6 Challenges of Doing Business in China and How to Overcome Them
As the fastest-growing major economy in the world, China continues to offer global companies attractive investment and business opportunities. However, doing business in China also means navigating the complexities that arise from China's unique historical, political, and cultural contexts. China offers plenty of opportunities for new ventures; the Chinese market continues to grow about 7 percent annually, and it is the second largest economy in the world behind the United States. With opportunity comes challenge, however. In this article, we outline some important challenges to consider when doing business in China and offer some recommendations for success.
Business people must have some sensitivity to the Chinese culture and how it impacts business. Hierarchy plays an integral part of business culture in China with leaders and managers being more distinguished than in many Western countries. Chinese leaders and managers expect obedience without question. One important concept to master is “face.” Face represents a person’s reputation and feelings of prestige within the workplace, family, friends, and society. For instance, an American subordinate attending a meeting where his/her boss is making a presentation would generally not think twice about asking a question, making an alternate suggestion, or even disagreeing with something. In China, this would be a serious face-losing situation for the subordinate, boss, and even the company. Not pointing out others’ mistakes and giving credit for others’ good work are both good ways to help others save face.
Because China has a long history of being exploited by foreign countries, it is of particular importance to show respect as a Westerner doing business in China. Giving gifts, accepting invitations, acknowledging hierarchy, addressing people by their designation, attending meetings, and showing genuine interest in the local culture are ways to show respect in China.
Moving Too Quickly
Doing business in China often takes longer than it would in most Western countries. American companies often fail because they are eager to move ahead rapidly, but it is typical in Chinese culture to establish a strong relationship before closing a deal. Therefore, it is important for Westerners to understand they may need to meet with Chinese businesspeople multiple times before a business partnership or deal can be made. If Westerners are invited to drinks or a meal, it is vital to the development of the relationship to go.
Chinese business culture also has a longer decision-making period than Westerners are used to. It is not uncommon for Chinese businesspeople to extend the decision-making period past a deadline given to them. It is important for Westerners to be prepared for that and to not rush them into making a decision before they are ready. Patience is the key to success!
Cost of Doing Business
It is common for Western businesses to move operations overseas to save on operational costs. However, in China, operational costs are getting more expensive. Foreign companies have been required to pay education and urban maintenance and construction taxes since December 2010. In addition, the Social Insurance Law, which took effect in July 2011, imposed additional operating costs on companies that already provide international insurance coverage for their employees.
Companies are also becoming alarmed by industrial overcapacity. Subsidies have encouraged some firms to continue production even with dropping demand and then sell their products overseas. Increasing salaries and growing turnover are also a trend around China, especially in second- and third-tier cities. Both of these factors increase costs for companies because they have to pay workers higher wages, as well as hire and train new workers frequently due to turnover.
Nevertheless, China’s population allows great potential for productivity and potential for demand. As wages continue to increase, so does the purchasing power of Chinese workers. Even with increasing costs, having a business presence in China represents a large opportunity for growth.
China’s growing debt is also of concern. Infrastructure has been a top priority of China’s government, with projects for roads, rails, electricity, and telecommunications…so much so, that China’s investment in infrastructure has hindered their growth. According to researchers at Oxford University, more than half of Chinese infrastructure investments have decreased in economic value as the costs have outweighed the benefits. While infrastructure has been a huge driver of Chinese economic growth over the last few decades, China has recently increased infrastructure spending to counter the slowdown in manufacturing investment. Such investment can lead to waste and add to China’s debt.
Because China’s economic growth has slowed, policymakers in China have begun focusing away from its reliance on investment and industry and on to consumption and services. This is expected to slow short-term growth; however, this shift should build foundations for more sustainable long-term expansion for businesses.
The Role of Government in Business
There is a substantial difference in the role of government in Chinese businesses compared to Western countries. China has a planned economy closely tied to government. In 2007, for example, the US federal government’s fiscal revenue was $2.4 trillion, or 18 percent of GDP, whereas China’s fiscal revenue was 5.1 trillion yuan ($770 billion), accounting for 21 percent of GDP. In China, more than 76% of assets are owned by the government, with people owning less than a quarter; while in the United States, assets are owned privately. This means that to do business in China, a company will most likely have to negotiate with the state. The bureaucracy involved in negotiating with the state can slow down the pace of business ventures.
Joint ventures are difficult to establish because they have substantial government involvement. Legal matters lack consistency and can be changed at the will of the Chinese government. However, the Chinese government has tried in recent years to upgrade legal protections making the business environment more enticing to foreigners.
Corruption in China has certainly become more of an issue as the Communist Party of China’s policies, institutions, and norms have clashed with recent market liberalization. Bribery, kickbacks, theft, and misspending of public funds cost at least three percent of GDP each year. Because the Chinese government owns the majority of China’s assets, they have the ability to spend without much oversight into the budget process. The Chinese government has wasted money on high-profile infrastructure projects and government office buildings, and invests in industries with high resource consumption, high pollution, and low job creation.
Recently, there has been a crackdown on corruption, and many high-profile political figures have been jailed for getting caught up in the net of bribery, abuse of power, and other corrupt practices. While foreign investors are generally happy to see this cleanup work, some have expressed fears that the crackdown also lacks transparency. Nonetheless, it is a step in the right direction for foreign businesses.