The 10 Biggest Problems With Doing Business In China

Chinese china dragon

Photo: flickr: benandbarnet

The US-China Business Council has released its survey on member companies’ experience doing business in China this year. You can check out the full USCBC 2011 China Business Environment Survey here.Or you can just click through the highlights we’ve put together for you. While most companies had higher profit margins in China than anywhere else in the world, and over 40% of respondents experienced 20% revenue growth or more in 2010, there are still major problems doing business there.

Basically, this survey isolates the top 10 issues, some that have improved since last year and some that have stayed the same. For example, respondents said they made progress on intellectual property rights enforcement and transparency, but virtually none on competition with Chinese companies, restrictions on foreign investment, and market access for services companies. Also, they’re worried about rising costs for labour and raw materials.

In general though, respondents were optimistic about the next five years in China, though they are less optimistic than they were a few years ago. They look forward to the Chinese market opening up even more, and recognise the power of their consumers. In other words, they’re not just using the country as a place to make goods on the cheap and ship them out. That’s great for the Chinese government, because they want to see their consumer purchasing power grow as well.

Bottom line: this is a $150 to $200 billion market for U.S. companies, and will probably be much more. So pay attention to these problems, you can probably make bank if you have solutions.

#10 Market access for the services sector (financial, legal, information, telecom)

There are 8 top constraints for growth in the service sector (which covers everything from health care to construction and engineering). Here, the problems are basically a microcosm of all the issues facing the American companies as a whole:

  • Human resources (i.e. finding qualified workers)
  • Administrative licensing and product approvals
  • Competition from Chinese companies
  • Lack of equal treatment from domestic companies
  • Competition from other foreign companies
  • Investment restrictions
  • Lack of consumer awareness/understanding about products
  • The slow pace governmental policy reform.

#9 Discrimination

Now that the competition for China's market is heating up, the government is favouring domestic enterprises. 70% said this situation is as bad as it was last year, 30% said it had gotten worse.

Here are a few points where companies are really hurting:

  • Project bidding
  • Being considered for receiving incentives
  • Being allowed the same scope of business as domestic firms
  • Indigenous innovation preferences, and
  • The ability to open branches at the same pace as domestic companies

#8 Transparency

This issue is a factor in almost all other problems, and while the government has made progress here, respondents say it's uneven across sectors. Some companies, 58%, said there had been no improvement in this sector at all.

#7 Restrictions on inbound investments (i.e. ownership limits)

77% of foreign investment is through wholly foreign owned enterprises... but what about the other 23%? Those are generally partnerships and joint ventures where foreign companies take a minority stake. This year, the government released a document outlying where direct foreign investment in products was 'encouraged, restricted, or prohibited.' That's a step forward for transparency, but respondents say that there are often restrictions on products even where investment is 'encouraged.'

#6 Standards and conformity assessment

These are the rules for how products are designed, manufactured, sold, used, disposed of, and certified before they enter the market. Many respondents feel that standards are purposely complicated for foreign companies in an effort to protect local competitors.

#5 Intellectual property rights enforcement

According to survey respondents, this is the problem that saw the most improvement over the last year. Government officials, they say, have been paying greater attention to this issue. Still, 93% said that they were either somewhat or very concerned about about it, so there's still a long way to go.

#4 Competition with Chinese companies (state-owned and private)

There are two elements to this issue. The first is market competition, and the second is policy preferences. Chinese companies are trying to improve the quality of their products so that they can launch them outside of China. At the same time, the government heavily favours domestic companies over foreigners. This is a big deal to respondents, as 72% of them said they compete directly with state owned enterprises.

#3 Cost increases, including labour, materials, and inflation

This was the category that had deteriorated the most since last year, according to respondents. 62% said that they had increased wages by 5% to 10%. Eight per cent of respondents had hiked them more than 15%. This was the area that concerned respondents the most.

Then there's the issue of general inflation affecting the cost of materials -- something everyone in China would like to keep under control.

Regardless, this is the number one reason why companies consider moving their operations to other Asian countries.

#2 Administrative licensing, including difficulties gaining business licenses and product approvals

Despite regulations that require business licensing decisions to be processed in a matter of weeks, many companies are waiting months for a number of them, including some for product approval, business operations, and investment review.

Bottom line: this slows the pace of doing business.

#1 Human resources: Talent recruitment and retention

A lack of talented, skilled workers was the #1 issue last year, and there it remains. To put it simply, the demand for good workers is way higher than the supply. And that's for anything from managerial professionals to blue collar factory workers.

And this is another reason why wages are inflating so quickly. Companies are trying to keep the workers they already have, and the competition is fierce. For senior managers, changing jobs can mean a wage increase 30%.

And if you don't know who has the final word on all matters, take a look at this slide show

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