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China: Look Before You Leap
Essential Advice for Doing
Business in China
By the U.S. Commercial
Service, Beijing
and Rosemary Gallant U.S.
Commercial Service
 Since
adopting market reforms in
1978, China has been among the
world's fastest growing
economies. This has led to
dramatic developments in
America's commercial
relationship with China. In
1986, total trade between the
United States and China was
$7.9 billion. By 2003, this
total had reached $170
billion, making China the
United States' third largest
trading partner. Despite a
significant trade deficit,
U.S. exports to China grew by
66 percent over the past three
years as compared to 10
percent decline for the rest
of the world. There are
significant opportunities for
U.S. businesses in China.
A key list of "do's
and don'ts" of doing
business in China draws from
the experience of American
companies with successful
sales in China, as well as
information from the U.S.
Department of Commerce.
DIVERSE MARKETS REQUIRE
CAREFUL RESEARCH
China is a very diverse
market with varying levels of
development and regional
industrial strengths. From
Harbin in China's Northeast,
to subtropical Haikou on
Hainan Island in the South
China Sea, China encompasses
diverse topographies,
climates, cultures, and
peoples. Each region therefore
has its own consumer
preferences and business
needs. Some industries are
spread all over the country,
some are clustered, and others
are heavily concentrated in
one area. For example, of the
roughly 3,000 personal care
products factories in China,
2,700 are located in the
southern province of Guangdong.
Basic market research is
available from the U.S.
Department of Commerce through
www.export.gov,
as well as a host of private
consulting firms, research
companies, and trade groups.
The commercial sections of the
U.S. embassy and consulates in
China can also work with
American exporters to provide
research on specific topics to
understand current market
conditions, pricing, and
future trends. Lists of local
businesses service providers,
consultants, and law firms are
available through the
commercial sections of the
U.S. embassy and consulates.
The U.S. Department of
Commerce maintains offices in
Beijing, Chengdu, Guangzhou,
Shanghai, Shenyang, and Hong
Kong. Similarly, many
companies need multiple
representatives to cover
China.
SPEAK THE SAME LANGUAGE
Despite China's commitment
to, and success in, developing
human resources with good
English-language skills,
companies that are serious
about doing business in China
should supply company
information in Chinese and be
prepared to initiate contact
in Chinese. Having
Chinese-language material
prepared and a Chinese speaker
or interpreter available makes
a great first impression and
demonstrates that a company is
serious about doing business
in China.
Small firms also need to be
resourceful about finding
affordable Chinese-language
expertise. For initial oral
communication, a number of
companies have used
Chinese-speaking employees
from other parts of the
company to help with sales and
marketing to China. One
business has an individual
responsible for placing sales
calls to China stay late at
the office to introduce the
company during business hours
in China. Another transferred
a Chinese-American from the
factory floor to the marketing
department to handle Chinese
customer accounts.
Interestingly, once contact
was made in Chinese, several
companies indicated that they
then conducted routine
business in English via e-mail
without a problem. Similarly,
successful companies normally
invest in developing
Chinese-language material
about their companies and
products. Companies worked
with their distributors on the
translations, used outside
professional firms, or used
their U.S. staff to produce
business cards, brochures, and
other materials. The
Commercial Service can help
companies find translators.
FIND THE RIGHT PARTNER
Small firms typically need
to find a counterpart in China
to make sales and deliver
products for them.
Guidebooks on doing
business in China emphasize
the importance of personal
connections, or guanxi (GWAN-shee).
Networking is an aspect of
doing business around the
world, but it takes on added
importance in a society with a
complex bureaucracy and a weak
legal system. A web of guanxi
helps firms navigate China's
bureaucractic and distribution
challenges.
The importance of
relationships is another
reason why many small American
companies choose to sell
through trading companies or
local distributors, even if
they have offices in China.
Representative offices, the
most basic, least-expensive
type of foreign commercial
presence in China, may only
perform "liaison"
activities; Chinese law does
not allow such offices to sign
sales contracts or bill
customers directly. As a
result, local agents and
representatives are crucial.
