Growing any China business involves substantial risks – which need to be managed tightly and reassessed often in light of fast-changing conditions. Risks in China can evolve at a different rate than the underlying business, making it critical for companies to monitor their risk profile continuously and ensure constant attention to synchronization.
Market development
Markets that are new and fragmented are notoriously risky. Government-related entities typically dominate the early phase, and competition for the available market is generally intense. Pricing is often volatile and discounted heavily. Market share is an important goal for Chinese competitors, who recognize that owning a major share of market will yield larger benefits at a later date. Multinationals – accustomed to markets that behave more rationally – find market-related decisions particularly challenging.
Intellectual property
Theft of intellectual property is an important problem and can lead to losses in China and even elsewhere if the offending company goes global with the product at a later time. Grey products abound – and will probably remain a fact of business life in China for the foreseeable future. Nevertheless, patent laws are finally gaining recognition and importance, particularly as more Chinese companies demand respect and protection for their own indigenous inventions. Enforcement is still weak and fines inadequate, however, so speedy innovation and local adaptation remain among the best tactics.
Business practices
Local Chinese business practices are unfamiliar to many foreign companies and require careful vetting. Certain practices are confounding and can easily lead to inappropriate business behavior and even violations of Chinese law. One example concerns related-party transactions, which are very common and which can generate conflicts of interest that undermine business performance.
Regulatory compliance
China is fast becoming a rule-of-law nation with hundreds of laws and regulations enacted over the past two decades. This advance comes with a cost for companies – careful regulatory compliance and awareness of changes likely to reform the regulatory environment. Foreign laws such as the Foreign Corrupt Practices Act (FCPA) are also looming larger than ever and requiring special effort. The combined effect of more regulation and greater compliance is not simply tactical – it can impact strategic options because of cost, complexity, and persistent uncertainty.
