Chinese business culture and market entry
19 Jan 2021 11:33 AM
To make the most of opportunities in China, you need to understand and address the risks.
In association with The Week and CBBC
China presents real opportunities for UK tech companies. Scale counts – this is a country with over 100 cities of more than a million people – and China-UK trade surpassed £70bn in value in the 2018/2019 financial year. The Chinese government is working to drive future growth through technology investments and innovation, and Chinese markets hold UK tech companies in high esteem. China wants to take advantage of the UK’s capabilities in AI, big data, fintech, ed-tech and Ecommerce. It’s looking to create strong synergies for closer UK-China collaboration in these areas where UK tech companies are already experiencing success.
Yet moving into China also has its challenges, not least building a brand in a market that covers such a huge and diverse territory. There can be regulatory barriers which can inhibit foreign market access, and restrictions around foreign investment in some sectors. These aren’t necessarily higher or more onerous than those in other territories – including the US – but they need to be considered.
It can take up to six months or more to clear the hurdles involved in setting up a Wholly-Foreign Owned Enterprise (WFOE), a Chinese limited liability company 100% owned by the parent foreign company. And while it doesn’t take as long to set up a Representative Office – effectively a local extension of a foreign business – these cannot engage in direct profit-making activities.
There are various other regulations and licenses tech companies need to be aware of, such as licenses for hosting on Chinese servers, hardware manufacturing regulations, national product standards and rules on cross-border tech licensing agreements. China’s E-Commerce Law has also introduced a series of regulations around the setup and operation of online stores. These cover everything from responsibilities for the prevention of IP infringement to measures that protect consumer privacy and rights.
These issues can be challenging to navigate without local Chinese expertise. Even where you base your organisation has an impact, as specific special zones offer distinct rules and benefits for foreign businesses, based on the industries and sectors they’re designed to support; a provision that’s far from specific to China, but that can have a real impact on UK tech firms doing business in the country. Local expertise can also help you understand available business incentives across the country and to navigate compliance mechanisms. Luckily, other companies have blazed a trail and expert advice is available. You can find initial guidance on many of these issues and negotiating China’s regulatory frameworks at the UK Government Digital and Tech China website, along with links to further resources. The China-Britain Business Council can also help with webinars, reports and a range of useful services, many of them free. Finally, techUK is another key organisation. Not only does it specifically support the growth of the UK tech sector both at home and overseas, but it offers various resources to help technology companies navigate these business pitfalls.
IP and joint ventures
There’s no shortage of demand in China for innovation and original ideas, but it remains important to take steps to put IP protection measures in place. While the government has addressed the issues with new regulations, areas of inconsistency remain, and it’s only sensible to take steps to protect your IP before launching technology products, including software and 3D product designs. Bad faith trade mark claims – or trade mark squatting – are another thing to watch out for, where a Chinese entity registers your product’s name or logo, then expects you to pay before they’ll transfer the rights.
What’s more, companies entering into joint ventures with a Chinese partner are required to share technology and IP with the other company and commit to joint development in Chinese research centres. This itself can complicate your IP rights.
Expert help is available. The UK government’s Intellectual Property Office has an online IP Health Check tool you can use to identify your IP assets, while the IP attaché team based in China can offer advice on registering and defending your IP. You can also find legal services that specialise in Chinese IP issues, to help ensure you take the right steps.
Intelligence and security
Firms operating in China must also comply with the full range of applicable Chinese laws, including the Cyber Security Law, which protects China’s critical network infrastructure and governs the collection, usage and transfer of data. The National Intelligence Law, which requires companies to cooperate with state intelligence agencies, also has obvious implications for data privacy and security.
Beyond this, Chinese partners can end up with unrestricted access to any systems or data produced through the partnership, and pass that on to government agencies. In one case, the developer of a medical information platform found out too late that it had no control over the use of patient data, and that a Chinese partner and six government bodies had unrestricted access. This wasn’t good for its reputation or its international sales.
The most sensible approach to dealing with these laws is to carefully assess how they might apply to your business and the potential impact on the business and its customers. You can find further explanations of these laws, along with guidance at the UK Government website dedicated to doing business with China.
UK regulations also govern what businesses can do in China. Companies have to perform due diligence to ensure they don’t breach the Human Rights Act, and must be wary of manufacturing or inadvertently selling dual-use technologies, which have potential military or intelligence applications. China’s Military Civil Fusion policy encourages sharing of science and technology resources between the civil and military sectors, meaning that a product developed with a Chinese partner could potentially be repurposed for military use. This can even happen without the foreign partner’s consent.
Taking a hypothetical example, a UK-registered company could end up with a £400,000 fine on an £800,000 commercial deal if, for example, it sold cameras without a necessary license that could then be incorporated into weapons programmes. Again, getting advice early can help you spot potential challenges and work out ways to counter or avoid them. The UK Government has a page on Strategic Export Controls where companies can find useful resources and guidance.
Meet the challenge
China is a very different market, with its own systems, its own dominant online services and its own unique business culture. UK tech businesses have their hands full working with Baidu rather than Google or Weibo and with WeChat rather than Facebook and Twitter. Yet, they also need to work around local customs in a territory where personal relationships are key.
So how can UK companies meet the challenge? Partly, it’s a question of preparation, deciding on the right business structure to support your Chinese ambitions and researching the regulatory hurdles. Perform due diligence on your proposed activities and ensure that you’re staying within the bounds of both UK and Chinese law.
Just as importantly, companies need to make connections, developing the personal contacts essential for your Chinese business to thrive. For instance, the Norwich company, Developing Experts, sells online teaching resources into Chinese schools. When Chinese regulations changed that could have affected the business, a contact within the government provided warnings and advice that helped the company comply and continue sales.
Making these connections may require some grounding in Chinese business etiquette. The China Britain Business Council has some excellent resources that newcomers should refer to. Try to avoid hostile negotiation strategies; in China the worst thing you can do is cause potential Chinese partners to lose face. Similarly, working with a Chinese interpreter will not only help you in meetings and social encounters, but make it easier to avoid basic errors in your marketing or social messaging.
The complexity of navigating both the cultural differences and the local regulations means that working with a local partner becomes the logical next step. In fact, Everledger, the developer of an AI-enhanced blockchain platform with a growing presence in the Chinese jewellery market, says that it’s critical, enabling companies to cope with market conditions and consumer preferences in a country where both can change so quickly.
Even so, UK companies need to take any time necessary to review their potential partners. Are there any records or corporate filings on potential partners? Can a Chinese-speaking colleague do some internet research on Baidu? It’s better to find out about court cases or corruption allegations before entering any partnership, as the association could affect your business for the worse. Similarly, it’s helpful to know about any commercial or political ties that might not be immediately obvious. There are Government resources to help you with your due diligence, providing advice on the important questions to ask and how to answer the questions you’re likely to face.
None of this should put you off doing business in China, but to make the most of the opportunities, you also need to be prepared to meet the challenges head-on and do the research needed to help you make the right decisions.