Starting a Business

For many years, the allure of cheap labor and a staggeringly large market, has brought expansion-minded companies in their thousands to China . However, even today successfully setting up shop in China is likely to be one of the biggest challenges a company will ever face.

The list of big business that has blundered into China and underperformed is both long and illustrious. The Chinese business environment is still a convoluted maze full of pitfalls, rather than a well-oiled machine that some may presume. There are typically 25 to 30 steps involved in the business registration process, the nation's legal system is unreliable, and government regulations are vague and often subject to bureaucratic whims. Added to this are different cultural norms and a level of unpredictability that far exceeds the normal volatility of entrepreneurship, and you start to get a glimpse of what you're up against. It is little wonder that global champions from PepsiCo to Microsoft have stumbled in the China market.

For the majority of multinationals, these complications are simply considered part of the cost of doing business in China . Large companies have the capacity to afford extended investment of capital and manpower into their China operations until they finally achieve profitability. However, the smaller companies can not afford the same luxury.

For a small business to succeed in China , there are a few things to keep in mind during preparation.

Industry

The 2001 entry into the World Trade Organization and increased global pressure on Beijing to level the playing field for international investors, have caused the long-standing restrictions on foreign companies to rapidly diminish.

As a result, China is more accessible international small business than ever before. In this constantly shifting landscape, being up-to-date on the latest rules and regulations is integral to the success of your business. Policies governing a single sector can vary widely from province to province, city to city, and even within different districts of the same metropolitan area. Ensure that you know the rules and regulations of your industry on a national level but also double-check to make sure the same rules apply locally.

Location

Though Beijing , Shanghai , Guangzhou and a handful of other cities on the East coast remain the destinations of choice for most foreign companies, they may not be the best locales for businesses on a budget. The growth of the Chinese economy and the influx of international business, means that they prices in the coastal cities are no longer offering the best offers for small business.

China possesses almost 100 cities with a population topping 1 million, and almost all of these make an active attempt to attract foreign investment. This presents a good opportunity for small business to find an economical location and potentially favourable treatment from local authorities. These government incentives can translate into substantial savings. In just one example, the well-developed and historic city of Xi'an, with population of over 4 million in China's West, has a High-Tech Zone that offers foreign companies discounted office space and tax exemptions until two consecutive years of profit have been achieved.

Investment structure

One of the biggest decisions for any foreign business entering China , will be what investment model to consider. Joint Ventures (JV) and Wholly-Owned Foreign Enterprises (WOFE) are the most common. In general, statistics have shown that WOFE's are chosen as the more favoured investment model by a ratio of 2:1.

Management

Unless your business is a very simple outsourcing project, experts agree that a permanent China presence is essential. That means that you need to give serious thought to the management in charge of operations on the ground. Relying on management via ‘remote control' from afar, is a bad idea and will likely end in disappointment.

On the other hand, sending staff from your head office can also be costly, especially if they require all the perks of expatriate life. Furthermore, many foreign companies have failed under the management of Western managers with little understanding of local ways and customs. For a small business though, it is still worthwhile keeping a knowledgeable foreign presence on the ground in China .

Ultimately a mix of both management styles is usually most effective. To ensure compliance with local customs and law, it is essential to employ a local Chinese manager. On top of this, a "part-time expat" that can regularly visit the office will help to maintain the core business direction, oversee operations and act as a liaison with headquarters. Most major Chinese cities have a range of Western management companies or at least a community of Westerners that have established themselves in China and are willing to do this for less than the cost of a "full-time" expat.

Intellectual-property protection

A 2004 study by the American Chamber of Commerce- China in Shanghai showed that member companies still cited lack of intellectual-property protection as one of the biggest obstacles to business in China . This is despite the fact international pressure continues to build on China to crack down on rampant piracy. To get around the problem, some manufacturers hold back core technologies or try to "blackbox" their operations, producing component parts in multiple locations around the country and then assembling them in a single, low-tech factory. But while you should have a clear plan for how you'll minimize your potential losses, there is often no simple way to keep maintain the integrity of your IP.

If taking the risk is too much, or if finding a Chinese partner is proving too complicated, many foreign businesses have chosen to operate out of Hong Kong or in partnership with a Hong Kong-based company. Though this will be more expensive than the mainland, the legal system of Hong-Kong is more developed and companies are faced by fewer trade barriers than those in the rest of China .

Commitment

There is no doubt that the biggest mistake a business owner can make would be to approach China without conviction. China can offer a lot to a small company, but the many challenges involved in the establishment of an operating presence there will test your resolve.

While a carefully constructed business plan is essential, a business new to China should still prepare to be flexible. The survival of a business in China often hinges on the ability to constantly adjust to the unexpected. China will reward those businesses that are committed, well organised and flexible.