It is critical that
companies make sure that their
partners are reliable and that
they have the right
motivation. Make certain your
client or partner is able and
willing to do all he says he
will do in the contract.
Ensure that it is in your
partner's best interest to
perform as agreed. Is it in
his interest to assist you to
protect your brand or other
intellectual property rights?
Be careful that your partner
is allowed by law to fulfill
the promises in the contract.
Check the reliability of
information on your partner or
customer through using
independent sources.
Companies can locate
distributors or sales agents
through a variety of methods,
including trade shows and
business connections. The
Department of Commerce offers
a program that helps companies
find representation in the
market—the Gold Key Service
(see www.buyusa.gov/china/en/gks.html).
Knowledgeable Commerical
Service trade specialists
research and develop
appointments with the contacts
you need to do business in
China. The Gold Key Service
can provide instant business
relationships for companies
new to China, by setting up
tailored appointments with
potential importers,
distributors, end users, or
trade associations. Companies
already in China seeking
further representation may
consider using either service.
One Midwestern industrial
equipment company used a small
and under-funded distributor
in China for 10 years. In
early 2002, the company
traveled to China on a trade
mission that included Beijing
and Shanghai. The 15 meetings
arranged through the Gold Key
Service led the U.S. company
to sign up four distributors
covering four areas from the
northeastern to the
southeastern part of China.
Successful companies have
also used independent
distributors either
established by entrepreneurs
in China or branches of
companies from Taiwan, Hong
Kong, or Singapore. Other
companies work through major
state-owned trading companies
that provide wide geographic
coverage. The number of
distributors these companies
use range from two to 34, but
regardless of the number, the
U.S. companies screened them
as thoroughly as they screen
distributors in other markets,
requiring business plans,
interviews, and background
checks before signing them on.
Finding the right partner
or distributor and employing
prudent payment practices are
particularly critical in
China, where the judicial
process is slow, expensive,
and plagued by corruption.
Rather than relying on legal
safeguards, American companies
need to ensure that their
Chinese counterparts in any
contract have their own
motivation for fulfilling the
contract.
HAVE CLEAR CONTRACT TERMS
China's consistent,
8-percent economic growth
leads to continual radical
transformations in the
internal dynamics of the
economy. When entering into a
contract with a Chinese
partner you must be careful.
Do not attempt to enter into
an agreement without sound
legal advice. Have your own
legal counsel. In your
contracts, specify exact terms
of payment and performance
standards. Set timelines. Pay
careful attention to details,
such as initialing pages of
contracts and signing
properly. Scrupulously follow
the contract yourself—or
expect to pay a high price. Do
not rely on legal advice from
your Chinese partner. Beware
of claims that Chinese law
requires specific covenants in
your contract. Verify this
with your own counsel. Do not
agree to provisions in a
contract that are not under
your control. For example, if
your client or partner wants
you to specify in the contract
that he must visit your
production facilities in the
United States, remember that
you cannot guarantee that he
will receive a visa. This
could invalidate your
contract. Do not assume that
local or provincial officials
actually have the authority to
give you permits and
permissions. Verify their
claims of authority through
independent sources.
ENSURE PROJECT VIABILITY
Profitability of a project
or the sale of goods and
services should be based on
sound economic criteria. Do
not rely on promises of
subsidies, special
considerations, or non-market
sources of income to create a
profit. If subsidies are
offered, they should be used
to augment profit, not create
it. Make certain your partner
has the authority to offer
subsidies and verify from
independent sources that the
subsidies will actually be
paid. Look for examples of
companies that have actually
received such benefits.
Viability may look very
different over the short,
medium- and long term. Many
Chinese partners will
encourage you to look at the
long-term potential of the
market and sacrifice profit in
the early stages. Doing so
maybe detrimental to your
ultimate success in the
market. In China, as in any
high-growth economy, it is
difficult to predict the long
term, so make sure that you
can obtain profitability in
the short term and sustain
that profitability in the
medium term.
