Everybody wants to get into the Chinese market at the moment, China is rapidly becoming the world’s largest economy and opportunities in the country are highly sought after by businesses and investors looking to expand their portfolio of offerings. However there’s no secret that many foreign investors have found themselves struggling in China, paying attention to the financial side of a business is vital to maximise profits and minimise losses. Here are some simple tips to get you started.
Be Prepared for Serious Competition and Constant Pricing Pressures
One of the major problems facing companies in China is the highly dynamic nature of the local market. The moment an enterprise reaches a certain level of success then multiple competitors will spring up overnight. Because the playing field is geared for domestic producers, this means in practice that these competitors can get easy and low cost access to capital and preferential treatment in a host of other areas.
This has a rapid “knock on” effect on pricing and many Chinese companies with large cash reserves may be willing to sell at a loss for a period, or worse give away the product for free in the hopes of earning revenue on services.
Goods sold within China do not generally attract high margins (outside of highly desirable highly visible “branded” names) and nor do services. This doesn’t mean that those selling into the local market can’t make money, but it does mean that margins will be considerably lower than for equivalent businesses in the West and that those margins may be under threat at any time. Market positioning is key to avoid failure through over charging.
Firstly ensure that your credit terms are explicit and in keeping with the local economy, it is highly unusual for Chinese suppliers to offer much (if anything) in the way of credit facilities. The business norm particularly at the start of a relationship is for the vast majority of costs to be paid up front prior to commencing a project with a letter of credit provided to cover the balance. If credit terms are extended they are minimal and never for long periods of duration.
Secondly, you need to be specific about the currency in which you will be paid and where this will be paid. China has strict currency controls and you may not be able to take the currency you’re paid in out of the country even if it’s in your local currency and not in RMB. Some companies may not be able to pay you in the currency you require and may need to engage a “window” company to make the transactions on their behalf.
Finally it’s often said that credit risk management is impossible in China because of the lack of a clear financial system and ratings agencies. This is not the case; it’s just more work than it is in more established markets. You can undertake your own credit risk assessments or engage a consultant to do so for you, while there are obviously no guarantees you can substantially reduce your risk exposure by doing your homework in the first place.