China Changes: Don’t Over-React or Under-React.

China Mexico Vietnam

The simple solution is almost always the right solution.

Companies often come to my law firm’s China lawyers planning to do a China joint venture until we explain they can better and more cheaply accomplish their goals via contract. Companies often come to us with big plans to form a British Virgin Island (BVI) company to own a Hong Kong company to own a Chinese WFOE until we explain they can usually meet all their goals and save tens of thousands of dollars by simply having an American company own the Chinese WFOE directly.

I am riffing on simplicity to warm everyone up for the simple and excellent advice I just found on the simply named China Business Blog. In a post entitled, Talking Economics: China Markets and Costs, [link no longer exists] Kent Kedl reveals a recent epiphany (not a simple word, I know, but this is Kedl’s word) he had after people overreacted to China’s recent one day stock market plunge.

Kedl’s epiphany is that people must not do the same with China’s market as a whole and he gives the following excellent (yet simple) advice towards that end:

1) Don’t over-react. The recent changes in China are not a death knell for global business. What is happening here are just the normal growing pains of a developing economy showing signs of budding maturity and the problems that go along with it.

2) Don’t under-react. China is going to be a growing consuming market and it will suck up a lot of raw material and energy resources. And this will impact other countries and economies by making these resources more expensive. It is a reality. It is happening. Sitting and complaining about it will not help. What emergency plans do you have to address potential future scenarios involving a growing China?

3) Don’t over or under-react, but do react.
Many a fortune cookie tells us, in some form or another, that in the midst of great chaos one finds great opportunity. Well, now seems a time of – if not great chaos – then some modicum of chaos in global markets. So how can you react and take advantage of it?

4) Look at all of your options.
The lesson here is that companies that do business internationally should consider their growth possibilities in China. China is the most compelling market in the world. However, companies should not look at China at the cost of ignoring other markets. If the changes in China are motivating companies to consider all their options this is a good thing healthier for everyone involved.

To put it in even blunter terms, not much has changed. China is still a good place for manufacturing and it is still a good place for selling products and services, but you absolutely should consider other countries as well. Heck, just the other day I spoke with a client that moved all its manufacturing to Vietnam and to Mexico and by doing so is saving 20% over what it was paying in China and its news sales in Mexico have far exceeded its expectations. China is still a growing market for goods, but do not for a minute think that just because it has 1.3 billion people and a growing economy you will be able to waltz right in and corner the proverbial 1% of the market.

To simplify even further: Just use your head.

2 responses to “China Changes: Don’t Over-React or Under-React.”

  1. “Clients often come to us with big plans to form a British Virgin Island (BVI) company to own a Hong Kong company to own a Chinese WFOE until we explain they can usually meet all of their goals and save tens of thousands of dollars by simply having an American company own the Chinese WFOE directly.”
    Are you taking about this from legal point of view or tax point of view?

  2. Excellent post. Companies that plan to leave China should read this post to avoid regret. Apparently, some Korean companies have left China illegally because of the changing environment, and their illegal exit has become a diplomatic issue between China and Korea. Please refer to the latest post on my blog for some more details.

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