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Why China for Small Businesses?

There can be no doubt that China—which means “middle kingdom” in Chinese—is at the center of the world stage. China’s two-decade-long market reforms have fostered a wealth of entrepreneurship, resulting in the largest reduction of poverty and one of the fastest increases in income levels the world has ever seen.

As a manufacturer of many of the world’s products, China is renowned as a production powerhouse. But the nation of 1.3 billion people also is becoming known for its purchasing power. According to McKinsey projections, urban households in China will constitute one of the world’s largest consumer markets by 2025, with spending clout that almost equals households in Japan today. This trend only will continue as approximately 8.5 million Chinese citizens migrate to urban areas every year for higher-paying jobs.

For U.S. small businesses, these changes in China can present increasing opportunity. Many small businesses already are exporting their products to China; in fact 90 percent of all U.S. exporters to China are small- and medium-sized enterprises (SMEs), according to 2004 U.S. government data, the most recent available on this topic. The number of U.S. small businesses exporting to China is outpacing the number of large companies. From 1992 to 2004, the number of SMEs exporting to China surged by 511 percent, compared to 128 percent for large-company exporters.

“Not to become familiar with a transformative country like China is just plain foolish,” said Laurel Delaney, founder of GlobeTrade.com, a consulting firm that helps small businesses grow globally. “China [should be] an integral part of your company’s global strategy and competitive advantage.”

Sources:

• U.S. State Department
• “The Value of China’s Emerging Middle Class.” The McKinsey Quarterly, Special Edition, Serving the New Chinese Consumer. July 2006. Diana Farrell, Ulrich A. Gersch and Elizabeth Stephenson
• U.S. Export Portal
• “Invisible City. The Guardian, March 16, 2006

China: Key Facts and Figures

Population: 1.3 billion

Age structure:

• 0-14 years: 20.4 percent (male 143,527,634/female 126,607,344)
• 15-64 years: 71.7 percent (male 487,079,770/female 460,596,384)
• 65 years and over: 7.9 percent (male 49,683,856/female 54,356,900)

Life Expectancy at Birth:

• Total population: 72.88 years
• Male: 71.13 years
• Female: 74.82 years

Ethnic Groups:

• Han Chinese: 91.9 percent
• Zhuang, Uygur, Hui, Yi, Tibetan, Miao, Manchu, Mongol, Buyi, Korean and other nationalities: 8.1 percent

Area: 9,596,960 sq km, (about 3.7 million square miles), which is slightly smaller than the United States

Capital: Beijing

Other Major Cities: Shanghai, Tianjin (tee-en-gin), Shenyang, Wuhan, Guangzhou, Chongqing (chong-ching), Harbin, Chengdu.

Official Language: Mandarin Chinese is spoken by approximately 70 percent of the population; however, there are many other regional dialects including Cantonese in the south. The Chinese government adopted the pinyin system for spelling Chinese names and places in Roman letters, which is widely used in China on street and commercial signs.

Literacy: 90.9 percent

Government: Communist Party-led state

Economy:

• Size: Fourth largest in the world, approximately one-fifth the size of the U.S. economy
• GDP (purchasing power parity): $10.21 trillion (2006 est.)
• GDP (official exchange rate): $2.527 trillion (2006 est.)
• GDP - real growth rate: 11.1 percent (official data) (2006 est.)
• GDP - per capita: $7,800 (2006 est.)
• GDP - composition by sector:
  • Industry: 48.9 percent
  • Services: 39.3 percent
  • Agriculture: 11.7 percent

Note: industry includes construction (2006 est.)

U.S.-China Trade:

• Total U.S.-China Trade $354.2 billion, 12.4 percent of total U.S. trade
• U.S. imports from China: $295.8 billion or 16.5 percent of all U.S. imports
• U.S. exports to China: $58.3 billion or 5.5 percent of total U.S. exports as of Nov., 2007
• Top five U.S. exports to China: Semiconductors and electronic components, aircraft, waste and scrap.

Labor Force: 795.3 million (2006 est.)

Unemployment Rate: 4.2 percent official registered unemployment in urban areas in 2005, however there is substantial unemployment and underemployment in rural areas, according to some of the latest data available in 2005.

