By Cindy Payne, Managing Director
Asia-Pacific Connections Pte Ltd

September 2003

One of the world's oldest civilisations, rich with thousands of years of history, China has, indeed, come a long way from its isolationist policies of the 70's and 80's. Its entry into the World Trade Organization (WTO) in 2001 and the populist platform of the new regime of President Hu Jintao and Premier Wen Jiabao have repositioned China as "open for business". Foreign direct investment now pours into China, and is expected to total US$57 billion this year. Even before China's accession to the WTO, many companies eyed China as one of the most coveted markets, with access to the world's largest consumer population – estimated at 1.3 billion. With a gross domestic product (GDP) of US$1.2 trillion in 2002, China is the world's sixth-largest economy, and is growing at approximately 8% annually – apparently unaffected by the global economic slowdown. Companies worldwide, especially global multinational companies (MNCs), are making a beeline to China, where domestic consumption is burgeoning. Amongst the top 500 multinational companies, over 400 have already invested in China, with over 200 investment companies and nearly 400 research and development centres already established there.

IT is one of China's most vibrant sectors, fuelling China's massive manufacturing sector – valued at 54% of China's GDP – led by enterprise-resource-planning (ERP) and supply-chain-management (SCM) solutions, as well as a myriad of process-management tools. According to International Data Corporation (IDC), China's IT market grew by 18.2% in 2002 over the previous year, totalling US$22 billion – slightly lower than 18.7% in 2001 – representing the highest IT growth in the world. IT spending in 2003 is expected to reach US$28 billion. Four key factors driving opportunities for IT players include:

• The government's informatisation drive – a Chinese coined word to describe the process of spreading the use of information technologies amongst communities, government agencies and China's traditional industries – to drive China's economy, to facilitate the government's urbanisation plans, and to improve the overall quality of life for Chinese citizens
• The massive infrastructure building to support fixed-line and mobile-telecommunications demand
• The "Go West" campaign to narrow the digital divide between Eastern and Western China and build the interior provinces
• The 2008 Beijing Olympic Games, with its focus on high-tech applications, to showcase China's technological prowess to the world

No doubt, China's accession to the WTO has provided a more transparent investment environment and is accelerating reforms. However, there are still significant hurdles for newcomers to overcome as China moves from a planned to a market economy. Cultural differences, language barriers, complex channel-distribution systems and sudden changes in government regulations are challenges not for the faint-hearted. New entrants to China must remember that China cannot be treated as one homogeneous market. Even the primary markets of Beijing, Guangzhou, Hong Kong, Macau, Shanghai, Shenzhen, the Greater Pearl River Delta and the Yangtze River Delta encompass extremely diverse economies and cultures. China must be viewed as disparate regions, each with its own distinctive characteristics, requiring due diligence – including extensive research, networking and onsite visits – before embarking on any strategic market-entry planning.

In addition, China has an overly complex legal and regulatory structure. Many laws and regulations are not recorded in any one place and some are changing in today's volatile environment, creating confusion for foreign investors. In some instances, national laws may be contravened or ignored by local and/or provincial authorities. The lack of a nationwide system for conducting background checks on individuals or companies, strict foreign-exchange control measures, minimum paid-in capital requirements, and acquisition restrictions on state-owned assets add to the complexity. To overcome this, foreign investors must ensure that they secure more contractual protection in their agreements than is common elsewhere. It is highly recommended that new businesses engage a qualified counsel to review any contract or agreement before signing it.

Similar to other international markets, it is best to thoroughly understand the local market and fine-tune market-entry strategies. Alliances with local Chinese firms prove to be an attractive option for many companies. In 2002, according to McKinsey & Co., alliances attracted approximately half of China's new foreign-direct investment of US$55 billion. There are a number of market-entry options for foreign investors ranging from using agents and distributors to setting up representative offices or establishing foreign-owned enterprises. Prior to entering any agreement, all companies are advised to consider how the Chinese partner will add value to the business and to clearly define roles and responsibilities for all parties. Once the venture commences, foreign investors should keep a close eye on the financial and operational progress, and be prepared to restructure as necessary.

Unfortunately, most foreign investors in China naively judge their success by their short-term profitability, instead of by longer-term, more strategic measures – such as placing value on learning how to operate in China, gaining access to local regulators, building market share or brand awareness, and developing an export-manufacturing base. Keeping an eye on the longer-term benefits, as well as adopting a flexible attitude, will help foreign companies to maximise their investments and build more strategic partnerships.

Before jumping into the Chinese market, foreigners need to understand the concept of "guanxi", the Chinese word for relationship. This is a very complex concept that goes beyond the simple definition of "connections" – using one's connections to get things done. Though relationships are important in every business venture, in China, the role of "guanxi" is probably more pronounced than in other markets. The key is building the right "guanxi" with a number of people at various levels, spanning government and industry entities. Building strong contacts amongst key constituents is necessary for cutting through red tape and obtaining requisite approvals. Though it takes years to master "guanxi", good manners, due diligence, patience and goodwill – all of which are Chinese virtues – go a long way in building the foundation required to support the complex web of relationships required to be successful in China.

There are certainly many challenges in building a business in China – a unique market and one of the largest and most dynamic in the world. However, innovative foreign IT companies with an open mind, focus, commitment, strong managerial skills, and good connections stand a reasonable chance of breaking into this market where technology is lauded, guts – tempered with loyalty and patience – are rewarded, and sound business relationships built on trust and mutual value, can be leveraged time and time again.

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