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After years of reporting double digit GDP growth, there is talk of China’s economy slowing down. Projections for Chinese GDP growth in 2015 may only be 7%, but this still compares favourably with IMF predictions of 3.5% annual growth rates for the global economy.
The reduced levels of growth have followed a period of economic reform in which the government has sought to reduce the nation’s dependence on low-cost manufacturing. Favourable tax policies have been aimed at attracting technology companies and R&D centres amongst others. There has also been a broadening of the scope of categories in the Foreign Investment Catalogue in which foreign investment is permitted or encouraged. This has done much to continue attracting foreign investment in new sectors that add to the diversity of the economy.
Foreign direct investment into China is projected to quadruple over the coming six years. Recent reports in the national press highlight the expectation that the UK’s share of this is likely to increase above its current levels – at the same time as the overall levels of FDI continue to grow.
While UK growth rates fare better than much of mainland Europe, the potential opportunities deriving from doing business in or with China are not to be ignored. It is not only the larger corporations that should seek to take advantage of the growth opportunities. Within the manufacturing sector, there remains a strong need for specialist component suppliers to follow their customers around the world. As foreign investment continues to increase, there will be increasing demands for international education, healthcare and other professional services.
As business leaders, however, readers may be concerned about the perceived levels of risk. It would certainly be irresponsible to follow the crowd to invest in any other country without performing an in-depth analysis of the expected risks and rewards. Entering the Chinese market should be no exception. Here are some areas that should be included in a good business plan:
The recent coverage of the FIFA scandal may make us believe that corruption is something that only happens abroad. It should also, however, remind us of the legal environment in which we all work. It may have been the American Foreign Corrupt Practices Act (FCPA) that initially highlighted the alleged misdemeanours of numerous FIFA officials, but the UK Bribery Act 2010 also clearly places a responsibility on British businesses to refrain from bribing foreign officials and to prevent third parties engaging in bribery on its behalf.
It is not only at home that you need to take care. Recent probes into corruption in public life have highlighted the established behaviour of a number of former ministers. Senior management in much of the state-owned sector of the economy has been subject to investigation. It was also widely reported that a foreign pharmaceutical company had been fined $0.5billion for paying bribes to doctors and hospitals in order to promote their products.
It may seem like doing business the local way, but regulations around the world are making it harder to claim that ‘corruption pays’.
2 Intellectual Property Rights (IPR)
Piracy of intellectual property has long been associated with emerging markets such as China. It has often been perceived that the courts would generally find in favour of local defendants rather than recognising the validity of foreign plaintiff’s actions. There has been a trend over recent years, however, for strengthened enforcement of IPR. Companies that enter the China market should seek specialist legal advice early on to ensure that their IPR is properly registered at the outset rather than seeking assistance to perform rectification at a later date.
3 Business practices
Business practices often appear widely divergent from those expected by foreign investors. This applies not only in the areas of corruption and IPR, but also with regard to many daily functions within an organisation. It is important to note that translation alone is insufficient to ensure that local staff and investor understand each other. It is really important to fully understand how people think on either side of a national border. Many British businesses may have some experience dealing with other countries within Europe, but it is a large step from the continent of Plato and Aristotle to the continent of the ‘hundred schools of thought’ and Confucius. The organisations that invest in developing their local staff as well as maintaining a sufficient degree of oversight are the most likely to succeed.
4 General compliance
Tax and regulatory filings and even employment can seem quite bureaucratic. Company seals are very important and can be used to transfer money. Safe custody of seals is therefore very important and may be best effected by a third-party service firm (lawyers or accountants) if the manager from the head office cannot read Chinese documents. Companies first entering the Chinese market are likely to need assistance with the compliance functions while they develop their market presence. The primary objective of entering the market should, after all, be to develop a business that can grow and not to spend time on compliance issues.
5 Investment structure
Historically many British companies have entered China via Hong Kong. Singapore has also been a strong regional centre for many international groups. The location of an intermediate holding company will not in itself change the way that dividends are taxed, but may influence the future repatriation of profits. A more important consideration for location of an intermediate holding company is often the use of international arbitration for contracts and the presence of a reliable court system. Investment structure is therefore an area that will require both legal and tax advice.
