payoff in the future, to be part of the growing market, to be part of a growing middle class there,” said Principal Global Investors’ Muller.

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This article was subsequently amended to clarify that Principal Financial Group, not Principal Global Investors set up a JV in China in 2005.