Doing Business in China Part 2
In this second posting of doing business in China I review:
• Cultural Factors
• Legal Factors
• Financial Factors
Another aspect of doing business in China is how to develop a relationship or guanxi with the supplier. Initially the relationship that will form between the foreign firm and the Chinese supplier will be that of strangers working together (Luo, 2010). There will be no strong ties at commencement. The foreign firm needs to understand this and start developing some guanxi at the initial contact. The process could include:
• Site visit to the factory and tendering gifts to the senior Executives and staff dealt with on an ongoing basis (Duo, 2005, p.82). This is known as renqing (Luo, 1997, p.47)
• The next level will come after a longer term relationship which has been mutually beneficial to both companies (Duo, 2005, p.82). This trust is formed out of the ongoing relationship and regular visits to the factory.
Via frequent trips management will develop guanxi with the Chinese management and this can develop into one of the five relationships in guanxi; friend – friend (Luo, 2010). This can then develop from strangers into weak ties and finally familiar ties where trust and favour giving are commonplace (Luo, 2010). It also assists in the ‘gray’ areas of doing business in China, such as legal and governmental hurdles, to get the optimal position of maximising any return (Zhang, 2010, p.29)
The key outcome for the foreign firm is that over time trust and guanxi must be developed to ensure that it gains priority in production and a high quality product for each shipment.
The Chinese commercial legal system is generally underdeveloped but is improving since WTO entry (Lapres & Zhang, 2008, p.10). This is a good result considering that there was no commercial law in China until 1978 (Zhengping, 2010).
According to Clarke (2003, pp. 108-109) there are three issues preventing China from attaining WTO compliance. They are:
• China has a poor legal system
• The authority levels of judges are limited and can be overridden by the Government
• A distinct lack of legal-trained judges
This means that there is a risk that if the agreement fails with the Chinese supplier, that the foreign firm may find it very difficult to pursue the supplier legally.
However since 2003 there has been some progress. In 2008 Lapres & Zhang (p.11) noted that there have been some major accomplishments in legal reform and that the Government is supportive of improved governance, an independent judiciary and effort to reduce corruption. Further, as civil law becomes more prominent in China the Government has plans to introduce laws on commercial secrets and Intellectual Property (IP) in the future (Zhengping, 2010), further mitigating risk for foreign firms.
In 2008 the National People’s Congress passed the Environmental Protection law and upgraded the National Bureau of Environmental Protection to a Ministry of Environmental Protection (Zhang, 2010, p.200-1). This indicates that the government is now focused on sustainable economic development and environmental protection. The relevance for foreign firms is that exporters can be barred for 3 years if they do not adopt the new standards (Zhang, 2010, p.200). There is a need to ensure that Chinese suppliers are compliant in any site visit.
A final factor is the recently introduced Labour Contract Law which protects staff from unfair dismissal and delivers a minimum wage (Jiang, 2010; Zhang, 2010, pp. 36-37). This is another risk that could affect suppliers in the future if they don’t manage their workforce legally. However the upside for foreign firms is if local suppliers do support the new laws the result should be a more motivated workforce and therefore less problems in quality or non-production.
While the legal landscape is changing for the better and reducing risks for exporters Professor Lu Zhengping advises that anyone doing business in China should seek a good lawyer. All foreign firms should heed this advice.
At the commencement of the relationship it is imperative that the foreign firm protects their investment by not parting with any money until the goods are delivered and checked. The best way to handle this transaction is through a letter of credit or bill of lading (Hill, 2009, pp. 548-550). Credible International Banks such HSBC, NAB or the People’s Bank of China could be used as they are trusted by both parties. This could form a part of the contract.
Over time, even if guanxi is developed, it is important to ensure that a contract remains in place and that the finances are protected and released only at satisfactory delivery of the goods to the foreign host country port.
Another financial factor to consider for exports is the fluctuating exchange rate. At present $A1 buys RMB6.34 (www.xe.com, 22/4/10). Since 2005 the RMB has been pegged to a basket of currencies and is able to fluctuate daily in a range on 0.3% (USST, 2010). However in 3 years since the float the RMB has only appreciated 18% (www.safe.gov.cn, 2010; USST, 2010). Therefore the Government does not believe that the RMB is undervalued and is resisting US pressure to float the RMB. However, it is believed that either the Government will be required to increase interest rates or let the RMB appreciate (USST, 2010). This could have an adverse effect on any export as it would increase the cost of the landed good.
As previously discussed the GFC has adversely affected the manufacturers of this region and this is putting pressure on competitive advantage, profits and downward pressure on wages (Zhang, 2010, p.35). This is leading to social unrest and could adversely affect any suppliers operation in Shenzhen in the future.
In the final blog on doing business in China I will cover the factors of:
*Innovation & Value-adding Preferences
* Technology Utilisation & Management Practices
And some recommendations for firms considering doing business in China
I look forward to your comments.