There is significant money to be made in China and not just by large, multinational companies. Small and mid-sized U.S. companies can benefit from the growing Chinese marketplace, where the gross domestic product is expected to rise 7 to 9 percent annually for the foreseeable future. However, despite an apparent abundance of opportunity, your company should be prepared to face a few obstacles when entering China for the first time.
Smart Business talked with George Hoffman, vice president of PNC Bank’s Global Treasury Management, on the potential business opportunities in China for U.S. firms.
Is China really a hot market for middle-market U.S. companies?
As the United States’ fourth largest export market, China represents a lucrative marketplace for U.S. companies regardless of their size. U.S. Commerce Department statistics show that 90 percent of all U.S. firms that exported to China in 2004 were small or medium-sized firms.
Although only a fraction of China’s 1.3 billion people are in a position to buy U.S.-made goods and services, that figure still represents a very viable potential market. What’s more, China has $1.2 trillion in foreign currency reserves to pay for whatever it wants to buy from foreign suppliers, according to the U.S. Commerce Department.
What should a U.S. company take into consideration before entering this market?
Any U.S. company seeking to export to China needs to consider a host of financial, legal and cultural issues and must learn how to work within a business environment that is unlike almost any other marketplace. It’s essential to develop a well-planned marketing strategy. Seek advice from professionals, such as bankers, lawyers and federal, state and local agencies who can help you understand the risks and rewards of going global and navigate China’s complex web of regulatory requirements and cultural barriers.
What are some of the risks involved?
Perhaps one of the major risks of doing business in China today is the difficulty of collecting full payment on time. Market risk and currency exchange rate risk can also be concerns for U.S. companies conducting business in China. Other risks include widespread intellectual property theft, significant pricing pressure, fierce competition, lack of quality controls imposed at the requisite level by governmental bodies and, conversely, government interference. However, with proper planning and guidance from your financial and legal advisers, these obstacles can be overcome.
How can companies manage these risks?
- Have clear contract terms. Proceed with extreme caution before entering into agreements with your Chinese constituents. In your contracts, specify exact terms of payment and performance standards with specific timelines. Do not rely on legal advice from your Chinese partners; have your own legal counsel verify what may or may not be valid claims.
- Protect your intellectual property. Understand your intellectual property vulnerabilities before entering the Chinese marketplace. Learn how to protect your rights in China, and develop an action plan for what to do if your company’s rights are compromised.
- Ensure payment. Spend the time and money to analyze your buyer’s creditworthiness to minimize exposure to the risk of nonpayment. This type of analysis may be challenging due to language barriers, varying accounting standards and the overall limited amount of credit infrastructure in China, but it is critical. It is also very important to work with a bank with expertise in issuing international trade letters of credit and other financial instruments that can reduce payment risk. If you cannot obtain a letter of credit to secure your payment, require cash in advance, as Chinese companies typically do not allow unsecured payments after delivery of goods.
- Manage foreign exchange risk. If possible, request payment in U.S. dollars to reduce repatriation risks. Talk with your banking adviser about hedging foreign exchange risk using nondeliverable forward contracts, which can reduce the uncertainty of the exchange rate with the Chinese Yuan.
- Identify a trusted U.S. financial adviser. Find a U.S. financial institution with extensive experience in helping businesses expand into China. It can also be beneficial to work with one of the Export-Import Bank's ‘Fast Track’ lenders as this can help to streamline and facilitate working capital loans to support sales to overseas buyers. Also, a bank that maintains close alliances with Chinese banks, as well as the U.S. Department of Commerce, can help ease your company’s entry into China and turn export opportunities into real sales for you.
To learn more about doing business in China, visit PNC's Middle Market Advisory Series at pnc.com/joinus.
This was prepared for general information purposes only and is not intended as specific legal, tax or financial advice, or recommendations to buy or sell currencies or engage in any other transactions, and does not purport to be comprehensive. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk.
GEORGE HOFFMAN is vice president for Global Treasury Management at PNC Bank, National Association, a member of The PNC Financial Services Group. Reach him at (412) 768-7910.