Getting a Leg Up in China How to set up shop or sell your wares in this enormous, fast-changing market.
By Brian Caulfield and Ting Shi

(Business 2.0) – Scarcely two years after China joined the World Trade Organization, more and more of the global economy seems to be falling into orbit around the world's most populous country. Its fast-growing economy is slurping up raw materials from across the globe, popping out cheap finished goods in unheard-of quantities, and creating vast new domestic markets for consumer goods. But while the opportunities in China are huge, so are the challenges. Here's how to do business in China without looking like a sha lao wai (that's "silly foreigner" to you). --BRIAN CAULFIELD AND TING SHI

WHAT DO YOU WANT TO DO?

China has long been a major manufacturer of everything from car parts to footwear, and soon 15 percent of all electronics will be made there. But there's more to China than manufacturing. It's also an enormous and growing consumer market. Huge, underemployed waves of university graduates provide a third opportunity: the ability to set up product development and engineering operations at affordable prices. Whatever you do, make sure to ask provincial officials about tax breaks. Local governments can be especially generous if your business is important to the region's development (see next page).

Manufacturing

LOCATION: If you're thinking of basing a plant in China, pay attention to local development plans. Each of the provinces and major cities has identified the industries it wishes to attract and develop. (The U.S.-China Business Council summarizes much of this at www.uschina.org.) Transportation and communications are still unreliable in China, so your operations should be close to vendors and clients. If you're looking to export, focus on business-friendly coastal regions.

CONTRACTORS: You'll also find plenty of local manufacturers eager to crank out your products. Working with them might be quicker and cheaper than setting up your own factory.

LOCAL OFFICIALS: Get to know them. Government support can be crucial to resolving disputes with suppliers, workers, and partners. Don't be shy. Local officials are often rewarded based on how much foreign investment they attract, so they're eager to hear from you.

Engineering

HARDWARE: China's universities are cranking out highly skilled graduates able to handle a wide range of tasks, from semiconductor engineering to product design. Nokia and Motorola, for example, both employ teams of Chinese engineers to pump out new designs for the local market. That's allowed the companies to grow their local business despite relentless competition from Chinese cell-phone makers.

SOFTWARE: Here the country still lags behind India because of the language barrier. For that reason, companies like PeopleSoft outsource hard-core coding work to India and rely on Chinese programmers to tailor their software for the local market. Expect that situation to change, however, as more and more Chinese students take up English. Anticipating this shift, Microsoft set up a lab in Beijing in 1998 and stocked it with talent from Tsinghua University to create handwriting-recognition code, among other technologies.

Selling

MARKETS: China's economic development is too patchy, its infrastructure too uneven, and its government too bureaucratic for most companies to tackle the entire country at once. Nimble outfits can succeed by breaking off bite-size pieces, though. Luxury-goods retailers like Gucci, for example, have set up shops in prosperous markets like Beijing and Shanghai, where residents have plenty of disposable income.

COMPETITION: Once you identify a market, the challenge is to outmaneuver the knock-off artists. Local entrepreneurs can quickly duplicate a product, crushing margins for everything from watches to fruit juice. The best way around this problem is branding: Chinese shoppers flock to name brands, especially those associated with celebrities. French cosmetics giant L'Oréal has successfully protected its market share by enlisting top Chinese stars to hawk its products so status-conscious shoppers aren't lured away by cheaper knockoffs.

HOW TO ...

Get Guanxi

In China, the rules may be fixed, but people can be flexible. That's why personal networks--or guanxi--are very powerful. Showing respect for your business partners and government contacts, especially in social settings, will enhance their mianzi, or "face"--and cultivate your guanxi. Small gestures count: Always present your business card with both hands when you first meet someone and offer product samples and literature about your business. Modest gifts--a bottle of liquor, a carton of cigarettes--are essential. The wrong gift, however, can chill a relationship.

AVOID THE FOLLOWING:

--Lavish jewelry. It smacks of bribery. --Anything "made in China." Your host will think you're mocking him. --White gift wrap. The color connotes death. --Clocks. The Chinese phrase for "giving a clock" sounds like "sending somebody to the grave."