AVOID PROHIBITED
AGREEMENTS
Creating viable contracts
and agreements is challenging
in any business transaction.
However, given an unfamiliar
business environment, many
companies can be unwitting
victims of illegal agreements.
Be familiar with the
overarching rules governing
agreements at all levels of
jurisdiction. U.S. companies
often enter into agreements in
China with promises from local
officials that central
government rules will not be
enforced in the provinces.
Indeed, often they are not.
Problems arise when these
rules are suddenly
applied—sometimes
retroactively—leaving a
company with little recourse.
You must be ready to follow
all WTO-compliant regulations.
Seriously question any
agreement in which you are
told you can ignore or avoid
these rules. Also, make sure
that your managers know all
relevant U.S. laws such as the
U.S. Foreign Corrupt Practices
Act. You should be aware that
China is also cracking down on
corruption. You do not want
your business to be associated
with corrupt officials or
illegal practices. Be aware of
Bureau of Industry and
Security regulations on the
transfer of dual-use
technology to China. U.S. law
prohibits transfer of some
sensitive technologies without
a license.
PRACTICE PROBLEM
PREVENTION
In addition to creating pro
forma balance sheets, spend
some time at the beginning of
a project to create possible
scenarios if things go wrong.
Try to anticipate possible
problem areas. Create a
practical strategy to deal
with potential problems. Set
milestones in the project for
performance. Have an escape
strategy for each stage of the
project, even if you do not
plan to use it. In China,
personal relationships are
very important, and sometimes
partners may not be completely
truthful about potential
problems if they feel the
problems may have a negative
impact on a personal
relationship. Chinese partners
may also be under pressure
from government or party
bureaucrats (as well as
business associates) to
compromise ethical standards.
When problems arise, you
should have excellent contacts
among officials at the local,
provincial, and central
government to manage the
issues.
DO A THOROUGH RISK
ANALYSIS
Be realistic about how much
risk you are willing to accept
in your business venture. Make
sure you use reliable sources
for this assessment. Use more
than news media sources or
your immediate partners to
evaluate the market. Do not
have a corporate risk analysis
policy for China that is
different than you would have
for any other country. If a
project is too risky, do not
do it—even though it is in
China. The majority of
American companies currently
in trouble in China did not
performed thorough risk
analysis.
EXPECT FIERCE COMPETITION
AND PRICING PRESSURE
Recent economic analysis
suggests that there is a
significant surplus in
industrial markets. There are
strong competitive pressures.
Chinese brands are strong and
gaining market share in many
sectors. In many Chinese
markets there is a constant
downward trend on prices.
Chinese competitors,
particularly those from the
state-owned sector, often
enjoy very low costs of
capital. Thus, they can enter
markets quickly, and they can
expect to receive strong
encouragement from the
government for their efforts.
The Chinese government makes
no secret of its support for
state-owned enterprises.
Foreign companies should not
expect a level playing field.
GETTING PAID
Pay careful attention to
how you get paid, when you get
paid, and in which currency.
If you want to be paid in U.S.
dollars, be certain you are
able to convert profits. Be
advised that not all companies
have rights to provide payment
in foreign currency, and
payment may be arranged
through a "window
company." Inquiring about
a company's payment process
shoud be an important part of
screening for partners. Use
letters of credit and other
financial instruments to
protect yourself. If you do
not want to use a letter of
credit, require your partner
to make advance payment.
Remember that Chinese
companies usually do not use
terms that allow unsecured
payments after delivery of
goods. For example, payment
terms of "30 percent
letter of credit, 70 percent
payment, 120 days after
delivery" would not be
customary in China. For most
large projects, terms of
"70 percent advance
payment, 30 percent letter of
credit" would not be
unusual. Never agree to
unsecured payments after
delivery.
One critical difference
between China and most other
markets is the country's lack
of a predictable, systematic
approach to credit and
receivables management.
