The lure of emerging markets could result in a costly mistake. Jeremy Butler, director at KPMG who advises companies on trading with China, looks at the key pitfalls... Much has been reported on the threat poised to local companies from emerging markets, and in particular, China. However, as more companies look at how they can set up operations there, lesson must be learnt from those who have succumbed to the many pitfalls of trading with China. The Chinese are highly commercial people. While some may not have banked on the Chinese embracing enterprise, it has risen to the challenge of a modern market economy very easily, and while they are feeding demand in their domestic market, there are also significant opportunities for local companies to set up operations and benefit from the growth prospects and all the wealth this brings. There are many examples of how doing business with China is changing. For example, at one time joint ventures were seen as the best strategy to adopt when looking to enter the market. In recent years, however, the popularity of this approach has begun to wane due to many companies experiencing difficulties in working with a local partner. Instead many companies are now looking at setting up as wholly-owned foreign enterprise. The one thing that remains constant across the board are the many pitfalls that face foreign-owned entrants and, if any business is to be successful, it must face up to a number of issues, regardless of the approach adopted. Relationships do, however, remain key. With many companies now choosing not to adopt the joint venture approach, there are some relationships that would be advantageous to foreign companies. These tend to focus around local government officials, business park management and the mayor's office. These types of people can assist overseas companies greatly and should be respected. A failure to invest the necessary time in building local relationships could result in problems not being resolved as effectively as might be the case otherwise. For those who do choose to establish a partnership, time must be taken over the selection process. Choosing the wrong partner could be disastrous and foreign management teams must be careful not to fall into the trap of considering good language skills to also mean good commercial practice - this is often not the case. Being successful in selecting a good commercial partner is helpful when trying to get to grips with the marketplace. Not understanding the idiosyncrasies is a common mistake and could be significantly detrimental. China is not a homogenous market and the provinces have historically operated with a large amount of autonomy. Furthermore, tastes vary considerably, whether that is with regards to food and drink or their propensity to adopt Western ways - something which could be fundamental to a foreign owned company's ability to break into the market. Companies also need to be real-istic in their expectations and ensure they are not held hostage to fortune. There has been much talk of the money that could be made by Western firms and as a result, many management teams have set goals that are too aggressive and unobtainable. Over the past few years there has been a significant increase in the number of businesses which have failed in this area. Competition is fierce and companies going to China should not trade on the fact that their Western kudos will result in consumers wanting to purchase their product. The Chinese want the best and will purchase accordingly. In the early days of commerce, Western companies used both Western and Chinese script so that the consumer would know that the product was Western. Domestic firms quickly picked up on this and added a Western name to complement their own name. As a result, any marketing advantage for Western companies was quickly lost. With many cultural issues to solve, making sure your product is going to be adaptable and useable within China is paramount. A good example of this is how pizza companies launched the concept of eating pizza within the country. The market had to be created from scratch and as a result, consumers were not familiar with what pizza was, or how to eat it. As a result, all advertising featured a family eating the pizza, thus demonstrating how the concept works. However, for those who have been successful, there are many more that have got it wrong. For example, a foreign car company introduced a two door pick-up truck to the Chinese market but failed to sell them in any significant numbers. Market research revealed that buyers of pick-up trucks in China wanted four doors as they would pick up casual workers on the way into work. The lesson here is, understand what the Chinese seek from you, how they will use your product and how it fits into Chinese culture. Regulation is also a major issue for foreign companies doing business in China. The regulatory environment moves extremely quickly and the laws and regulations have, in the main, taken their lead from best practice from around the world. However, a combination of factors means that things do not stay the same for long. Loopholes in tax and legal code get updated regularly and the dynamic control between the central government and the provinces can mean less or more rigour for specific regulations. Add to this the far-reaching powers of Chinese Customs and it is easy to see that remaining on top of any key legislation changes is vitally important if companies are not to be heavily penalised. On a more general note, foreign managers need to ensure they do not underestimate the tenacity of the Chinese. The approach taken by the Chinese is often one of long-term goals. They work incredibly hard to realise their ambitions, with the local press often carrying stories of how individuals have endured hardship yet have eventually succeeded to become successful, wealthy business people. This ambition and tenacity follows through to their negotiating style too. Paul Brough, KPMG head of mergers and acquisitions for Hong Kong and China, has said he has never seen the Chinese out-negotiated. As a result, any foreign management team looking to negotiate with a future partner must do their homework before any form of negotiation begins. The counterparty will expect discounts, will use different people to front the discussions, reopen previously closed points and drag out seemingly minor points - these are all normal tactics in China. So how can European companies compete? The first thing any management team must realise is that they cannot compete on price. If a company's product has a labour cost to it, then it will just be a matter of time before a company from any country will come along and undercut it. Instead, managers need to think hard about what the company does. Consider the UK engineers who have successfully focused on niches, where innovation and research and development have kept them at the high-end of the market. Business models also need to be considered carefully. Here in the West Midlands, manufacturers have traditionally been producers and retailers. However, in order to take advantage of the Chinese market, it could be suggested that they look to convert their business model to focus on buying and retailing, with the manufacturing element being carried out elsewhere. For example, consider how the Dutch have evolved - a country without a huge amount of natural resources, they have become excellent managers and traders of products. There is no doubt that opportunities exist for West Midlands companies. However, caution is needed if they are to succeed in what is a tough and competitive environment. The jewels are there for the taking but only if the homework is done upfront and cultural issues taken into consideration. Failure could be costly, but success could bring significant commercial success. ..SUPL: | 
