Challenges of Doing Business in China

For all the notoriety China has gained due to its rapid development, knowledge about China is relatively limited. That makes China a level playing field and provides small and large companies alike the same opportunity to win. While most of the largest companies in the world have operations in China, they are still learning how to do business in the country. That is the case because doing business in China requires dealing with a host of issues, many which are not found to the same degree in more developed markets.

Fragmented Markets: For any product with a relatively high degree of technology, it is not uncommon for the number of global players to have been reduced to a handful of truly competitive companies over the years. However, the existence of a large and growing “local” market in China, characterized by low technology and low price, reduces the cost barriers and encourages new market entrants. As a result of this unique structure, hundreds of local companies in the China market may be making the same product that only a few companies are making on a global scale.

Lower Affordability Standards: Due to a fundamentally different and lower “cost perspective” where Chinese tend to look at a RMB 100 bill in much the same way that Westerners look at a $100 bill, affordability standards are much lower in China than in more developed economies. Technology and products that may be reasonably priced in other markets may be outside the range of affordability in China.

Downward Price Pressure: The extreme fragmentation of the China market, as well as China’s lower affordability standards, creates a constant downward pressure on prices.

Uneven Legal Enforcement: Although China has a well-developed legal infrastructure, enforcement of laws and contracts is uneven. As a result, companies must learn to resolve conflicts “the Chinese way.”

China’s Management Gap: China does not have a long history of treating management as a science. As a result, Chinese managers who understand the rules of the global economy are in short supply, making it more difficult to build an effective and professional local management team.

When the U.S., Western Europe, and Japan used free markets and capitalism to rebuild their economies after World War II, China turned inward.  State ownership and central planning, not market forces and entrepreneurialism, were the key elements in its model for economic development.  Managers in the West had to face the markets and learn how to manage more effectively in order to compete for the customers and capital necessary for survival.

In China, managers were given the capital and the labor by the state and then simply told what products to make.  Once they were manufactured, the products were then turned over to state-run companies for distribution.  Under this kind of system, nobody ever had to face an actual marketplace, and so nobody ever changed.  China’s state-owned enterprises became stagnant, and the country’s management pool came to consist almost entirely of managers who could only be described as “highly bureaucratic.”

Meanwhile, in order to succeed in an increasingly competitive world, companies in the West began to regard management as a science, and invested heavily in management development programs to improve and broaden management expertise.  Individuals interested in improving their career prospects also invested time in their own development, and getting an MBA became a must for advancement in many companies.  The objective of management development and MBA programs is to take raw management talent and give it enough structure to run a large organization, without destroying the entrepreneurial spirit that moves a company forward.  Western companies developed a growing pool of people who combined the best of these features, and those that did were rewarded in the capital markets with high stock prices.

In 1978, Deng Xiaoping began his economic reform program and effectively took the economic handcuffs off of the Chinese people. Once liberated, the entrepreneurial spirit in China flourished, but with no legal system or independent markets to serve as a check on this spirit, unbridled capitalism created a different set of problems.  Where once you had only the highly bureaucratic managers in China, you now had a second category, one which can only be described as “highly entrepreneurial.”

Unlike in the West, China has not recognized management as a science historically. It wasn’t taught in the schools, so Chinese managers had no real opportunity to learn basic management concepts and tools.  With the 1990s came a wave of foreign direct investment, just as government was decreasing its involvement in non-strategic industry sectors and the country as a whole was shifting toward a market-driven approach.  All of this created a growing demand for professional managers–precisely those that were in short supply.  Even with the establishment of business schools, beginning in 1991 at People’s University, and the introduction of management development programs by multinational corporations during the 1990s, the rapid growth of China’s economy has created an insatiable demand for management.

Practically speaking, what this means is that when companies from developed economies arrive in China, they immediately confront a “management gap.” Rather than having a large universe of local professional managers to choose from, companies often have to choose between managers who are too bureaucratic and those that are too entrepreneurial. If a manager is too bureaucratic, nothing gets done and progress is slow. If a manager is too entrepreneurial, they are difficult to manage because they don’t follow any rule books.

While the supply of good, professional local managers in China has improved significantly in recent years, building a good local management remains the biggest problem faced by companies in China today.