As part of our ongoing Inspiring Thursday series of talks, theDesk recently hosted a panel discussion with industry experts to gather advice on how to kickstart growth when expanding a business to China. The relevance of this topic should come as no surprise: the Chinese economy as a whole has continually experienced record growth over the past few decades, and is still targeting a growth rate of around 6.5% for 2019. For anyone running a business in Hong Kong, the statistics and huge potential pool of new customers are a major draw. However, it is also an idiosyncratic market where companies can fail just as easily as they succeed, and it is crucial to have the right approach and knowledge in order to grow.
To help businesses navigate these challenges we invited several experts to share their opinions and discuss the topic with each other and with members at theDesk. Carrie Hui, Partner at Chak & Associates, who has years of experience working in and navigating the legal system in China. George Lam, Partner at Crowe Tax Services, an expert in solving the complicated system of cross-border tax between Hong Kong and China. Jason Gerber, Managing Director at Robert Franz Limited, a financial professional with years of experience consulting and advising companies on the Chinese market. And Frank Doogan, Director at Train the Teacher and member at theDesk, an education expert and entrepreneur who has spent decades growing education companies in China. Below are some key takeaways from the discussion:
As a business looking to enter the Chinese market for the first time, what are some key points to understand about the business climate, and how do you choose the right region to enter?
- Diverse market – China can’t be thought of as a homogenous market, it is hugely diverse. As such, the approach of a company entering a market like Shanghai will be very different from a city like Chengdu. The differences are not just geographical, but also cultural and linguistic. Business owners need to focus on the unique challenges of the regional markets that make up China, rather than think of it as a monolithic entity.
- Grounded expectations – While businesses in China can enjoy a high growth rate, there is also a high failure rate. Especially for startups, the legal system can be difficult to navigate, so it is crucial to secure trusted partners who can help navigate these issues, legal or otherwise. In particular, those partners need to possess local knowledge of the area in which businesses are looking to grow.
What other complicated challenges might a company face?
- Tax System – Hong Kong enjoys a relatively simple tax system, however in China it can be more complicated, particularly for a growing business. Similar to securing a legal partner, it is important to secure a partner to help navigate the tax differences, which is different in key areas such as the fact that gross income is taxable, not just net profit.
- VIE Structure – Depending on the industry, if a Hong Kong company wants to do business in China they will need to enter the contractual obligations of a Variable Interest Entity. Since direct ownership of a company in China is often not be permitted, particularly in industries such as internet tech, the VIE structure can allow for companies to do business and also to raise public funds through joining with a Chinese partner.
How should people understand the growth rate in China now, as opposed to how it was about 10 years ago?
- Competition – The standards of practice have changed, and almost every industry has become more competitive. To stay on top of those changes, companies need to secure a solid foundation before attempting entry: they must have a good product, a solid source of funding, and most importantly, great marketing that speaks to their target audience.
- Focus – Given this competition, what are the keys to finding success in the market? Businesses entering the Chinese market need to stay hyper-focused on their core competencies and delivering a product that meets a high standard. From a marketing perspective, they should avoid the temptation to bend or shape their message to a perception of what Chinese consumers want. If the product or service is fundamentally good, they mustn’t lose sight of that through trying to adapt too heavily.
What is a fundamental element of successful business growth in China?
- Partnerships – Whether legal, tax related, or just relationships that provide business insights, it is crucial to first find and match up with trusted partners. In an environment where laws can change quite quickly, those partners can be a crucial buffer to mitigate and deal with change. Taking manufacturing as an example, a factory might suddenly find they are in violation of a new compliance law overnight, but a good partner could perhaps anticipate those kinds of changes and provide advice before it happens. Furthermore, partners can provide referrals which are a crucial part of networking and growing relationships in China.
Final thoughts: what does all this say about the future growth of the Chinese economy?
- World economy – There are differing opinions on what the future holds. On the one hand, one can argue that China is already the world’s ‘largest’ economy, not in sheer size, but in the influence and co-dependent relationships between Chinese industries and the rest of the world. On the other hand, economic figures and statistics don’t always tell the full story, and there are still clear challenges that China needs to overcome. Regardless, with the right tools and knowledge, it still presents an important opportunity for businesses to tap into a new vein of growth and change.
Throughout 2019, our “Inspiring Thursday” series will continue to host insightful discussions that keep our community engaged and in the know – we hope to see you at the next one!
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