6 Take advice
While each of the previous sections has stressed the need to take advice, it is worth repeating. Organisations such as UK Trade and Investment and the China Britain Business Council provide a wide range of information about market entry. It is also worth consulting peers and customers to learn from their experience. There are likely to be significant areas within your China plans that will need specialist legal and accounting advice.
The risks may be there, but so too are the potential rewards.
About the Author:
Mark Wilson is an audit and business advisory partner with MHA MacIntyre Hudson, based in the Reading and City offices. He specialises in advising internationally active clients with regard to cross-border accounting, control and compliance issues. He is a chartered accountant with 12 years experience providing audit and advisory services in China to a wide range of European and American clients.
Details: Mark Wilson -0118-9503895; email@example.com
It’s well known that China is the largest economy in the world, and the most populous country in the world. But what does this mean for Thames Valley businesses?
There are many stories of companies doing business with China and experiencing growth like they have never experienced before. The Thames Valley region has a reputation for branded high technology and British craftsmanship which are very sellable in China and sought after by Chinese consumers and companies.
However, you don’t have to go very far to tap into the Chinese market. For companies based in and selling in the UK, there is a growing Chinese market right here on our doorstep.
Thames Valley is home to prestigious universities such as Oxford and Reading, with thriving Chinese student populations. They are adventurous and enthusiastic for British experiences. Chinese companies that have invested in the Thames Valley include Huawei (the Chinese telecoms giant headquartered in Reading), Hytera, ZTZ and TP Link, with more manufacturing companies looking here as first choice for their UK operations; all attracting Chinese staff and their families.
The brands that appeal to the Chinese during their stay in the UK will be recommended to their friends, relatives or online social media contacts, all of whom are future potential tourists. It is estimated that by 2017, Chinese tourists will spend £1 billion a year in the UK, with many also visiting attractions such as Oxford University and Windsor Castle. Definitely not a segment to be ignored.
The Chinese market is big and strategies accessing it can vary requiring anything from small to large-scale investments. How are UK companies supposed to arrive at a clear strategy for the Chinese market and get the support they need?
How Prospect has helped
Our clients fall broadly into two categories: companies in the UK wanting to attract more Chinese business by adapting to Chinese consumers; and companies in the UK aiming to generate sales in China.
Prospect Chinese Services has helped companies across the UK in first identifying what their aims are and then constructing the strategy to achieve this. Offering a personal and highly-tailored service, our focus has been in the following areas:
Examples of our success stories include:
Chinese firms have recognised that the UK is a great place to source products and invest in. Chinese companies are increasingly heading to us to find opportunities for investment and in search of new high-quality brands and products for their domestic market.
We are currently working with Chinese companies looking for the following:
If you are interested in exploring the above or any other opportunities the Chinese market has to offer, contact us. We offer a free no-obligation 30-minute consultation.
Details: 0845-287-5582; firstname.lastname@example.org
Exporting is a proven route to business growth. Government export body UK Trade & Investment (UKTI) urges Thames Valley companies to rise to the opportunities that globalisation can offer
For those considering or new to exporting, UKTI may be an unknown source of support. However, it can offer companies tailored and specialist support as well as access to a global network of trade specialists in over 100 markets.
Many independent studies have shown that companies that export see a dramatic impact in the following areas:
Companies who would like to utilise the support of UKTI can benefit from a free consultation with their local international trade adviser (ITA), all with a wealth of experience within the international private sector, who will offer impartial advice and support.
What does UKTI offer Thames Valley and South East companies?
UKTI has an experienced team of ITAs in the Thames Valley area, managed by locally-based Angus Murray, which can help local businesses with a variety of support services and programmes. From selecting suitable markets to helping companies with market research; from identifying local importers and partners to offering overseas market visits.
Companies can also take advantage of UKTI’s Overseas Market Introduction Service (OMIS), where they can tailor requirements to fit their own needs; ITAs work closely with a dedicated global network of market experts to assist companies entering new markets. Joining one of our export programmes such as Passport to Export or Gateway to Global Growth encourages businesses to look strategically at their international growth and helps them plan the steps required to succeed.
