With its continent-sized geography and complex bureaucracy, China is a challenge even for repeat visitors. Rosario Di Maggio, Director of Business Development at Vistra Shanghai, a business consulting firm that specializes in Chinese markets, has lived and worked in several major Chinese cities for the past decade. In a conversation with Exportwise, Di Maggio shares his first-hand knowledge of a vast and complex country that few outsiders truly understand.
What are the biggest challenges of doing business in China?
From a Canadian exporter prospective, the more a company is willing to commit with a presence – including spending time understanding the market, competing with local companies, creating distribution channels and building a local team – the less challenging it will be.
Next, you need to figure out not only how you will deliver goods, but also how to get your money out of China. Do you invoice in renminbi (RMB)? Do you open an RMB bank account and remit the money to Canada? The decisions you make on these matters will determine whether or not you need to set up a company in China, which in turn would have tax implications.
Then there’s finding a Chinese partner to act as an agent which brings a completely different set of challenges. Companies need to make sure the Chinese partner puts the right amount of effort into the project. For example, one company we work with used to sell through a partner but realized the partner was serving other competing brands and was selling only in Shanghai. After a couple of years they realized business was not bad, but they expected more. So they created a Chinese company and developed their own distribution with a staff of four people going all over China and trying to open new markets themselves.
What is the most common business model adopted by Canadian businesses working in China? Are there better alternatives?
I don’t think there is a common business model. Previous to 2008, some business models were led by preferential and/or local tax policies, but these are not available anymore. Today’s business models, at least for foreign investors, are driven by the kind of operations needed on the ground and by the type of structure allowed. China is still a bureaucratic and regulated country that does not always allow flexibility.
With regard to small and medium sized companies (SMEs), we see a trend. In the past Canadian companies would look for agents and distributors. Today, many are opting for a small presence that enables activities such as market research, promotion, competitor analysis, and building new distribution channels.
At the end of the day, the business model really depends on what the Canadian exporter needs to do in China. If there is a Chinese agent importing and selling on the company’s behalf, then the Canadian side will not need much. Where promotion, market research and co-ordination are the operations required on the ground, then a representative office would be enough. But if the Canadian exporter needs to invoice locally and receive payments in RMB, take care of the logistics, repackage or assemble locally, and provide after-sales support, training, etc., then the choice will be for a wholly foreign-owned enterprise or joint venture.
What resources are available to help Canadian companies cost-effectively set up a presence in China?
Canada has resources on the ground – including EDC, the Trade Commissioner Services, the Canadian Chamber of Commerce and the consulates – which provide information and can direct your business to organizations. Then you have private organizations such as banks, law firms and business consultants. Bank of Montreal is the Canadian bank with the largest presence in China. Finally, there is a myriad of local service providers.
What should Canadian exporters be doing to minimize their risks in the face of China’s economic problems?
We hear about China’s economy slowing down every day in the news, and I am sure that something is happening at the highest levels as well as in sectors such as raw material, oil and gas, and heavy manufacturing. This might, at a certain point, affect what I would call here the “real economy.”
However, from our offices in Shanghai, Beijing, Guangzhou and Shenzhen, where we assist small and medium foreign investments entering the market or striving to do business in this country, we don’t see much difference compared to two, three, five and 10 years ago, except for the type of business coming. Before there was a majority of foreign owned business coming to China to produce cheap products, or to buy those cheap products which were produced by Chinese or Taiwanese manufacturers, or to be part of their supply chain by selling them raw material or high-end components, services, technology, etc. Today, the majority of the new arrivals are here to sell or to facilitate the sales of products and services into China and to Chinese consumers.
What new areas of emerging opportunity do you see for Canadian exporters?
We see a lot of food and beverage, but also healthcare and medical devices, information and communication technology, education, and all sorts of services and consumer goods-related business looking at China and how to sell to the Chinese market. There is also an interesting surge of Internet-based business and a wave of ecommerce businesses from overseas that are massively trying to enter China at the moment. For several different reasons, China offers many opportunities with ecommerce and some foreign investments are already looking into taking advantage of that sector.
What is your top advice for Canadian exporters who want to do business in China?
I have five pieces of advice for SMEs who want to do business in China:
- Send your best people to evaluate and decide whether to establish a presence. This is a difficult market where opportunities and challenges need to be evaluated properly and by management at the highest level of the company.
- If the decision is to go, then put your best available people on the ground as they will need access to headquarters’ decision makers. They will need a fair amount of decision-making power themselves.
- Do not underestimate the amount of resources required to start up a business in China. Renting office space, hiring and retaining local talent, and accessing solid and useful information might prove to be very expensive.
- Take the time to choose proper external advisors. As regulation, markets and opportunities are evolving fast, you will need support from external advisors to guide you through part of the process. However, the service provider’s market in China is very opaque and fragmented, from cheap local consultants to international top law firms, business consultants and Big Four accountants.
- Take the time to think it over, but do not postpone forever as China’s market changes fast and opportunities are missed. While China has been able to create this shining allure of “Eldorado,” the reality is far from ideal and the business environment is not for every product and service. Do your homework and then act fast.