China’s role as a global economic leader is by now consolidated, having radically changed its economy from a predominantly agricultural one that was generally closed to international trade. China is now top of the list of countries for whoever wants to expand and invest internationally. When a foreign company plans to move into China market, it is essential to evaluate the pros and cons of doing business in China. Knowing the specific circumstance of Chinese market, your entry strategies will be clear and to the point.
Jingle Office has summarized the pros and cons of doing business in China to help you save time and cost.
The positive side of doing business in China are:
1. Attractive Market
With a population that exceeds 1.3 billion people and a land mass larger than the United States, China represents a huge potential market for foreign goods and services. Whether it be the large Western multinationals with an established China presence or the first-time market entrant with no previous China experience, foreign companies of all shapes and sizes often find China market attractive.
China is heading into the middle class. This is no longer the old China. The new China is emerging, and although that means higher costs for foreign businesses, they all seem to recognize the fact that a richer China, even a higher regulated China, is still better than no China at all. Despite the higher costs, the profit margins of foreign business are still higher than anywhere else in the world.
2. Better Supportive Policies
Chinese government has revised law and regulations and policy documents according to the requests of the market economy aiming at creating a just, fair and open market. Meanwhile, due to the transformation of the government functions, China will improve the examination and approval of investment management while reduce the links, and increase the service efficiency.
Moreover, in order to develop economy of the inland regions of China, the governments of China set up a series of favorite investment policies, ranging from taxation to land-using on these provinces. Encouraging foreign businesses in the coastal area is the first tier of opening door policy of China. After that, the government encouraged the foreign companies to do business in the inland of China, such as Xi’an, Chongqing, Wuhan, Nanchang, Heilongjiang, Jilin, etc.
China government also adjusted the tariff policies on imported products which is beneficial for foreign companies to sell products into China market.
3. Available Skilled Talent
Another advantage of doing business in China is the skilled and competent workforce. High educated workforce in China is growing. Every year, more than 6 million students graduated from the universities in China. Most of them are bilingualism— Chinese and English. Most of Chinese students are learning English at the kindergarten, and English exam is a big subject in the Chinese education system, either for entrance to high school or admission to university. The skilled employees can create, manufacture, and provide goods and services that can compete in global markets. What the foreign companies have to consider is how to retain them.
4. Political and Economic Stability
Chinese government values stability which is the overriding priority for China. China’s experience over the past three decades shows how important social stability is to the economic development. Political and economic stability is an important guarantee for the healthy operation of a company, no matter foreign or domestic. Stability represents predictability and the opportunity for enterprises to gain better foresight into the future. Alternatively, constant social unrest, rioting, rebellions and social turmoil are settings not conducive to business. Economic instability can also contribute to hyperinflation, which can render the currency virtually obsolete. China has domestic stability which fits together with economic progress, and offers a favorable business environment for foreign companies to conduct trade activities.
The negative side of doing business in China:
1. Weak Law Enforcement
At the top of everyone’s list of challenges, is the question of how a company can protect intellectual property rights. When combined with the lack of legal enforcement, the issue of protecting intellectual property rights (IPR) is the single biggest hurdle for most companies to overcome when thinking about entering the China market. The effects of IP leakage in China are ubiquitous. They are visible in counterfeited items including toys, luxury goods, automotive and aircraft parts, pharmaceuticals and other complex high-tech products. For many multinational corporations, IP leakage frequently becomes a barrier to Chinese market.
Moreover, regulatory enforcement also is uneven in China. Agents enforce the rules for foreign companies when they don’t enforce them for the Chinese counterparts. For example, the judicial system is biased toward protecting the Chinese side of a joint venture, who conduct what are sometimes perceived as unfair, illegal, or unethical business practices.
2. Higher Business Cost
The cost of doing business in China has become much higher than before. Cost increase remains a nearly universal concern for all foreign companies operating in China. Human resource costs top the list of specific cost concerns. China is no longer the place for cheap labor. China have increased minimal wages and working standards, so the cost of labor has risen. Besides, China is going to have to build up a social safety net for its billion-plus population, so for foreign companies, employee benefits are a major add on to payroll cost in China. Tax cost of a company is currently higher than before, which falls purely on foreign business, and adds an additional burden in profitability costs. Office rent is extremely high with advance payments. Other support services like drivers, security, office maintenance also cost you much.
3. Dilatory Licensing Process
License obtaining remains an important issue for foreign companies. It is reported that most companies have experienced licensing problems in China, including securing product approvals, investment approvals, business expansion, renewing business licenses, and even routine business activities, while their domestic competitors do not face the same licensing challenges.
Another issue faced by foreign companies is that Chinese companies continue to increase capacity and receive preferential treatment, while foreign companies may suffer lengthy or stalled licensing and investment approvals, and a general lack of government action to move files forward in the approval process.
4. Fierce Market Competition
As China’s economy has grown in size and strength, an increasing number of foreign companies are now trying to sell their goods and services to Chinese consumers. But breaking into the market can be challenging, especially for small and midsize companies that lack global brand recognition, because China is a huge market with large numbers of entrepreneurs in various sectors of the economy. Competition comes from not only foreign companies which have established their businesses in the China market, but also Chinese domestic companies both private and state-owned. Many Chinese companies are looking to improve the quality of their products and services, which has increased competition as a result. The government can also give preference to domestic firms, and state-owned enterprises control most of China’s retail space.
Despite of the negative side of doing business in China, as the second largest economy in the world, China has great market potential which can not be replaced by other countries. Do keep in mind that carefully analyzing the market will also need to be a top agenda item. With updated strategies, China can still be an attractive profitable growth opportunity for many foreign businesses.
Jingle Office have the local knowledge to help you navigate these minefields and boost your success in China. Whether you want to set up in China or just want to streamline your Chinese operations, talk to us.
Related reading: 9 Keys to Successfully Sell Your Product to China.