7 Potential Risks of Doing Business in China

As the second largest economy in the world, the GDP of China continues to grow about 10 percent annually. Therefore, many articles about the China market stress the opportunity in China. Indeed, the appeal of the China market is strong, and there are great opportunities in the China market for foreign companies. However, you have to realize that with each opportunity there are commensurate risks.

Jingle Office, over ten years’ experience in China market, would like to share with you some insights about the potential risks of doing business in China.

1.  Cultural differences

You do not have to be fluent in Mandarin but you have to keep sensitivity to the Chinese culture and the way it impacts business. Chinese are proud of their thousands of years of history. They value family ties and relationships, and at the same time, have high priority in business dealings. They also place great importance on social network (guanxiwang in Chinese), personally or bureaucratically. Understanding the social network in China is challenging for a foreigner, and building your social network with Chinese is even more challenging.

2. Unfamiliar market

Confronted with a totally different and unfamiliar market, Western companies have many things to do to understand the China market before entering. A deep investigation is essential. Research everything about the market, including business environment, regional differences, consumption habits, target customers, potential distributors, etc. to make a detailed assessment of all the potential risks. Some foreign companies that are successful in their country, such as Google and eBay, failed in Chinese market. One important cause of their failure may point at inadequate investigation.

3. High cost

It is expensive to do business in China. Office rent is extremely high with advance payments, government permits and other bureaucratic procedures are time consuming and expensive; Chinese pressure for technology transfer is costly to foreign companies; Maintaining your relationships with customers, distributors, partners and government officials also cost you much. Other support services like drivers, security, office maintenance, obtaining necessary permits, etc. are also costly.

4. Inadequate infrastructure

While China has made significant progress, the infrastructure is still lacking for efficient business practices. There are still issues to deal with, such as road networks, port access, delivery schedules, dealing with suppliers and distributors, etc. This requires someone fluent in Mandarin and familiar with Chinese business practices.

5. Government involvement

The degree to which the government involves in the business is the substantial difference between China and Western countries. The Western government promotes transparency for doing business; While in China, the Communist Party exercises absolute power over legislation and economic & cultural institutions. Although China’s economic pattern is changing from the planned economy system to the gradually diversified market economy system, major business decisions are not made without some government involvement.

6. Legal challenges

Strict laws in the Western countries protect both domestic and foreign businesses; While in China the legal system is not so developed as that in the West, giving rise to various loopholes in the law. Protection of property rights including intellectual property is vague and inconsistent, and can be interpreted in many ways. These law loopholes leave room for manipulating the law further by the local lawyers against western businesses. One of the reasons that joint ventures are difficult to establish in China is that the Chinese side of the joint venture utilizes the loopholes to prevent Western partners from selling assets or ownership.

7. Inefficient negotiation

The negotiation style of Chinese is different from that of foreigners. Chinese are not pressed for quick solutions and agreements. The patience of Chinese is a strong negotiating tool which they use very effectively. Another point confusing foreigners is that Chinese seldom respond a straight yes or no answer to your ideas or suggestions. They usually use the terms such as “we will think about it”, “we have to study the case somewhat more” and “maybe”. In addition, contracts only result after a letter of intent, followed by an agreement, neither of which are binding and, finally, a contract which is not always enforceable.

To succeed in doing business in China, it is essential for foreign companies to realize these potential risks of doing business in China and do some investigation & preparations before entering the China market.