china law

Controlling the Uncertainties

In understanding some of the issues faced by companies doing business in China and especially in controlling the uncertainties encountered, we will use the experience of one of our clients in the pharmaceutical industry as an example.

Uncertainty in government policy and regulation are inherent in any commercial environment. In China, with the change from a centrally planned to market economy, this adds a further dimension to the challenge of creating a profitable enterprise.

We all need to appreciate where China is coming from and that it is going through the most dramatic and massive economic transformation ever attempted in history, in any country.

The Chinese fear that foreigners will enter the market and exploit the economy using their business skills that at this point are greater than those of Chinese enterprises. Therefore, education, agriculture, defense, pharmaceuticals and the health care industry are major concerns for all governments because of the direct impact they have on the well being of the people. Due to the structure of the health care industry here in China, foreign companies have taken a large share, within a short period of time, of the pharmaceuticals market in China in value terms. As a result, foreign pharmaceuticals companies receive more attention than would otherwise be the case.

An example of the above concerns and scrutiny of the Chinese government of various industries are the comments made by President Jiang Zenmin on CNN, when asked what concerned him most when he woke up in the morning, he replied, "I worry about feeding one and a quarter billion people." Therefore, with government playing a prominent role in certain industries, developing a good relationship with and staying close to government is a necessity.

Companies need to be seen as friends of China, working jointly on projects. Trying to work with government, and therefore spotting the policy changes, is part of reducing the uncertainties inherent in this environment.

Depending on which industry your company is involved in, companies seeking to enter China may require a joint venture (JV) partner and are therefore required to enter into either a cooperative or equitable joint venture. You must be aware that while you may have the same interests as your JV partner(s), your JV partner(s) objectives may be different to your own. In most cases, the Chinese partners have minority stakes (the stake is dependant on the industry being entered into), and they are usually looking for an early return on their investment. By contrast, the foreign partner is usually looking much longer in term, particularly when a large plant has been constructed.

Further, foreign companies in China sometimes find that feasibility studies, often carried out five years earlier on the basis of limited experience of the country, predicted positive financial performance that has taken longer in practice to materialize. When the Chinese partner discovers this, mutual trust can break down because it is typically the foreigner who prepares the business plan in the first instance.

Coupled with the issue of returns on investment, is the issue of 'face', that is, the pride in being part of a JV with a large foreign enterprise. Relationships can sometimes be emotional rather than objective. Nevertheless, if a JV has no chance whatsoever of meeting its original objectives, one has to be prepared to cut one's losses and sever the relationship.

Continued focus is needed on investing in the "soft side", that is, people, systems, and training.

The market environment in China is another major cause of uncertainty. Although the market is growing fast, encouraged by sustained growth in GDP, the future shape of many industries is uncertain.

One possible method of combating these uncertainties is to try to get closer to the market and understand what is happening - not just in the big cities, but in the rural areas as well. It is also necessary to understand your customers' mentality and the way this is changing, to understand the information flow about your products and the way they should be promoted. Spend a lot of time listening to people.

Keep your feet firmly on the ground. The Chinese will understand the regulators and the markets far better than any foreigner. That is, in the end, how to manage the uncertainties. That is how to succeed.