Being the owner or manager of a company, regardless of the place in the world where you operate it, is always a challenging endeavor. Let’s face it, the process of doing business, setting up the corporate structure, selling, chasing clients, doing marketing, manufacturing, it’s always hard, even if the system is supportive of your operation. Even when everything is on your side.
Having a foreign invested company in China doubles that hardship, and in this case, many wonder if the “system” I mentioned above is indeed for you, indifferent of you, or against you.
The system that I mention is not only the enforceability of laws but also the transparency of the regulations, the costs, interaction, and relationship with the local authorities, and most of all, the perception that your clients and your business partners have of you.
Because of the state of the world and the level of tension and fragile diplomatic relations that the international community as a whole or individually as countries have with China, many of the foreign companies present in this market wonder in which direction is the pendulum going and simply put, they ask if things are getting better or worse, where business environment is concerned.
An on-the-ground understanding about the country’s business environment is thus revisited every year and foreign chambers of commerce in China often write and perform surveys on these matters, all intended to reassure the international business community of how things actually stand. This could indicate real versus perceived grievances, show how foreign companies engage with authorities, and what are the challenges and opportunities versus expectations and promises. This has been showcased in the recent American Chamber of Commerce (AMCHAM) report on the business environment in China – that everything is alright, and the future is promising.
AMCHAM published its White Paper on Business Environment in China on February 25, 2021 taking a focused look on the business environment in China and how companies were able to survive unforeseen catastrophes last year and emerge stronger and optimistic. The publication offers a lot of insights on local practices, provincial growth and business experience, demographic trends, revenue and profitability, as well as what to expect from political maneuvers, trade deals, and general events impacting the business environment in China.
AMCHAM’s survey in South China met with mostly positive answers as most companies rated the business environment as ‘very good’ or ‘good’. Answers were more positive than the previous year, accounting for nearly 80 percent; those seeing a decline in the business environment accounted for only about 14 percent – a decrease of six percent year-on-year.
As we are discussing surveys concerning American companies and knowing that at times your nationality might make a difference on how you are treated and perceived in this country, most of the times, the only status that matters are ‘local’ or ‘foreigner’; and the most important information to retain from this White Paper is that of the 208 surveyed companies, none of them plan on leaving China in the foreseeable future.
Likewise, on the European side, the last Business Confidence Survey (BCS), which was published in 2020 (the 2021 one will be published in June of the present year), made statements to the effect that doing business in China has become subject to political issues and media reporting; with the US-China trade war constantly in the news, this is a clear reminder that sometimes politics and business collide with disastrous consequences.
This remains true.
However, the data collected for the BCS published February 2020 was at a bleak time, when China was hit the hardest by the pandemic and the whole world was much more uneasy than they are today. In Q1 2020, 460,000 companies had closed business in the first quarter and registration of new businesses went down 29 percent.
Therefore, it would be reasonable to wait for the release of the new BCS and to draw conclusions from the White Paper published by AMCHAM, earlier this year, especially when it comes to the South China region. As per the White Paper’s findings, Guangzhou remains the number one preferred investment destination in China, unchanged for four consecutive years, followed by Shanghai, Shenzhen, and Beijing. Other attractive cities include Dongguan, Chengdu, and Zhuhai, which feature prominently on investor radars.
The business environment in South China: Talking to locally incorporated SMEs
Reading reports and surveys published is important but not enough to acquire a thorough knowledge of the foreign SME situation in China, so I set out to talk with some companies who have been in the city that I am currently based for some years – Shenzhen – and the conversation went beyond the normal rigid survey questions that we normally have come to expect from chambers of commerce. The results were interesting.
First on my list was a Shenzhen-incorporated football school that is owned solely by a foreign individual without any local Chinese partners and has been in the region for half a decade. This was a little after China deemed parts of the educational sector as an encouraged industry to invest in as per the 2015 Foreign Investment Catalogue.
