Risk vs reward: is China worth the effort?

Business Asia, Nov, 2003 by Randolp Ramsay

China is the "it" export market globally, with traders being urged to go to China to take advantage of their huge market and massive investment opportunities. Look through the hype, however, and you'll find doing business in China can still be a problematic experience.

When it comes to trade buzz, no other nation on Earth is generating noise quite like China is now.

Thanks to its booming economy, large population and increasingly open markets, China is being touted by analysts and experts around the world as a trader's Shangri-la.

Australia has not been immune to the hype, with many local commentators and government bodies praising the two nations' relationship and forecasting strong growth in trade.

Various government studies and an increasing number of media reports have portrayed China as a land rich for export pickings, with Australia's offerings of goods and services being extremely complementary to China's needs.

The local hype reached its crescendo last month with the visit of Chinese President Hu Jintao and the announcement that Australia and China had agreed to work towards a free trade pact.

But what the spiralling big-ticket trade figures don't show is the difficulties many businesses will encounter when trying to crack the China market. Australian businesses on the ground in the Asian giant say that despite the promise of massive export opportunities, China remains one of the toughest Asian economies to find success in.

Lower expectations

Any perception that China is an easy market to penetrate is "naive", according to the China Australia Chamber of Commerce in Beijing's (AustCham Beijing) general manager Auslan Ishmael. "It (China) is generally one of the hardest markets to penetrate in the Asian region," he said.

AustCham Beijing is a non-profit organisation set up to represent Australian business interests in northern China. As the head of the organisation, Ishmael has seen first hand just how challenging entering the market can be for Australian businesses.

"China is still China, and every culture has its intricacies for doing business," he said. "Whether or not one accepts the conditions to do business here is another issue."

Austrade's country manager and senior trade commissioner for China, Kym Hewett, agrees that the country is a demanding market, and that exporters would do well to lower their expectations.

"We have a couple of rules we tell prospective exporters here. One is double your budget and time, and the second is to halve your expectations," he said. "It's easy of falling into the naive trap of multiplying everything by 1.3 billion and getting a big answer. The fact of the matter is there are not 1.3 billion consumers--it's closer to 600 million."

Bureaucracy problems

The myriad levels of Chinese bureaucracy, coupled with the general opaqueness of the business system, seems to be the biggest obstacle facing foreign companies working in China. Beijing Consulting Group director Edward Smith, who has worked in China for more than eight years, says while it was now relatively easy to set up a business in China, those who go it alone will need an intricate knowledge of local practices to remain viable.

"In Australia you can register a company in approximately one hour. In China, it generally takes two to three months and the government must approve (and may put limits on) your business scope," he said.

"The application must all be done in Chinese and you have to register and report to a large number of government departments, such as the Ministry of Commerce, the State Administration of Industry and Commerce, and several tax departments (national, municipal, local).

"You also have to invest a minimum amount of capital, and in some industries, you have no choice but to find a local partner, as you are not permitted yet to set up a wholly foreign owned enterprise.

"Having set up the business, you will find that ongoing reporting to government departments and bureaucracy in general can be very time and resource intensive."

Differing rules

And even after those initial starting roadblocks to setting up shop, the process of growing and expanding your operations could prove problematic. Austrade's Hewett says Chinese authorities police a foreign businesses' scope to a tight degree.

"One of the particular issues identified by the Australian business community in China is that when you define your business scope in applying for a business licence here, the authorities police it very narrowly under the description that's been given," he said.

"If you say you're making paper cups, and one day you get a brainwave and want to go into China cups or paper plates, you will have to reapply to broaden your area of business scope--it's policed to that degree of precision."

Bureaucracy is certainly one of the key hurdles businesses will face in China, Hewett says.

"The other reality of working in China is that there are many layers of administration--there's a national level, a provincial level, a city level, a county level. And there are requirements for approval on all of those levels," he said.