challenges in china

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OnShore Advisory Group LLC

❖ Re-Shoring❖ Supply Chain Management❖ ERP


The challenges of Doing Business in China

Many years ago, when I first entered China, there were no how-to books on what to do, how to do it or when to do it. We went there with our eyes and minds wide open and our hopes high.

Many years later and after countless experiences, both positive and negative, it is my hope that this short guide will help you ask the right questions and enter this land with the tools necessary to avoid some of the more obvious pitfalls.

There are no cookie-cutter approaches to doing business in China, but a healthy dose of skepticism, curiosity and pragmatism must be packed in your luggage.

Richard S. Ellert


Doing Business in China

Why China?

What is the attraction?

What is the business case for being in China as a company?

For most, it is all about low cost, for others it is ef:iciency or scalability, but is China really a Low Cost Country or is it a Lower Cost Country?

Are there viable alternatives?


What are the real challenges?

When thinking China, what :irst comes to mind?

-‐ 1.5 Billion people -‐ Labor is cheap -‐ Access is easy -‐ Everyone is there

In Fact, reality is that:

-‐ There are signi:icant labor shortages -‐ Labor cost has doubled in the last 5 years -‐ Material cost has increased in double digits -‐ Re-‐Shoring activities are picking-‐up speed


Low Wages = Low Cost?

Why Low Wages do not necessarily equate to Low Cost..

Here is a clear example of the challenges facing those seeking to reduce cost by migrating production and activities in China.

Let's assume that I am currently producing, in the US, a consumer product made mostly of resin-‐injected parts, decoration, simple electrical parts and packaging.

In the last 5 years, commodity material cost (resin, paper, copper, etc..) has gone up at a double digit rate year over year, which implies that prices are fairly equal across world markets.

Labor cost (in China) has gone up between 10 to 15% yearly for the last 5 years. By 2016, it is estimated that China Labor Cost will equate that of the US.

Historically, labor cost in consumer products rarely exceeds 20% of the overall cost, if we include factory pro:it, logistics, certi:ication, etc.

The lesson here being that focusing solely on decreasing labor cost can lead to miscalculation since the impact of a 15% increase on labor represents only a 3% overall cost increase.

Focusing on issues such as logistics, transportation, :lexibility, tying up of cash :low, distance, quality control and certi:ication can yield signi:icant cost savings that may often exceed the advantages of lower cost labor.


Guide to the Decision Process

Making the decision to outsource or move operations to China requires a well though out strategy.

This quick guide to the decision process will help you ask the right questions and proceed methodically.


Controlling Risk

Business in China requires Risk Management Take your time in making decisions It will take time, efforts, resources and lots of patience.

Answer these important questions: If you are not sure of the answer(s), it is time to take a step back and ask for help.

❖ Do I clearly understand why I intend to move some / all of my operations to China? ❖ Have I looked at alternatives closer to home and did I go through a pros and cons study of the

alternatives? ❖ Do I understand the :inancial, regulatory and administrative challenges? ❖ Do I have in-‐house staff with the required experience? ❖ Are there any issues linked to IP and/or proprietary processes? ❖ Do I have a plan in terms of controlling the quality and safety of my products?


Controlling Risk

Important questions:

❖ Am I able to absorb increased lead-‐times initially as part of the transition process? ❖ Do I have a strong enough product development team, capable of communicating

effectively with China? ❖ Am I able to deal with the cash :low requirements of an increased product cycle

time table? ❖ Do I have a team on the ground, capable of dealing with day-‐to-‐day issues at the

factory level? ❖ How are my customers (and employees) likely to respond to our exploration of

doing business in China?


The 5 Keys to the Decision Process

In the next slides, we will explore the 5 Keys to the Decision Process:

1. Is my primary motivation for looking at China justi:ied?

2. There is little or no credible / veri:ied information or data

3. In China, nothing is what it seems

4. The role of government is paramount to any business decision

5. There are no established or standard ways of conducting business in China

except that You Must Question Everything


1. Your primary motivation

❖ Is this is for the long term. If it is not, stop now. ❖ There are no shortcuts ❖ Am I getting on the band wagon? ❖ Am I being pressured (by the board, By my customers, etc.) ❖ Is China my simplest and only option? ❖ Do I have the right internal Expertise? If not, will I require external help?


2. Lack of Credible InformationAny decision, at any level requires access to credible information

❖ Information in China is tightly controlled by the government ❖Corporate reporting is unreliable ❖ Information is fashioned according to the need of those asking ❖Blurred relationships between business, individuals and government


3. Nothing Is Ever What It Seems

❖ Chinese culture and ethics: There are no clear points of reference for

Westerners ❖ Ask questions. Lots of them. Repeatedly. ❖ Obtaining :inance and ownership history is dif:icult, but a Must ❖ Check references. ❖ Investigate independently ❖ Establish a relationship with the local government


4. Role of Government

❖ Political structure of the business • Most enterprises in China started off as State Owned Enterprises (SOE’s). Despite widespread privatization,

connections to the government are rarely severed.

❖ Connect to local government • Understand the political structure surrounding the business you are exploring, either for acquisition, as a partner

or as a supplier • Identify and hire a locally connected associate (accountant or administrator), give him low risk work and let him

establish links to local of:icials

❖ Engage with local government • Make it a point to engage personally with local government, they will often hint at issues and help you deal with

them

❖ Investigate status with Customs, Security and Tax authorities

China’s government is very active in business matters and decisions. There are many layers and a multitude of administrations who can

influence, sometimes control, how a business entity will fare.


5. No Standard Way to do Business

❖ Expertise must be local • Unless you are a major corporation, you must seek local expertise.

❖ Mitigate risk • Every one of your actions have to be geared towards mitigating risk

❖ Banking and supply chain issues have to be resolved up-‐front ❖ Find trust-‐worthy local help ❖ Don’t allow corrupt practices to seep into the process

❖ Be wary of offers to help smooth the path in front of you. It is never done in an altruistic fashion

All business in China is Local. Although China is one country, it is made-up of hundreds of ethnic and cultural groups.

Someone from Beijing is considered a foreigner in Xinjiang.


About OnShore Advisory GroupI founded OAG on principle that small/medium companies deserve access to

pragmatic, no nonsense information and guidance

Our mission is to assist you throughout the process of establishing presence in China, and to :ind alternatives if China is not the best solution. Our Re-‐shoring activities have doubled in one year, clearly suggesting that this is now a two-‐way street…

Proven track record having spent 10+ years working in China in the :ields of Supply Chain, Manufacturing, Operational management, etc.

Applying ;irst-‐person experience that cannot be gained from books or trolling the internet

Experience that allows OAG to quickly identify major risk factors and help turn your plans into successes

Visit us at: www.onshoreadvisory.com

Join our Newsletter by signing up here.

Richard S EllertFounder

OnShoreAdvisory Group LLC

[email protected]

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