China has a fascinating history. Always a dominant regional power, the ‘Middle Kingdom’ has been the world’s largest economy for 18 of the last 20 centuries. China has also proven quite capable of turning her back on the outside world. This happened in the Ming Dynasty, leading to hundreds of years of isolation and Napoleon’s famous comment ‘Let China sleep……… when she awakes the world will tremble’ and more recently during the Cultural Revolution. 1978 brought about the winds of change. The ‘Opening Up’ policy initiated by Deng Xiaoping began to open China to the outside world, this further accelerated after 1989, directly leading to the China that dominates economic news today.
The Awoken Giant
China is now awake. Should we tremble? 1.3 billion people. Annual growth consistent at 10-11%. Tens of millions of people migrating to work in developing areas. A middle class of over 150 million people, predicted to grow to 290 million by 2011. Half a billion mobile telephone and computer users, with market growth in these sectors varying between 10% and 50%. Often the figures relating to China are staggering.
Any observant visitor to China will see that the spectacular growth is not without its problems and often leads to great contrast. The 21st century shopping mall is less than a block away from the truck repair workshop – which is situated outside on the pavement! Seeing a sunset is rare, as the sun sets into a fog of pollution. Criticism of China’s apparently slow response to the problems of growth is easy, but one experience brought home the meaning of change to me more than anything else. At the banquet to celebrate the signing of a new contract, our table was groaning with delicacies. My Chinese colleagues were chatting and the conversation turned thoughtful. Someone asked me if I knew what they were talking about and then explained; ‘You know, Vince, we are eating very well this evening. We are actually talking about only a few years ago – when we didn’t have enough food and were hungry. How different it is now.’ I suddenly realised that my middle-class business colleagues and partners had experienced hunger – which was, frankly, a shock. When I think about the Pandora’s Box that was opened in China in 1978, and all the effects this has had, I remember that evening and ask myself ‘How could it be otherwise?’
Today, China is changing again. In December 2001 she joined the World Trade Organisation, committing to open internal markets and protect intellectual property. Steps to change this are being taken, though sometimes this is happening at a pace that is frustrating and it is often complicated by local interpretation of policy. Within the last year, legislation has stripped away the tax advantages enjoyed by foreign investments, replacing them with incentives for ‘hi-tech’ and strategic ‘approved’ initiatives. New employment laws will make it very difficult for an investor to hire and fire labour. Exports no longer enjoy a blanket VAT rebate, instead this is geared to the ‘added value’ contribution to the Chinese economy and environmental impact. At national and local level, the impact of the unbridled growth on the environment is being taken seriously and manufacturers who want to produce cheaply, whatever the environmental cost, are increasingly unwelcome. Business persons entering the Chinese market today are confronted by a rapidly changing economy and legislative environment. They will also meet a heady concoction – traditional Chinese business culture, with its emphasis on relationship building and ceremony, is changing as the more prescribed business practices of the West are adopted.
To underpin the growth, unlike her rival India, China has invested heavily in infrastructure. Everywhere in China there are new road, rail and air connections. Cities and towns are surrounded by Development Parks or Zones, often these are cities in their own right, with housing, shops and universities. Your hotel will have high speed Internet and your mobile phone will work throughout China – everyone in China seems to have a mobile phone and spend most of their time using it! Talk to the authorities in any region and they will tell you of a wide range of opportunities, especially for hi-tech, knowledge and service businesses – but what is this market really like and are the opportunities real?
IT and Related Markets
Various sources give different sizes for the Chinese IT industry but all agree on annual growth of over 10%. UK Trade & Investment, who collect data through teams in the British Consulates, value the market at approaching $500 billion. Dominated by hardware (at 70% of the market), the software and services sectors are relatively small at 13% and 17% respectively. Regular computer users in China represent around 40% of the population, compared to 76% in the UK, but consider the much larger population and the relative newness of urbanisation in China. Much of the hardware market is export-led, from components to complete computers. Turn over most Japanese or ‘Western’ branded laptops and the ubiquitous words ‘Made in China’ will appear. This is likely to change as Chinese companies realise the benefits to margins of building brand awareness – or buying it – as China leverages over $1 trillion foreign exchange earned through exports. An early example of this is the Chinese company Lenovo buying IBM’s personal computer business in 2004. China represents a valuable, but increasingly expensive, source of computer hardware. To UK companies with ideas and ambition China also represents growing opportunities for cooperation and development.
