Myths about Doing Business in China
- Carson Block, China Primer
This article covers a number of widely-believed myths about doing business in China. Included in this article are the misconceptions on how cheap it is to do business in China, China’s cheap labor, and the realities of “guan xi” or relationships.
1. China is a cheap place in which to do business.
China is actually an EXPENSIVE place in many regards. Transaction costs, compliance costs, and taxes are substantially higher in China than in Western markets. Transaction costs are high because 1) rates for professional services are high, and 2) the difficulty of your service providers’ jobs ensures that they will need to spend a good deal of time on your job. Professional service rates in China are high because of the flood of foreign investment that floods into China, competing with your investment for good help. China’s inherent bureaucracy and opacity ensure that transactions will take much longer to close – for example, incorporating a company in China will often take two to three months at the least.
Compliance costs may be difficult to measure in pure financial terms, but they are significant – particularly in terms of lost productivity. China’s regulatory environment is usually opaque, with enforcement standards unclear, overlapping regulatory purviews, and unknown regulatory directives. Companies – both foreign and Chinese – must spend substantial amounts of time jumping through the hoops just to understand what the applicable regulations are.
China is a relatively high tax environment. Although some tax incentives are available, the new Enterprise Income Tax (EIT) law in 2007 provides for a 25% corporate tax rate. In general, fewer tax exclusions and deductions are available in China. Individual income taxes are high (up to 45%). Social benefits paid on employees’ salaries add significant amounts to payroll costs. Import duties are generally very high, making imported goods purchases expensive. Government taxes levied on various goods and services also have a strong impact.
2. China’s cheap labor means that huge cost savings are possible.
On a per unit bases (i.e., man-hours), human labor in China is much cheaper than in the West. However, that usually does not translate into substantial cost savings for manufacturing firms. Many manufacturers in China will still automate substantial portions of their manufacturing process, thus partially negating the benefit. Chinese worker productivity will not come close to matching that of Western factory workers – you will therefore need more workers to perform the same function that one Western factory worker would perform. The need for repeated quality control checks also means more workers. The difficulty of terminating local Chinese workers is also a potential expense that foreign businesses should consider.
Manufacturing in China saves money because China provides lower construction costs, lower utility costs, the ability to use cutting-edge manufacturing models, excellent infrastructure, and excellent availability of suppliers.
3. Great “guan xi” (relationships) will ensure success.
A good business plan will succeed without great guan xi, and a poor one will fail with the best of guan xi. Guan xi will get you information, which is important in China’s opaque environment. Guan xi will also speed approval processes.
Guan xi will not get you below market prices on assets – such prices can only be obtained if there’s some tangible benefit to the seller. Guan xi will not get officials to issue approvals that are not in compliance with the law.
When dealing with the government, it is important to understand that your business will frequently need to liaise with multiple government agencies. Every Chinese person seems to have a friend at some local agency – at best, this will often only be of marginal help to your business. It is also important to realize that government officials transfer functions, locations, and agencies. Your guan xi may be “here today, but gone tomorrow.” It can actually be detrimental to you if your contact’s replacement is one of their bureaucratic rivals. In that case, expect all benefits to end.
4. Developing guan xi requires heavy drinking.
A (or several) nights of heavy drinking, dining, and partying with Chinese businesspeople or government officials often makes a Western businessperson feel as though they are “in like Flynn.” The reality often turns out to be different.
It should not be surprising that Chinese are pragmatic – and they can get drunk with any number of people beside you. To have truly effective guan xi, they need to perceive tangible benefits to going out of their way to help you. For businesspeople, they need to clearly understand that you will financially benefit them (for more on this see our negotiations in China page). For government officials, they want you to help them advance their careers. You can really only do this by helping them accomplish an important goal (i.e., bring a large green energy project to their town); or, by introducing them to higher government officials and well-connected business people.
In other words, the drinking, toasting, and laughing are cosmetic. You need to show that you can provide tangible benefits in order to develop guan xi.
For a thorough discussion of the various myths, please see Doing Business in China for Dummies.
More Information on Doing Business in China
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