Since the early 1990s the international business community has shown a keen interest in the untapped potential of the Chinese market. Canadian business and government have also taken note of the “sleeping giant” and responded by taking part in several trade missions.
With over $23 billion in bilateral trade in 2003, China is Canada’s largest Asian trading partner, and ranks second as Canada’s global trading partner. Statistic Canada’s preliminary figures for 2004 indicate growth of more than 30 percent in two-way trade between the two countries.
In January 2005, International Trade Minister Jim Peterson led a successful Canada Trade Mission to Shanghai, Beijing and Hong Kong, China. CCC President Hugh O’Donnell joined delegates from 280 companies and various government departments and agencies in further developing commercial ties in China and establishing new ones with Chinese partners. During mission, Mr. O’Donnell signed an MOU with the Ministry of Land and Resources, building on an initiative started in 2002, to test the efficiency and system stability of data exchange technology. The work will be performed by GEOMAX International of Brossard, Quebec.
While there is no doubt that China offers tremendous potential for Canadian business, along with that potential comes a degree of risk and a number of challenges that companies need to keep in mind when developing the China component of their business plan. Many Canadian companies have had disappointing - if not disastrous - previous experiences with transactions involving Chinese partners or customers – a fact that demonstrably explains why many small and medium-sized firms are hesitant about doing business in China. With proper planning and better understanding of the Chinese market, Canadian exporters can reduce their risk.
Risk-mitigation tips
Before deciding to enter into the Chinese market, a company should carefully evaluate all the risks posed by the country and identify various strategies to mitigate the risks. Effective risk mitigation strategies can be costly to implement, and some companies may decide that China does not offer sufficient rewards to compensate them for the risks they face.
For companies deciding to go ahead with projects in China, Renato Tavares, a CCC director with experience in contract negotiation in South-east Asia and China, offers practical trips on doing business in the region.
- Learn about China
One of the biggest hurdles is coming to terms with the real China, a land of great geographical, social, political and industrial diversity. As a starting point, it's essential to cut through the thicket of misunderstandings and misinformation about doing business there. Clearing them up won't guarantee the success of investments, but it will at least increase the chances of getting the foundations right, particularly at a time when fears that the country's economy is overheated are further complicating decision making.
- Establish a local presence
The most widely practiced formula in China by firms already enjoying success there is to establish a representative office in conjunction with a strong domestic private sector partner that already possesses the necessary access to all level of decision-makers in their field.
- Select partners carefully
Whether looking for a partner, distributor, agent, or licensee conducting due diligence, finding the right partner takes time, patience, and experience. Even finding the right partner does not guarantee success, but the wrong partner, almost always guarantees failure. Carefully review your partner’s background as you will inherit the claims and debts of your Chinese partner should you merge your companies or form a joint venture.
- Prepare well for contract negotiations
Chinese are renowned in the international business community for using the terms negotiated in a contract to their benefit when a contractual dispute arises. They always come well prepared. Keep in mind that these negotiations may take some time, but it is necessary to give everyone the opportunity to save face, which can be a slow process.
- Put China-level risk management processes in place
In a rapidly changing, high-risk business environment, it is crucial to have in place a dedicated, continuous risk-assessment process. Local personnel should be central to this process, as they will be quicker to identify threats and have a greater ability to interpret the local implications.
- Merge business and personal relations
"Guanxi" - the development of personal relationships - remains central to successful business in China and is an important part of risk management. Executives must nurture close relationships with their local counterparts. This not only helps them to understand the Chinese domestic market, but also creates invaluable networks for the time when China's businesses begin their own inevitable journey towards globalization. Heavy investment in relationship-building with both government and business partners is crucial for mitigating strategic and operational risks.
- Localize activities early
Companies should establish a joint venture or a company directly in China as soon as possible. Furthermore, Chinese expertise and local talent must be incorporated into management teams. There is no substitute for local knowledge as a source of information, access to networks and social and cultural learning.
- Establish friendly relations with government officials
A strong government-relations program remains an important factor for success in China, where, as in other emerging markets, the state uses its influence over market access and business rights to shape how far foreign companies can go. Unfortunately, for many of them the management of government relations often takes a backseat to other business operations and, most important, lacks long-term consistency. Such companies have government-relations departments in China but plan and execute less systematically in this respect than business units usually do.
- Make one's company important
Chinese culture places a high value on respecting hierarchy. When developing a market or starting the negotiations, a high-ranking official of the company with decision-making power should always be present and his authority should always be highlighted.
- Maintain maximum corporate flexibility
Many companies with activities in China have created a wide portfolio of corporate structures, usually consisting of multiple joint ventures and subsidiaries under a holding company. The benefits of building visibility across regions, spreading risk and developing relationships with a range of government bodies must be weighed against the extra costs and liabilities implicit in such diversification. Companies must take a pragmatic approach to how they structure their operations across the country.
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