During the past year, I have written many articles on China which my readers could interpret as optimistic and ‘bullish’ on the China economy with exciting opportunities for Southern California Companies.  There are many signs that reinforce that point of view; economic growth of more than 10% annually; surging foreign investment into China for infrastructure and merger and acquisition activity; increasing disposable income and consumer spending, exports to Europe, US, Japan and the rest of Asia continuing to accelerate, the decentralization of government to the provincial level, the increased privatization of corporations once state controlled, and now the ramping up for the 2008 Olympics in Beijing with the expenditure of close to $40 billion dollars.

Some enormous strides have been made in China since the Tiananmen Square incident of 1989. Economic reforms are moving full speed ahead.  The general attitude in China can be summed up thusly, “Who cares about politics, let’s get down to business”.

So, the picture in China today is growth:  10-12% GNP growth annually, decentralization of government to the provinces, economic reform, relative political stability and a noticeable trend toward privatization.  But with this growth comes commensurate risks and euphoria, and as business people, we must strive to minimize the risk and euphoria and maximize the reality. 

Let’s look at a few things we can do. China is a big country, 22 provinces, three municipalities, and five autonomist regions, one and a half billion people, regionally broken up into Western China, Northeast China, Northern China, Southern China, and Southwest China.  So what we must do firstly to minimize risk and optimize opportunity is not to focus on that entire country, but focus on specific provinces and direct your efforts toward those provinces and direct your marketing, your product and your service to match up with individual provinces.  Concentrate on specially designated areas like special economic zones and open coastal cities, new development areas, free trade zones and high technology development zones.  Also, remember one province in China is equal to an entire country!

Secondly, pre-qualify the end user and the customer’s ability to pay.  Work in areas where you might see some international financing, the World Bank, the Asian Development Bank, the Export/Import Bank.  Look for provinces where the Chinese themselves have put up seed money for the development of that province and the development of the infrastructure.

Thirdly, keep in mind that in China, negotiations are difficult, don’t be dissuaded or don’t be persuaded by signing a Letter of Intent, it means nothing; it simply means that you may have the intent to do business with each other.  Remember there are three steps in doing business in China; the letter of intent, the signing of an agreement, which is also a non-binding document that’s usually signed at the end on a negotiation session, and finally, the signing of a contract, which is definitely legally binding, but not always legally reinforce able.  The best way to prevent contract violation is by having a strong relationship with your Chinese partner.

Other things to remember in minimizing the risk:

• Relationships are always important.  Doing business with China is not just a deal, but it is a relationship with your Chinese partner.

• Negotiations are lengthy; price will be a critical factor.  Chinese want state-of-the-art products at the lowest price, so be ready to bargain.

• Negotiating with the Chinese will always involve an educational process.  For you, it is an understanding of how business is done in China, for them, understanding how Western private enterprise works.

• Spend some time learning about Chinese business customs and protocol.

• Build a reasonable cost of doing business and bargaining margin into your initial price.  Chinese are tough bargainers; they expect to get a discount on the original price.  Give a little bit at a time.

• Try to get all the Chinese side issues on the table first before you start making concessions on individual points.

The economic reforms in China which are happening today are overwhelming and the dynamism of the China market is probably the story of the decade.

Having said all that, in my judgment, China remains one of the riskiest markets in the world.  It is easy to be caught up in the euphoria, and you can’t overlook the fact that you are talking about a country that represents 20% of humanity, but it requires careful prequalification, sharp focus, realistic appraisal of the opportunities, a lot of homework, and a lot of staying power.  Southern California companies should focus on the realities of the China market and not the euphoria. 

Richard King, Chairman Emeritus of WoodburyUniversity, Director, Pacific Rim Programs at WoodburyUniversity,
Chairman/Founder King International Group 626-792-4729