Challenges of the Chinese Market for a Foreign Investor
Every year, many foreigners try to do business in China. The reason is not far fetched, considering that China has the highest spending population of middle class – about 800 million middle class population are in China. This urbanization, migration and economic development of the new middle class call for businesses to serve the new emerging market.
Why China?
China is the world’s largest manufacturer, with more than $2.2 trillion in manufacturing value added. It makes 80 percent of the world’s air-conditioners, 90 percent of the world’s personal computers, roughly 70 percent of the world’s solar panels, 90 percent of the world’s mobile phones, and some 65 percent of the world’s shoes.
Manufacturing makes up 40 percent of the Chinese economy and directly employs 130 million people. But its traditionally low labor costs are rising, and there is aggressive movement from low-tech assembly to high-tech manufacturing, as well as from the more expensive coastal areas into cheaper central and western China.
However, there are some challenges for foreign investors trying to do business with China. While the challenges are worthy of concern, there are also strategies to mitigate the risk of new entrants into the Chinese business environment.
These are some of the most popular challenges foreign investments face when trying to enter the Chinese market.
1. Cultural challenges
The Chinese culture is vague and often ambiguous. Considering that Chinese culture is deeply rooted in the way they do business, cultural differences can pose challenges for new entrants. First, consider that the Chinese people are polychronic in nature. They are not obsessed with time-bound goals. Instead, they want to build relationships over time. Hence, the signing of contracts, negotiation, and business meetings may take longer than you anticipate. Also, loyalty is not instant just because you have signed a contract with a Chinese partner. Chinese people are loyal to their country and government. Some norms and traditions that prevail in the business world in the West may not apply in China. Learn the basic Chinese language, and their culture and observe closely before choosing a business partner.
2. China's laws & regulations
The government of Chinese is highly involved in the business industries. The constant change in laws and regulations makes it difficult for foreign businesses to adapt to the Chinese market. Also, the fact that some regulations are interpreted unfairly is a big challenge for foreign investors. The lack of transparency from the government, coupled with corruption amongst government officials breeds favoritism for local business owners against foreign investors. This is something to consider a challenge when doing business in China.
3. Intellectual Property Rights Theft
China is the biggest offender of fake products in the world. This is because theft of IP and trademarks is a common thing in China and somehow, the government is not helping to minimize this plague. This is evidently because the procedure for arbitration and the legal battle is often long and many battles majorly end up favoring the local business owner such that the foreign investor ends up stifled, and may eventually sell the business to the competitor. Joint Ventures are usually the biggest victim of IP theft. The laws of China to have local data stored in China is also a big challenge for technological businesses as well.
4. Finding a trustworthy Chinese partner
Whether you are entering as a WFOE( Wholly Owned Foreign Investor) or Joint Venture, it is often advised to have some local support team to help you navigate the Chinese market. Getting a trustworthy partner is hard because a lot of Chinese business owners are looking to take advantage of foreign investors. Many are looking to steal IP, learn trade secrets and use their network to stifle foreign investors. The cost of conducting due diligence may also be high but it is worth if for foreign investors.
5. Choosing a business location
The Chinese market is constantly growing and there are many factors foreign investors will have to consider before choosing a business location. Some locations are more expensive to operate than others while some may also be cheap but won’t be closer to the target customers. Also considering that the top business locations (Shanghai, Beijing, and Guangzhou) are currently overpopulated, it may cost extra to find a location for your business.
6. Logistics challenge
The supply chain and logistics industry is highly fragmented in China and the lack of automation despite the growth in Artificial Intelligence is a challenge to getting goods to many developing parts of China. The rules and regulations involved in logistics permit also make it very challenging for foreign investors looking to get their goods across to consumers in markets that are away from the major cities in China.
7. Managing Sales & Distribution Agents
This is another challenge for foreign investors. Remember that China sells a lot of fake goods to their consumers, often these fake goods are cheaper than the real ones. Hence, distributors want a quick profit and a bigger profit margin. Often, they prefer to work with businesses that can give them bigger profit margins and when they see that the profit margins are not as big as the fake counterparts, they dump the brand and distribute the fake ones instead. Finding a trustworthy distribution partner is a big challenge foreign investors face when doing business in China.
8. Hiring the right staff
Finding quality staff is a challenge in China because of the limited talent pool available. The few qualified staff are sought after by other local and foreign competitors and also, managing the local staff is a challenge. In WFOE, there are often challenges managing local staff due to cultural differences that affect work culture and team building. For Joint Ventures, many of the local staff are loyal to the Chinese partner and they will often do the bid of the local Chinese partner even if it may be detrimental to the business goal.
How Naiyuan Mart Can Help
Navigating the Chinese market is tough for foreign investors. Naiyuan Mart has helped a lot of African investors and business owners to do business with the Chinese. Naiyuan Mart has territorial knowledge of the Chinese market and can help manage the business relationship on behalf of foreign investors.