Other services such as export communication reviews and export market research services are available for firms wishing to develop their international web presence and be fully informed and prepared for the competition in their chosen market.
There is also a programme of seminars and master classes in various export-related subjects, as well as services which can support exhibiting overseas though the Trade Association Network.
Why do business in China?
High-growth markets such as China require special care from new entrants. ITA Chris Lowsley is UKTI’s China specialist, with many years’ experience in doing business in China and business counselling companies on the ‘do’s and don’ts’ in the market. China can seem daunting but for those who do their homework, take time to investigate the market properly and know their own strengths and resources, it can be very rewarding. Time and resources need to be carefully managed and finding the right partner can be crucial to success.
China’s consumer market now has a buying power similar to the combined purchasing of all EU countries. It is worth noting that China is not a single market and it presents a similar level of diversity seen in continental Europe. China’s e–commerce market and online trading is more developed than much of the EU and demand for branded goods from Britain has mushroomed.
UKTI can assist in areas such as managing trading risks, understanding the local business culture and practices, and selecting the best partners. Given the demand for assistance in dealing with China, UKTI has appointed China-Britain Business Council (CBBC) to offer commercial advice and support.
To find out more about the wide range of support services available through UKTI to help your company succeed overseas, call the South East international trade hotline.
Details: South East international trade hotline 0330-3000-012; email@example.com
Cultural approaches to business obviously vary enormously around the world but probably the single biggest difference which can be found would be with regard to the relative importance placed upon relationship-building and relationship maintenance.
Some cultures tend to put business before relationships whereas other cultures very strongly place relationships before business. If you are from a culture which places business before relationships then you will do business with people provided their product is right, their delivery is right and their price is right – but any personal relationships are secondary to the harder commercial issues. (US, UK, Germany etc would be in this camp). If, however you place relationships before business, then you are loathe to do business with people until you have decided that they are the type of people you would be happy and comfortable to do business with in long-run – the relationship has to come first and only then, may some business follow. This does not mean that product, price and delivery are unimportant; it means that those issues are looked at later in the business cycle after the relationship has been built (Japan, Middle East, Brazil etc).
China is strongly on the relationship first model – in fact the research places only Japan ahead of it in terms of relationship orientation – and therefore the development and maintenance of strong, long-term ties are vital. You will often hear the word Quanxi used when people discuss Chinese business culture and it is worth taking a minute to explore the concept.
What is Quanxi?
Simply put Quanxi describes the relationship between two individuals which codifies the way in which they interact with each other and their ‘right’ to prevail upon each other to ask for favours or services to be undertaken on their behalf. Quanxi relationships need not be between individuals of equal hierarchical status (but might be) and when you are in this kind of Quanxi relationship it is virtually impossible to refuse to agree to do what you are asked – regardless of how difficult it might be. (However, concern for other people’s face means that people are unlikely to ask for something that cannot be delivered.) Favours done must always be repaid which can mean people enter into a life-long cycle of obligation and repayment.
Quanxi also extends beyond person-to-person relationships and can be used to describe an inter-connected web of relationships between extended groups of people who are, in some way or another, linked to each other. These Quanxi relationships can refer to connections with family, school and university peers, members of common clubs or organizations (the largest of which would be the Communist Party) and work colleagues.
Interestingly, the Quanxi relationships are personal and non-transferable. This is of considerable interest when considering lateral hires into organisations in China as they can often bring with them considerable Quanxi networks – the downside is that it will probably go with them if they leave at a later date.
An interesting question is whether or not a foreigner can ever really have Quanxi relationships and experts differ in their response to this. The truth is that a foreigner can probably never have real Quanxi relationships simply because they are not Chinese – or that it would take a lifetime of effort to develop such relationships. However, some foreigners can develop better relationships with the Chinese than others and those who work hard to develop and crucially maintain those relationships over long periods of time are the ones who will probably succeed in the local China market or in their interactions with the Chinese.
What does this mean in terms of day-to-day business dealings?
Taking time: Small talk should never be viewed as time wasting or irrelevant as it is a vital ingredient in the relationship development process. Do not become impatient if a lot of time is spent talking about non-business or seemingly inconsequential issues.
