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Doing business in China

By Lynette Dicey (People's Daily Online)    17:25, September 27, 2020

A number of South African companies have – or have had - business interests in China in recent years with varying degrees of success including Sasol, Landpac, Old Mutual, Hollard, Discovery, Distell, KWV, Babylonstoren, Beijing Axis and Aspen Pharmacare, amongst others.

The biggest and most successful investment, however, is through JSE-listed Naspers’ stake in Chinese Internet services giant, Tencent, a messaging, social media and gaming entity. Founded in 1998, Tencent currently is one of the largest listed Internet companies in China based on market valuation and the largest online gaming company globally. The company launched WeChat, one of China’s most popular mobile apps with over one billion monthly active users. However, it is video games which have generated the bulk of its revenue and profits.

China’s rapid economic growth has increased the country’s share of global GDP from 2% in 1995 to 16% in 2018. Over the last decade it has become an increasingly important contributor to the world economy, typically accounting for more than 30% of total global GDP growth. However, as China’s growth slows down, so too are its growth levers changing resulting in accelerated household consumption at the same time that government consumption and capital formation growth is slowing down. High value services like IT, software, leasing and business services are replacing industry and manufacturing as the primary drivers of China’s economy, according to analysis conducted by The Beijing Axis.

Megacities are on the rise in China. China has 15 megacities, each with populations ranging from around 10 million to more than 29 million. These business and consumption hubs provide companies with new markets to serve.

However, despite the potential that large, consumption driven Chinese markets offer, establishing a business or doing business in China is challenging. This is despite the fact that Chinese President Xi Jinping pledged greater openness for foreign companies doing business in China including increased financial liberalisation, lower tariffs and less ownership restrictions as well as greater intellectual property protections.

The biggest problem for South African companies wanting to do business in China is that locally there is a very low base of knowledge of that market, explains Kobus van der Wath, founder and CEO of Axis Group International, an international trade and advisory and supply chain specialist based in Beijing. “The Chinese economy is very large and undergoing significant changes. The challenge for South African companies wishing to explore the Chinese market is identifying which province, which region and which tier cities they want to target. Does your business, for example, need a China plan, a four-city (the first tier city) plan or perhaps only a Beijing or Shanghai plan? It takes time and money to research this.”

Good information and strategic intelligence is key to any foray into the Chinese market, he says. “Does your business understand what Chinese consumers want and need?” Added to this the local business needs to have the time and resources to spend on negotiating.

Doing business successfully in China requires an understanding of the cultural differences given that the Chinese typically make decisions very differently, adds Van der Wath. “You’ve got to become culturally astute in order to negotiate and influence in that environment.”

But arguably the most important element is whether the local business is China ready, says Van der Wath. “SA produces in one year what China consumes in one day. We frequently come across businesses that want to invest in China but they can’t scale quickly enough. Don’t invest in China if you can’t meet demand,” he advises. “Similarly, don’t consider investing in China if you’re a start-up. Instead, become an experienced exporter first.”

Other essentials include having a Chinese website and a trusted advisor who understands the Chinese market. While the right Chinese partner can add real value, the wrong one could be a poisoned chalice, he warns.

Some of the main challenges for South African businesses in China would be significantly lessened by protecting their intellectual property and conducting appropriate due diligence of potential partners and distributors prior to entering the market, says Peter Grinsted, an economist at Beijing-based consultancy, Development Reimagined. Grinsted assists a range of African businesses with their entry into the Chinese market as part of his work with the consultancy’s Africa Reimagined programme. “Preventing bad faith IP registrations and ensuring reliable locally-based partners are two keys necessary to unlocking the Chinese market in a sustainable way.”

A China strategy needs to be flexible and adaptable, allowing the business to pivot when necessary, with the aim of setting out to do roughly the right thing from the outset, suggests Van der Wath. “Learn from your mistakes and don’t make the same mistake twice.”

It’s a mistake to rush in, maintains Grinsted. “A step-by-step, methodological market entry and expansion plan is far more likely to succeed.”

The biggest opportunities in China reside in an already huge and fast-growing consumer base of middle-income buyers, who increasingly prefer products that are unique. This offers a huge opportunity for forward-thinking and capable South African brands, says Grinsted.

However, they need to take cognisance of the fact that China’s online market is significantly more developed than many people realise. “For many South African businesses, generating a sophisticated online presence on these platforms should be a priority – far more so than it would in many other markets.” says Grinsted.

Grinsted points out that last year the South African embassy in Beijing hosted a two-day event celebrating all things South African, including pinotage, music and South African food. “However, although there were many companies present selling brilliant South African products, only a minority of these companies were actually South African, with many more Chinese importers present.”

He says SA’s Department of Trade and Industry would do well to negotiate with China on the recognition of South African geographical indications in order to help home-grown South African brands looking to expand into China.

Van der Wath says for those companies wishing to put the necessary effort into researching the Chinese market there are opportunities. It can be slow and costly to venture into China and there are no assurances of success, but - in spite of the challenges and the risks - there are opportunities for SA businesses to take advantage of China’s enormous consumer market, particularly in the agricultural sector.

The author is a free-lance business journalist based in South Africa. 

(For the latest China news, Please follow People's Daily on Twitter and Facebook)(Web editor: Hongyu, Bianji)

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