Further, football is now among the most popular sports in China, making the sector ideal for business investments. However, the reality is that, as profitable as the business may be, it is at times bittersweet given that as a foreign invested company, loans and financing in general are virtually impossible to get. In a business where fixed costs are a major component, it is important to maintain a healthy cashflow, especially, as my interviewee stated, during the peak of the pandemic, when the country and the world barely left home, let alone go to a football school. Overall, despite occasional setbacks and hardships, business is booming and if this trajectory is maintained, more schools (branches) will be opened in the future.
Second on my list was an Italian restaurant, which also has been in the region for more than five years and has amassed a clientele that is mostly Chinese, as it should be, otherwise the business will not be sustainable.
“Successful from the get-go” and “if the product is good, they will come” were some of the sentences thrown around. According to my interviewee, despite the good financial situation and the total control of the management process (this company is also wholly foreign owned), there are many challenges, and in the proprietor’s own words: “a restaurant must prove its value every day. Glories of the past don’t excuse a bad dish today”.
This and other problems, such as high rent, deposit fees, and higher than average salaries (to cultivate a climate of loyalty and prevent them from changing jobs after 2/3 months) are some of the features of the restaurant business. Important, as well, is to foster an environment of friendship with the neighboring shops and authorities, find ways to appease them (and prevent jealousy of this restaurant’s success), and in the process, enable the increase of the neighborhood’s property value. The machine must be oiled and some of the ways to do it can be unorthodox.
The main lesson is that as good as your product may be, relationships with customers, neighbors, and authorities is important. As many have said before me, relationships in China are everything.
The third interview on my list was with an entrepreneur that for the past few years has invested in and developed companies in sectors that are dear to the Shenzhen and Greater Bay Area’s priorities for the future, namely, medical devices, automation, and software.
Stating that “the biggest difficulty is not giving up in front of the difficulties”, this entrepreneur’s business operations are sustainable without the need of credit or partners, whether these are local or foreign.
According to my interviewee, the business environment in China has improved in the past 15 years, although there is still a lack of talent and knowledge in the high-tech sector within the region (which means foreign companies can still add value to the sector) and that, similar to the company I mentioned before, relationships are important, as well as luck.
My final question was a classical and useful one for entrepreneurs that may come after: “Having in mind what you already know, if today you started a new company in China, what would you change and what advice would you give to someone with the same intention?”
The answer was insightful: “Find the real market before investing your money. Create a brand and then the sales will follow. In China, the goodwill that arises from Intellectual Property may be even more important than other countries”.
(In order to respect their privacy, the names have been kept out of the interview report.)
With the southern region as a window into the business environment in China, my overall impression is good.
It must be kept in mind that Guangdong is the largest province in China by economic size, at RMB 10.77 trillion, or 10.9 percent of the national total GDP in 2019. Compared to other economic hubs in China, such as the Yangtze River Delta, Guangdong stands out for having:
- The largest external facing economy with exports, accounting for 25.2 percent of the national total in 2019.
- The largest retail market of consumer goods, at around 10.4 percent of the national total in 2019.
- Guangdong accounted for about 16.2 percent of China’s total utilized FDI and foreign investments in Guangdong are mainly engaged in tertiary sectors.
- Since 2015, Guangdong’s development has been driven by the launch of the Guangdong-Hong Kong-Macao Greater Bay Area, an innovative cluster that encourages foreign investment, strengthens conditional rewards and subsidies for enterprises, and promotes scientific research, talent, and trade cooperation with Hong Kong and Macao.
All of the above are important pillars that will render investment easier, but in the words of the European Chamber’s last South Annual General meeting (AGM) keynote address: “Business is strong but for how long?”
The “how long” part is something that needs to be built day-by-day. Taking into account what already has been created and will be created in the future, the difference between success or failure and between net profit or net loss will depend mostly on the company or the entrepreneur itself and how they engage with the changes to the investment environment. It is important to stay alert to changes, which may come in the form of direct and indirect limitations affecting your business plans or direct and indirect opportunities to expand or diversify your business scope.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.