Indeed, perhaps the primary
risk of doing business in
China today is the difficulty
of collecting full payment on
time.
The lack of credit
infrastructure makes
determining creditworthiness
challenging—but not
impossible. Companies need to
spend the time and money to
analyze customers' and
partners' creditworthiness or
minimize exposure to the risk
of nonpayment. The Commerce
Department's International
Company Profile service can
help companies understand the
background of potential
customers or business partners
by providing reports on
individual Chinese companies.
The Commercial Service in
China subcontracts with Kroll
Associates, an American
investigative service firm,
for parts of these reports.
Commercial Service staff
members provide additional
information about the relative
strength of the firm in its
market and the firm's
reliability.
A small U.S. firm that
provides specialized training
for the financial services
industry in China ran into
trouble when it attempted to
save money by foregoing due
diligence, relying instead on
a personal referral. The first
training session it organized
with its local partner was
well attended, but success
soon gave way to a trade
complaint. A company
representative stressed,
"When I say the Chinese
company took advantage of us,
I mean it in the full
extent." In this case,
the partner collected $10,000
in registration fees but
refused to share information
on the number of paid
participants. The
representative continued,
"When it came time for
[the partner] to pay us the
money agreed upon, she
reneged. She paid me $1,000
cash and promised to pay 50
percent via wire. We will lose
90 percent of what we agreed
to." Given the vast need
for financial services
training in China, the U.S.
company decided to plow ahead
despite this experience, but
with a more cautious strategy.
This small service provider
subsequently found
success—packed training
sessions and full payment for
its services—by establishing
a relationship with a domestic
Chinese insurer. The U.S.
company found that locating a
reputable partner through
extensive research and
requiring third-party
confirmation of information
could help avoid further trade
disputes.
To minimize risk, companies
just entering the market can
protect themselves by not
selling on credit. Exporters
frequently require full
payment in advance from their
distributors or customers. One
credit manager has his
multinational corporate
clients in China pay his
company directly, via bank
transfer. For local Chinese
buyers, the American company
requires payments from its
distributor before releasing
shipments.
The local distributor is
responsible for collecting
payment from the end users
that placed orders. Two U.S.
consumer products companies
recently made their first
significant sales to China, in
both cases to retail
companies. The two U.S.
companies obtained full
payment prior to shipment,
allowing them to gauge
consumer interest in their
products while limiting their
risk.
LOOK BEFORE YOU LEAP
Companies must be
persistent in their efforts
but flexible in their
strategies to take advantage
of the changing landscape.
When they need help, U.S.
companies should use available
services, from the Department
of Commerce as well as from
the many professional law,
accounting, marketing,
translation, and other firms.
One good starting place is the
Commercial Service China Web
site, www.buyusa.gov/china/en.
Small firms can use the site
to find information on
Commercial Service China
services, Beijing 2008 Olympic
updates, and industry
highlights.
The U.S. Department of
Commerce, as well as other
business-oriented
organizations, is prepared to
serve the interests of
American companies and assist
with market research, locating
suitable and reliable
partners, or providing
feedback on the viability of a
business plan.
China is a rapidly changing
market that requires a great
deal of caution and patience.
Companies should test the
water carefully before jumping
in. With proper preparation,
however, firms can position
themselves to profit from
China's growth in the years to
come.
China and Standards
New Rules, New Resources
By Tim Wineland
Office of the Chinese
Economic Area, Market Access
and Compliance
Radical changes are
occurring in China regarding
standards and testing
requirements, at the same time
as U.S. companies recognize
China as a key export market,
not just a low-cost source of
suppliers. To avoid problems
with customs clearance in
China and to ensure their
products reach their Chinese
buyers, exporters interested
in selling to China need to
understand China's new and
changing standards and testing
regulations.
STANDARDS AND TODAY'S
CHINA
For a century, the United
States and other developed
countries have recognized
product standards as a
facilitator for the global
economy, creating trade and
assuring safety and quality.
