CNBC Business | Make Money In China

Make Money In China

How to get rich when you enter the dragon’s den

Meanwhile, hordes of other players such as Veolia, Airbus, BP, Sanofi-Aventis, Ericsson and Philips are aligning their efforts to develop solutions in the energy, environment, transportation, pharmaceutical and high-tech industries for the China market.

MAKING IT Businesses setting up in China will have to contend with improving domestic companies These industry giants clearly benefit from having resources and funding, but fortunately for managers of small- to medium-sized enterprises (SMEs), which account for 99% of all firms in the EU, opportunity is not merely reserved for big players. There are a rising number of European SMEs in China. Leaders on both sides recognise their role in supporting economic growth and are working to improve market access. The European Directorate-General for Enterprise and Industry and China’s National Development and Reform Commission signed a memorandum of understanding in 2006 to open policy dialogue to promote cooperation between EU and Chinese SMEs. In a symbolic move, China designated a preferential tax rate for small foreign companies in the new tax law, which eliminated many incentives used to attract overseas investment when it took effect this year.

As the overall environment for foreign business improves and emerging inland markets liberalise, more doors will open for investors throughout the country. Transparency and regulatory enforcement are already decent in developed cities such as Shanghai and Beijing and the momentum is spreading to new business hubs such as Qingdao, Chongqing and Chengdu.

Succeeding in such a rapidly expanding market may seem foolproof, but the Business Confidence Survey shows that over 40% of companies “have lower than average profitability in China” and the share of respondents in the red actually increased from 23% the previous year to 28%. Clearly, not every company is living the Chinese fairy tale.

Problems begin when the business objective is not clearly defined. Ganster says doing business in China remains “complex and risky, so management needs rigorous validation of its reasons to invest.” Enterprises must first answer two questions, according to Bouée: What is my strategic advantage and what is my brand perception in China? “Don’t go to China if you don’t know how to make a profit,” he says. No matter how hot the opportunities may seem, “you need to have the right business model.”

CHINA’S NEW CLOTHES Textile manufacture is still vital
to the economy, but factories are now a little more high-tech Unfortunately, many fail to do adequate homework before plunging into the market, especially when it comes to partner assessment and due diligence, says Ganster. This leads to significant problems later on – an example being the failed joint venture of Peugeot and Guangzhou Automobile Group, which collapsed in 1997 due to conflicts between the partners.

To avoid such disasters, management must look at its resources in terms of operations, management team and financials. This means sending “the best and the brightest” to China, says Per Jenster, professor of management at China Europe International Business School. In such a high-potential yet high-risk environment, managers need good leadership skills, a keen understanding of how business is done and the flexibility to localise their approach. Moreover, they should have significant international experience under their belts to survive in this unpredictable market. In other words: “You can’t date China. You have to marry it,” says Robert Watson, father of the LEED green building standard and founder, chairman and CEO of green building services firm EcoTech International. His advice for those looking to sell to the Chinese market: be patient. Entrepreneurs coming with riches in mind will be disappointed initially – the first few years will likely be lean – although Watson reassures managers that “China rewards loyalty.”

In addition to strategy issues, managers also cite unclear regulations, bureaucracy and poor protection of intellectual property rights (IPR) as major problems. “Companies whose business is IPR-dependent should also take extensive pre-emptive action to protect their IPR before starting business,” suggests O’Sullivan, such as local registration of their trademarks. Yet, for Steve Clark, executive director of SUEZ Environment China and Sino-French Holdings, the big challenges today are human resources and rising competition. Clark is certainly not alone in having these concerns.

In the Business Confidence Survey, more than 70% of respondents said they had had difficulties retaining qualified managers. SUEZ’s Grivel says: “Technology is one thing … but without proper experience and know-how there is nothing.” While companies are currently sending managers from overseas to fill senior positions, this is both expensive and unsustainable as business localises. There is also the added problem of retaining staff. Chinese employees are moving from one company to the next for pay rises and promotions. A first quarter report for 2008 by HR services firm Hudson finds that China’s average turnover is over 10%, the highest in Asia, and wages are rising sharply.

To cope with the HR crisis, SUEZ is recruiting from local universities and offering in-house training for locally hired managers and staff. As for retention, firms are developing comprehensive compensation and benefits packages and providing employees with attractive opportunities for career progression.

The difficulties do not stop there. Managers also have to deal with the intensifying competition from domestic companies. During their struggle to gain market access over the past few years, many Chinese companies have pursued an “intense improvement agenda” and are now equipped with better technology and high quality products, says Jenster.

BETTER TOGETHER Dongfeng Motor Co is the successful joint venture of Dongfeng Motor Corporation and Nissan Chinese brands are also quickly expanding their market share overseas. After all, opportunity is a twoway street. China’s exports to the EU jumped by 21% in 2006 and brands such as Lenovo and Huawei are gaining credibility around the world. To ensure that strategic markets both in China and back home are not neglected, managers must develop a clear global vision.

As China matures, opportunities and challenges are becoming more complicated. Building a global brand means realising which opportunities are real, which are diminishing and which are fairy tales. One thing is certain: China wants innovative solutions to sustain economic development for years to come. For those with the right strategy and enough determination, New China is still an open playing field.

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