China A Land Of Opportunity

October 28, 2002
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GRAND RAPIDS — With China’s acceptance into the World Trade Organization last November, the once isolated communist country will come fully in line with the other trading nations over the next five to 10 years.

So how does a company go about deciding whether it should establish international business relationships with China?

“I think the first thing they have to ask themselves is how successful is their business here on our own shores?” said C. Peter Theut, chair of the Butzel Long Global Trade and Transactions Practice and partner in the Detroit-based law firm of Butzel Long. “They should make sure they’re doing reasonably well here first.”

Butzel Long was a sponsor of a recent seminar on doing business in Asia presented by Grand Valley State University’s Van Andel Global Trade Center. Theut was one of the event speakers.

If a company is having difficulty with its own management or its own bottom line, then going abroad will only compound its problems, he said.

The second thing a company has to ask itself is whether it is already multi-cultural minded.

“To do business in a place like China, you really do have to come to appreciate and respect that culture or you’re never going to really feel comfortable,” Theut said.

“The Chinese culture is a very complicated, fascinating culture that’s obviously been around thousands of years. In fact, 75 percent of the time that we’ve been on earth, China has been the lead civilization. That’s something to really think about.

“It’s a very powerful, ancient, strong culture and you have to be opened-minded enough to try to learn that culture or you’re not going to be able to deal with it.”

Another basic difference is China’s legal system. The long-established Western legal system is the background for the Western commercial system. China, however, didn’t institute a legal system until 1989, but it’s coming into play quickly, Theut said.

“Another thing, of course, is once you go over there you have to recognize that it takes time in China, depending on what sort of business you’re in. You really have to be patient. You’re not going to make a whole lot of money overnight.”

What a company has to do is find a niche product — and then be patient, he said.

Companies can enter China’s market either through a joint venture (JV) with a Chinese partner or by establishing a Wholly Owned Foreign Enterprise (WOFE).

In China, a foreign company with a WOFE owns 100 percent of the enterprise. 

Last year, about 61 percent of the foreign businesses going into China used a WOFE, Theut noted.

But five years ago about 80 percent of foreign companies were using JVs, he said. 

“The reason JVs have fallen into less use is because people were just unable to make profits with them because you have to have a Chinese partner, and that can be difficult if you’re here and the partner is there. So more and more companies are using WOFEs.”

He believes if a WOFE is set up properly, it has a lot of advantages over a JV, the greatest of which is retaining control of the company. 

“First of all, it-s 100 percent owned by the U.S. company. You can protect your technology much better when you’re controlling the company,” Theut explained.

“The other thing is, with a WOFE you can expatriate your money out to the United States easier than you sometimes can with a JV, and also you don’t share the profits with a Chinese partner.”

Anytime a company gets into a JV, there are “some mountains to climb” in terms of how the two will share profits and expenses, he pointed out.

“Since a WOFE is wholly owned, it’s just you and your management team that would be running it, with Chinese labor.”

Establishing an international business relationship with China is not for everybody. A company should have some international experience before delving in to China’s market.

For a company with no experience doing business oversees, a country like Mexico would be easier to deal with, Theut said.

Companies in the automotive sector are going over to China in droves, principally because the original equipment manufacturers (OEMs) like GM and Ford are over there and are insisting that their Tier 1 and Tier 2 suppliers come to China, he observed. 

That’s one category.

The other category includes the non-component companies that manufacture products like toys.

A company that manufactures things like cups, saucers, toys, swings or pedal cars, for instance, could manufacture those types of products in China probably cheaper than they could here.

What does it take to be successful in China’s market?

“Certainly if you’re an automotive company that has strong ties with an OEM that’s already doing business in China, and they want you to come to China, that’s one way that reasonably insures you will have success.”

In the non-automotive area, the companies successful in China are those that tap in to niche markets.

For example, a company may manufacture something unusual in the United States and have a decent market for it, but profit margins aren’t great because of labor costs.

“You obviously can go over there with that niche market, make it cheaply in China and export it back to the United States,” Theut said.

“The thing that’s difficult to do is for you to make that same unique product and try to market it in China. Even though China’s market is huge, it’s tough to get access to it. The competition from local Chinese companies is brutal.”

However, there are large companies that have been extremely successful in penetrating that market, such as Motorola, Amway (Alticor Inc.), and the Big Three automakers, among others.

“They are big enough to have a strategy; they have capital enough to market and to really go after that Chinese market. Smaller companies would have more difficulty accessing that.”

Is this a good time to be entering China’s market?

Theut thinks it is. It’s a better time now than it was a few years ago because China has acceded to the WTO, and that’s changing the country’s infrastructure tremendously, he said.

The country is establishing all kinds of new laws to protect intellectual property, to protect contracts and to resolve disputes.

“It will take five or 10 years to perfect those, but with the kind of market you have over there, now is the time, in my opinion, to go in and get situated so when that market becomes accessible, you’ll be running well.”

Theut said major cities like Beijing, Shanghai and Guangzhou will comply most quickly with the trade rules of the WTO.

But China is so vast that the problem will be expanding outside of those major cities to areas where warlords and regionalism control activity.

“I think if you go to the major cities, you’re probably going to see compliance quickly, but if you go to the outback areas, it may take five to 10 years.”

Theut advises that companies establishing an operation in China have someone “on the ground” that they really trust — whether a Western or a Chinese manager — to oversee the enterprise on a weekly basis at minimum.

Overall, he recommends companies not to jump too fast into China’s market.

“Take a look at it. Go at it cautiously. One ‘must’ is that you have to go there and spend some time on the ground. If you don’t do that, you can’t possibly expect to be successful in China.

“If you go there and take a look around two or three times, the likelihood is that you will find it an excellent land of opportunity.”

Within the next three months, Butzel Long will open offices in Shanghai, Beijing and Chengdu.

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