Selling Products and Services into China: Tension is Rising

China MOU LOI

Just got back from speaking at a truly excellent doing business in China seminar at the University of Toronto. I was on a panel where the question was asked whether rising tensions between foreign companies and China were due to the changing nature of their relationship with China. The question posited that in the “old days” the typical relationship was that of a foreign company sending money to China to buy a product, but today, the typical relationship is far more complicated and these increased complications are increasing “tensions.”

My answer was that I had never thought about it in that light, but that was probably true. I then went on to talk about how the nature of my law firm’s China business has so drastically changed over the years. Whereas five years ago, probably 75% of our business was for companies looking to manufacture products in China, with 25% focusing on businesses that wanted to sell products or services to China, that ratio has pretty much exactly flipped.

When I got back to my computer, I had an email from a retailer asking whether it would need to open up a branch office in every city in which it wanted to locate a store. Our short answer was “generally yes.”

The big issue today is not so much how to make products in China, but how to sell products and services to China, be that within China or from outside China. Needless to say, the “within China” part is where the complicated legal regulations and hence the tensions can arise.
Twice in the week before I left for Toronto I was interviewed about this “sea change.” Once by a friend writing a book and the other by a reporter. Both wanted examples of American companies profiting or seeking to profit from selling their goods or services to China, and I talked a bit about the following, in an effort to show the incredible diversity of ways American companies are “going to China” these days:

  • US company that provides high end remote medical testing. It sells its testing systems to hospitals and then does the diagnostics from the United States. It is not forming a company in China; it does this from the United States.
  • US company that provides movie services to China’s leading movie companies. It is not forming a company in China; it does this from the United States.
  • US and Canadian and European and Australian and Latin American companies  that provide online learning to Chinese companies. These companies, pretty much by necessity, are having to work with Chinese domestic companies that possess an ICP license or have the ability to get one. Some of these companies are not forming companies in China, but selling from their home countries. Some of these companies are forming companies in China to assist in selling or providing support services there.
  • US and Canadian and European and Australian companies that sell enterprise level software to Chinese companies. Some of these companies are forming companies in China and some are not.

I could go on and on with examples of foreign companies are seeking to profit from China’s rising wealth. The point is that the legal and business issues foreign companies face in trying to profit from China are usually very different and oftentimes more complicated than those faced by foreign companies that have their products made in China.

If you are sitting in the United States and just buying product from China, your legal issues are going to be both very different and less complicated than someone selling enterprise software to China’s hospitals. The company buying product needs to have a good contract that makes sure its IP is protected and that its widgets are of good quality and arrive on time, but the software company is going to need to deal with pretty much the full panoply of China’s laws. The software company may need to form its own Chinese entity (almost certainly a WFOE) for China and then it will need to make sure it complies with China’s employment laws, antitrust laws, and anti-corruption laws, just to name a few.

I just read a Forbes article, The China Luxury Downturn Is Real – Global Luxury Brands Must Adjust, focusing on what foreign luxury brands are facing in China these days, and what they should/can do about it. Zakkour’s article nicely highlights the huge difference in issues faced by sellers to China as opposed to buyers from China. The article talks of how the “premium luxury market slowed” in China in 2013 and of how that trend will likely continue in 2014, especially for those companies that “depend on gifting.” But even that market, according to Zakkour is “still pointing up.”

Zakkour starts out listing a number of factors that have driven growth in the premium luxury segment down to about 2% and he leads it off (rightly I think) by citing to President Xi Jingping’s intent to make “a huge dent in the endemic corruption in Chinese politics and business.”
The article then lists the following reasons why luxury brands should “continue investing in China as a long-term growth market”:

  • After 30 years of exponential  economic growth and development, China’s economy is slowing, but this is relative, from 10% to 6%-7%, which is still robust — luxury purchases will continue to grow with the economy in general.
  • Urbanization and an ever enlarging middle and upper class are fueling further growth for the best things in life – While 1st Tier cities and regions have been saturated, the new growth will come from Tier 2, 3, 4 and 5 cities, representing another potential 300 million new luxury buyers.
  • Current events and government policy are always fluid in China.  When the differences between legitimate and illegitimate purchases are sorted out “this too shall pass.”
  • The accessible luxury market will continue to grow and prosper.

The opportunities for making money in China are considerably greater today than they were five years ago and will almost certainly be considerably greater five years from now than now. But selling into China — especially selling from within China — is not the same as sending out a purchase order.

Chinese and American businesses are working together (or not) in a different way than they did even five years ago. Their business relationships are getting more complicated and the competition between them is increasing.

A couple days ago, we ran a guest post on Expat Stress in China and we received an unusually large number of fairly strident comments and emails from that post, most of which highlight increased tensions.

Is the business relationship between China and and the West fraying? And, if so, why? Is the switch from foreign companies manufacturing to selling products and services into China driving this? Or was the relationship never really all that good in the first place?

What do you think?

2 responses to “Selling Products and Services into China: Tension is Rising”

  1. The way I see it; services, as sold by foreign entities, will be encouraged. The current need for the knowledge of moral capital and its implementation in sufficient quantities to drive the shift from a business base of inefficient SOE corruptors/polluters to efficient clean job/consumer creators currently allows it. Goods, not so much, that one is covered. The balanced plate spinning continues. Watching it is pure entertainment.

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