Why is this important?

China offers huge export opportunities for Australian businesses across a diverse range of sectors. However, given the alien nature of local regulations and the business culture in China, it is critical to be proactive and fully prepared before you take the strategic move to export to China.

China is now Australia’s biggest trading partner with export opportunities continuing to expand. Currently around 4,000 Australian companies are trading with China – a country which is a massive buyer of commodities such as iron ore, wool, cotton, copper, lead and manganese ores.

Exporting to China is an important opportunity for your business as there are huge and diverse untapped trade opportunities for Australian products, services and ‘know how’. You will find export opportunities in:

• construction
• engineering
• environmental and town planning services
• advanced medical and health services and technologies
• telecommunications
• lifestyle and leisure
• food and beverages
• medical and pharmaceutical
• luxury consumer products, architecture
• design
• logistics
• legal, financial and business administration
• tourism
• education and training 

What to do

The following tips can help you to successfully export to China:

1. Develop a strategic approach to export to China

Remember to start small. China is a large and complex market so it is recommended that you initially establish and focus yourself in one province, even one city. Once you understand the regulations and practices in that region you can begin to expand one region at a time.

2. Understand your export options

You must thoroughly consider the different market entry options before engaging with China. Remember, you have several options for your location presence in China. Your presence may take the form of:

• direct exportation
• a representative office
• local representation as offered by a third party (eg a local distributor/agent/secretary/representation service company)
• a co-operative joint venture (CJV)
• an equity joint venture (EJV)
• a wholly owned foreign enterprise (WOFE)

Your entry model depends on your business strategy, resources, industry practice and legislation and the market situation. Additionally, you must understand what business structures are allowed in China.

3. Understand China’s business culture

• Be prepared for a very different business environment – China’s business relationships are generally established for the long term. Negotiations can seem slow at the beginning, as your potential partner gets to know you in order to determine if you both can commit longterm.
• Visit China and meet your potential partners if you can.  This will help you develop comfortable business relationships.
• Respect ceremonies such as giving gifts and hosting meals. These ceremonies, though they may appear casual, are traditionally very important and still highly respected by the Chinese.
• Appreciate that in China, life is business and business is life. Chinese business people work long hours and many social activities revolve around business networking. When establishing a relationship with a Chinese company it will not be unusual for them to request a meeting in the evening or on a weekend.
• Language will be a barrier to establishing relationships. English is not widely spoken and you need to be ready for the challenge. However, in contrast to popular opinion, Chinese people are not easy to offend. If you make an attempt to learn the language and stumble, they will appreciate your efforts more often than become offended. A good way to minimise the effects of cultural differences is to employ staff or an advisor with Chinese experience or background.

4. Understand legislation and other set-up rules

If you are setting up a business in China, you must be aware of the following factors:

• Understand legislation, laws, rules and regulations governing your chosen industry

Each Chinese industry has very specific laws, regulations and policies as well as government restrictions and incentives, some which can restrict the activities of your business. For instance, though the market is freeing up, wholly-owned foreign enterprises (WOFEs) are still not permitted in all industries.

Ensure:

• your business case meets all local requirements from the outset – this thorough preparation will streamline the application and approval process
• you explore the restrictions on investing parties
• you understand what business structures are allowed, especially who is permitted to be your business’ legal representative
• you understand your potential tax liabilities and explore the legitimate mechanisms to reduce tax liabilities
• you are aware of government incentives, including tax holidays and special treaties offered by different regions.

Further, it is very important to define your business category and scope as China National Development and Reform Commission may prohibit, restrict, permit or encourage your business set-up, based on your business categorisation and scope. By carefully defining your business scope and category, you ensure you do not breach legislation or restrict the options available to you.

• Confirm the minimum registered capital requirement
  
  

Confirm the minimum registered capital for your China operation, as the Chinese government requires certain minimum registered capital for various types of businesses. However, be aware that local industry and commerce administrations may still decide on your minimum registered capital based on their judgment of your business scope and operation scale.