Natural Resources: Coal, iron ore, petroleum, natural gas, mercury, tin, hydropower potential (world’s largest)

Sources:

• CIA World Factbook
• U.S. State Department
• U.S. Census Bureau

SMALL BUSINESS TRAILBLAZERS

Valerie and Joseph Orr, Owners
Atlanta Discount Warehouse

Small business at-a-glance:

What?
Atlanta Discount Warehouse imports furniture from China and sells it to commercial establishments, including restaurants and hotels, in the United States and Canada.

Where?
Based in Atlanta, Ga., ADW conducts most of its sales online

Who?
Husband-wife team Valerie and Joseph Orr own and operate the business.

For Valerie and Joseph Orr, success grew from the painful failure of the couple’s restaurant business. “It was heartbreaking,” Joseph says. “But after we liquidated our furniture, we kept receiving e-mails from people who still wanted to buy it—long after it was sold. We said to ourselves, ‘there’s got to be something here.’”

Most of the people interested in buying the furniture were looking to resell it to other restaurants. So Joseph and Valerie investigated building a new company that sold furniture to restaurants and hotels—businesses that often operate with razor-thin margins—at affordable prices. Their research led them to China, and in three years, they have built a successful company that sells approximately
3,000 pieces of furniture to customers across the United States and Canada every month. The couple is developing classes to teach other small businesses about the ins and outs of importing and exporting to China. The following offers some of the key lessons they have learned along the way.

How did you start to do business in China?

Joseph: We found a website that listed vendors in China, and then went to a trade show in China to meet them. We found interpreters to help us negotiate, and today, we visit about once a year.

How did you choose your vendors?

Valerie: Going to China was critical. One of the very best places to meet vendors is at the China Import-Export Fair, also knows as the Canton Fair. (www.cantonfair.com). I would tell any business that you must meet prospective vendors face-to face and develop a relationship with them. If you’re not comfortable right from the start, don’t do business with that vendor. Joseph: We visited the manufacturing facilities of vendors we liked. Most vendors over there are very hospitable; they’ll want to take you out and get to know you a little. It’s very important to know that you can’t rush into a deal in China. It takes time to develop trust.

What do you consider to be the biggest benefit about doing business in China?

Valerie: It has given us a clear competitive advantage. We can offer our customers better pricing and have more control over our products than we would if we were doing business solely in the United States. Our vendors in China can make custom furniture that we can sell for a lower price than we sold our used restaurant furniture.

What are some of the obstacles you have faced in China?

Joseph: The language barrier can be difficult. We conduct most of our business through e-mail because that seems to work best, but it would be much better if we could be there more often. Also, just getting to know how to do business there at first is a challenge.

Your business requires a lot of shipping. Do you have any logistics or shipping advice for businesses?

Joseph: Be careful who you use as a customs broker or freight forwarder. With a 12-hour time difference, you need to make sure that someone will be on top of your shipments 24-7. We ship a lot with ocean freight, and if our container isn’t booked on time, missing a day could mean that shipments arrive into port a week late.

Valerie: On top of good pricing from vendors, you need to have good shipping rates from a reliable partner. Develop a relationship with a shipper’s local corporate sales rep and negotiate rates. Keep an open relationship with them and tell them your needs.

What advice would you offer other small businesses seeking to go into China?

Joseph: Definitely go in with an open mind and take some time to find out about the culture. It’s nothing like building a business in the States, and you can easily offend people. Also, have more than one vendor. Don’t put all of your apples in one basket.

Valerie: You’ve got to be willing to put in some extra work and stay up late at night sometimes because of the time difference. But it is important; if you don’t try to do business with the rest of the world, your business will die.

MINDING YOUR MANNERS: BUSINESS ETIQUETTE IN CHINA

China is a complex nation with vast regional differences. So even seasoned international business travelers may not fully understand the intricacies involved with doing business in China. Here are a few universal dos and don’ts to know before you go.

What’s in a Name?

• Chinese family names are written or spoken first and usually are one syllable. A one or a two-syllable given name follows a family name. For example, if you are meeting someone called Li Jianguo, Li is the family name and Jianguo is his given name.
• Address a person using his or her family name only; only use his or her given name if you have a close relationship. So, when you meet Li Jianguo, you would refer to him as Mr. Li.
• It’s always advisable to ask a native speaker which is his/her family name, as it is common for people used to doing business with Westerners to reverse their names.
• For business purposes, it is acceptable to call a Chinese person by his or her title followed by the surname, such as “Director Li.”
• As a sign of respect and commitment to doing long-term business in China, consider giving yourself a Chinese name. Consult with several native speakers first to choose a name that will be well-received.