At the same time, as countries
have reduced tariffs and other
barriers to trade, standards
and testing requirements have
sometimes proven to be
obstacles to trade—a way for
countries to protect their own
industries and put foreign
companies at a competitive
disadvantage.
From 1979 to 2000, China's
rank as a trading power rose
from 27th to seventh largest
in the world, in terms of
total value of trade. At the
same time, China began to
recognize the importance of
product standards as a
lubricant for international
trade. In 1984 and 1989, China
enacted landmark laws
establishing a modern-day
standards and testing regime.
Additionally, individual
government agencies in China,
such as its health ministry
and environmental protection
agency, adopted new standards
and regulations affecting
importers and domestic
companies.
In the 1990s, as China
implemented its standards and
testing laws, and as companies
began to see China as a market
for exports, foreign companies
experienced China's standards
regime firsthand, and reported
that the system was in some
cases costly, burdensome, and
applied more stringently to
foreign imports than domestic
products. When China
negotiated WTO accession in
the late 1990s, it was
conditioned in part on an
agreement to revamp its
standards system so it would
apply equally to domestic
manufacturers and foreign
importers.
A SEA CHANGE FOR CHINESE
STANDARDS
In conjunction with China's
WTO entry in 2001, the country
reorganized its standards and
testing systems. It merged two
standards agencies—one
focused on domestic
standardization and one
focused on imported
goods—into a single entity,
the State General
Administration of Quality
Supervision, Inspection, and
Quarantine (AQSIQ). China also
combined its two prior
"safety marks"—the
Commodities Inspection
Bureau's mark and the
"Great Wall" safety
mark—into a single safety
mark, one that applies equally
to domestic and imported
products. In the area of
transparency, China must now,
like all WTO members, notify
the WTO of its draft technical
standards in any cases when
mandatory standards differ
from existing international
standards and impact trade.
UNDERSTANDING CHINESE
STANDARDS
The Chinese standards
system can be viewed as a
three-legged stool. The first
leg of the stool is China's
set of mandatory, national
"GB standards." The
second leg is China's
"China Compulsory
Certification," or CCC
mark, a safety mark that is
required for 133 categories of
products sold in or imported
in to China. The final leg is
agency-by-agency technical
regulations and testing
requirements that vary by
product.
GB Standards. AQSIQ
oversees China's so-called GB
standards. Currently more than
19,200 GB standards are in
force, and they range from
standards for jet fuel to
green tea to truck tires to
fertilizer. Compliance with GB
standards is mandatory. This
means that if a certain
product is sold in China, it
must meet the relevant
standard, or its manufacturer
can be assessed fines or other
administrative penalties. The
standards can be enforced at
Chinese Customs, for imported
products, and once the product
has entered the market, for
both imports and domestic
products. Additionally, some
GB standards are used in the
CCC mark system, described
below.
Notably, many GB standards
are similar to or identical to
international standards widely
used in other countries. For
example, GB electrical
standards are often equivalent
to IEC standards, a set of
international standards for
electrical products. If a
company is already familiar
with IEC or other
international standards, it
will often find that it
already meets China's own
standards.
For a U.S. exporter,
finding out whether products
are subject to GB standards
can be challenging, and then
obtaining the GB standards
themselves can also prove
taxing. One place to start is
the Standardization
Administration of China, the
body under AQSIQ that develops
China's GB standards.
Exporters unable to find
answers to their questions
about GB standards can contact
the author at (202) 482-5316.
CCC Mark. The China Compulsory
Certification (CCC) mark was
announced in 2001 and was
fully implemented on August 1,
2003. The quality and safety
mark is required for products
in 133 categories, ranging
from electrical fuses and
toaster ovens to automobiles
and information technology
equipment. About 20 percent of
U.S. exports to China are on
the product list. If an
exporter's product is on the
CCC mark list, it cannot enter
China until CCC registration
has been obtained, and the
mark physically applied to
individual products as an
imprint or label. The CCC mark
system is administered by the
Certification and
Accreditation Administration
of China.
