What Are the Disadvantages of Doing Business in China?
Over the last half a century, companies across the globe have been flocking to China to both manufacture and sell their products. While there are many benefits to doing business in the country, there are also some downsides, and it's important to be prepared for these potential pitfalls before you attempt to work in China.
One of the biggest and most well-known challenges of doing business in China is the problem of intellectual property, or IP, theft. According to Gary Locke, America's ambassador to China, things will soon change for the better, as he explains that “for every foreign company calling for stronger IP protection, there are more Chinese companies calling for the same." Nevertheless, Chinese enforcement of IP rights has been scant historically, and even if some reports indicate that the government is slowly stepping up its protections of intellectual property, the majority of trade secret thefts are not investigated or prosecuted.
The effects of intellectual property theft are immediately visible while walking the streets of a busy Chinese city. You can see counterfeited products everywhere, many of which are produced by the same factory commissioned to make the authentic product. The problem of counterfeit products isn't just limited to designer handbags and shoes, either. It extends to toys, auto parts, pharmaceuticals, cell phones and other high-tech products.
If you have a new product filled with secret, groundbreaking technologies, producing your product in China might be a bad idea. Indeed, this is one of the greatest problems American companies face when considering doing business in China.
Unfortunately, even if the government steps up its enforcement of IP theft, it is far more concerned with protecting Chinese companies than foreign ones. This means that while it might be more likely to step up enforcement of IP rights in cases where someone counterfeits a Chinese designer's products, it may still take the side of a manufacturer that has been accused of violating a foreign company's intellectual property rights. As it stands right now, the judicial system is notorious for protecting Chinese companies that have been accused of illegal or unethical business practices at the expense of their non-Chinese business partners.
Beyond getting protections for your business, it can actually be hard to stay on the right side of the law as a foreign company. That's because the country suffers from a lack of transparency, and with many laws and regulations remaining unpublished, it can be difficult to jump through the bureaucratic hoops of doing business in China without actually knowing the details. This is why it is critical for anyone who does decide to do business in the country to first hire a local lawyer with experience helping non-Chinese companies with matters such as incorporation, intellectual property, licensing, etc.
The government has some strict rules relating to how products can be designed, manufactured, sold and disposed, and it is very important that you work with someone who understands these laws, or you could end up in legal trouble. Getting licenses and permits in particular is a notably difficult process for foreign companies in China, including securing product approvals, business licenses, investment approvals and more. Chinese companies often do not have the same licensing problems and are rarely subjected to lengthy or stalled approvals for these licenses and permits the way non-Chinese companies are subjected.
One of the biggest advantages of doing business in China has always been that it is a cheap place with which to work, particularly when it comes to manufacturing products. However, as more tech companies have moved to China, the demand for a skilled workforce has increased, resulting in increased wages for these workers by as much as 40%.
On top of that, the government has increased minimum wage and working standards for all workers, and the cost of land in cities has been increasing, meaning workers need more money to live. The U.S.-China Business Council even published a report showing that 62% of respondents had increased wages for their Chinese workers by 5 to 10% in recent years, and 8% of respondents said they had increased wages by more than 15%.
Higher rents don't just affect the workers who need more wages to live there, as you'll also need to pay more to rent or buy a property, particularly in large cities. Plus, the government has also been increasing taxes (particularly on foreign companies) to provide a security net for its citizens. Add on the facts that raw materials have also been increasing in cost over the last few years, and many products coming to the U.S. from China are now subject to tariffs, and it's easy to see that China may no longer be the most affordable place to do business.
If you're not just looking to manufacture a product in China but want to actually crack the local market, you're going to have an increasingly difficult time doing so since the number of Chinese companies has been increasing in recent years. Whereas local companies were once known for selling subpar products and services, these companies have been increasing the quality of their products to better appeal to the budding middle class of the country.
As you may have already guessed, the government also gives preferential treatment to these local companies, offering them better opportunities and reduced bureaucratic red tape with which to deal. This is why most retail spaces in China are controlled by domestic and state-owned firms.
Even if you do have fair access to the Chinese marketplace, Chinese shoppers have notably distinct tastes, meaning that even if your product is wildly popular throughout the rest of the world, it might fail to resonate with Chinese shoppers. Additionally, many shoppers prefer to support local companies over international ones. In fact, it's estimated that a whopping 37% of successful U.S. products that are eventually brought to market in China end up failing in the country.
For those who hope to manufacture products in China, the process can be a lot more difficult and expensive than people have been lead to believe. The first problem comes with trying to establish a partnership with a manufacturer. Trying to establish these relationships online can leave you falling for a scam and losing tens of thousands of dollars and never getting anything in return. Before working with any company, always check the registration of a potential manufacturing partner before establishing a relationship.
While many people believe that working with a broker can help them avoid these problems, the brokers themselves can be a problem, with many alleged brokers actually being scammers themselves and others taking a larger percentage of your payment than negotiated and giving less to the factory, leaving you with a shoddier product to make up for the difference in price.
Only work with a broker who has trustworthy referrals from companies with which you are familiar. Better yet, go to China and see the factories and meet with the representatives yourself, or at least send a trusted individual to do it on your behalf. Before signing any contracts, have a local lawyer review everything to make sure you aren't going to be cheated.
Of course, even if you find a trustworthy manufacturing partner, you can still encounter problems. While most representatives of these businesses speak English well, they are also hesitant to deliver bad news and will often only give you answers that you want to hear. Additionally, even manufacturers known for quality may change their standards at any time, leaving you with products that do not meet your expectations. This is why you should continue to work with a trade representative in order to ensure you're kept abreast of any problems and changes in the production process.
Some consumers prefer to support companies that make their products in the U.S. This could be because they are concerned with the well-being of foreign workers laboring in sweatshop conditions for pitiable wages or because they are interested in keeping jobs in the U.S.
Whatever the reason, many manufacturers find that American citizens will spend more money in order to purchase products that have been made in America. Additionally, many companies feel the same ethical concerns as consumers, preferring to keep jobs in America and ensuring that the workers creating their products are treated well and paid a fair living wage.
Of course, while there are downsides to working with China, there are obviously many benefits or there would not be so many international companies operating inside the country. Small businesses are particularly impressed by the many opportunities of doing business in China since these companies often cannot find an American manufacturer that can provide the high-quality products they wish to sell at the right production quantity and price. Additionally, China offers a number of products and materials that simply can't be found in the U.S., particularly for affordable prices and in quantities required for manufacturing purposes.
Small businesses often find that one of the advantages of trading with China is that manufacturers there are willing to handle small production quantities, whereas U.S. manufacturers might not even give you the time of day when it comes to making such small numbers. Additionally, because so much manufacturing is done in China, you can frequently find a factory producing something similar to your product, and they will be able to create something that meets your specifications in far less time than a factory somewhere else where they have to start from scratch.
While many people are concerned about quality issues with Chinese manufacturers, some reputable manufacturers will actually offer to remake products if the original production isn't up to your quality standards. Although there is some risk to doing business in the country, a successful manufacturing deal can save you a fortune, with some products costing up to 80% less in China than in America.
If you're hoping to sell your product in China, you have the benefit of a burgeoning middle class that has a high demand for all numbers and natures of products. While there are many other countries offering similar business opportunities as China, the language barrier is minimal in China because almost all business representatives speak good English.
The stability of the government and the marketplace is also an advantage over other countries with which you may work since this means risks of hyperinflation, labor strikes and other things that can be problematic for businesses are minimal. As long as you are prepared for the downsides, there can be more than enough positives to make it worthwhile to do business in China.