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Chinese Consumer Myth 5

Myth 5: Companies that can penetrate the Chinese market will prosper

Fact: Any businesses that wish to expand internationally (especially in developing countries) have to understand this basic concept: If the local Government wants you dead tonight, you won’t live to see the sunrise the next morning. Challenges that foreign businesses encounter in China include restrictions on foreign investments, widespread counterfeiting, and segmentation of local markets. But the biggest risk of all is really the Chinese government itself.

The rules and regulations imposed by the Chinese government can significantly increase the costs of doing business for foreign companies. For instance, web sites such as Google in China are required to employ many additional people to monitor and delete objectionable content, and taxes such as the recent maximum tariff of 105.4% on American chicken would diminish the profits of foreign businesses and make them less competitive in the local market.

Moreover, the tendency of the Chinese government to favor domestic businesses will limit opportunities for foreign entities. For example, foreign banks that have been eager to set their foot in the Chinese market were disappointed when many of the projects triggered by Beijing’s USD$586 billion stimulus plan were funded by the country’s large state-owned banks, essentially limiting foreign banks to doing business with mostly multinational companies or small and midsize local firms. The National Development and Reform Commission, China’s top economic planning agency, had also ordered national, provincial and local government agencies to buy only Chinese-made products and allowed imports only when no suitable Chinese products were available as part of the stimulus program. Another example is the new China’s Postal Law that forbids foreign global express carriers like TNT, UPS, DHL, and FedEx from delivering express letters in China.

For people who still think that going into China is a sure bet, you may want to note that even big firms such as Yahoo! and eBay Inc have given up on the Chinese market after years of sluggish performance. Just yesterday the Financial Times reported that Google is “99.9% percent” sure of shutting down in China. If you were to study Japan, you would see that most American firms who tried to set their foot into the Japanese market during its boom time have failed miserably except probably for IBM and Boeing. While the fundamentals of Japan are widely different from China, the point is doing business in a foreign country is often not easy. After all, just like China today, Japan was also a booming market that many foreign businesses had been drooling over in the 80s.

Despite the many obstacles to doing business in China, I am not saying that everyone should run for their lives. I would just caution investors to be cautiously optimistic when investing in companies that do business in China. Beware of the risks involved and understand that many companies may fail; but equally undeniable is the fact that enormous opportunities certainly exist in China and should be given due consideration by investors.

Disclosure: No positions