We have all experienced embarking on a trip to a new place, maybe even to a foreign country. Before you leave you are filled with anticipation of what is to come. When you get to your destination, the different language, culture, and surroundings can leave you feeling dazed and confused. Thankfully, the research you did and the guide book in your hand will help you navigate this new place and reduce the risk of a disappointing trip.
A similar situation can happen in business. You have a business challenge that could be solved by outsourcing, but you do not know where to begin, who to involve or how to do it. Why leave it to chance? Just as in personal travel, one of the best ways to increase the probability of a positive experience is to know your destination. And what better method is there than to learn from a person on the inside? Having worked for various top companies in China and Canada, and as the current owner of a company with offices in Changsha, China and Toronto, Canada, I have learned many lessons. I have selected a few to explore to help you successfully do business in China.
China’s rise on the global market started with manufacturing, which continues to be a dominant economic force, but services and innovation are poised to be future stars. Today, both business and consumer markets have matured and are increasingly open to Western products and involvement. Tomorrow, those markets will be even more mature, and the adoption and progression of new innovative technologies will happen much more rapidly.
Did you know? The consumer market in China is hot and consumers are aggressive adopters of new innovations and technologies. Year-over-year growth for retail sales was an impressive 17-percent when comparing August 2010 to August 20111 . In contrast, U.S. retail growth was 7-percent higher than August 20102 .
Cities in China can be classified into tiers based on several factors such as population, economic prosperity, workforce education and so on. Tier 1 cities, such as Beijing (population 19.6 million3 ) and Shanghai (population 23 million4 ), are on par with top U.S. cities. In Tier 1 cities, you will find the most prevalent use of English in business, highest adoption of western-style management and the greatest presence of U.S. companies. Yet you will find that costs are higher and the turnover rate for the workforce is also higher because there are more lucrative opportunities available for the ambitious employee to explore. In Tier 2 cities, such as Hunan province’s capital city, Changsha (population 7 million5 ), local companies have traditionally dominated the business scene, but that is changing as multi-national corporations are increasing. A sampling of Fortune 500 companies located in Changsha includes: The Coca-Cola Company, ConAgra Foods, Walmart, Bosch, NEC and LG.
Costs and the workforce turnover rate are lower in Tier 2 cities, but other challenges exist. There is a higher likelihood of misunderstandings because English is less widely used in business, and there are fewer managers experienced in Western-style management practices. Thus, more effort is required to ensure there is common understanding with your vendor.
When evaluating where you will do business, it is critical to evaluate what type of risk you can tolerate. Do you have the appetite for risks that arise with a less developed industry sector while reaping the cost benefits? Or do you prefer less risk and a more established, mature and expensive market?
Tip. To increase the degree of success and overcome the language and cultural differences, working with someone who is locally-based can help you evaluate potential partners, guide you through cultural and social customs, and open business networks key to navigating the overwhelming potential vendor pool. Consider that in Changsha alone, there are more than 700 outsourcing suppliers. For the best result, you want to ensure that your local liaison has a comprehensive network of business contacts relevant to your specific needs and industry. One way to find that local liaison is through the local government or a local business leader.
Did you know? China is a very relationship-based community so networking is critical. This means that you should visit the city where you are looking to outsource and, sorry to repeat myself, find yourself a local consultant to work with.
You might be asking, “Why should I consider China?” Simply put, China offers ample opportunity when you know how to find it and work with it. The advantages of outsourcing to China are numerous. A few of the key ones are:
The high urbanisation rate, which continues to accelerate annually, is currently 47-percent for the whole of China6 and 63-percent for Changsha7. These stunning rates demonstrate how quickly the workforce is expanding. The people are eager and ambitious with a strong work ethic. The well-established education system, recognized for its depth and rigor, is producing an intelligent and skilled candidate pool. To give some context, in Changsha alone, there are 97 research and 49 post-secondary institutions that produce 310,000 graduates annually8 .
Did you know?In China, face-to-face and detailed SMS (text messaging) are preferred methods of communication over email and phone calls.
Tip. As a foreigner in China, you might encounter unexpected issues that can turn into a frustrating situation when you deal with your Chinese business partners. It is critical to take the time to understand the rules of engagement for doing business in China, and then parlay that knowledge into successful business relationships. One nuance to remember is the time it takes to secure a commitment on a proposal. Do not expect a firm answer in the early rounds of meetings. You will need to leave your proposal with potential business partners, and give them ample time to discuss with their supervisor and then respond. The challenges you could experience are rooted in the recent development of Chinese economy. The pace of development is so rapid that the people have not had time to adjust. Be patient, accepting of the differences, and keep a positive outlook. It is important to establish the relationship first.
Tier 2 cities in China not only offer a cost advantage over their Tier 1 counterparts for services outsourcing, but also compared to cities in other countries. For example, wage costs in Changsha are 30-percent lower than the coastal areas of China. Land and office rents are also much lower than other cities in China. When comparing Changsha to cities beyond China, the overall business operation cost is only about one fifth that of western countries.
Tip . It is very important to thoroughly research and complete reference checks on your potential vendors, as their marketing material might be overstating their capabilities. There are vendor rankings in China on www.baidu.com (China’s version of Google available only in Chinese,) but you should view those rankings with a critical eye. The Commerce Bureau might offer you some recommendations, but it is important to do your own due diligence. Meet a potential vendor in person to validate their claims with your own eyes and ears. If you find a vendor that can provide you what you are looking for and your due diligence is positive, start with small business engagements to allow for the working relationship to develop. All in all, a cautious approach is necessary when you start your business endeavour in China.
A key priority for the Chinese government is to foster a favourable environment for international business development. All levels of government are committed to supporting the service outsourcing industry through favourable financial incentives (tax subsidies, talent recruitment and training incentives) and policy programs—although some local governments may offer more assistance than others. Another area to investigate is what the local government is doing to attract talent to its city. In Changsha, there is an incentive program in place to attract high quality talent to the city. The most recent program’s goal is to bring 10,000 people to the city, 30-percent of which are management staff.
Tip. As with any country’s government, it can be tough navigating the various layers of bureaucracy to get things implemented, and knowing who the key people are to make those things happen. In the Chinese government administration, the local Commerce Bureau usually manages foreign businesses, although you might find it difficult to identify the exact function of each Commerce Bureau department. Their websites can offer some guidance and often offer an English version, but the translation might not be as clear as it could be. A government relations consultant can to help you make the proper introductions and connections within the government. To be honest, if your consultant is based in your home country and does not have real “field experience” in China, I suggest you find a locally based consultant to work with because there is no substitute for local experience.
So there you have it, a few of the lessons I learned both as an employee and employer within China and internationally. Outsourcing to China has its upsides as it relates to costs and government support, but there are also challenges arising from different business customs and language gaps. You need to not only complete your own due diligence of potential vendors, but also assess your patience and risk-tolerance for overcoming the challenges of determining where and who is the best fit for you. China is well-poised to deliver on the three key pillars of outsourcing: cost, quality and innovation. Just remember to find that local guide to team up with and help you to avoid being lost without translation.
1 National Bureau of Statistics of China
2 US Census, Advance Monthly Sales for Retail and Food Services August 2011
4 Shanghai Statistics Bureau
5 KPMG: Changsha Investment Environment Study 2011
6 China Center for International Economic Exchanges (CCIEE)
7 KPMG: Changsha Investment Environment Study 2010
8 KPMG: Changsha Investment Environment Study 2011