Foreign Businesses In China -- Profitibility Is Both Easy And Hard

Two somewhat contradictory posts on yesterday's blogosphere on the ease of doing business in China.   

The relatively new Going Global Blog, written by Craig Maginness, an international trade consultant, just did a post entitled, "Walking the Tightrope to Profitability in China -- Must We Work Without a Net?" discussing the difficulties foreign businesses have in turning a profit in China.

The post sees foreigners doing business in China as feeling as though they are Chinese acrobats performing without nets.  Maginness talks about being "struck over and over again about conversations with business people who are pumped about the opportunities in China but who have lost money pursuing them."  He asks, with so much growth and abounding economic opportunity, how can so many companies be losing money?

Manginnes then answers his question by talking about the "delicate" balancing acts that businesses must go through in China and proposes businesses prepare for this by increasing "the time and focus on the contingency portion of your plan for China."

I agree with the advice, but, based on both my own experiences and on what I read, I disagree with the facts he uses to get there.  First off, the companies I know doing business in China are, almost without exception, doing quite well there.  Those who manufacture in China (either on their own or through OEM) are, despite frequent quality control problems, making money by saving money and those who are in China to make money by selling goods or services are doing exactly that. 

As much as I would like to assert that our clients thrive in China because of something we are doing as their lawyers, I know that is not the case.  They are thriving in China because the kind of company that is savvy enough to retain Western lawyers with substantial China experience for their China business needs is the exact kind of company that is likely to thrive there. 

The company that thinks it can send someone to China for a month or so, hire a great local manager for $300 a month and then leave will virtually never succeed.  Those are also the companies that are unwilling to do things right on the legal side either. 

In addition to my own small sample of thriving China companies, the statistics also indicate foreign businesses are thriving in China.  As I previously noted in my post, "Lies, Damn Lies, Statistics and Making Lots of Money in China," a recent survey of American companies doing business in China indicated that two-thirds said they are profitable or very profitable in China, and 42% said their China margins were higher than their world-wide margins.  These statistics are really quite amazing since there are definitely many companies in China expecting to lose money for years until they can build up their name or achieve economies of scale and because so many companies are relative newcomers. 

The Chief Asia Inspector Blog just did a post that, at least in part, helps explain why foreign businesses are thriving in China.  This post, entitled, "The Tale of Two Offices," discusses the ease and low cost of opening an office in China by comparing it to opening an office in France (my own personal favorite whipping boy country): 

 
In one of these countries [France], thanks to red tape, the whole exercise took 10 months. In the other [China], once we decided where we wanted to be, it took 3 weeks. In Country A [France], we spent '120,000 on a 250 m2 space; in Country B [China], we spent '12,000 for a 350 m2 space .

If you want to get all accountant about it: that's 40% more space in Country B [China] than Country A [France] for a tenth of the price, organized in only 7% of the time. Country B [China] practically delivered the office faster than it takes Country A [France] to deliver parcels. 

Specifically, the Country B site is in Shenzhen's Special Economic Zone. My recent enthusiasm for Shenzhen becomes clear! We've tripled our staff there since the beginning of the year and the city has welcomed us with open arms.

For those who dismiss China as simply a source of cheap labor ' look again. It is such a relief to be here and not to have to gear up for a bureaucratic battle every time we try to use our entrepreneurial initiative.

China is, in many ways, a surprisingly easy country for foreign business, but not always.  I like how one of our clients, a very successful transportation engineering company, in describing what it is like for his company to do business in China, said that it China surprises him with how loose it is in most aspects of doing business there, but yet it is also surprisingly tight in a few areas.  My own view is that China is, overall, a relatively easy country for foreign companies, but the ease of doing business in China does vary depending on the type of business and its location.