Can China Be Ignored? If Not, Can Your Firm Afford to Do Business There?

Editor’s note: “International Business Corner” is a weekly column written by Joan Keston that provides information for people involved in or considering international operations. Keston is an international business consultant. Over the next several months she will be writing about important issues that international businesses face as they compete in the 21st century global business environment. This article discusses costs of doing business in China, and effects for small and medium sized businesses.

RALEIGH — When discussing the cost-benefit analysis of how to do business in developing countries, one factor that is extremely critical and especially significant for small- and medium-sized businesses is the initial cost to enter that market in either a direct approach, i.e., establishing a subsidiary or becoming part owner of a company, or an indirect approach, i.e., contracting with a representative, distributor, etc.

This cost analysis is also important in the case of outsourcing, whether you establish your own production or purchase from independent sources.

Can China Be Ignored?

China, and India to a lesser extent, cannot be ignored in current and, increasingly, in future business situations. Other developing countries, while presenting opportunities and undergoing tremendous growth, do not have the population and thus the sheer market force that the China has. Free-trade discussions and debates are irrelevant when considering China. We cannot unilaterally or even multilaterally impose restrictions or control the impact of China on global business. The development road that China is on will not be a smooth ride. China faces extreme domestic challenges that will affect its growth. However, it appears that China is here to stay.

One factor that must be considered when weighing the costs and benefits of doing business with or in China in developing your corporate strategy is the future of your business if you ignore China. Global business has been changing drastically over the past five years and will continue to do so. Where will your company be five to 10 years from now? Can you afford to ignore China for now? If you wait, will you be too late?

Can You Afford to Do Business in China?

Regardless of how you plan to do business in China, you must realize that China is a relationship-based country and factor this into the costs for your strategy. Having a written contract, even one written and negotiated by the best and most expensive attorneys, may not help you when it comes to enforcing the terms and conditions of your transaction. Who you know is critical in ensuring that your business dealings are successful. It is important that you begin to develop critical relationships from the very beginning, not when problems arise.

An added factor is that the government has the ability to change laws and affect your business in ways not accepted or even imagined in the U.S. The rule of law is not a well-established concept in China’s business culture. You can lose your business advantage overnight to a local Chinese enterprise supported by the government. Relationships are critical in establishing your venture and ensuring the viability of a successful one.

The costs of developing those relationships can be quite high, given the logistics of China (e.g., the cost for an economy ticket, to say nothing of business class, which is often a requisite of professionals needed in your business), the language barrier and differences in business culture, for example.

Challenges for Small- and Medium-Sized Businesses

Given the realities of doing business in China, how does a small- or medium-sized business address or handle the challenges?

The costs of international business are a hurdle that companies must overcome to become global. Small- and medium-sized companies must carefully analyze their readiness for global business before they begin. If entry into the global business arena is inevitable, then they must be prepared and creative.

About the author: Joan Keston is the Managing Principal of Keston & Associates, Ltd., an international business consulting firm located in Raleigh, NC, and a Partner at Paladin and Associates, Inc. She has 25 twenty-five years of experience with mature as well as entrepreneurial companies, domestically and internationally, coupled with an executive managerial and legal background. Her firm facilitates international business transactions, and assists companies establish, grow and integrate their international operations. She can be reached at (919) 881-7764 and jkeston@kestonassociates.com.