UCSD Connect: Year of the Dragon: Now is the Time to Enter the China Market
June 6, 2005
The Sleeping Giant has awakened and is starting to shake up the world economic balance faster than any country in history. With a population of over one billion people and annual consumption rates growing at nine percent per year, China is quickly making an impact on the world economy. In fact, Goldman Sachs predicts that China’s economy ($1.4 trillion 2003 GDP) will surpass Japan by 2015 and the United States by 2039.
During the last 25 years, China has averaged over seven percent real growth, with rates even higher in east coast cities.
When China joined the World Trade Organization (WTO) in 2001, it officially opened the doors to foreign capital through a phased-in opening of most business sectors by the year 2006.
China’s WTO accession is being complemented by gradual deregulation of industries. Recent constitutional reforms and legal infrastructure are providing the legal underpinning for privatization and free-market competition to flourish. The rapidly emerging private industry in China will serve as the major economic driver of investment and partnership in the future. Over the next decade, there will be a boom in mergers and acquisitions, industry consolidation, company restructurings – and most of all, a determination to internationalize.
“China supports a fast growing entrepreneurial-class, building very innovative businesses,” says Naser Partovi, managing partner of Enterprise Partners, a La Jolla-based venture capital firm. “For North American companies, there is a significant opportunity to invest in the emerging entrepreneurial resources of China.”
As the entrepreneurial spirit and foreign investment continue to thrive in China, new laws are passed daily – in July, the Beijing Municipal Administration outlawed counterfeit sales of 25 world famous brands including Louis Vuitton, Prada, Chanel and Burberry, and laid out procedures to extend this protection to more popular brands.
Early beneficiaries of increased foreign capital and reduced government regulation in China are the telecom, biotech and high-tech markets.
Deregulation of China’s telecom sector in the mid-1990’s ignited a multi-billion dollar telecom industry and quickly elevated several companies to global prominence, including TCL, Huawei Technologies, and China Netcom. These companies were some of the first to thrive as private entities without government shackles and to illustrate the growth potential in China’s new economic climate.
Low cost labor and an extensive life sciences infrastructure – 400 universities and 20,000 scientists – are driving China’s promising biotech and pharmaceutical industry. The Chinese government has designated the industry as one of seven keys to fuel growth in the economy and committed to investing $120 million into the research and development of new drugs in the future.
The burgeoning high-tech industry has already provided tremendous foreign investment opportunities. Companies like NEC, Acer, and Quanta Computer have all set up manufacturing facilities in the country. Government designated “high-tech zones” have emerged to foster development of new software, games, and Internet-based applications. The zones house nearly 300 scientific and enterprise technology incubators that help fledgling companies secure capital and avoid early-stage pitfalls.
These industries mirror San Diego’s innovative markets and offer plentiful opportunities for regional investment and growth.
“In recent trips to China, representing communications technology companies, Chinese companies have been eager to learn about San Diego’s innovation,” says Julia Wilson, CEO, San Diego Telecom Council. “Although strong in communications research, they still look to the West for cutting-edge technologies to license and to enhance their products.”
Clearly, China’s economic infrastructure is maturing but there is no “standard” path into China. Companies that successfully penetrate the Chinese market do so buy navigating conflicting governmental interests and by dealing preemptively with the issues that the Chinese legal system presents.
Recognizing cultural and legal differences is simply not enough for American companies doing business in China. Working closely with consulting and law firms to manage these differences is essential for success.
Lee Sands, managing director of Sierra Asia, a China-based advisory and financial services company, knows that China – while an amazing market – can be unforgiving.
“United States companies succeeding in China have used a highly experienced business advisor,” Sands says.
Sierra Asia has helped multinational media companies Sony Music and Turner Broadcasting develop entry strategies, identify partners, and navigate China’s complex bureaucracy – obtaining approvals and negotiating deal terms.
When Sony first entered China in 2000, they realized the country was a difficult environment for business. Beyond cultural differences, they needed to understand business protocol, regulatory issues, legal requirements and negotiation practices. Sierra Asia bridged those chasms and today Sony has three joint ventures in China. They’ve invested more than $100 million and employ over 6,000 personnel.
“Sony believes in the great potential of the Chinese market,” says Hiroshi Shoda, chairman of Sony (China) Ltd.
The world believes in the Chinese market, too. But success will belong to companies that are innovative enough to spot opportunity and flexible enough to negotiate the business process.
Editor’s Note: Sobrian is a senior consultant and vice president of marketing for Procopio Business Consulting. She is a board member of the San Diego Telecom Council and advisory committee chair for CONNECT Springboard-Product Stage. She can be reached at csl@procopio.com.