Guard Intellectual Property

Be careful. Enforcing laws protecting IP is a pretty low priority throughout China. To prevent theft, some firms ship sensitive parts to China for assembly rather than building the parts there from scratch. Another way to protect your IP is to avoid contract manufacturers; instead, buy or invest in the local operations you'll need. Finally, IP can be a valuable chip in negotiations with potential partners and with the government. Siemens won China's nod on a mobile-phone standard because it agreed to hand over a stake in the standard and much of the profit derived from it.

WHERE DO YOU WANT TO DO IT?

China isn't monolithic. Its consumers, competitors, and workers are enormously diverse over the major cities and 31 provinces. Global hubs--Beijing, Shanghai, and the province of Guangdong surrounding Hong Kong--offer the most talent and superior infrastructure, but they'll cost you. Other regional centers (see below) may suit your budget better. Do your homework: The U.S.-China Business Council, the American Chamber of Commerce in China, and the Chinese National Bureau of Statistics can all provide a wealth of data on China's markets.

Hot Spots to Watch

TIANJIN China's cell-phone-manufacturing hub and fastest-growing economy. POPULATION: 10 MILLION PER CAPITA GDP: $2,665 FOREIGN INVESTMENT: $3.8 BILLION INVESTORS: HONEYWELL, HYUNDAI, LG, MOTOROLA, SAMSUNG, YAMAHA

BEIJING The capital is also the country's largest software production center. POPULATION: 13.8 MILLION PER CAPITA GDP: $3,351 FOREIGN INVESTMENT: $5.1 BILLION INVESTORS: AT&T, BAYER, HITACHI, IBM, MICROSOFT, NEC, ORACLE, XEROX

LIAONING The city of Dalian is attracting tech to a province once known for heavy industry. POPULATION: 42.4 MILLION PER CAPITA GDP: $1,570 FOREIGN INVESTMENT: $4.3 BILLION INVESTORS: ACCENTURE, CANON, FORD, GE, GM, MITSUBISHI, OMRON, TOSHIBA

SHANDONG This booming province's strengths are consumer appliances and oil. POPULATION: 90.8 MILLION PER CAPITA GDP: $1,406 FOREIGN INVESTMENT: $6.5 BILLION INVESTORS: DAEWOO, LG, LUCENT, SAMSUNG, TOYOTA

JIANGSU One-quarter of the world's laptops come from this province, which is also a major producer of digital cameras and auto parts. POPULATION: 74.4 MILLION PER CAPITA GDP: $1,739 FOREIGN INVESTMENT: $10.8 BILLION INVESTORS: BASF, FUJITSU, MOTOROLA, SONY

CHONGQING China's automotive center. Chemicals and pharmaceuticals are also growing. POPULATION: 30.9 MILLION PER CAPITA GDP: $767 FOREIGN INVESTMENT: $450 MILLION INVESTORS: BP, ERICSSON, FORD, HONDA, PHILIPS, SUZUKI

GUANGDONG This province cranks out toys, shoes, appliances, and electronics for export. POPULATION: 86.4 MILLION PER CAPITA GDP: $1,815 FOREIGN INVESTMENT: $13.1 BILLION INVESTORS: BP, COCA-COLA, HONDA, NESTLE, PROCTER & GAMBLE, SHELL, WAL-MART

ZHEJIANG China's chief silk-producing province and home to light industries like textiles and electronics manufacturing. POPULATION: 46.8 MILLION PER CAPITA GDP: $2,001 FOREIGN INVESTMENT: $4.7 BILLION INVESTORS: HANKOOK TIRE, MOTOROLA, NOKIA

SHANGHAI The commercial and financial center, and a base for steel, autos, and semiconductors. POPULATION: 16.7 MILLION PER CAPITA GDP: $4,913 FOREIGN INVESTMENT: $5 BILLION INVESTORS: ALCATEL, ERICSSON, EXXON MOBIL, GE, GM, INTEL, SIEMENS, VOLKSWAGEN

Note: All figures are for 2002. Source: Chinese National Bureau of Statistics