With an economy three times the size of those of Brazil, Russia and India added together, China demands attention. And yet although some 480 of the Fortune 500 companies are already there, the country has a long history of confounding multinational investors. Many firms have entered this promising market with wild hopes but suspect strategies, only to see their dreams shattered because they misjudged or misunderstood the market. Not that this has stopped others from trying: foreign investors continue to be enticed by the prospect of heady growth, in sharp contrast to the sluggish growth or even decline in their traditional markets.
FROM BACKWATER TO SUPERPOWER
It's easy to see why China seduces. It has, after all, emerged as a global superpower with almost indecent haste. The past three decades of market reforms have unleashed economic growth of unprecedented scale and pace. Like Japan, Hong Kong, Taiwan and South Korea before it, China has used its attractions as a cheap manufacturing base to drive economic growth, to the point where today foreign companies account for 30 per cent of industrial output, 55 per cent of trade and 11 per cent of urban jobs.
Economic development has brought with it increasingly complex political, social and environmental challenges for the central government. Yet China has emerged from the global economic crisis even stronger than before. Not only is it a global manufacturing hub for cost-cutting multinationals, it is also emerging as a significant consumer market — even if the transition from an economy driven by investment to one fuelled by domestic consumption remains many years away.
To get a clearer idea of the market, it helps to think of China as a patchwork of markets with all the variety of the European Union: like Europe, culture, language, business practice, operating cost and consumer income and behaviour (not to mention football teams) can vary hugely from region to region. Cities and their populations are changing at a bewildering speed, affecting all these categories. The appearance of a middle class and China's growing integration with global consumer trends has seen the emergence of a younger generation who share more similarities with their Asian (and global) counterparts through popular culture than any other consumer segment in the country's history.
WHO ARE YOU SELLING TO, AND WHERE?
Before entering this bewildering market, you should be clear about your target consumer and the resources you need to reach them. Are you seeking to establish a manufacturing business with an export-driven strategy, or one that focuses on the local consumer? Are you looking to sell to middle-class consumers in and around the wealthy cities of the coastal provinces, or to distribute mass products to both urban and rural consumers across the country?
Once you have identified your consumer segment, where do you base your operations? China has 651 cities, of which 113 have populations of more than one million. Foreign investment has historically focused on Guangdong's Pearl River Delta, Shanghai and the Yangtze River Delta (YRD), and Beijing. While these big three markets are close to major ports and consumer segments, they are obvious targets and so tend to be saturated and overcrowded. Other large-scale coastal cities — Dalian, Shenyang and Qingdao in the north, Xiamen (home to US computer firm Dell) and Fuzhou in the southeast, and Wuhan, Chongqing and Chengdu in the interior — offer large markets and efficient infrastructure.
Early entrants to the market, such as Wrigley's, Coca-Cola, KFC, McDonald's, Taiwanese instant- noodle-maker President and Hong Kong retailers Giordano and Bossini, have been pushing deep into second- and third-tier markets in search of mass consumers for many years. Now IT multinationals, such as Dell, Hewlett-Packard and Nokia, are moving into these markets as» »their distribution channels develop and their cheaper products become more affordable for locals. Helped by government stimulus programmes, rural retail sales have responded since 2009 with a new confidence that raises hopes for increased domestic demand.
RED TAPE AND OTHER OBSTACLES
WTO membership since 2001 has helped to remove or at least shrink major obstacles to investment. In a recent World Bank report, China came highest of all the BRIC countries in ease of doing business, ranking 89th out of 180, but lagging behind regional neighbours Singapore (1st) and Japan (15th).
Challenges remain in the form of intellectual property protection, local protectionism, red tape and corruption, although multinational companies are finding that effective compliance programmes are raising awareness within their organisations and so minimising the risk of financial crime - and the threat of hefty fines for violation. The key to mitigating these risks lies to a large extent in the people you hire and those you cultivate through external corporate networks.
FINDING THE RIGHT PEOPLE
You wouldn't have thought it, but China has an acute labour shortage. The problem is that as the economy has grown, so has demand for experienced mid-level managers and skilled labour. Appealing job packages and prospects for professional development are key to attracting and retaining talented staff. At the same time, manufacturers are being forced to raise salaries and introduce new incentives in a bid to hold on to skilled workers. The story is unlikely to improve in the near future, with too few skilled graduates entering the market over the next five years.
Senior managers in China generally spend more time managing and developing local staff than their counterparts in the West. They are expected to provide guidance, direction and effective communication, and to show an interest in the personal lives and longer-term professional development of individual staff. Local workforces respond enthusiastically and positively to social activities outside the workplace; these help to develop stronger personal connections with management and so foster a positive working environment.
Many multinational companies run programmes and other initiatives to develop staff. These include seconding managers to different business units to deepen management experience, introducing cross-functional projects to help local staff in their professional development, setting up mentoring programmes and running leadership training modules. Training is fundamental to developing management skills and also to staff retention. This can range from evening classes in English or Microsoft Excel to mentoring or short-term secondments to MBA programmes. Local (private and state-owned) and foreign companies alike budget for training, spending as much as 15 per cent of annual salaries in the case of private or foreign-invested operations.
GUANXI: OVER-HYPED, BUT STILL USEFUL
Guanxi describes the personal networks which underpin all business relationships. The business relationship implicit in guanxi requires mutual cooperation by each party. This cooperation is personal and cannot be transferred to other people. An expatriate resident of Beijing for the past 20 years equates guanxi with networks and connections in other business cultures but believes that guanxi can reap much more rewarding results than in other business cultures. Certainly, these relationships are not unique to China: similar concepts exist in the form of Blat in Russian culture, wasta in Middle Eastern culture and even the old boy networks of western societies.
As in other cultures, guanxi has suffered from an association (sometimes perceived, sometimes real) with corruption. It is true that the line between maintaining guanxi and engaging in bribery can occasionally blur. Gifts such as dinner at an expensive restaurant, a bottle of whisky or a bulky hongbao (cash-filled red envelope, traditionally given at Chinese New Year) can be interpreted by some (including the recipient) as bribery and, where applicable, a violation of international regulatory principles.
Much of the mystique of guanxi is misplaced. Yet it is true that business transactions in China are based to a greater extent on personal relationships, mutual understanding and implicit agreements than on formal legal contracts — recognition perhaps that China's evolving legal and administrative environments could not be counted on when carrying out business deals. As these areas become stronger, more predictable and transparent, it is logical to assume that the need for guanxi will ultimately diminish, though there will always remain a perceived benefit to developing high-level political relationships in the hope that it helps to oil the wheels of business at some point.
THE GOLDEN RULES FOR GOOD GUANXI:
Every action has a reaction: for every favour you call in through guanxi, you will at some point be required to return a favour, which may not be entirely to your liking. Never burn your bridges or your own guanxi — you never know when you will need that extra bit of guanxi to drive something through to closure. Find ways to build connections and networks around the country both vertically and horizontally to get maximum effect.
It is also worth bearing in mind that even carefully maintained guanxi can be lost. As one expatriate lawyer in Shanghai says: "Guanxi get old; guanxi get divorced; guanxi die."
Chris Torrens is author of The Economist Guide to Doing Business in China (Profile Books, £20).
BA flies twice daily to Hong Kong, daily to Beijing and five times a week to Shanghai. Visit ba.com
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