“There are three ways to make money in China: sourcing, manufacturing and selling,” explains Helen Huang, vice president and manager of the Comerica Bank Shanghai Representative Office, which opens this summer. “Most American companies understand the advantage of reducing costs via a China strategy, and more are realizing the opportunity to sell in China to its 1.3 billion people who now have more spending power.”
Smart Business spoke with Huang about the reasons behind China’s economic emergence, how a company should proceed if they are interested in doing business in China and what types of opportunities she foresees in the future.
What are some of the driving factors behind the tremendous economic growth that China has enjoyed?
The low labor costs and availability of skilled workers combined with favorable government policies have enabled China to become the No. 1 destination for foreign investment. In addition to exports, another important factor behind the tremendous growth is the need for massive infrastructure building within China itself. Also, China’s stable political environment has played a role. Since the 1970s, China’s government has changed its focus from political movements to economic growth. The central government has implemented polices encouraging trade, foreign investment and economic growth while maintaining stability.
In what ways does the Chinese business environment differ from the United States?
Historically, the Chinese economy was totally state controlled. Today, government at different levels can still have a big impact on businesses. Also, the Chinese legal system is still evolving. The rights of each party in the economy are not clearly defined, and it is not easy to enforce one’s rights. Signing a contract often becomes the beginning point of the real negotiations. As well, if you don’t understand the culture, there will be misunderstandings. For example, the answer ‘yes’ is not necessarily an agreement. ‘No problem’ can mean ‘big problem.’
What advice would you give to a company that is interested in doing business in China?
In general, U.S. businesses should understand that China is a very different culture including the way in which business is conducted. You need patience, an open mind and a long-term view. It is probable that you need a local partner or consultant who understands Chinese culture and its business practices.
In addition, the regulatory environment is very different in China. Understanding government policies relevant to your industry and the type of business that you want to set up should be a very important part of research and planning of your strategy.
How can a company find suitable business service providers in China?
You can ask for referrals from your bank, CPA, attorney, and others who have had experience doing business in China. A credit reference system is not necessarily available. You will probably find that good business service providers come from introductions from a trusted source who knows the providers.
How should a company go about evaluating locations to set up an office or manufacturing facility?
Currently, most foreign investment takes place in three regions: Yangtze River Delta, Pearl River Delta and Bohai Rim. These three regions are the most developed areas in China with the best infrastructure, the most sophisticated business environment and the best trained professionals. Obviously, these regions are significantly more expensive than inland areas.
When evaluating locations, there are many factors that a company should take into consideration. Labor cost is one of them, but not the only one. Other important factors include close proximity to highways, ports and airports; close proximity to customers and suppliers; and local government incentives to foreign direct investment.
Over the next several years, what types of opportunities do you anticipate for American manufacturers in China?
China will remain an attractive location for manufacturing due to its low labor costs and improving infrastructures. The cost has been going up in coastal areas and Chinese currency is expected to continue to appreciate against the U.S. dollar, but manufacturing costs will still be much lower than in the U.S. The provincial and local governments are eager to attract foreign investments and therefore have very favorable incentives.
HELEN HUANG is manager of the Comerica Bank Shanghai Representative Office. Reach her at email@example.com or contact Peter Knudson in Comerica International Trade Services at (310) 297-2849 or firstname.lastname@example.org.