Continuity of contact: On the whole, people from relationship oriented cultures do not like frequent (indeed any) changes in key contact people within supplier organisations and partners. They do not want to have to continually go through the relationship building process. Therefore, continuity of contact is crucial. Key contact people should be selected carefully and kept in place over long periods of time. This can be both a blessing and a curse from a corporate risk perspective. Do you want to be overly dependent on one person? On the other hand, without the right key person with the right relationships things can be difficult.
Contracts: Less emphasis is generally placed on the over-arching importance of contracts as the basis of the business relationship – after all, the relationship itself is far more important than anything written in a formal contract. In China a contract is often viewed as a statement of the best set of circumstances at a specific point in time but that, should circumstances change, it would be unreasonable for reasonable men with good relations to abide by the original terms of the contract. A contract is seen more as a statement of intent that work will be done together.
Availability: As business is relationship driven, business contacts are friends and friends should be available when I need to speak to them or when I need to meet with them. I expect you to drop what you are doing and deal with me and I expect you to answer my phone calls even if you are in another meeting.
Responsiveness: Our relationship means I expect you to respond immediately to requests – even if these requests are last minute or seemingly unreasonable. A common complaint made by people working in China is that they wait an age for a response to a question but when a response does appear everything is expected to be completed by yesterday.
Entertaining: A great deal of the relationship-building process is done through informal and formal entertainment events. Again, never view an invitation to a function as dead time – it is a key part of the relationship-building process and often more important (at a senior level) than the actual business meeting you may attend.
Keith Warburton is CEO of Global Business Culture, a Hampshire-based world-leading cultural awareness organisation which helps companies to work more effectively and profitably in the global arena. Contact Warburton firstname.lastname@example.org.
Everybody will tell you how important it is that you do not do things that are likely to make Chinese counterparts lose face and this is undoubtedly good advice. But what, exactly, is Mianzi? And that is where the problems start. Most Chinese (and other Asian business people) are very quick to tell you how important face is – but most of them find difficulty in explaining exactly what it is.
What is Mianzi?
What Mianzi is not, is the mild embarrassment a Westerner might feel if they are seen to make a mistake – it goes much more to the self-esteem somebody feels and the way in which they feel they are viewed by the groups they belong to. (China is a group-oriented culture and people belong to a myriad of groups – family, university peers, the Party, work teams, social club etc.)
The concept of face can be better understood with reference to China being a massively hierarchical society. The position a Chinese person occupies relative to others (eg a boss to an employee, or a parent to a child) commands a certain degree of respect and demands certain behaviours. Thus, a director within a local Chinese company will expect their subordinates to politely greet them in ritual fashion on arrival at work in the morning and a parent will expect his or her child to achieve high marks in school. If these expectations are not met, the director or the parent will potentially feel slighted or embarrassed. This would then mean they potentially lose face in the eyes of their co-workers or family.
The great danger of being seen to make somebody lose face (even inadvertently) is that the injured party is unlikely to want to do business with you in the future and their peers are likely to view you as a potentially ‘dangerous’ person. If you are the type of person who can make one person lose face, you are likely to do the same to others.
The typical actions which a Westerner might undertake which could make the Chinese lose face are:
Side-by-side with the concept of losing face, sits the concept of gaining face. Many things can ‘give face’ including being praised by a superior, having a good job, working for a prestigious company, becoming a Party member or driving an expensive car – all of these can lead to being admired by one’s peers and society in general and that leads to ‘gaining face’. It is always a good idea to help counterparties gain face as they are much happier to work with someone who is a known face-giver than somebody who is oblivious to face-related issues.
Keith Warburton is CEO of Global Business Culture, world-leading cultural awareness consultants. Based in Hampshire, he trains business people for multi-locations, and is a keynote speaker on cultural awareness. Contact Warburton vie email email@example.com,
With a population of approximately 1.4 billion people and a growing consumer and middle class, China is a beacon of opportunity for UK importers and exporters looking to expand globally. According to HM Revenue & Customs’ overseas trade statistics, UK exports to China grew by a compound annual growth rate of 17% from 2006 to 2013, the second largest growth rate after Switzerland on 32%*
But entering a market as vast as China for the first time can be daunting, particularly for medium-sized UK companies with little experience of doing business in this part of the world. Restrictions on the free movement of the Chinese currency, the renminbi (RMB), by the Chinese government may have also created uncertainty among companies about how best to pay for goods and services they sell to or import from China.
