The road to China

US and European nations have watched the emergence of China as a global economic powerhouse with a mixture of amazement, admiration and fear.

Amazement at the speed of its growth, admiration at what it has achieved and fear for the implications for their own business communities.

However, all the factors that make China a ferocious competitor to the UK also mean it is a huge potential new market.

China’s economic growth is usually associated with the production of low-cost or commodity products. However, the country is no different to the UK or any other nation in realising that technology, innovation and R&D are the keys to a sustainable economy in the longer term.

The Chinese government recently announced a range of plans designed to create an ‘innovative state’, with companies encouraged to invest more in R&D and wean themselves off their reliance on imported technology.

If that sounds like bad news for technology-led businesses in the UK seeking to gain a foothold in China, the reality may be somewhat different.

In promoting the need for more home-grown technology and R&D know-how, China is by definition highlighting the opportunity for external expertise that currently exists.

And in practice, turning around this or any other aspect of the Chinese super-tanker is unlikely to happen within the period of the latest five-year plan (it is easy to forget that China remains a communist state and — at least in theory — a planned economy).

The likelihood is that in many areas of advanced technology, China will need the products and services of nations such as the UK for some time to come.

The number of major engineering and technology firms with Chinese operations is lengthy and growing. BP, Rolls-Royce, ABB and Siemens are just a few.

However, this does not mean that small businesses cannot at least take a look at their own prospects.

Entering any international market as an exporter can appear daunting, but China is a particular challenge. This is why many UK firms choose to enter via the more familiar environment of Hong Kong.

The Scottish Council for Development and Industry (SCDI) has organised trade missions to China for companies interested in doing business there.

Iain McTaggart, SCDI’s general manager, said that for SMEs in particular third-party support is essential and acting completely independently a bad idea.

‘You would be very lucky indeed to make much progress, or indeed to emerge unscathed from the experience,’ said McTaggart.

Thankfully, plenty of support is on offer from a variety of sources, ranging from regional groups such as SCDI, UK government agency UK Trade & Investment (UKTI) and Anglo-Chinese initiative the China-British Business Council (CBBC).

For many UK SMEs the first point of contact with China will be one of the numerous trade delegations to the country organised by bodies such as the above.

They also offer services such as market intelligence, language services and networking opportunities in China itself.

The last of these is particularly important, because according to McTaggart, the starting point for entry to the Chinese market is to build relationships with those already operating in the country who know how to get things done. This could be a local business, consultancy or UK trade office, and McTaggart said it would almost certainly be plural relationships as a single partnership is unlikely to cover the whole of China.

According to CBBC, the choice for businesses entering China for the first time generally boils down to one of two options. The first is to set up a Wholly Foreign-owned Enterprise (WFOE), an operation that is 100 per cent owned by the overseas investor. The advantages of a WFOE are that the UK owner has full control of how the business is run and does not have to split revenues earned with a partner. However, it also leaves the company alone to negotiate the considerable challenges of doing business in China.

The second option — and for a long time the only route available to overseas firms — is to establish a joint venture with a local partner. While obviously relinquishing total control, and some of the profits, the right joint venture partner could provide UK new-entrants with invaluable ready-made assets such as sales networks, facilities and workforce.

SCDI’s McTaggart said the profile of China as a fast-growing economy, and the obvious rewards on offer to those who make a success of doing business there, has led an increasing number of SMEs in Scotland and the rest of the UK to beat a path eastwards.

Once there, the importance of high-quality advice becomes obvious. The issue of intellectual property (IP) protection, for example, looms large for any company doing business in China, and for technology-led UK firms the problem is particularly acute. Indeed, worries about the integrity of IP is cited by overseas companies as one of the main deterrents to trading in the country following horror stories about designs being copied, forged, stolen or otherwise abused, with little protection for the patent holder.

McTaggart said the Chinese authorities recognised the damage this was doing to their inward investment prospects and have busily set about putting comprehensive legislation in place.

Unfortunately, the supertanker effect applies again, and enforcement of the regulations across the vast Chinese economy is still patchy.

‘The difficulty is that when you get down to the grass roots of business there is still sometimes very little protection,’ said McTaggart.

The prudent course of action is to take legal advice before exposing IP to the Chinese market, not least to ensure that it is properly covered by what protection the law allows.

Indeed, according to McTaggart, guidance is essential not just over IP but on all the legal implications of doing business in China. ‘UK companies are used to all the protection of contract law, which doesn’t necessarily mean the same thing in China as it does here,’ he said.

Legal problems are not the only potential pitfalls awaiting novices in China.

Cultural factors also assume far greater significance than they would doing business in, for example, the US or another EU state.

The issue of corruption, in particular, has attracted widespread attention in the West. UKTI, which has produced a useful guide for first-timers in the Chinese market, is clear on the subject. ‘Anyone doing business in China is likely to encounter or hear of corruption in one form or another. Historically, practices such as facilitation payments, bribes and giving and receiving expensive gifts in order to develop relationships were often regarded as a normal part of doing business.’

UKTI says this is still the case in some areas, although the situation seems to be improving.

For all the above challenges, plenty of UK SMEs are winning new business by operating in China. ‘There are tremendous opportunities, and if you have what they need and take the right advice can be a positive move,’ said McTaggart.