Originally Published on the www.exportvirginia.org Website

03 November 2004

Exporting to China: Myth or Market?

China is now a member of the World Trade Organization. She has granted major concessions to trading partners, including fuller market access throughout most industries, reduced tariffs, greater regulatory transparency, etc. This does not necessarily mean, however, that exporting your products to China has become easier. In fact, in some respects the job has become more difficult. This article looks at typical negotiating tactics used by potential Chinese customers, and offers strategic recommendations for protecting your company’s interests which we have developed over the last seventeen years of doing business in China.

China’s WTO accession only means that the door to China is unlocked. It does NOT mean that the door to China is open. The Chinese don’t have to buy our products; China’s membership in WTO only means that we have better rules on our side if we can sell our products in China in the first place. And therein lie the problems.

National pride is huge in China, and this is reflected in consumer as well as in industrial and government buying choices. “Made in the USA” fares well as foreign branding goes, but China by and large has an aversion to buying imports if it can be avoided. Exceptions are seen in the luxury and designer fashion markets, in consumer electronics of a level of sophistication not yet produced in China, and of course in commodities such as steel, copper, plastics, and oil. But industry, much of which is still tied in some manner to the government, does its best to keep its imports of finished foreign products to a minimum. As one textile manufacturer proudly demonstrated to us in his factory earlier this year in Guangdong Province, the company had purchased one of a special type of foreign equipment needed for production purposes, but had then been “clever” enough to replicate it themselves twenty times over.

In practice, this means that, particularly for industrial requirements, Chinese buyers may be eager to buy your company’s products…until they can find a way to have it produced in China. Not surprisingly then, your business development efforts with Chinese buyers will likely be met with some or all of the following responses:

1) “We are very interested in your product. Why don’t you invest in China, produce it here, and we will be glad to buy it from you.”

If you hear these words, pinch yourself. Remind yourself that you have come to China to SELL, not to invest. Don’t be sold on a plan that you didn’t originally have. Remember three key points:

• It is not necessary to open a factory in China in order to sell in China.
• Opening a factory in China is no guarantee of being able to sell in China.
• And finally, most foreign-invested factories are not even designed to sell into China; they are set up in export processing zones to produce products that will be sold OUTSIDE of China.

This “invest in China in order to sell in China” approach has been used to tremendous effect for years now by the Chinese. It is the classic bait-and-switch technique, only in this case it is used by everybody from potential customers to government officials to grandmothers. Hundreds of companies have gone to China over the last fifteen years intending to try to access the magical “1.3 billion person market”, only to end up building factories in China to supply customers outside of China.

Unless you are going to China with a definite intent to consider investment, don’t be talked into it as a means of furthering your sales into China. Any investment plan should look at real feasibility, not vague promises.

2) “We are very interested in your product. As a matter of fact, we have a strong network of relationships throughout your industry here in China that we would like to use in order to sell your product domestically. But in order to do this, we need exclusive rights to the Chinese market for your company’s products. Otherwise, we won’t be able to access and protect the market we now have for you.”

My grandmother used to say that men and women need to know each other through at least four full seasons before they should even consider getting married. It’s an axiom that seems to have wider application to all relationships, particularly where the two parties are fundamentally different from one another, in philosophy, values, and practical approaches to life. The differences between you and your potential Chinese distributor or agent are huge, although they may not seem so at first.

Make your distributor or agent prove himself. As a dear client of ours says, “Date before you get married.” If your potential agent or distributor has the relationships he claims to have, the end result will not be affected by whether or not he has an exclusive right to your products.

3) “We are very interested in your product. Please send us a sample of your product for testing / evaluation / certification [any of these terms may be used]. If your product meets our requirements, we will certainly consider placing an order.”

Red flags should sprout at your feet if you hear these words. There are legitimate reasons and times to send samples of your products to potential customers in China, but there are equally reasons and times not to. If you make anything that in any way includes proprietary technology or processes, you should be suspect of requests to send a sample of such products to China for “evaluation”. China Channel has done due diligence in many cases of this kind. One in particular involved our client’s $70,000 piece of sophisticated equipment to China that, had it been shipped to China to undergo “testing”, would certainly have disappeared without a trace, along with the “Ministry representative” who had brokered the deal for eighteen months, and the $40,000 “testing fees” that went along with the project.

4) “We are very interested in your product. We represent the Ministry / the government / the decision-maker / the end-user [any of these may be used], and we would like to come to the United States to visit your factory prior to placing an order. Please issue us an invitation letter so that we can get our visas.”

In these days of massive restructuring and layoffs of literally hundreds of thousands of government and other employees, it is absolutely necessary to verify credentials in China. Office holders may formerly have had authority; relationships and access may be from a previous life, not the current one. Find reliable, impartial, and capable consultants to assist in sorting out who’s who.

The keys to successful exporting to China (and it is possible) can be summed up:

• Stick to your own plan
• Protect your technology
• Give trust based on results, not on promises
• Use reliable and experienced consultants to help you navigate the regulatory environment, and to do due diligence on everybody in your potential commercial world in China. Customers may become competitors; government officials will certainly have all the necessary contacts in your industry to help domestic businesspeople co-opt your technology and designs if they are seen as attractive.

Only fifteen short years ago, China made virtually nothing that could have been sold on the world’s markets. Today they make and sell garments, toys, furniture, computers, auto parts, industrial tools, hardware, kitchen appliances -- to name a few. The drive and determination of China to develop and succeed should not be underestimated. Creating and developing business in China can be exciting on many levels; make sure it’s in your company’s, your industry’s, and yes, your country’s, long-term interests as well.

Bonnie Girard
China Channel Limited
info@chinachannellimited.com
www.chinachannellimited.com
 

DISCLAIMER – The contents of this article are intended to provide pertinent information for Beyond Virginia subscribers interested or already involved in international trade. While every effort is made to convey accurate and timely information, the contents of this article are not intended as specific advice to its readers. Our intent is solely to convey information.