You need to confirm with local government agencies the minimum registered capital through local contacts before taking any other actions in case they require an amount far above your financial resources available for the China operation.

• Fully understand employers’ responsibilities and liabilities in China
  
  

If you are employing local Chinese, be aware that China’s labour contract law, in effect from 1 January 2008, specifies issues relating to the employment contract, redundancy, etc. Without preliminary knowledge of this law, you could end up spending a huge amount of time and money terminating the contracts of any under-performing employees. You also need to be aware of mandatory employee welfare and benefits so as to include such costs in your budget.

• Develop a comprehensive local employee management system

Recruiting the right staff in a foreign country is a hard job. It is even harder to effectively manage the local staff in a foreign country. A comprehensive employee management system will encourage the engagement and commitment of local staff and avoid potential risks. You could include reporting and communication policies, staff training, performance assessment, remuneration, career management and an employee management manual in the system.

• Form a relationship with the regional government

By building a strategic relationship with the regional government, you will be able to access excellent advice on local policies and regulations – this link may also open access to other business networks.

• Integrate commercial clauses in the Articles of Association to maximise profit repatriation into Australia

You may have commercial arrangements between your headquarters in Australia and your subsidiary in China in order to guarantee maximum profit repatriation. However, some arrangements must be included as part of the Articles of Association to be valid. The Articles of Association is to be submitted to local government agencies for approval and filing during business licence registration. Hence, you must incorporate necessary clauses in the Articles of Association in the first instance.

5. Don’t neglect due diligence

Conducting research into potential Chinese partners can be difficult, but this should not prevent it from happening. Though language barriers can impede your ability to find quality advice, you should not rely on information sourced from the internet alone.

Understand that your partners may not be what they claim to be. China’s business culture customarily appears outwardly affluent. Hence your Chinese business partners may look financially viable and well connected but, as a matter of fact, live on bank loans and personal debts.

6. Seek help

China is a large and complex country with varying laws and regulations depending on the industry category and region and this patchwork of information can be quite confusing for the uninitiated. Further, exporting to China is a project that requires financial and time commitments, business management knowledge and China expertise.

It is recommended that you consider acquiring a competent agent to manage the process which may be a cost and time effective way to avoid potential pitfalls.

See how it’s done

West Pharmaceutical Services –

Tapping into China’s growing healthcare industry

China’s enormous population has a relatively high consumption of pharmaceuticals per capita. While the pharmaceutical market is currently heavily price-controlled by the government, it is moving toward a free economy and the government is allowing foreign investment. As a result, China is becoming a very attractive destination for foreign companies involved in the pharmaceutical industry.

West Pharmaceutical Services manufactures primary packaging for pharmaceutical products, primarily injectable medicines. The company has factories throughout the world, and its established reputation for uncompromising quality has secured a market share above 60 percent in regulated markets globally. However, the company did not have a significant presence in unregulated markets such as China.

“China was a new challenge for us,” says Jeremy Layman, Vice-President for Sales and Marketing, Asia/Pacific. “We predominantly supply to large multinationals, but the majority of drugs in China are locally produced for local consumption, and there has not been a high level of quality control in the market.

“But the level of regulation is rapidly changing and companies are beginning to demand the high standards used in regulated markets. And as manufacturing becomes more sophisticated it is also reasonable to predict that China will begin to produce pharmaceutical products for export. So as standards tighten, we would like to take a bigger part in that market.”

The challenges

Targeting domestic Chinese manufacturers is a significant change for West Pharmaceutical Services. Multinationals demand the same high standards no matter where in the world they manufacture, but the accepted standards for domestic Chinese manufacturers are different.

One challenge the company faces is producing price competitive products. Unlike other markets where consumers pay a premium for high quality products, the price of drugs is controlled by governments. Because the market is price controlled, manufacturers demand packaging products at low prices to manage profit margins.

