"EA-Tokyo 3 Year Anniversary Panel Discussion - Doing Business in China"

China has the world’s fastest-growing economy and is the third largest trading nation after USA and Germany, China currently ranks seventh in worldwide GDP. With its entrepreneurial outlook and population of 1.3 billion, it offers unique opportunities for domestic and overseas investors.

EA-Tokyo presented a panel discussion with one of Japan’s leading economic and business analysts on China, Takashi Kumon, currently a Deputy Manager at Interchange Association. Since 2002, Kumon has been a researcher and analyst for the last four years with the North Asia Division of the Overseas Research Department at the Japan External Trade Organization (JETRO). In addition, he has written widely on the Chinese economy, including the recent book, “Human Resource Strategy of Japanese affiliated Companies in China” (2005, co-authoured) JETRO, Japan.

Joining Kumon was Richard E. Dyck, the President of TCS-Japan and East Asia Connector Services, Ltd. (Shanghai), manufacturing high-speed connection systems for the electronics sector. TCS-Japan was co founded in 1999 when Richard E. Dyck and Mike Strack acquired the Japanese operations of a backplane connection systems business from Teradyne, a US manufacturer of automatic test equipment systems and high-speed connectors. Together they shared their experiences, viewpoints and provided valuable insights for entrepreneurs wanting to enter the Chinese market. Todd Porter, an EA-Tokyo advisor moderated the panel discussion on June 6, 2006.

Trend spotting
China’s economic rise has experienced three major industry booms since the late 1980s, maintaining an 8-9% growth in economy for the last 5 years.

The industry booms were:
Textile and garment production in the late 1980s.
Factory machinery from around 1992-93.
Electronics, electronic parts, car manufacturing, software and R&D centers since 1999-2000 and ongoing.

Japan previously viewed China as the ‘world’s factory,’ however, these attitudes are shifting and China is no longer seen purely as producers but as consumers and a large one at that. Statistics show the Chinese lower middle class is growing at rapid pace and by 2011, it will supersede the United State as having the largest population with lower middle class status. With consumerism on the rise, China’s current and potential market is staggering, so how do we tap into this growing market?

The Pros
The thriving economy, statistics and market trends indicate an ideal environment to cultivate a business on the surface.
Foreign companies have branches in China but remain foreign. The general attitude towards foreign companies is ‘doing business with foreigners are a part of doing business.’

So many businesses have their sights set on China and want to profit from the growing economy. If your business is connected to China in any way, it can be a plus when trying to attract potential investors and partners domestically.

Growth rates at approximately 7.5% per annum at least until the Beijing Olympics in 2008 and the Shanghai World Expo in 2010 according to China’s 11th year plan.

Healthy consumer culture in China. It is a misconception that China is a capitalist society; China maintains some of the strictest and most detailed regulations.

Strong consumer culture in China. But, it is a misconception that China is a capitalist society. China remains complex and detailed regulations, many of which are implemented at the discretion of local officials. This system is not new to the Communist regime, but has existed for more than a thousand years. There is little transparency, and the potential for “moral hazard” is big. In many ways, China remains a nation of “men” not a nation of “laws.”

The Cons
China is a different playing field and in some aspects, it is the antithesis of Japan.

Ability to retain staff. Hiring new staff is a straightforward process but on average Chinese employees will change jobs every two to three years. The Chinese work ethic differs from Japan and the new generation, in particular, feels pressure to always find something fresher and potentially better - both monetarily and for career advancement. We have a whole generation in China who are confronting career possibilities and experiences which are very different from their parents – they have no model to follow. For them, the grass always appears greener elsewhere. This may be one explanation why job-hopping is rife in China and why the approximate turnover rate is approximately 30-40% per annum.

Japanese companies are not popular with Chinese graduates. Only Sony and Matsushita get a mention in the top 50 most prestigious companies to work for poll. USA has 15-20 companies on this top 50 list. Japanese companies tend to have lower starting salaries than the US and European companies.

Lack of training and protocol in the workplace. New employees need adequate training to ensure safety, efficiency and quality control.

A misperception is China has a huge, profitable market and to a certain degree it does but it also attracts competition making it an extremely tough market. Japanese companies in China may find themselves competing with companies that they do not face in their home market -- companies such as Nokia, Ericsson, Samsung electronics, etc. Also, Chinese competitors can be ruthless with prices and often have the advantage of knowing the local market better than foreign investors.

Recruitment. USA and Japan have very different approaches to hiring staff. American companies will do on-campus recruiting for graduate programs. This achieves two objectives; firstly hiring new staff and secondly there is a company presence on campus and students can familiarize themselves with that company. Japan does not tend to do on-campus recruiting within Japan or overseas.

Bureaucratic pervasiveness, moral hazards, piracy and copyright breaches.

Pollution in China. According to 2004 World Bank statistics, China has 16 of the world's 20 most polluted cities.

Mixing business with politics.
Political tensions that surface cannot be ignored between China and Japan. This is beyond our control, by employing a neutral and diplomatic approach these tensions can be ameliorated but be aware this could be an implicit factor in business dealings.

Despite the obstacles and challenges you may face, if China is where you want to do business then there are some resources available to maximize your chances of success.

Lending a helping hand
If the pros far outweigh the cons and doing business in China is an integral part of your business plan there is some help at hand. JETRO has offices in China and can help entrepreneurs and/or companies ease into the market using their advising service. JETRO can introduce reputable lawyers, accountants and industry consultants based in China - both Japanese and local advisors.

Know your market in China before entering the market yourself. Make trips there, network with foreign investors and business owners, see what brands are leading in your industry sector. Nokia, the top ranking mobile phone company from Finland does extremely well in China. In contrast, Nokia lacks presence in Japan and does not hold a large market share. Be aware that the market is very diverse compared to Japan and there are companies you may never have had to compete with before.

Sound advice
Replicate or utilize an existing market. A success story is Shiseido, a Japanese cosmetics brand that has been extremely successful in duplicating its’ business strategy to dominate the cosmetic market in China.

China is not predictable so ‘keep your powder dry’. Do not make investments beyond your vision of the market.

Make contacts and network with industry people before entering the market. They can be a valuable long-term resource and support.

Give performance bonuses quarterly to encourage employment longevity.

Beware of a business plan that utilizes only one boom.

As a culture, Chinese people do not like to lose face, be respectful of this in negotiations and meetings.

Like with any major business decision, entering the China market should not be taken lightly or be rushed. There are so many variables that have to be taken into account that differ from businesses elsewhere. An overtly rigorous approach to the research and development of a business plan and networking with China based businesses and individuals could assist in combating against a freefall.

Text: Katherine Pham Do
Katherine is a freelance writer and photographer for both newspapers and magazines, she is the editor of Folio DVD magazine. www.foliodvd.org