03 May 2018

China business – what really matters?

This article was written by Monique Carroll

China is the world’s second largest economy and a key trading partner for most countries around the world. However, companies that do business in China, or with Chinese enterprises are not always having a good story to tell. There are observable trends around what works. So then what really matters for the success of China business?

At the macro level, governments are playing an important role in foreign relations and opening up formal barriers to trade by, for example, free trade agreements. However, this is only one piece of the puzzle. The success of China business most commonly relies upon businesses identifying and managing the challenges the business will face at an operational level. As is not surprising, when these challenges are not identified and managed at all, problems arise. Two particular challenges are commonly overlooked: the complexity of the regulatory environment and obtaining performance of agreements.

China is now a highly regulated environment and because it is developing and growing still at an impressive rate, the regulatory environment changes at a similar pace. The importance of understanding the current regulation of an industry and how this might change in the short to medium term is therefore critical.  In recent years companies have been seen to invest in China to subsequently discover that a regulation exists which requires a re-structuring of the investment to make it legal or profitable. Or, there may be foreshadowed regulatory changes that will impact the profitability of operating. In 2017 these included stricter pollution controls and restrictions implemented in respect of the importation of infant formula. Companies can successfully navigate this regulatory environment by identifying the likely issues from the outset and then structuring their investment and business plan accordingly.

Obtaining performance of agreements becomes a challenge where insufficient attention is paid to the negotiation and agreement of the contract and planning for how a dispute will be managed. This can occur due to a lack of confidence as to how to negotiate the key points whilst building the relationship or guanxi. Sometimes it occurs because the motivation behind or reward for securing the deal is short term and doesn’t factor in the actual performance on the agreement.  In either case, the usual result is that the ability to have any leverage in the relationship is lost at the outset together with the ability to secure performance of the contract.  This challenge can be navigated, however, by identifying the key ‘lynch-pins’ for contractual performance and developing the contract negotiation and relationship building around these.

Australian companies have always been geographically well placed to capitalise on China business. Whilst doing so was once a simple economic equation based on growth, cost and population, the business strategy now needs the complexity to match the growing sophistication of the Chinese market and industry.

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