Stepping into China

In Shanghai, it's easy to stare transfixed at the streams of shoppers trampling over half-finished roads to get to the big, new shopping centres. Open 14 hours a day, longer on weekends, these shopping centres are hives of activity.
But this buzz is a double-edged sword for Australian exporters. It means big opportunities, but it also means fierce competition as the world's brands clamour for a slice of the burgeoning market.
Long and involved negotiations, enmeshed and often conflicting regulations at provincial and local levels, heavy bureaucracies, local partners that may or may not be trustworthy - these are just some of the challenges that threaten to trip most small businesses.
Toss in the market entry strategy - whether or not to open a representative office, sign away an exclusive distribution licence, form a joint venture, or go the whole way and set up a wholly-owned foreign enterprise - and watch what started out looking like a money spinner morph in to a nightmare.
It took one Australian environmental consultancy, now owned by GHD, almost 10 years to crack China.
"It was quite a number of years before we could say, 'We're making a dollar out of here,'" says Peter Wood, founder of the business and now general manager of GHD's operations in China.
More Australian businesses than ever before want to sell to China. The proportion of small businesses exporting to China has doubled in the last two years, according to recent data compiled by Sensis and Austrade, and more than 50 per cent of Australian exporters have China tagged as their biggest growth market in the next twelve months, according to the latest Austrade and DHL export barometer.
With a large and rapidly urbanising population, China's demographics are a big drawcard. By 2020, 55 per cent of Chinese households will have climbed into the ranks of the middle class, according to the Policy Research Office of the Community Party of China Central Committee. Right now, just 5 per cent of households are middle class.

Demand for branded goods and services, hot new technology, infrastructure, and finance is expected to grow with these annual incomes. Based on similar projections, AC Nielson in its report titled China Trend Watch 2007 estimates that manufacturers and retailers have an untapped market of about 850 billion RMB ahead of them.
It's not just coal and resources that Australians are good at selling to the Chinese. Food and beverage exporters have doubled their shelf space in the last five years, and products and services trading on Australia's clean and green image such as organic products, body care, fitness training are in high demand, according to Austrade's senior trade commissioner in China, Peter Osborne.
With China expected to be home to half of the world's building construction between now and 2020, there is also an unprecedented appetite for green technology. Subsidies offered by the Chinese government in the lead up to the Beijing Olympics and mandatory energy reduction targets are driving demand. "When you've got a country that has 16 of the most polluted cities in the world incentives like those will only grow," Osborne says.
Business owners who think that turning up with some expertise or a container load of goods is enough to make a sale, think again. Consumers are brand conscious and spoilt for choice. And as customers or partners, Chinese businesses want to know you are there for the long term before they commit to doing business with you.
"In Australia, if you tender a bid and it is clearly the best there's a good chance you'll get that contract. In China, if you haven't developed a strong personal relationship with the organisation it really wouldn't matter what your proposal was like. From their perspective you're too risky. If they don't trust you, you won't win the work," Wood says.
The first challenge for exporters to nut out is how to enter the market. There are four options: open a representative office, cut a deal with an agent or distributor, form a partnership or joint venture, or set up a wholly owned foreign enterprise (WOFE).
The majority of Australian exporters start small by selling via an agent or distributor. Online trade portals such as Ali Baba may be the easiest way to make contact with potential agents, distributors, or retailers, but the ease belies many challenges.

It's important to research distributors or agents to make sure they will take your product, which is often one of tens of products they are trying to sell, seriously.
Hotch-potch networks of agents and distributors can give rise to disputes regarding who has the exclusive right to sell what, where.
And it can be difficult to assess whether or not agents have the muscle to get the shelf space they promise.
Partnerships or joint ventures, while requiring investment and long-term commitment, can be the best of both worlds because partners offer local knowledge of the market and contacts with key decision makers in government or retail. Rather than handing agents or distributors a fixed fee, joint venture partners share in the profits.
But choosing a suitable joint venture partner takes time. Wood met with about 25 prospective partners over two years before settling on one in Wuhan. "The decision was really based on countless discussions, meetings, and when it came down to it, gut feel about the partners and how well we could work with them," Wood says.
Austrade and a Chinese born and educated engineer he had hired in Australia ended up helping him sift through the potential partners. "If you can develop strong personal relationships there's a good chance you will succeed. If you can't or don't there's a good chance you won't," Wood says.
Going one step further and setting up a wholly-owned foreign entity means skipping the challenges that arise with joint venture relationships.
Legislative reform in the last five years has made the registration process simple and easy, but experts warn this is the most involved business structure - in time, effort and money.
Richie Guo, who runs Business Strategies International's China consultancy, advises his clients to have the paperwork ready to submit to China's Ministry of Commerce as early as possible. "China is so fast moving, if you're an exporter that spots an opportunity you've got to be ready to move then, at that moment. Gaps in the market disappear so quickly," Guo says.
A mistake Guo sees business owners make is leaving the debate about business structure to the last minute. By the time the business entity and bank accounts are sorted in China, for example, the opportunity has been snatched by someone else.
China's deference to hierarchy throws many Australian exporters. Multiple people will work on a single transaction and there can be a long ladder to climb to get to the main decision makers.
Wood warns that formal meetings with six Chinese negotiators does not necessarily mean that the Chinese party is serious about working through the tough issues.
"The real negotiation rarely happens around a table with lots of people. If there are half a dozen negotiators that meeting is all about process and formality. Serious negotiations are always done one-on-one, behind closed doors, between the key decision makers on both sides," Wood says.
"You do need to get the support of the people doing the negotiating, though. They have the key decision maker's ear," Wood says.
And beware of Chinese business culture. Guo recounts a meeting between one of his Australian clients and a Chinese business owner. His client was looking to acquire the Chinese business and at the first meeting the Australian asked within minutes whether or not the Chinese business was turning a profit.
"What a disaster. Those sorts of questions, if they can ever be asked, require a relationship of trust and mutual respect. To the Chinese, that question was rude and arrogant," Guo says.

(Source: Smh)