Business Basics

• Always arrive on time for business meetings.
• Exchanging business cards should not be done casually. Usually, they are exchanged at the beginning of meetings. When you give out your business card, hold it with both hands with the writing facing the recipient. Be sure to exchange cards one at a time and never slide your business card across a meeting table.
• Receive a business card with both hands and scan it immediately. Then lay the card in front of you on the table. It is considered inappropriate to put someone’s card directly into your pocket or purse without reading it first.
• Your colleagues or customers will appreciate it if you bring business cards with information in English on one side and the same information in Chinese on the other.
• Meetings typically begin with small talk, so avoid discussing business matters immediately. Appropriate conversation topics could include Chinese food, sports or places to visit. Do not discuss sensitive topics such as politics and religion. Also, avoid telling American-style jokes because they often will not translate.
• Chinese businesspeople appreciate it when guests bring small gifts to business meetings. A suitable gift would be some thing representative of your hometown or country. Such gestures can go far when attempting to build relationships, but they never should be too ostentatious or expensive.
• Smoking is common and many executives—particularly male executives—will smoke cigarettes during business meetings.
• Western dress is becoming more popular in China. From a business perspective, men and women should wear com fortable and conservative clothing. Avoid wearing white and all black as both colors are associated with mourning.

Yes … and No

• Don’t take the word “yes” literally in business discussions. Chinese executives often say yes and nod during conversations, but this often is to show that they are paying attention
  to what you are saying, not necessarily agreeing with it.
• Avoid saying “no” in business discussions. Instead, say, “let me think about that,” or “we’ll review this further and get back to you.”
• If you’re confused about whether someone is in agreement, consider taking him or her aside for a one-on-one dialogue. At this time, he or she will be more direct with you.

Outside the Office

• If your business trip calls for a formal dinner or banquet, your host may start the evening with a brief speech. As a guest, it is expected for you to respond with your own friendly speech to thank your hosts.
• When at a meal, you should try to sample every piece of food provided by your host. It is also customary for you to leave a small bit of food on your plate when you’re finished. If a plate is left empty, your host will think you’re still hungry.
• Toasting at a meal is common, but be careful not to drink too much! Liquor in China can be very strong. Your host will understand if you politely refrain by saying that you aren’t accustomed to this liquor.
• If someone compliments you, it is polite to deny the compliment. Modesty is valued in China.

Sources:

• ChinaSavvy

HOW TO AVOID COMMON FAUX PAS AND FOIBLES

Kevin M. O’Connell, senior partner of the law firm O’Connell and Co., offers some useful tips and resources to help American small business owners embark on doing business in China.

What do you think are among the most common mistakes that you see American companies make when they start to do business in China?

Two significant mistakes I encounter are arriving without a basic understanding of how business is conducted in China and not having a clear vision of what you want your company to accomplish there. American business owners must know that the Chinese have a long-term view toward business, and that business transactions are based upon the parties developing a relationship first.

American businesspeople sometimes assume that whatever skills they’ve learned from doing business in other countries will apply in China. In most instances, they won’t because China is very different from anywhere else.

Could you please name two or three things that American small business owners must—or must not do—to follow proper business etiquette in China?

I strongly caution our clients to avoid political discussions. Perhaps the most sensitive issue is human rights. The Confucian ethic sets society’s priorities as follows: The emperor is the top priority, followed by family, father, and then son. The individual and his or her rights are at the very bottom of this hierarchy, and this line of thinking remains true today. Absolutely “off limits” is any discussion of the events of June 1989 (sometimes referred to as the “Tiananmen Square Incident”) or referring to the People’s Republic of China as “Red China” or “Communist China.” Acceptable “small talk” topics
include Chinese history and culture, food and places you’ve enjoyed visiting in China.

Two seemingly minor missteps that would offend your host are wrapping a gift in white paper—white is a symbol of death and mourning—or giving a clock as a gift; in both Mandarin and Cantonese, the word for “clock” is a homophone for “death.” In a business setting, mistakes would include displaying rudeness, arrogance and impatience, and thereby showing that one does not understand the importance of “guanxi,” or relationships being the basis for business in China.

What advice would you offer small businesses seeking to do business in China? What resources would you refer them to?

