Corporate Training Magazine

CHINA: Research, Planning and Developing a Strategy for Economic Entry
Vol 2 Issue 4- Sept 2006

By Robin Lin

One point three billion. The number is staggering. The opening of the Chinese economy offers international businesses access to a market of over 1.3 billion people. Never before has an untapped market of this size and magnitude suddenly materialized on the international economic scene,

With an economy growing at nine percent a year (2004), China is poised to become one of the most significant markets for business and trade. And companies are clammering over the Great Wall to get a piece of this lucrative market.

Analyst forecasts of a huge middle class with enormous spending power are already emerging. This, combined with direct spending on or by urban teens in China totaling 290 billion renminbi (about $36 billion) a year, makes the consumer market a very appealing lure for companies around the globe.

And Chinese consumers are hungry for a taste of Western culture. The 'American lifestyle', along with innovative products, dominant brands and profitable business models, has firmly seeped into the consciousness of China.

"China's burgeoning consumer market is providing a second wind for a lot of North American products," said Mei Xinyu, a researcher with the Chinese Academy of International Trade and Economic Co-operation.

The strengthening of the business sector is also paying dividends for multinational companies entering the Chinese market. One example is Boeing. In a global airplane market where sales have otherwise taken a nose dive, China ordered 120 planes from the company last year. And the Chinese delegation to the United States, led by Vice-Premier Wu Yi, signed an agreement to buy 80 Boeing 737 planes in April of this year.

Further, a recent survey by the American Chamber of Commerce in Beijing found that 42 percent of US companies operating in China report that their Chinese profit margins exceeded their worldwide average margin.

And while past concerns focused around the stability of the nation's banking system and its adherence to trade commitments, these and other issues for companies looking at entering the Chinese market have been greatly reduced through a joint and concerted effort of the national government and the business sector.

In 2004, management consulting firm McKinsey reported that the Chinese banks were on a strong upward trajectory. With the assistance of a favorable government-regulated interest-rate spread between deposits and loans. Chinese financial institutions have been provided with one of the largest margins in the banking world, and they have used it to write off bad debt.

In the last two years, state and private banks have received injections of capital and capabilities from the government and private investors. These infusions have done a great deal to minimize the threat of a banking crisis or collapse. Chinese financial institutions have also made great strides in preparing for the shift in profit sources--from deposit taking and commercial lending to retail credit and SME lending.

Some banks are also improving their capabilities rapidly and benefiting from foreign capital. Citibank and HSBC, for example, are investing billions of dollars in Chinese financial institutions.

But Bernhard Hartmann, vice- president of the management consulting firm A.T. Kearney cautioned that establishing a foothold in China requires that companies provide something beyond just goods and services. They also need to build a positive image.

One way they're doing this is through demonstrating a level of corporate social responsibility. For example, Starbucks donated 40 million yuan (US$5 million) during 2003-2005, Motorola gave 25 million yuan (US$3.1 million) and Pfizer 18.5 million yuan (US$2.3 million).

Cultural factors also play a role in the economic process. One such important element is the practice of guanxi, which describes the basic dynamic in personalised networks of influence. Guanxi is a central concept in Chinese society and describes, in part, a personal connection between two people in which an individual is able to prevail upon another to perform a favor or service, or be prevailed upon. It could also be a network of contacts, which an individual can call upon when something needs to be done, and through which they can exert influence on behalf of another.

While guanxi is seen less in the new China, the practice has not disappeared. It remains a factor of doing business in the Asian powerhouse, and companies entering the Chinese market need to be aware of the practice and how they may be affected. Analysts advise that dealing with guanxi now requires a more systematic approach. Nurturing the right ministerial relationships no longer confers the same advantage.

As the Chinese economy and regulatory infrastructure mature, fewer decisions affecting businesses are being made for the first time, and precedents can be difficult to break no matter whose ear a senior executive can bend. Moreover, players on both sides of the table are much more professional than they were a decade ago.

Similar to the home front, the task of attracting and retaining employees is having a major impact both on Chinese companies and multinationals entering the market, and the battle for talent continues to heat up. It is estimated that domestic firms will require 75,000 leaders who could work effectively in global environments within 10 to 15 years, compared with the 3,000 to 5,000 on hand today.

This is putting upward pressure on wages and making it difficult for companies to retain managers. Research also shows that 30 to 40 percent of senior managers at multinationals switch jobs every year, and their average salary increased by 14 percent annually from 2000 to 2004. Chinese companies are also struggling to acquire top talent, which further exacerbates the challenge for multinationals.

So, is the timing right to enter China? What companies need to recognize is that there's no universal right answer to this question. Each company must eval- uate the venture for itself. And by being fully aware of the climate--political, economic and social--and bringing all the potential dangers to light, you can make an informed decision for your organization based on the weighing of the vast opportunities against the potential threats.