“Chinese pharmaceutical companies manufacture their products at a very basic cost,” says Layman. “This can rule out the use of our products. We are not expensive because we demand a large profit, we are expensive because our high quality inputs are expensive. And that makes it much harder to bring your price down.”

To supply the Chinese market and balance profit with maintaining standards, the company is focusing on obtaining reasonably priced raw materials, developing efficient manufacturing processes and securing economies of scale through market size. The company also made the decision to manufacture in China.

The right entry strategy

Establishing this manufacturing presence continues to be a significant challenge. Some of the products the company wants to manufacture fall into the government’s restricted category, meaning the company had to obtain a licence. However, with 40 companies already operating in the market, the government was not allowing any new licences. To gain access to a licence the company had to find an established Chinese manufacturer with an appropriate licence and form a joint venture (JV).

As part of his research into the market, Layman attended an Australian Business International Trade Services seminar on China. There he met Sara Cheng, Australian Business International Trade's client manager for China, and quickly realised the assistance she could provide. Though the company had an established China Manager based in the country, establishing a joint venture was proving to be resource intensive. Cheng was a source of experience and cultural understanding that boosted the company’s resources in China. Layman and Cheng developed a proposal which would see Cheng assist the company through the process of selecting a potential JV partner.

Establishing a joint venture

After building a list of possible partners, Layman and Cheng developed a list of criteria required in a partner, which ranged from close location to a port to manufacturing capabilities. Cheng then researched each company against these criteria and whittled the list down to 14.

A questionnaire was devised to reduce the list even further. Cheng contacted each of the companies, reached the person who was knowledgeable enough to answer those questions and reduced the possible partners to just five. The company then sent a manufacturing team to China to visit each of those five factories which identified two possible partners. Negotiations with one company were not successful, however a second company accepted the offer from West Pharmaceutical Services and a JV has now been established.

“Sara really impressed me,” says Layman. “She understood that the relationship we wanted with our JV partner was not just about manufacturing, but also marketing, sales and distribution and, very importantly, networking. We wanted to build a relationship, not just a manufacturing partnership, to strengthen our chance for success.

“But it wasn’t just Sara’s excellent knowledge of business, it was her knowledge of the acceptable cultural practices that impressed me. It would not have been easy to call those companies, get to the right person and ask the questions we needed her to ask. And she was very professional, maintaining anonymity for our company through the whole process.

“Her ability to complete the task so well was partly her skill, but it was her cultural awareness that was key. You can read all the books you can find, but you will still only be a student of Chinese culture. Sara’s instinctive understanding was a valuable resource.”

Lessons learned

Establishing the JV was unfortunately not the end of the journey for West Pharmaceutical Services. “Since establishing the JV we have had to gain government approval for the JV, find an appropriate site for our factory, gain an investment agreement and secure a business licence,” says Layman. “Unfortunately we have to wait before the land will be released, so we have not been able to start construction yet.”

Layman says bureaucracy such as this is the greatest frustration he has faced. “Everything takes a lot of negotiation,” says Layman, “and a lot of the decisions, even legally based ones, have not been black and white. What one level of government says can be reversed by the next.

“As a result you have to take the best possible advice, from lawyers, government departments and other business people such as your joint venture partner, combine that with commonsense, and do what you feel is the right thing. But you don’t often feel certain about your decision.”

Cultural differences have also been a challenge for the company because the difference between Western and Chinese cultures is so great. “There are differences between Australian and American cultures, for example, but you have a good understanding of what those differences will be and how to manage them,” says Layman. “Not knowing what to expect in China means managing the differences becomes very difficult.

“Even things like cues from body language can be different, so there is quite a period of time where the relationship is very formal. It takes time to develop a relationship where you can comfortably go out to dinner. But the relationships you do develop are doubly valuable because you work so hard on them.”

Where to go for help

Do it yourself

For help with exporting to China as a new or existing exporter, see:

Australian Business International Trade Services

For information on Chinese laws that may affect your business, see:

China’s Database of Laws and Regulations

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