I’m not a Republican.  I do consider myself a fiscal conservative, however.  This would be why I tend to vote for the other guys and support a public health care system.  Protectionism is something that rubs me the wrong way though, and I fear the latest trade row between Chinese tire manufacturers and American chicken farmers is a big step in the wrong direction.  Both countries are at fault here, but I’m only going to touch on the Chinese side today.

Business in China has huge profit potential but is also extremely difficult for some arbitrary reasons.  The extremely one-sided Heritage Foundation listed China as #132 out of 179 countries in their “economic freedom index” (Hong Kong took the #1 spot; US was #6).  I don’t suggest for a second that the US does not practice many of these broken ideas, and I encourage those interested in the American side to submit a rebuttal.

This is an extremely simple and non-exhaustive list, but it’s a rough overview of China business pros and cons:

Pros:

  1. Largest market in the world.  Can’t argue that.
  2. Market potential is enormous.  Almost 50% of the Chinese are still farmers.  Once they move to the cities, their income and desire for foreign goods is only going to increase.
  3. A highly literate population means it’s easier to find skilled workers.  The large rural population coupled with a rapid move to the cities means cheap, skilled labor is going to be there for some time.
  4. Chinese cities are denser than American ones.  It’s nicer to have electricity/water/roads at a location already instead of paying to run power lines out to some remote McDonalds in Montana.  Also, China is obsessed with new highways, harbors, airports, and high-speed rail.  Whoever they are trying to impress, a great infrastructure will only help a foreign company.
  5. TV/Radio ownership is pretty high.  Advertising seems to be more prevalent in subways and buses than in the States.  So you’ll have plenty of places to advertise.
  6. Being foreign immediately carries considerable prestige.  It’s common to slap “American brand” onto a completely Chinese-owned brand just because it carries a lot of weight.  “Foreign” is also understood to be more expensive, so there’s not a lot of pressure to sell at a discount, ever.

And now some cons:

  1. As mentioned above, glaring protectionist policies.  The biggest problem is probably a drastically undervalued currency.  The exchange rate is pegged at 6.8 yuan to 1 dollar.  Meanwhile, the University of Pennsylvania estimates the real exchange rate (based on what you can get with your money) should be about 2.14:1.  So its extremely cheap for Chinese companies to sell goods in America, and extremely expensive to import foreign goods to China.  The Chinese government keeps the rate to protect domestic business.  It’s lousy.
  2. Starting a branch of a foreign company often requires a joint venture with a local parter, bribing government officials, and usually both.  The Economist wrote about how Goodyear tires went through the trouble of making over 700 unique partnerships with local suppliers in China, because they had to.  Bombardier has a partnership with a Chinese train manufacturer, and GM’s China operations are largely run by a Shanghai partner.  A huge party to the joint venture requirement is the entertainment industry.  American films can only be imported by 2 state-owned companies, and there is a quota on the number of films that can be screened.  This isn’t as huge of a problem for Chinese consumers, because…
  3. No intellectual property protection.  There is literally zero market for legitimate DVD purchases.  Software and books tend to fare better, but tens of thousands of websites can offer that stuff for free.  Granted, China has a lot bigger problems than catching the college kid who downloaded an MP3 or two.  But when the country’s largest search engine (Baidu) offers a sub-site specifically for downloading MP3s, it sort of tells you there’s no interest in protecting IP.  Clothing is equally susceptible.  In a bizarre set of twists and turns, Louis Vuitton became known as a prestigious brand in China.  So the clothing pirates started making fake bags to sell for about $5.  So now everyone has a look-alike, which eliminates its prestige.  True luxury “show-off” goods have to be more confined to those things difficult to pirate, like houses and cars.  Either way, LV loses big time.
  4. A very small middle class, maybe 15% of the population.  It will get better as time goes on, but unless your product is dirt cheap, it’s going to be hard to move inventory in any large numbers.
  5. It’s not the US, Europe, or South America.  Chinese people like red bean flavored ice cream more than chocolate.  Clothing trends aren’t the same.  Coupled with a huge urban-rural divide, and marketing can be really tough.  The Chinese don’t speak as much English as Indians or Southeast Asians either.
  6. And the big one: opacity in government and legal procedures.  You don’t know who’s going to be in charge or what the new policies are going to be next year.  There’s no polling.  You don’t know if your company is going to be axed for breaking a law that didn’t exist last week.  Newspapers offer no reliable economic statistics.  Censoring the internet means businesses have to either spend extensive resources  on workarounds, or ignore banned social media sites entirely (Facebook, Twitter, WordPress, etc.).  I even encountered a situation where a local police station said city population stats were classified data.  Its tough to market when you don’t know anything about your audience.  I think the legal system is improving, but the political stability of most Western countries is a huge advantage.

If you can get over all the hurdles, working in China can be very lucrative.  GM sells more cars here than anywhere else.  Crest and Colgate have the toothpaste market almost locked up, and there are no Chinese cola brands to compete with the ubiquitous Pepsi and Coca-Cola.  CLSA published a list of the top brands in China, and there’s a lot of foreign companies who have claimed a slice of the pie.

And if you’re really interested in selling to China, I have more than a few friends who want to help with that.

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