Sourcing is a relatively safe way many companies have started to do business in China. According to a Morgan Stanley study, since the mid-1990s imports from China have saved U.S. manufacturers untold billions in cheaper parts for their products. Pat Gore, who earned his Executive MBA from the School of Business in 1997 and serves on its CIBER advisory board, says the easiest way for companies to begin doing business in China is by sourcing parts for sale elsewhere, rather than trying to own or co-own factories in China to produce products for local consumption.
Gore is senior vice president global purchasing for Spectrum Brands, formerly Rayovac, a $3 billion consumer-products company with global headquarters in Madison and factories in the United States, Europe, Latin America and China. Gore, who visits China some 10 times a year, said doing business in China is not for the faint of heart, due to its lack of infrastructure, especially legal and banking infrastructure. “The laws change region by region. The government looks at rules as works in progress. So, business decisions based on rules may not be correct a couple months later,” he said. “It’s very important to have local legal counsel.” Another area of concern, he said, is in collecting receivables. “You need a good sales force on the ground.”
The cost of doing business in China is going up, particularly labor costs, according to Gore. “Due to demand, engineer salaries in China are rising dramatically. Costs in China are increasing to the point that the next international location ripe for investment may be Southeast Asia.”
As a foreigner, you will meet these challenges with your business in China:
1) Even with China joining the WTO, protections for intellectual property rights are not consistently enforced.
2) Markets are subject to sudden changes in the government’s economic growth policy.
3) China has no nationwide credit database, so it is difficult to assess consumers’ credit-worthiness.
4) China is undergoing rapid social and economic change; a widening disparity between haves and have-nots could cause significant upheaval.
5) Multinationals often must compete against local players with lower cost operations and lower prices.
6) The diversity of the Chinese market is significant, requiring a variety of products to meet segmented needs.
7) Infrastructure is less developed than in U.S., making transportation a challenge.
Conducting market research and identifying market sectors is extremely difficult.
