China: A Giant That Is Hard to Crack

China in 2015

Fact box

Population 1,375 million

GDP per capita $7,808

GDP $10,736 billion

Economic growth 6.9%

Investment +10%

Industrial production +6.1%

Unemployment rate 4.1%

Fiscal balance -3.5% of GDP

Public debt 79.4 of GDP

Inflation PPI -5.2%

Exchange rate vs USD 6.49

Exports $2,283 billion

Imports $1,681 billion

External debt 13.2% of GDP

source: FocusEconomics

Lukáš Hlaváč

About Lukáš Hlaváč

Lukáš Hlaváč is the Founder of Whoolala, an online marketplace that enables its users to discover and share their fashion sense. He is also a consultant helping foreign businesses to grow and manage operations in China since 2009. He previously worked at Czech Lasvit and more recently as a business development manager in China. He has two masters degrees, in Informatics and Business Administration and is fluent in Mandarin, English and Czech. Twitter: @HlavacLukas

With an average growth rate of 10 per cent over the last decade and an increasingly affluent population of 1.3 billion people, China is a dream market for many companies, including those based in Central and Eastern Europe.  Small and medium firms are excited by the prospects of the Chinese domestic consumption because Chinese consumers are literally hungry for goods from the EU. In the past five years, exports from the EU to China have grown by 9.8 per cent, to €160 billion, while exports from China to the EU have only increased by 1.6 per cent.

I have lived in China, since 2009, from the time we successfully introduced the Czech lighting company Lasvit onto the Chinese market. It has been an arduous journey and the success came at a high cost and is still relatively limited, given the scale and potential of the Chinese market. This is why my advice is to shake off any infatuation with unlimited opportunities, before trying to do business in China, and to explore the country with extreme care and attention. 

The Chinese market has always been an uneven ground for foreign enterprises. Succeeding in China requires that SMEs make a long-term commitment and that they allocate the appropriate resources in order to overcome the many challenges that foreign firms face in the Asian Giant. 

I speak and write fluent Mandarin, but I am still slower and need more time to analyse the enormous amount of information from the market every day, than a smarter Chinese native. China is the most dynamic market in the world and the business landscape changes at an extremely fast pace. Entrepreneurs need to be able to navigate the newest technologies and trends to be able to take advantage of them, at the earliest stages, so that they can get the highest possible return on investment.

It is fairly easy to register a company in China these days. The entire process takes around 30 days and costs roughly €3,000. It is more difficult to obtain the many licenses you may require for your particular business and may take much more time and cost more than expected. I have been trying to get a license as an internet content provider in China, for my latest project, for the past 14 months and have not succeeded, even though the process is supposed to take around three months. 

Particular businesses require documents that are hard to obtain, such as social networks, user generated content based platforms, SaaS providers, banking, finance, FinTech and media (especially video content). It is far less complicated to operate companies in the consulting and manufacturing industries, as well as food and beverages, in China. My advice would be to think twice before entering China, unless you have strong governmental ties or a lot of time and capital.

In addition, the Chinese legal system provides a framework for intellectual property protection. It may take one-two years to register your trademark in China. The process is extremely slow and provides little protection in the incredibly dynamic Chinese market. A good example of how this works is the recent case of Apple’s losing in a Chinese patent fight.

The Chinese market is the most competitive market in the world. Chinese companies are extremely agile and fast in copying what works elsewhere. When you enter China and experience early signs of success, be ready for stiff competition and to burn money just to acquire market share. This has already happened to giants as eBay or Uber and SMEs with limited capital resources are even more vulnerable.

Entering this giant market is not cheap. Many SMEs that I have spoken to, that are interested in entering China, mostly underestimate the investment necessary to win over the Chinese customer. The entire population of emerging Europe is less than 200 million, which accounts for just 15 per cent of China’s people. Reaching out to these consumers is costly.  Besides that, in China, everything takes longer than expected. Even a six month delay in acquiring the required licenses can result in hundreds of thousands dollars spent on overheads, while waiting for approvals to start the operations. 

Last but not least, as the Chinese economy overheats, there is an extreme shortage of talent. Top Chinese talents are attracted mainly by the dynamic Chinese tech giants such as BAT (Baidu, Alibaba, Tencent) and multinational Fortune 500 companies. This can help young people to turbo-charge their carriers and build guanxi (a network of social contacts). SMEs have little chance of attracting the best talent, unless they give out shares or overpay their hires. 

I believe that only companies with strong, competitive core competences, or a unique product that is not available locally (and that is hardly possible), should consider entering the Chinese market. The management of SMEs from CEE needs to make a strong long-term commitment and dedicate the appropriate resources in order to succeed. SMEs may need to look for a local CEO, who understands the local business landscape. Companies need to be ready to offer higher salaries, compared to the CEE, together with employee options’ schemes, in order to attract top talent in China.

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