China’s rise as a consumer economy has long been suspected, but recent figures have confirmed that the once export-orientated powerhouse is now much more internally focussed, creating ample opportunities for companies looking to expand abroad.
Official figures recently revealed that China had been pushed into deficit as imports overtook exports during the year to March 2013. The results confirmed what many analysts had long hoped for - that the country’s future growth would be less dependant on exports, and that the new leaders are focused on delivering sustainable, quality growth, which is a welcome change from the growth-at-all-costs approach of the past.
The effect of increased wealth and consumer spend in China is already being felt around the world; recent tourism numbers showed that visitors from the country spend more than any other country in the world with a record $102 billion shelled out on the road. For growing companies with overseas aspirations, China seems like the perfect destination for expansion. But with lengthy bureaucratic procedures and an unfamiliar consumer environment awaiting those who try, it is crucial to have local advisors on hand to help navigate the complex market.
As the economy continues to grow (it is expected to expand by 8.2% this year), we assess some of the main difficulties encountered by overseas firms doing business in China.
Local distribution networks, buying habits of local consumers and regulatory requirements can make China a very difficult market to access. What’s more, the market environment is completely detached from most other economies in the world, making it difficult to take the first steps. It is estimated that 37% of products that pass for the US market fail in China.
There has been a sizeable class shift in China over the past few decades, and the consumer environment is far more diverse than it once was. It is also completely detached from markets elsewhere in the world, and many companies have sunk in China because they failed to take into account consumer preference.
Overseas firms often struggle with laws and regulations in China; 31% of 338 respondents in a recent business survey listed bureaucracy as their top concern when expanding into the country. Most common complaints revolve around obtaining the required licenses and permits, with many respondents bemoaning the laborious processes.
Transparency of government procedure and corruption are chief concerns of companies moving into China, although this is likely to change as new leadership is ushered in. The citizens of China need to believe the government’s decisions serve their interests, and there is a growing risk that Party leaders increasingly are viewed as clinging to power in order to enrich themselves.
Standards and conformity assessment
All products entering the Chinese market must comply with rules stating how products are designed, manufactured, sold, used and disposed of; this can be a very foreign procedure to many companies, and can impact the country's appeal.
Intellectual property rights is an area that has been notoriously difficult in China, although recent reports suggest this is an area that is vastly improving. Gary Locke, America's ambassador to China, recently said that “for every foreign company calling for stronger IP protection, there are more Chinese companies calling for the same".
Many Chinese companies are looking to improve the quality of their products and services so they can sell them abroad, which has increased competition. Additionally, consumers can, in some cases, give preference to native companies over those from abroad. The government can also give preference to domestic firms, which makes disrupting the market rather difficult.
The US-China Business Council recently published a report that showed 62% of respondents said they had increased wages by 5% to 10%. Eight percent of respondents had hiked them more than 15%. This was the area that concerned respondents the most on the whole survey.
Human resources remains a priority for Chinese companies, with the demand for trained, professional labour still outstripping supply. Companies therefore find it hard to keep hold of their best staff, as some job changes can mean salary increases of up to 30%.
Administration, licensing, product approvals and many more laborious operating task can leave managerial desks flooded in paperwork. For many firms, overcoming the bureaucratic hassle is the biggest task to successfully breaking the Chinese market.
We have the local knowledge to help you navigate these minefields. Whether you want to set up in China or just want to streamline your Chinese operations, talk to us.