Software in China is an industry approaching $70 billion. Like hardware, the market is relatively open for foreign investment, with opportunities for partnerships (JVs) and wholly foreign owned businesses (WFOEs) alike. Indigenous Chinese companies dominate the market, Neusoft being amongst the best known as one of the major outsourcing destinations. Given the level of local activity, selling into the market is likely to succeed with high-end, bespoke products. One route to enter the market may be to follow and service foreign investment in another sector – for example, a manufacturer who wants to integrate local and global IT systems and enable operations in their Chinese factory to be viewed from overseas. Developing software in China for other markets is popular and it is worth considering that English, China’s second ‘official’ language (after Mandarin), is increasingly common.
With telecommunications, China has benefited from the leapfrogging effect of late development of the local market. Mobile connections outnumber landlines, with the April 2007 headcount being 495 and 372 Million connections respectively. The market is dominated by big players such as China Telecom and China Mobile. Unlike IT hardware and software, this market is not fully open to foreign investment and it is restricted under the WTO agreement to a maximum of 49% for telecommunications and 50% for the ‘value added’ SMS and data sector. There is thus limited external participation, with only a few companies like Vodaphone and Telefonica involved.
With 50% annual growth and over 160 million Internet users, China is second only to the USA in Internet access. The Chinese surfer is subject to some restrictions – searches for ‘Tiananmen Square 1989’ will draw a blank and access to Web sites like the BBC is blocked. E-commerce is growing, but is restricted by issues such as foreign exchange control and a more limited use of credit cards – a good example is that it costs $35 to transfer funds from a Paypal account into a Chinese bank account. Currently, much of the payment for Internet purchases is actually offline and 25% of purchases are paid for on receipt.
Part of the 2001 WTO agreement was to underwrite the protection of intellectual property and China has a sophisticated structure of patent and copyright laws. Infringements can be prosecuted via the local administration authorities (many cities have bureaux for the protection of IPR) or through legal channels. However, an old saying in China ‘The Emperor is a long way away’ is still true today and the protection of IPR is often an issue. A good example is demonstrated by the findings of a recent Chinese Ministry of Information Industries survey. This found that 27% of responders used ‘authorised’ software. The implication is obvious – what did the other 73% use? What about the non-responders? Before entering the Chinese market it is very important to consider both practical and legal methodologies to retain intellectual property.
Summary
The Chinese IT and telecommunications markets are rapidly evolving, especially as China moves towards a more developed economy and higher levels of disposable income. Not all of the market is open, and there are issues, for example the sheer size of the market and the wide distribution of wealth, that cause difficulties. As the market develops, it is becoming increasingly discerning and there are opportunities for British companies in every sector. For a British company to succeed in the Chinese market, it is critical that it first identifies that it really has something to offer – a ‘foreign’ badge is not an automatic passport to success. It is then important that the company recognises the size and complexity of the market and that China’s history and business culture dictate some unique ‘rules of the game’. While these factors must be recognised, it is important that they are not allowed to dominate and good business practice and controls are not seen as irrelevant and abandoned.
The UK provides a substantial support network for companies wishing to enter the Chinese market through organisations like the China-Britain Business Council and UK Trade and Investment. There are many ways to understand more about the Chinese market – for example the frequent seminars held throughout the UK – and it is simple to arrange an initial consultation. A market visit is an excellent way to meet potential customers, these occur on a regular basis. When drawing up contracts in China, it is important to do two things in parallel: yes, you must respect Chinese custom and develop the essential relationships, but you must also back this up with good business practice and take appropriate, informed legal and financial advice.
Vince Cunningham is a Business adviser with the China-Britain Business Council. With over 50 years experience, the China-Britain Business Council is the UK’s leading support organisation for trade and investment support in China.
Vince can be contacted at vince.cunningham@cbbc.org and the China-Britain Business Council website, www.cbbc.org, is mine of information about doing business in China.
