Doing business with China Featured

11:20am EDT February 28, 2006
The United States purchases more than $85 billion in Chinese products each year. Virtually every major consumer product retailer in America is sourcing at least part of its product line from China, because it has the labor rates and technical know-how to produce many products for pennies on the dollar, compared to U.S.-sourced products.

In 2002, China surpassed the U.S. as the world’s leading destination for foreign investment. Now a member of the World Trade Organization (WTO), many of China’s restrictions on foreign investment have been eased or eliminated. Nonetheless, foreign investments there remain highly regulated by the Chinese government.

Gary Biehn, partner in and the chair of the business department at White and Williams LLP, recently returned from China, where he was working for White and Williams LLP’s clients. Biehn spoke with Smart Business about the challenges of doing business in China.

If a company is interested in doing business with or in China, what crucial factor must managers realize?I always start off by saying that you have to be patient. There are great opportunities over — provided that you pick the right opportunity, the right partner, the right location. If you have a tendency to rush into China, you can end up making the wrong decision.

What kind of business is the Chinese government looking to do?
Five years ago, most of the emphasis was on taking advantage of lower manufacturing costs. But in the past few years, there’s been a shift. China has a system that evaluates and then encourages or restricts certain industries. At first, the government encouraged manufacturing, but not retail or service. That is changing.

The Chinese now want to expand their manufacturing success to other industries. They are also making it easier for U.S. companies to do business in China.

Their domestic global policy is also changing. There used to be a cap on the amount of U.S. currency that China would allow its domestic companies to hold for purposes of investing in the U.S. In January 2006, the government eased that cap, and is now encouraging investment abroad, particularly in the U.S.

Also, under WTO rules, China must allow other businesses into the country. An example is retail. China has 1.3 billion consumers, so Westerners have always been interested in opening up that market.

But the Chinese government wasn’t interested, because it wanted to protect its own retailers. Now, the Chinese government has lowered restrictions on the companies entering, consistent with its WTO compliance obligations.

What are some of the major obstacles to doing business with China?
A major difference is that, here, businesses are guided by well-defined legal standards. Over there, you can get a sense of the direction of the law, but you have to talk to the authorities. The law isn’t as black and white, and there’s more negotiation as to how any law will be interpreted.

In China, you have the law in books and the law in practice, and sometimes they don’t line up. For instance, there may be exemptions to their value-added tax, but the exemptions aren’t published, so you need to know what authorities to talk to. But [the situation] is getting better over time.

What also concerns Westerners is the lack of protection afforded intellectual property rights. Even though great strides have been made to get such laws on the books [in China], the enforcement of those laws is inconsistent. Often, judges are political appointees and what is sometimes seen is an interpretation that is more political in nature than legal.

Finally, Chinese banks historically have been controlled by government. In the past, the state-owned enterprises could borrow money without following the commercial standards familiar to western companies. Soon, as part of their WTO commitments, the Chinese banking system will have to be completely in compliance with international banking standards, which should be positive for U.S. companies doing business in China.

What’s the first step in having a successful business interest with China?
You have to visit the country — often more than once — and meet the people who are going to be the right match to work with. Once you see the land in person, you’ll know it’s all real. It’s by far the most dynamic world economy that I’ve ever seen.

But when you’re considering doing business with China, you’ll find that you won’t be traveling a straight line, and some of the process will be frustrating. Due diligence is the critical step.

Gary P. Biehn is a partner in, and chair of, the business department of White and Williams LLP. He focuses on assisting clients in the pursuit of global business opportunities. Reach him at (215) 864-7007 or biehng@whiteandwilliams.com.