The Chinese Business Review is out with an interesting article, by Jason Matechak and Brett Gerson of the Reed Smith law firm in Washington, DC, entitled, “Can China’s Government Procurement Market Be Cracked?” Its sub-heading is: “China’s preference for domestic products continues to worry foreign firms, but companies can take steps to improve their chances of succeeding in China’s government procurement market.”
The article does a really nice job setting out the present state of government procurement in China and explaining the key laws that apply (or don’t). It concludes with an excellent list of steps foreign companies can take to “increase their chances of successfully selling products or services to PRC entities”:
• Produce goods with at least half of their value added in China Products that contain at least 50 percent domestic content will likely be considered “domestic” for public procurement purposes.
• Consider making or assembling products that contain foreign components in special bonded zones Goods that do not require PRC customs inspection and release may be considered domestic for government procurement purposes.
• Offer energy-efficient and environmentally friendly products and services Article 9 of the draft implementing regulations would require PRC agencies to give preference in procurement to energy-efficient and environmentally friendly products. Whether China will give these products preference over non-energy-efficient domestic products remains unclear, but the regulations indicate that the State council will likely formulate procurement policies according to national economic and social development goals. Clean-energy development is high on China’s list of priorities, so an FIE may be able to improve its access to procurement opportunities by highlighting its product’s energy efficiency.
• Take advantage of provincial “buy local” provisions Compared with other administrative functions, local agencies and ministries have a significant amount of discretion in the procurement of goods and services. The PRC central government has delegated approval authority for all foreign-invested projects below $100 million to local authorities and, by some estimates, local officials are responsible for financing 75 percent of all PRC stimulus spending. (Under the PRC Catalogue Guiding Foreign Investment in Industry, foreign investment in “restricted” industries such as chemicals and financial services are still subject to higher-level government approval.) Strengthening relationships with local partners and officials will increase foreign companies’ procurement opportunities at the provincial, county, and municipal levels.
• Highlight JV status Since only FIEs that are part of Chinese-foreign JVs have succeeded in getting their products into indigenous innovation catalogues, foreign companies with part ownership in Chinese-foreign JVs should emphasize their JV status before and during the bidding process.
• Develop and highlight strong internal anti-bribery and anticorruption practices Under the draft implementing regulations, entities with a history of anti-bribery or Foreign Corrupt Practices Act violations may be blacklisted for PRC procurement. Since FIEs likely face inspection by highlighting their robust internal anti-bribery and anti-corruption practices.
From what I have seen, the success rate in selling to the Chinese government (I realize I am conflating all sorts of different governmental entities into one) is considerably lower than that of selling to China’s private sector. In the end, it seems both from what I have seen and even from most of the steps set forth above, that key to selling to China’s governments is to have something the government simply cannot resist. In other words, your product or service has to be so much better than domestic that the government almost has no choice but to buy yours.
For more on China government procurement, check out “China’s Liechtenstein Effect.”