Understanding China’s currency
Julie Smith, head of trade & working capital UK at Barclays, is confident China’s currency is on the rise: “US dollars may still be the currency of choice for our UK clients doing business in China, but it is time to demystify the RMB. We encourage UK companies to look at trading in RMB. It’s a currency they can purchase from Barclays to make payments to their Chinese suppliers.”
Smith goes on to explain that companies with sizeable cash balances sitting in China can now include these funds in a global cash pool. Companies can also centralise payments and collections, which is more in line with how they manage their cash in other parts of the world. “Financial liberalisation is accelerating in China. What’s key is that companies work with banks that understand how the RMB is evolving so they can help treasurers gain control over their RMB and foreign currency transactions.” This cooperation is crucial for success, as banks such as Barclays can help in keeping you up- to-date with the latest regulatory changes taking place as China looks to liberalise its currency.
RMB ready for trade
According to data provided by the SWIFT network, in January 2015 the RMB was the fifth-ranked global payments currency and accounted for 1.6% of global payments. Despite this, adoption of the RMB by UK corporates has been slower than the world’s overall rate.
Smith suggests that UK companies wanting to do business with China will need to start familiarising themselves with the RMB. “UK corporates will start to see more trade in RMB over the next few years,” she says. “Large companies will likely see evidence of this first, but smaller and medium-sized businesses will also to an extent.”
Additionally as more Chinese companies are encouraged to use RMB to trade internationally, Smith says UK importers and exporters will increasingly deal in Letters of Credit (L/Cs) denominated in RMB. When importing from China L/Cs are used by Chinese suppliers not only to mitigate credit risk, but also to help them obtain working capital locally. “Similarly when UK companies are exporting to China, offering 60 to 90-day credit terms under an incoming L/C may offer a competitive advantage; the L/C proceeds can be discounted post-shipment, subject to UK banks confirming the L/C, thus accelerating cashflow” says Smith.
Potential discounts for renminbi trade
Smith continues: “UK companies could ask Chinese buyers and suppliers whether they can invoice or make payments in RMB, as there can be a discount or price benefit.
“If there is an opportunity to pay in the local currency, UK companies could push to negotiate potential discounts with suppliers, as local businesses often build in a small margin when the payment is made in a foreign currency such as the dollar, to cover their foreign exchange risk.”
Working with UK Export Finance
When it comes to the export financing needs of UK companies that are funding operations in China, Barclays works closely with the UK’s export credit agency, UK Export Finance (UKEF). “Often UK companies are faced with competition from overseas competitors that receive assistance from export credit agencies. That’s where Barclays comes in, as we work closely with UK Export Finance and can make this assistance available to UK companies,” said Smith.
Given the range of support services available to UK companies looking to do business with China, Smith is optimistic: “The opportunity is there and so are the financial tools, so we’re seeing more and more small and mid-size companies take the export leap. Why not talk with your bank about the steps you need to take to make China work for you?”
Details: Julie Smith, 07775-550480 (mobile), firstname.lastname@example.org
The views expressed in this article are the views of the author alone and do not necessarily reflect the views of the Barclays Bank PLC Group nor should they be taken as statements of policy or intent of the Barclays Bank PLC Group. The Barclays Bank PLC Group takes no responsibility for the veracity of information contained in the third part guides or articles and no warranties or undertakings of any kind, whether express or implied, regarding the accuracy or completeness of the information given. The Barclays Bank PLC Group takes no liability for the impact of any decisions made based on information contained and views expressed.
Barclays is a trading name of Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (Financial Services Register No 122702). Registered in England. Registered number is 1026167 with registered office at 1 Churchill Place, London E14 5HP. September 2015.
For a business delivering invisible functionality, Abingdon-based P2i is well and truly making its mark. Set up in 2004, its nano-coating technology already reaches into 18 countries over five continents – a success story that can be attributed to its steps into China, and to the champions who’ve invested their time cementing those steps.
