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China: opportunity or overwhelming challenge?


April 25, 2012
by Mark Drake

Porcupines, the old joke goes, make love carefully. That also goes for international traders thinking about tackling the Chinese market.

As usual Foreign Affairs and International Trade Canada (DFAIT) sums it up well: “China is a country of phenomenal potential with its 1.3 billion population, rising middle class, exceptionally positive growth rates and relatively low inflation. At the same time it’s also a vast and complex country where conducting business can be difficult. Obtaining reliable information is a challenge, as is forging the right connections. The financial and taxation aspects of doing business there are intricate [and] key challenges include import barriers, inadequate intellectual property rights enforcement, subsidy practices and low transparency in contracting processes.”

One might add that there is generally an inconsistent application of regulations, a mind-boggling bureaucracy and corruption at most levels of government. Western leaders also fear (per The Economist) increased nationalism, rapidly growing military capability and sense of victim hood – not perhaps the ideal background for Canadians to pursue trade and investment.

Yet China is already the second largest economy and the IMF thinks it will be the largest – on a purchasing power parity basis – by 2016, thus extremely important for Canada. China is our biggest export destination in Asia, and now second overall, nudging out the UK and Japan, with merchandise exports of $13 billion.

Priority trade

Export Development Canada’s web site (www.edc.ca) has a good up-to-date overview of the Chinese economy and some excellent links to related sites. DFAIT has an embassy in Beijing, and nine trade supporting offices throughout the country.

Although Canadian exports are primarily resource-based (wood pulp, canola seed, coal and nickel), the department has identified seven priority areas of significant potential: aerospace, agriculture, automotive, electric power generation, ICT, metals and minerals (including oil and gas) and rail urban transit.
The local Trade Commissioner Service offers help in assessing market potential, finding qualified contacts and resolving business problems. The Chinese value personal relationships. They take time to develop, but are vital.

A change of leadership is scheduled to take place at the 18th Chinese Communist Party Congress later this year, when the 12th five-year plan will be introduced stressing socially and environmentally sustainable growth – around 9% to 10% in the past few years, but is likely to fall slightly.

Although the state-owned enterprises were scaled back some years ago, those that remain have increased in size and dominate the oil, power generation, automobile, railway, aviation and financial sectors. They’re potential customers but often harder to deal with than firms in the private sector. The World Bank rates China #79 out of 183 in terms of ease of doing business, #151 for starting a business and #179 for obtaining construction permits. Transparency International’s Corruption Perception Index places China at 3.6 (where 10 is least corrupt). That’s better than Russia at 2.4 but way behind Taiwan at 6.1 and Singapore at 9.2. By comparison Canada is 8.7.

Recommendations for export success include having a niche or specialized product or service, and finding a reliable and trustworthy local partner. Douglas Woollings, CEO of Interfast, recently offered some good advice about dealing in China during a chat with the National Post. He stressed the importance of speaking with other companies who already work in China, making sure the product or service is “best in class” or at least second, learning the culture of the country, being a good listener and not too aggressive, and above all not trying to do it everything overnight.

I would add that having a good policy in place to protect intellectual property is essential to prevent (or at least limit) patent or trademark infringement and the manufacture of imitation products (knock-offs). It’s also smart to have good local legal counsel.

There is no shortage of information around. The Canada-China Business Council (www.ccbc.ca ) has more than 200 members who either do business in China or have an active interest in the country. The Asia Pacific Foundation based in Vancouver (www.asiapacific.ca) has a colourful and interesting 19-page report on its site based on a 2010 survey of 95 companies active in China. In summary one respondent says of doing business there: “Nothing is easy, anything is possible.” HSBC has published a 50-page report on “Doing Business in China” (2010) dealing mostly with actually setting up a business, taxation, employment law and conditions of trade (www.hsbc.com).

No doubt China offers magnificent opportunities, but as with the porcupine, getting close requires patience and care.

Mark Drake is former president of Electrovert Ltd. and the Canadian Exporters’ Association.

Comments? E-mail jterrett@plant.ca.

This article appears in the April 2012 edition of PLANT.