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Ready for China?

By Mark Drake   

General Manufacturing China Exports management manufacturing trade World Bank

Balance the risk and reward.

“Why did you rob a bank?” goes the old joke. “Because that’s where the money is, Your Honour.” A bit like China: that’s where the market is. However, according to one US analysis it’s a country of “enormous business potential” but also enormous risk.

Already the second largest economy in the world and heading for number one, The Economist describes it as complicated and opaque, with a great number of low-cost local competitors, not to mention well-heeled multinationals.

So why bother? Here are some reasons.

Apart from sheer size, (1.3 billion people and a growing middle class), it has strong economic growth which, even after some decline, is still around 7.5%. China is Canada’s second most important export market with sales of more than $20 billion, and bilateral trade increased by nearly 60% between 2007-12. The Canada-China Business council website (www.ccbc.com) notes the extent of Canada’s corporate involvement, with around 200 organizations interested directly or indirectly in that market. One of them is Ontario manufacturer Hibar, which has been active in China since the late 1980s.

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Two other trends are encouraging: Prime Minister Stephen Harper visited recently with a large business delegation, helping to warm the frosty political Canada-China relationship. Now currency hubs are being set up in Toronto and Vancouver for settling transactions in renminbi, which will avoid transactions having to pass through US dollars.

China has been a member of the World Trade Organisation (WTO) since 2001, and in spite of more than 155,000 featherbedded state-owned enterprises (with advantageous financing, less requirement for profit), it’s working to improve the way business operates in terms of transparency and the elimination of corruption. This is one of President Xi’s main current objectives, but he has some way to go.

There are several free trade zones such as in Shenzen, (just over the Hong Kong border) and Shanghai. An investment protection agreement has been negotiated with Canada, but has yet to be ratified by the two countries. Massive infrastructure possibilities are coming up as the government tries to shift some activities from the coast into the less developed inland regions.

Opportunities for Canadians
Pollution is a major problem and that means there’s demand for technologies that will help. Many regional markets have their own specific priorities – a chance for locally focused entry-level approaches. Export Development Canada (EDC) sees opportunities for Canadian companies in the areas mentioned, and in electrical machinery, petroleum products, base metals and industrial supplies. China also plays an important role in global supply chains.

However, there are challenges!

The World Bank gives China a fair rating (90/189 – not very high but better than before) for ease of doing business as a whole. But when it comes to specifics, China is way down. Permits score 179 out of 189, power attachment 124 and protecting minority investors 132. Transparency International also rates it at only 100 out 174 in their 2014 corruption perception index, with a score of 36/100 (compare Denmark at 92 and Canada at 81). It seems that the concept of “conflict of interest” is not well understood in China, while embezzlement, kickbacks and institutional cronyism are widespread in the private and public sectors.

However, Hibar president and CEO Iain McColl, who visits China seven to 10 times a year, says things are getting better, and that it’s possible to refuse such requests (although some business may be lost). His company makes no such payments.

Other major challenges include decoding corporate structures (who exactly are the decision makers and the real power brokers?) and ensuring the best possible “connections” (guangxi). These are important in all developing markets, but especially so in China. Some officials still expect “favours” in return for permits granted, although gifts and lavish dinners are less common than before.

New technologies are very welcome but intellectual property protection is particularly weak (although improving), and the rules for the fair settling of contract disputes are opaque at best. The Economist says the cost of doing business can also be increased by “an unpredictable approval process in the face of restrictions and a massive multi-authority bureaucracy.”
Do not “go it alone.” Use all the help available, including: EDC, Foreign Affairs and International Trade, the Trade Commissioner Service (TCS), the Asia Pacific Foundation and the Canada-China Business Council. General information about essentials such as taxes and setting up a business is well covered by the international banks such as HSBC. Take special care when checking the legal and financial background of potential partners, acquisitions, senior managers, vendors and major suppliers. Pre-screening of all employees is also recommended.

And learn Mandarin, or be sure to have senior staff members fluent in it. Also visit regularly to build up contacts and trust.
The market has indeed both enormous risks and enormous business opportunities, but entry is probably less challenging these days than robbing a bank.

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

This article appears in the May/June 2015 issue of PLANT.

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