Doing business in China: challenges and success factors

By Juan Antonio Fernandez, Xu Bin and Zhou Dongsheng

With 2012, the year of slowest economic growth for China since 1999, companies in China are adapting to the new business environment, while recognizing existing challenges.

Although at lower levels than previous years, business confidence remains positive, with a majority of firms still reporting profits and growth. Companies keep a positive outlook for 2013 and even more so for the next five years.

Foreign companies have tempered their initially higher optimism to a level more in line with the new reality in China. As in earlier editions of this survey, there is still a gap between foreign and Chinese firms in their stated level of optimism, but so is the trend to see this gap becoming narrower.

Companies are looking at innovation, both in products and in management methods to increase their competitiveness. A majority of Chinese firms are focusing on improvement of quality and management systems, while in contrast foreign firms emphasize the reduction of their costs.

Moreover, Chinese companies are increasing their presence abroad, while foreign firms continue to invest more in China. Overall, all companies are increasing investments in R&D and marketing in order to compete in the market.

In 2013, success in China will come from the ability of firms to address the challenges they face. In many regards, Chinese and foreign firms perceive the same difficulties: finding and retaining talent, addressing raising labor costs, growing competition and the slowdown of the Chinese economy.

Companies in our survey declare that their key to success in this environment is increasing quality of their products and services, through R&D and product innovation, and branding. A strong company culture with a high-quality management team is also considered a success factor.

Firms are also working on human resources management practices: developing a feeling of belonging to the company, offering a good career path to employees, paying above market, and establishing a system of rewards and recognition.

Nonetheless, the playing field is not level for domestic and foreign firms. Foreign firms continue to have specific issues related to understanding the Chinese legal and regulatory environment, and to communicating the challenges of the Chinese market to their head office. Additionally, intellectual property (IP) infringements are considered a key challenge by more foreign firms than by domestic firms.

Domestic firms also have specific issues, such as corporate governance and financing difficulties. Even though access to bank loans is relatively easy for larger firms, most companies in our sample still rely mainly on self-financing, with capital markets less frequently available.

Finally, our survey also provides insights regarding firm’s perception of their competitors, with interesting differences between Chinese and foreign firms. Domestic firms see their competitors as stronger when it comes to branding, marketing and sales capability, and product superiority.

This contrasts with cost advantages, lower prices and government relationships and other guanxi, which are the strengths that foreign firms see primarily in their competitors in China.

Both foreign and Chinese firms think they are facing strongest competition from Chinese private firms, with foreign firms also measuring themselves strongly against each other.

The CEIBS Business in China Survey 2013 polled 1,214 executives from Chinese and foreign companies doing business in China. The survey was completed by 768 from Chinese companies and 446 from foreign companies between November and December 2012.

External challenges

The main external challenges for companies doing business in China are “rising labor costs,” “fierce competition,” and a “slowing Chinese economy.” A very distant number four is government policies for Chinese-owned companies and slow recovery of the global economy for foreign-owned companies.

These concerns were also present in previous years’ surveys. One notable difference from the 2012 survey is that Chinese companies had cited “government policies” as one of their top three worries, while this time it has significantly dropped to a much lower fourth position.

The survey effectively captures the transition of the Chinese economy. The three areas that consolidate executive concerns ― rising labor cost, stronger competition and slowing Chinese economy ― reflect the change that China is undertaking, going from a low-income country with an economy driven by cheap labor to a middle-income country.

There are a few interesting differences in the weight of some factors by Chinese and foreign firms.

― Although rising labor costs is the number one concern for both groups, it is stated as a concern by Chinese firms more than it is by foreign firms ― 65 percent of respondents vs. 57 percent, respectively. This is consistent with the fact that the Chinese companies in our sample generally have a larger number of employees in China than the foreign ones.

― “Local protectionism” worries 16 percent of the foreign firms in our sample, compared to only 8 percent of the Chinese firms. This may be due to the relative difficulty for foreign firms to navigate the differences existing in China at provincial levels, and the fact that they are currently more concentrated around the coastal areas and still need to learn how to penetrate the country.

― Chinese firms ― 34 percent of the respondents ― in our survey worry about government policies more often than foreign ones do ― 27 percent of those surveyed.

Managerial challenges

The most cited internal management challenge faced by companies operating in China is “finding and retaining talent.” Seventy percent of respondents both in Chinese and in foreign companies chose it. This is consistent with previous surveys.

Organization derived problems hold the second position, but these issues translate very differently for Chinese and foreign owned companies. Forty nine percent of the executives working for Chinese firms worry about “corporate governance,” which is only an issue for 24 percent of those working in foreign firms. Foreign companies tend to have these systems already in place, while many Chinese firms have only recently been putting them in place.

On the other hand, for executives working for foreign-owned companies, “support from head office” is the second most frequently mentioned managerial challenge, proving that distance matters.

“Distribution problems” is the next difficulty in the list as reaching target clients and consumers in different areas of China proves to be a challenge for 26 percent of Chinese firms and 22 percent of foreign firms in our sample.

“IP infringements” concern more foreign companies ― 20 percent of foreign firms vs. 9 percent of Chinese entities. This is consistent with the fact that foreign companies in our sample encounter IP infringements more frequently than their Chinese counterparts. Foreign companies in China tend to invest more in design and innovation and therefore could be more vulnerable to IP infringements.

“Services and materials quality” worries 19 percent of foreign companies in our sample, compared to only 8 percent of Chinese firms. This is consistent with the fact that foreign companies in China are often positioned in the higher end of the market and the quality of the end product depends on quality of the input. Specifically for our survey sample, 65 percent of the foreign-owned companies operate in the premium segment of the market versus 34 percent for the Chinese-owned ones.

“Finance-related difficulties” is a worry for 21 percent of the Chinese firms, compared to 11 percent of the foreign ones.

Success factors

Both executives from Chinese and foreign-owned companies in our sample believe that success in China is linked to product and service superiority, and to soft factors such as quality of the management team and company culture and values.

Chinese companies also emphasize other product related attributes: “R&D and product innovation” and “brand and awareness creation,” while foreign companies emphasize brand and awareness creation as well as proper “employee selection and training.”

It is interesting to note that while finding and retaining talent has been selected as the number one managerial challenge for both Chinese-owned and foreign-owned firms ― by 72 percent of Chinese firms and 70 percent of foreign firms, 46 percent of foreign-owned firms consider employee selection and training to be a success factor versus only 28 percent of the Chinese firms.

Brand and awareness creation also stands out as a strategy considered key to success more often by foreign-owned companies than by Chinese-owned companies.

Juan Antonio Fernandez is a professor of management, Xu Bin is a professor of economics and finance and Zhou Dongsheng is a professor of marketing at China Europe International Business School (CEIBS). CEIBS has campuses in Shanghai and Beijing.