Doing business with China

Industrial trend indicate that doing business with China better be on everyone's priority list. Knowing how to expand and do business in China before the opportunity arises will allow companies to capitalize on the movement of the trend. Companies who are looking to expand their business in China would do well to pay attention to several key factors that could help grow their China-based operations.

Industrial trends have shown that so many companies are headed there in droves, many have stayed and more continue to arrive. According to the U.S.-China Business Council's 2008 survey, 90 percent of the council's members are highly optimistic about expanding their businesses in China over the next five years, as the majority of these companies reported profitable operations. Although rising costs continue to be a growing concern, nearly half say their margins in China were better than their margins globally.

Companies will have to first start with understanding China's manufacturing and business landscape. Expanding production capabilities will require careful analysis and comparable due diligence of global manufacturing and supply chain strategies. It requires businesses to understand that their business will function in a new way, especially when developing measures to gauge potential operations performance, total costs and margins.

The following are three issues businesses that must be addressed to thrive in China.

1. Understand the Manufacturing Process-Businesses will need to understand that manufacturing in China continues to evolve. In order to be poised for profit from sales in China, more manufacturers must rapidly upgrade their production models in China to develop and capture economies of scale and scope. These companies should also view China less as a low-cost country and more as a competitive manufacturing and sales environment and the hub for an Asian growth strategy. It is important to realize that companies that have adopted such practices have had an average gross profit margin 4 percent higher than companies without them.
2. Understand the Labor Pool-Companies also need to understand how their workforce functions to manage workers properly. They must understand that there is little empowerment and/or self-direction among China production workers. A well-trained, empowered workforce is crucial to undertake improvement initiatives, particularly lean manufacturing and its culture of problem-solving and use of the scientific method. Also it is crucial to keep in mind that workers' cultural attitudes may be different from your own. The Chinese put great emphasis on practicing proven strategies and that government and business relations are off-limit topics.
3. Understand Tax Laws and Other Government Policies-There is several key governance factors that could affect a company's decision to expand their Chinese operations. Among them:

• Transfer pricing documentation compliance;


• Tax compliance;


• Accounting requirements;


• Due diligence for closing transactions;


• Banking policies in regards to foreign investments;


• Corporate governance;


• Labor contract laws.

It is important to understand that by not complying with or being unaware of, the rules and regulations, companies could end up serious problems that include audits, penalties or delays in closing business deals.

Companies should harness the fact that China is not only a low-cost labor market, but is also a strong export and domestic market. Recently the disposable income in China has risen three to five times faster than the income of the developed world. Surveys also indicate that most Chinese families plan to increase their spending in the near future.

Finally it is crucial that western companies that are doing business with China should understand that although Chinese consumers flock to international products, they remain firmly grounded in Chinese traditions and beliefs. Businesses must understand that their new market customers will have a fundamentally different world view than Westerners, and products have to be placed into that world view.