To demonstrate the technology, COO Peter Rankin produces two identical-looking tissues and drops some liquid onto each. The liquid on the normal tissue behaves as expected, but on the coated tissue, like magic, it literally beads up and rolls off.
The technology is a spinoff of an investigation into liquid-repellent nano-coatings to protect soldiers’ uniforms from chemical attack. The research, conducted by the company’s CTO Dr Stephen Coulson at the University of Durham and then the MoD, resulted in a gas-based process that puts down an ultra thin polymer film, 1,000 times thinner than a human hair, and can protect an entire product – inside and out.
This cutting-edge science had huge commercial promise, and P2i’s story is one of vision and passion, taking this unique breakthrough to the mass market – through footwear, to electronics and hearing aids, to mobile phones (currently its largest market) – and making it the world leader in its field.
With China heralded as notoriously difficult to break into, P2i made its entry by integrating its technology into a western brand with high-volume manufacturing.
Rankin explains: “Initially we got into the market through major customers like Hi-Tec, which already had manufacturing in Asia and China, and we worked with them for many years coating hundreds of thousands of shoes. As the company has developed we have done more and more business directly with Chinese companies, but initially it was through western brands.”
While this was without doubt a helpful start, he illustrates that it was by no means a short cut. “You’re supplying a US brand that’s subcontracting to a manufacturer in China, and they say, ‘You need to work with that manufacturer’. So you do get the introduction, but you then need to develop that relationship very quickly and build that trust. You also have the challenges of how to get the operation out there.
“It takes a huge amount of knowledge, know-how, skill and time to be able to integrate into the mass market.”
In his first two years in the role, Rankin spent 85-90% of his time in Asia, coming home for a week every couple of months. “But it does pay big dividends,” he adds. “Now I set out to China about once a month for a week or so, but initially it required a lot of investment.
“The Chinese want to see that you’re completely engaged and that you’re a trustful person before they’ll open up to you, but the great thing about China is that when you’ve got that relationship the invisible barriers come down and you can move mountains. Before that you’ll get stuck in the mire of bureaucracy for days on end.
“Any company moving into China needs a champion – someone on the ground who can spend a lot of time there, working with the key people and building that all-important trust. That’s without a shadow of a doubt going to help you more than anything else.”
The next essential, says Rankin, is local people. “You do need local people on the ground that you can trust, just navigating the complexities and bureaucracy of the system. And finding that local person, who also understands the western viewpoint, is really challenging.”
In 2011, P2i set up its own WOFE (wholly-owned foreign entity) in Shenzhen and appointed a GM. It got its licence in 2012 and opened up its own subsidiary, and today the company has 30 people employed there and works directly with Chinese businesses.
On business etiquette, Rankin says: “The Chinese are used to dealing with Westerners now, especially in the big cities, so they accept most practices. But I’ve learned so much,” he smiles. “The yes-no issue is possibly the most important. The Chinese will say ‘yes’ even when they don’t understand. So you have to do a lot of circling around to make sure the understanding is there – and it’s essential you do this without creating any embarrassment.”
Asked about intellectual property and the risk of copying, Rankin says: “If your technology is successful, it’s inevitable that it’s going to be copied at some point; you can’t avoid it. Where P2i is comfortable is that we have a huge R&D team here and we keep ahead of the technology.
“Also in China we provide technology and a coating service, rather than manufacturing, so for us it is not a direct threat. Nevertheless, we’ve protected our IP very carefully – we’ve got 173 patents in 65 patent families.”
Another issue is rising labour rates but this, he says, is sector specific. “It depends on the skill that’s required for that particular product. With a low-skilled product, manufacturing is more prone to chasing the cheapest labour, which is now moving to Vietnam and Malaysia. There’s more stability in electronics say, than the lifestyle industry.”
Rankin speaks warmly of China in every respect: “I have formed very genuine friendships there. They are fantastic people. It’s almost a stronger bond than you have with colleagues and suppliers in the UK where relationships are more formal and people are quicker to turn to contracts. (As soon as you turn to the small print there you’re starting to put up barriers.) Business is much more forgiving in China … but, as with everything, that’s only as long as you’ve earned and won that crucial trust.”