How to navigate China’s consumer boom

As more small and medium-sized enterprises go international to grow their business, they are not shying away from China as too big or too daunting for the likes of them.

Photo: Andy Brandl

Indeed, for a growing number of U.S. business owners and entrepreneurs, the conversation about China has moved beyond whether they should venture there, to on-the-ground tactics: How do I reduce the risk of getting paid? How do I ensure the quality of goods? And how do I protect my product from being copied?

These were some of the key issues addressed in a recent series of expert panel discussions on “Selling into China.” The seminars, held in Washington, D.C, Westchester County, N.Y., and Manhattan, were hosted by HSBC Bank, Business without Borders and The Business Journals.

Despite its outsized challenges and a recent slowdown, the Asian giant is still posting strong growth rates — slightly more than 7%— compared with the rest of the world. And these are just the early days of China’s boom period, the panelists said.

“China is in process of making a slow transformation from a producer economy to a consumer economy. As a result, there’s an enormous demand for Western products, luxury products. Anyone who has a product they can sell is ripe for entering that market,” said Steven Henning, a specialist in international accounting and partner-in-charge at Marks Paneth & Shron LLP

Henning was part of the panel speaking to a standing-room only crowd of local businesses in the leafy bedroom community of Westchester County. The other panelists included Paul Edelberg, a corporate attorney who has focused on China for more than a decade, and Robbin Price, who heads up the middle market foreign exchange desk for HSBC Bank in New York.

In addition to the opportunities, the panelists also discussed strategies for selling into China, and how to navigate some of the challenges.

Edelberg said there are basically three ways to sell into China: direct sales, the most difficult way; hiring a distributor or sales agent; or a joint venture. All three require an international sales contract that outlines everything from what currency you will be paid in, to how disputes will be resolved.

“I can’t emphasize enough how important it is to have contracts and enforcement mechanisms in place, because once you are there it is too late,” he said.

Intellectual property is another dominant legal theme in any discussion of doing business with China. Edelberg said China does have comprehensive trademark and patent laws in place and U.S. businesses should register their trademarks and patents there.

“However, the level of enforcement is another thing,” Edelberg said, although he noted some progress. “I’ve seen a few cases recently of domestic China companies enforcing intellectual property rights versus other domestic companies and I think this is a wonderful sign.”

Still, businesses should take some practical precautions to prevent their idea or product from being copied or stolen. For example, a company might arrange having certain components made in one place, other components made in a second location, with assembly taking place in a third.

“You have to deal with it,” said Edelberg. “And if you can’t deal with it, maybe you shouldn’t be selling into China.

Quality control in China is another major concern for American companies. Henning said the Chinese government is “fully aware of the need to be good corporate citizens of world” and is actively shutting down rogue businesses.

Sometimes, more extreme measures — jailing or executing senior executives — are taken to make a point internally, Henning said. “The Chinese government understands the economics of the issue. They know that many companies are no longer outsourcing to China because of quality concerns.”

Perhaps the biggest foreign trade issue for smaller businesses is how to make sure they get paid. While proper vetting of sales partners and a solid contract are good places to start, there are also some currency strategies that can help mitigate the risks.

HSBC’s Price said U.S. companies selling into China should be willing to accept the renminbi, China’s currency. “It is always cheaper. Why? Because you have the ability to hedge the foreign currency.”

The Chinese government has been loosening foreign restrictions on its RMB since 2010, as part of efforts to promote the RMB as a reserve currency.  Today, the RMB is fully tradeable, and business cannot get enough of the currency, she said. “It’s become almost boring – it’s like the euro.”

One strategy she recommended is to open an RMB account in Hong Kong and run all payments and dispersal of funds through that account. “Opening up an RMB account in Hong Kong is almost faster than opening an account in the United States – these people move,” Price said.

“You want to be in China because it’s an entire country filled with Type-A people just like us,” she said.