Doing business in China Featured

1:31pm EDT March 26, 2012
Doing business in China

Historically known as a country for low-cost manufacturing and a restricted currency, China now provides a wealth of opportunities for foreign businesses, says Alfred Ho, Vice President and Global Financial Institutions Manager at FirstMerit Bank.

However, any business that has ever ventured onto unfamiliar turf understands that turning opportunity into success comes with challenges. Overcoming barriers inherent in such a move requires foresight, planning and, notably, well-informed advisors who already know the terrain.

Ho explains that FirstMerit has dedicated itself to helping clients grasp the ins and outs of doing business in China. With an eye to the future, FirstMerit has been actively engaged in bolstering its credibility in China, staying abreast of the country’s rapidly changing market, and learning firsthand from its clients who have established long-term operations there.

As one of the first regional banks to have a renminbi, or yuan, (China’s currency) account with a large indigenous Chinese bank, FirstMerit’s International team has enjoyed a longstanding relationship with the country’s financial institutions and businesses.

To foster this relationship and lay the groundwork for new opportunities for its clients, FirstMerit Corporation Chairman, President and CEO Paul Greig and David Goodall, Executive Vice President of Commercial Banking, recently travelled to Beijing, Shanghai and Hong Kong, where they met with senior officials at various Chinese banks and worked to set up dialogues and relationships.

FirstMerit believes that having such infrastructure in place is crucial to paving the way for assisting its clients looking to expand into China.

FirstMerit executives also spent time visiting the Chinese operations of some of its clients, gathering insights that will ultimately smooth the process for others planning to do business in or with the second-largest economy after the United States. Ho, who worked with the Hong Kong government as a senior information officer for 10 years, shares some important things to consider:

Chinese workforce. Given China’s population of 1.3 billion, or nearly 20 percent of the world’s population, the labor force is abundant. However, employers in China are facing rising wages and keen competitions for skilled workers. Many find that it is getting more difficult to retain good workers who tend to have little loyalty and would leave on a dime, Ho explains.

However, employment laws recently became stricter in an attempt to eradicate unfair employment practices and to give workers more benefits and protection. Due to changing employment environment and demands from workers, wages have increased by as much as 20 percent or more in coastal regions.

Non-native workforce. A foreign company can bring its own employees to work and live in China with proper permits. Ho says that foreign companies should consider bringing employees who are open minded because the culture is much different than American culture. He advises an American living in China to have a basic understanding of the language and customs and be adventurous about various types of food, as food is a culture among Chinese and they are proud of their own local cuisine. One of the easiest ways to insult a Chinese person is to insult his or her food, he says, and it should be avoided.

Middle class difference. China’s middle class, which numbers approximately 300 million, differs from the American middle class, Ho explains. China’s middle class is growing exponentially because income is increasing substantially. Many middle-class families have become seemingly “rich” overnight, Ho explains, and as a result, they spend it readily.

They also typically do not have confidence in Chinese brands (remember the baby milk powder contamination scare?) and seek to achieve status through western brands. Many would pay a premium for western goods like Gucci purses and Apple products or General Motors or BMW automobiles as opposed to local brands, Ho says. These products both represent status and quality.

The growing middle class presents an excellent opportunity for U.S. businesses to sell to this population – as much if not more than selling to the entire United States, Ho explains.

Hong Kong vs. China. Know the history. Hong Kong was under British rule for approximately 150 years until China resumed control in 1997. Even though Hong Kong falls under Chinese rule, it still operates on a “one-country, two-systems” concept. While China is a communist country, Hong Kong remains primarily capitalistic and has its own currency and legal and judicial systems, Ho explains. However, Hong Kong is slowly becoming more like China, and in time, Ho says, it will be fully assimilated into the Chinese system.

At this point, while Hong Kong is now part of China, it currently operates quite differently. Many companies conduct business in mainland China but have their headquarters or family located in Hong Kong because it is more similar to the United States, Ho says.

Currency. Historically, the renminbi was restricted, although its value was pegged to the U.S. dollar. This has changed over the years and the renminbi is now pegged to a “basket of currencies” instead. In the past, the renminbi’s value has been a point of contention because many argued that the restrictions kept the renminbi’s value low, giving Chinese exporters an unfair advantage, Ho explains. However, in the last 18 months, China has relaxed the restrictions so that foreign entities, under limited and changing restrictions, can do business in the renminbi. Non-China entities are also now allowed to open a bank account in Chinese currency, thus somewhat mitigating the “unfair advantage,” he says.

Taxes. China no longer offers many tax incentives because it doesn’t see the need given the huge marketplace it offers, Ho says. Corporate income tax for both foreign and domestic companies is of the same percentage, unless the company falls under the “hi-tech” category which will have a more favorable tax rate. In addition, companies face other taxes in China, such as withholding tax, value-added tax, consumption tax, customs duty, etc. It’s recommended that companies considering doing business in China consult a tax professional who is knowledgeable about China taxes to truly understand how this will affect them.

These insights into doing business in China offer only a glimpse of what companies should know before taking any steps to enter the market. Companies need to have an understanding of what they want to accomplish, Ho explains. The process may take some time because many questions must be answered – Does your company want to set up a location in China or operate from the United States? Will your company buy the materials it needs to make its product in China or import them? Will you hire employees within China or bring existing key employees from the United States?

Ho says that the worst thing a company can do is enter the Chinese market and wait to make decisions until it arrives in the country.

U.S. companies should partner with a trusted advisor, such as a banking professional, to help them narrow their goals before entering the market. It might make sense, although not always, for a business to partner with a Chinese company to learn the ropes and ease into the market. In fact, this used to be the only way foreign companies could enter the country, but China now allows wholly foreign-owned enterprises.

Partnering with an advisor such as FirstMerit also allows a business to make trusted connections within the country. Ho knows the pitfalls of not doing so, citing a business that trusted the wrong person in China and ended up in an industrial park completely inappropriate for that company and lost business and eventually had to close the facility.

“We are always willing to advise and consult with our clients and prospects so we can deliver our expertise and experience to help them do business the right way,” Ho says. “We’ve spent time there and have real-world experience to help our customers.”

For more information on doing business in China, contact Alfred Ho at alfred.ho@firstmerit.com or 330-996-8011.

FirstMerit International Services

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