Become a “student of China” prior to attempting to do business there. The China novice should make an effort to obtain some basic grasp of Chinese history and culture. It also is helpful to learn one or two simple Chinese phrases—it will go a long way toward breaking the ice. These resources are important for small business owners seeking to learn more about China:

• Negotiating China: Case Studies and Strategies by Carolyn Blackman. This is an excellent “how to” business book
• The China Dream: The Quest for the Last Great Untapped Market on Earth by Joe Studwell. A candid treatment of foreign successes and failures in China
• The Search for Modern China by Jonathan Spence. An excellent one-volume general history of China.
• The U.S. Department of Commerce’s Commercial Service offers companies a wealth of information: www.export.gov.
• If you are serious about China, you should seek out and engage skilled China professionals such as lawyers and accountants early on—it will be money well spent. But you must do your due diligence. Many individuals, as well as a number of well-regarded firms and companies say they “know China,” when in actuality, only a few do.
• Most state economic development agencies have international capabilities. Some, like California and Maryland, have offices in China.
• Most industry trade groups are able to assist their members. The U.S. China Business Council in Washington (www.uschina.org) is primarily focused on the needs of large U.S. companies, but it does have general resources available to non-members.

THE EXPORT EXPERT

Barry Friedman is the minister counselor in Beijing for the Department of Commerce’s U.S. Commercial Service, which helps companies enter international markets with services including market research, trade events, making introductions and advocacy.

Where are China’s markets of the future going to be?

They are going to be what are known as emerging urban centers, or secondary cities—although it is hard to call these “secondary cities” because they have 8-to-10 million people in them. These cities are located in the interior and are very large, urban areas that have the buying power and industrial development that we have seen throughout the other parts of the country. These cities are where Americans should be looking if they want to be in business with China in the next five years.

Where are these cities?

They include special economic zones, such as Shenzen (Shen-jen) and Dalian (Da-lee-an) as well as Nanjing, Qingdao, Hangzhou and Chongqing—which actually is the most populous city in the world with 38 million residents. These cities have major infrastructure, and buying power on the consumer side and industrial side. China has been spending US$125 billion dollars on connecting these secondary and tertiary cities to large urban centers; they have spent about $200 billion on extending railways to connect these cities and are building another 30 airports, upgrading existing airports and building new ones over the next five years.

How fast are these emerging markets growing?

Their GDP is growing at about 2 percent faster than the rest of the country (which is 10.5 percent), so we are talking about a growth of about 12 percent-plus in these cities. The imports are growing quickly as well.

How would you advise American small and medium-size businesses to strategically look at these places and decide where to invest?

If I were a small- or medium-sized business and had some experience with exporting, I would go to my nearest export assistance office, sit down with them and look at what a business plan is for China. Find out if you are “China ready.” We have a great site that has a checklist on it and you can see for yourself before you come into our office, are you ready to go to China and if you are, are you ready to go to a city you wouldn’t think of right away? We have a network out there in China to help people.

How about the protection of intellectual property? What is the situation there and how are you helping?

I tell people that before you go to China, make sure you have your passport, tickets and money, and make sure you register your trademark, your company name and your intellectual property. You can’t go anywhere in the world without making sure you decrease your level of risk of doing business. One thing to do is to protect the most valuable items your company has—its intellectual property. You have your name, client list; these are things that need to be protected. Our websites have terrific information about how to protect yourself and where to go for advice. We have a lot of free advice we are willing to give you.

What would the next step be in terms of getting more information to develop a strategy for entering this part of China?

There is a wealth of information on the Internet. Go to our website, www.buyusa.gov, and take a look at what we offer. Take a look a www.stopfakes.gov to see what we’re doing with intellectual property rights. Meet with your local export assistance offices.

SURPRISING SHANGHAI

According to Conde Nast Portfolio, almost 50 foreign companies named Shanghai their headquarters city for Asian operations in 2007. What’s more, ChinaDaily.com reported that Shanghai is expected to have received actual foreign investment of $7.9 billion in 2007, up 11 percent from a year earlier.

Why do so many companies want to set up shop in Shanghai? With GDP that’s projected to reach US$276.3 billion in the next five years, the sky is the limit for opportunity in this cosmopolitan city.

• Since 1990, the central Chinese government has encouraged foreign investment by relaxing regulations and lessening bureaucratic procedures. Such alleviations have helped companies set up Asian headquarters in Shanghai.
  
