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Investing in China – is it worth it?
As foreign direct investment (FDI) continues to pour into China, more and more multinational retailers see the mainland market as the new strategic challenge — and a tremendous investment opportunity.
Not only has China seen outstanding GDP growth over the past decade (reaching 9% in 2003), but social and cultural changes are also revolutionising both the consumer and business-to-business markets. At the same time, China continues to open up previously-restricted markets, following its accession to the World Trade Organisation in 2001.
Foreign investors are now permitted to set up wholly-owned enterprises in retail, wholesale, franchise and commission-agency businesses. For many companies, China has become a major market — and for some, a major profit centre.
Yet, doing business in China remains a considerable challenge. Here we try to outline some of the challenges and the tips for success:
China is a patchwork of markets, with huge disparities in wealth and culture between cities and rural areas — as well as north, south, east and west. Investors should seek to focus on and research a single market rather than attempting to cover the entire country from the outset.
Items which are popular in the West may not always succeed in China. Investors must conduct careful research to ascertain whether or not their product suits local customer tastes and habits. For example, Chinese consumers prefer to buy pork warm, as this gives the impression it is fresh from the slaughter house — though from a hygiene perspective, prompt cooling is essential.
Navigating China’s opaque legal and tax systems is extremely troublesome. Local tax authorities have the right to interpret laws, even retrospectively, and this can affect the final tax burden. Establishing sound relationships with the local authorities is key. Shop managers can spend up to a third of their time dealing with various district and city department officials who come to visit.
The massive growth in demand for local talent has placed a huge strain on human resources in major Chinese cities. Investors frequently find that it is difficult to find the right people — and even more difficult to retain them.
With a limited talent pool, a significant challenge for employers is to meet the growing expectations of talented local staff.
Investors who succeed in this task find that their staff retention improves if they offer benefits (such as pension and healthcare) beyond just the basic salary. Although salaries for the management are rising fast, labour costs are still low in international terms, thereby enabling businesses to have a relatively high headcount.
Furthermore, far greater status is conferred on some jobs — such as those in the fast-food sector — in China than in the West. Nearly two-thirds of restaurant managers at fast-food chain operations are college graduates, many of whom have excellent promotion prospects because of the industry’s rapid growth.
Working with banks
For retailers working across a wide geography, the banking system may also present unique challenges. The key account approach adopted by big banks in the West does not work in China, where local branches tend to act independently. Efficient cash management is therefore more of a challenge for retailers in China.
Repatriation of profits
Approvals are needed to obtain and remit FOREX dividends overseas. Having the right business structure — and with all the right approvals — is a must to ensure you can repatriate profits from China, and it is important for investors to get the structure right from day one to ensure problems do not crop up later.