Obtaining the CCC mark
involves an application to
Chinese certification bodies.
The application process can
take three months or more, and
can cost $5,000 to $15,000 in
application fees. The process
includes sending testing
samples to a Chinese
laboratory and testing in
those labs to ensure the
products meet safety and/or
electrical standards. A
-factory inspection of the
applicant's factories, to
determine whether the product
line matches the samples
tested in China, is also
required. Finally, Chinese
testing authorities approve
the design and application of
the CCC mark on the
applicant's products. Some
companies, especially those
with a presence in China and
with a dedicated
certification/standards staff,
are able to manage the
application process in-house.
Other exporters tap the
expertise of standards
consultants based both in the
United States and in China who
can provide application
management services and handle
all aspects of the application
process.
The U.S. Department of
Commerce maintains a
comprehensive CCC mark Web
site to help U.S. exporters
determine whether they need
the CCC mark and how to apply.
Your first step in learning
about the CCC mark should be
the CCC mark Web site at www.mac.doc.gov/china/cccguide.htm.
The Department of Commerce
also regularly sponsors CCC
mark seminars in cities across
the United States. For more
information, visit www.mac.doc.gov/china.
Other Regulatory
Requirements. Like all
countries, China has numerous
government agencies that
mandate standards or testing
requirements for products
under their jurisdictions.
Even if a given product has no
specific GB standard
requirements and is not
subject to the CCC mark, that
product may still be subject
to particular standards or
testing requirements at
various Chinese government
agencies.
A general rule of thumb for
exporters is that if their
products are subject to
sector-specific regulations in
the United States or other
markets, such as the
Environmental Protection
Agency, Federal Communications
Commission, or Food and Drug
Administration, it is possible
that China maintains similar
regulations for those
products. To find out whether
you are subject to Chinese
regulatory requirements, first
evaluate what requirements you
have in other markets. Then
talk to standards and testing
consultants here in the United
States, or your Chinese
partners. You can also check
with the Commerce Department
at (202) 482-5527 or www.mac.doc.gov/china.
THE FUTURE
As China continues to open
its markets and modernize its
standards system, U.S.
exporters can expect to see
increasing use by China of
international standards, and
increasing similarities
between testing procedures
used by China and other
countries. WTO rules requiring
transparency in the drafting
process for mandatory
standards will also help
exporters by giving advance
warning of changes and the
opportunity to actually
comment on draft standards
before they are finalized. But
at the same time, China's
standards system is still in
transition, and China will add
new products to the CCC mark
list and draft new standards.
The challenge for exporters
will be to keep abreast of
those changes. Ensuring that
those changes comply with
multilateral trade agreements
will be the U.S. government's
challenge. One thing will be
certain as China's importance
as an export market grows:
understanding standards issues
is critical to any successful
exporter's China export
strategy.
ADDITIONAL RESOURCES ON
CHINA
- Exporting
to China: New
Opportunities, New
Resources
- On February 1, China
celebrated the Chinese New
Year: the Year of the
Sheep. U.S. companies that
export to China also had
reasons to celebrate. In
2002—China’s first
full year as a member of
the World Trade
Organization—U.S.
exports to China increased
significantly. U.S.
exports to China in 2002
rose 12 percent in
comparison with the
previous year. Since 1990,
American exports to China
have more than doubled to
over $21 billion a year.
-
Hong
Kong - the Paper Tiger
Lives - Hong
Kong, one of the so-called
Asian tigers of the 1990s,
may have lost a step or
two during the current
slowdown, but no snaggle-toothed
feline is this.
- Turley's
Tips - Written by
former US Senior
Commercial Officer, Alan
Turley, this handy series
of tips will help assure
your success in this
difficult market.
- China
WebGuide - A
web-based overview of the
Chinese Market.
|
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Date
Updated: March 27, 2007
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