Business Weekly - Cambridge, UK

According to forecasts by the World Bank, China will be the third largest economy in the world by 2010 and the largest by 2020.

Whilst previously only large corporates could contemplate operating in China, now small to medium sized enterprises are also considering market entry. Even so, it's a not a decision to be taken lightly.

Experience to date has shown that an up-front investment in market information, due diligence and planning more than pays back its cost in terms of secure partnerships, a realistic business model and a more defendable competitive positioning.

Bureaucracy and Regulation

Business in China cannot be approached in the way it normally would between two western companies, and the additional work required can sometimes appear to be unnecessarily bureaucratic, putting an additional burden on foreigners relative to local companies.

Foreign companies need to receive a number of approvals from the Chinese authorities in order to set up a legal entity in China. However compared to 10 years ago, the process has been much streamlined and in many sectors central government approvals are not necessary.

Only in restricted industries such as finance, insurance, automotive production, and telecoms are central government approvals or registration required. For other businesses it is the size of the investment that determines the types of approval. At the local level bureaucrats are keen to attract foreign investment and are prepared to make the procedures as streamlined as possible. In some economic and development zones the government boasts three-day turnaround of all approvals once the paperwork is in place.

The government departments for the approvals to incoming investment are the Ministry of Commerce, known as MOFCOM, (formerly MOF-TEC), and the National Development and Reform Commission, (NDRC) at the central government level.

Companies are then required to register their new business and obtain licences from the Administration of Industry and Commerce, known as AIC. This is done at local (city) level where the business is going to be located. In the restricted investment sectors such as banking and telecoms, approval has to be sought with their governing body.

Structure of China operations

There are multiple ways a company can enter China and no single company structure has emerged as the "best" way to enter the market. The more popular investment routes have been through a Representative Office (RO), Wholly Owned Foreign Enterprise (WOFE), and Joint Venture (JV).

While historically from the 1980s to the late 1990s, most foreign companies set up JVs in China in response to regulatory constraints, WOFE has proven to be more and more popular in recent years. For example, according to information (2003) from MOFCOM, more companies are using WOFE for their China operation in the eastern region of China, while in the other regions joint ventures are still a popular model of entry.

Choosing a location

One of the most important decisions new companies in China need to make is where to locate. This can be the first step to success or failure. Incentives are now available in some cities and zones are designed to tempt investment into the area.

While subsidies, training and interest-free loans are worth considering, successful enterprises also need to consider the availability and cost of critical transport and communications infrastructure, office accommodation, labour and housing.

The area in and around Shanghai has been very popular - and hence more expensive - because of its large concentration of private, foreign-owned businesses. A bit further inland, cities like Chengdu and Dalian, can provide first-class Chinese brain power at a more modest cost.

Employing local people

Local managers fluent in Mandarin Chinese and understanding the culture can go a long way in communicating effectively with Chinese staff, customers, suppliers, and bureaucrats, compared to Western expatriates.

Fortunately, China benefits from having highly educated managers, engineers and scientists, who work very hard for only a fraction of what their European counterparts earn. This means that the business case for employing Chinese is very compelling indeed. There were about 50,000 students studying in the UK in 2005 and most of them will happily head home to work with a UK company's offices in China.

For more senior positions there are large Chinese communities in London, Cambridge, Manchester and Newcastle that include many experienced Chinese scholars and managers.

It is important to appreciate that the Chinese themselves are going through a considerable transition phase. Having been accustomed to a state-dominated system of control, they now have to adjust to a brave new world of private enterprise, incorporating performance-related pay, personal accountability, corporate social responsibility and open communications in the workplace. So both Westerners and Chinese need to make efforts for the relationship to be successful.

* China Business Solutions will be holding a seminar on March 22 in Cambridge about how to successfully set up in China. More information is available on www.chinabusinesssolutions.com, and by calling +44 (0) 1223 421968.