China may not be on your business radar yet, but you can bet that your business is on theirs. The economy in China is changing at an accelerated pace, and with increasing momentum. China has the largest currency reserve of any country in the world at about $875 billion. The acceptance of China into the World Trade Organization in 2002 has opened China’s doors to an increasing number of companies across a broad spectrum of industries.

Whether your company is facing competitive pricing pressure, looking to capitalize on the growing China market, or you are being forced to enter China because your existing customers are pulling you there, the opportunities in China cannot be ignored and could dramatically impact your bottom line. In this article, I’ll attempt to give you a new view of China, provide a glimpse into China as a market opportunity, and offer some resources that may help you determine your own China strategy.

Are you ready for China?

A New View
China has a population somewhere between 1.3 and 1.5 billion people, 170 (+/-) cities with populations over 1 million. Compare that to the United States, with 9 cities over 1 million (population within the city limits), and Eastern and Western Europe combined with 36, and the scale of the China market begins to take shape (see map). The number of people that go unaccounted for in the China census would be equivalent to the fifth largest country in the world. Currently there is an incredible migration of farmers moving from the countryside to the urban centers to find work. Estimates place the number of migrant workers at 90 to 300 million. On the low end of that estimate is a workforce equal to the size of the workforce in the United States. Moving to the high end of the estimate, the numbers exceed the combined workforces of the U.S. and Europe. It is believed that by 2010, nearly half of all Chinese will live in major urban centers.

China is often referred to as the ‘manufacturer to the world’. It is very difficult to compete with China on price alone. The furniture industry has faced that challenge head on, with over 50% of all furniture bought in the U.S. now being made in China. Competitive pricing pressures will continue to force U.S. companies to seek lower cost means to produce the same or similar products. As a cost cutting strategy, the options in China range from sourcing parts from various manufacturers to the complete manufacture of your product in a China factory. As you move toward the latter option, the business challenges become greater and more complex.

Sourcing individual parts from factories in China has become fairly straightforward. Of course, there are issues with maintaining quality standards, reliability and predictability of shipments to deal with on a regular basis. However, there are numerous service providers who can help smooth the process ranging from quality inspectors, who can audit factories and shipments to ensure standards are met, to logistics companies that will help manage the warehousing, shipment, export and import requirements of the manufactured items. These can provide some assurance that parts will arrive on time and as expected.

If the manufactured item or process is proprietary, the challenges become greater. Intellectual property rights (IPR) is a big issue in China, and steps are being taken to protect your designs and technology from being duplicated or stolen. China is rapidly moving to change its reputation on IPR, and policies are being implemented and revised daily to create standards. Given the cost of labor and the low cost of plants and equipment, a direct investment in China may be the best long-term strategy to provide the most control over quality and protection of IP.

China as a Market
In 2003, there were over 19,000 U.S. companies that exported goods into China, with the total value of those exports exceeding $9 billion. Due to the increasing openness of the Chinese government to importing goods and services, the number of SME’s exporting to China should continue to increase. Below is a high-level process for determining possible options for reaching the vast China markets.

The process begins by determining which category your product has been categorized by the China Ministry of Commerce (MOFCOM). The four categories are: encouraged, permitted, restricted, and prohibited. If your product or service is categorized as:

Encouraged or Permitted
If MOFCOM has categorized your product offering as encouraged or permitted, then you will enjoy the most flexibility in crafting your go-to-market strategy. When a product falls into these categories, the preferred corporate structure is a wholly-owned foreign entity or WOFE. Establishing a WOFE allows for the most control of your product, from design and manufacturing to sales and support. You’ll be able to recruit and hire your own employees, train them in your corporate culture and to your standards, and develop them with your values and principles. Over 70% of companies expanding into the greater China market do so with a WOFE.

Restricted
If MOFCOM has categorized your product as restricted, the go-to-market options are more limited. The typical vehicle for China expansion under a restricted product category is through establishing a joint venture (JV) with an existing Chinese company. In this scenario, the Chinese company will have majority ownership and overall control of the strategy and direction of the jointly-held company. A joint venture is one way to gain access to an existing sales channel and customer base.

Prohibited
If MOFCOM has categorized your product as prohibited, the go-to-market options are basically limited to licensing agreements with a local China company, or to use China as a low-cost supplier for all or part of your product. It is advised to establish a representative office in China to provide oversight and “eyes and ears” on how the product is licensed and marketed, and depending on the scope of an outsourced manufacturing arrangement, provide quality assurance, maintain relationships and help work through other challenges that will arise. A Rep office can be used to hire and retain individuals, to conduct market research, due diligence and certain other non-revenue generating activities, but they are not allowed to accept any sales orders or contracts.

Helpful Resources
There are many more things to consider when answering the “China question.” The information presented here is very general and meant to provide a high-level overview of some possible strategies to consider. To accurately define and create a China strategy requires input from various professionals that have direct experience dealing with China and China business. Additionally, there are many good resources to assist U.S. companies with these import/export issues:

1. The Washington State China Relations Council (www.wscrc.org) is a non-profit business association dedicated to promoting stronger commercial, educational and cultural relations between the state of Washington and the People’s Republic of China. The Council is the oldest non-governmental statewide trade association in the United States dealing specifically with China.

2. The Washington State CTED (www.exportwashington.com) is committed to helping Washington state companies export goods to other countries. They have two offices in mainland China.

3. The Department of Commercial Services (www.export.gov/china) is a division of the Department of Commerce and is committed to helping U.S. companies export products. They have a number of offices in mainland China.

4. 9Spaces, Inc. (www.9spaces.com) is a Washington-based company committed to bridging U.S. and China businesses by enabling cross-border business networking, delivering focused business intelligence, and providing professional services.

An investment in China will take time and should be considered with a long-term outlook. One thing is certain – China must be taken seriously, whether as a threat or as an opportunity.  Are you ready?