• Shanghai is often regarded as the center of finance and trade in mainland China, and is becoming one of the world’s fashion capitals.
• Shanghai has the world’s largest cargo port. Ninety-nine percent of Shanghai’s foreign-trade goods are handled by its port.
• Shanghai boasts numerous five-star hotels. In fact, The Grand Hyatt in Shanghai is the world’s tallest hotel; although, its record will be broken this year by a new hotel being built atop the Shanghai World Financial Center.
• Contrary to most business guidelines, young up-and-comers in Shanghai don’t necessarily prefer small talk. This group prefers to discuss business even during happy hour.

To connect businesses to Shanghai, UPS is building an air hub at the city’s Pudong International Airport. Scheduled to open in late 2008, the hub will be the first constructed by a U.S. carrier and will link all of China via Shanghai to UPS’s international network with direct service to the Americas, Europe and Asia. It also will connect points served in China by UPS through a dedicated service provided by Yangtze River Express, a Chinese all-cargo airline.

Sources:

• Conde Nast Portfolio
• ChinaDaily.com. Jan. 5, 2008
• http://www.shanghai.gov.cn/shanghai/node17256/node18151/userobject22ai27327.html

SHIPPING DOESN’T JUST HAPPEN: HOW TO PICK THE RIGHT PARTNER

Handling shipping and customs can be one of the most daunting aspects for small businesses.As you begin to do business in China, you’ll need a reliable shipping partner. But how do you find one? Here are some questions to ask prospective shippers.

How would you ship my products?

For many businesses, a mix of air, ground and ocean shippingprovides flexibility and is cost-effective. So finding a single carrier who can offer you all three can be an advantage.

How long will my shipments take and how much will they cost me?

It is critical to find a company that offers safe, reliable, quick and cost-effective transportation services. Tell a prospective shipper what your needs are and they should be willing to work with you to cut down time in transit where possible and find ways to trim costs or add value. Services that help you calculate landed cost—the actual cost of a shipment including all duties and taxes—are vital to managing your shipping budget. UPS’s service, UPS TradeAbility®, helps international shippers quickly and easily identify specific country tariff codes to calculate duties instantly.

Will you handle customs for me?

Incomplete customs forms are one of the main reasons why shipments to and from China—and anywhere else—are delayed. To minimize the chances of this happening to you, choose a shipper that offers you customs expertise. UPS has teams of customs brokers who keep up with ever-changing customs laws in China and around the world. The company also offers the industry’s first paperless international shipping option, UPS PaperlessSM Invoice. This new service integrates order processing, shipment preparation and commercial invoice data and then transmits that data to customs offices across the globe, eliminating the need for paper commercial invoices.

How will I know where my shipments are?

Visibility into your supply chain is critical to avoid unwelcome surprises. You should be able to track shipments electronically. Better yet, find out if a shipper has a way to let you know automatically
if there are any delays in customs. Quantum View® Manage identifies every package moving toward a customer’s location, provides an alert if a package is delayed and provides tools to help importers clear shipments into the country if they get delayed at the border.

How will you help me when things go wrong?

Things can go wrong in the shipping process despite everyone’s best efforts. Ask a shipper for an example of something they’ve done for another customer when things didn’t go according
to plan. If they say that nothing ever goes wrong, they’re not being honest and they may not be the shipper for you.

CULTURE CORNER

Chinese New Year

Chinese New Year, also known as the spring festival or lunar new year, is the most significant holiday in China and across much of the Chinese diaspora. Held on the second new moon after the winter solstice (usually between Jan. 21 and Feb. 20), Chinese New Year celebrations span 15 days. During much of this time—most notably, the first three-to-five days—businesses are either closed or operating in holiday mode, so major decisions or negotiations will be put on hold until after the festivities.

To prepare for the New Year, families across China clean their homes thoroughly to sweep away any bad luck from the year and usher in good fortune. On New Year’s Eve, families and friends gather for a sumptuous feast that includes meat, fish and dumplings. It is a tradition to save some of the fish from the meal because the word for fish (yu) is a homophone for surplus—meaning that fish left over will help ensure abundance in the year ahead.

The first two days of Chinese New Year are a time for visiting family. On the first day, fireworks or firecrackers are lit and lion dance troupes perform loudly to ward off evil spirits. Families give red paper packets of money to children and hang couplets—paper signs bearing lucky phrases—on their doors. Paying respect to one’s ancestors is an important part of the New Year celebration, and families will visit grave sites and worship ancestors. Celebrations culminate with the Lantern Festival on the 15th day, when children carry red paper lanterns in a parade beneath the full moon.

Each year in the Chinese calendar is represented by an animal. The Year of the Rat begins on Feb. 7, 2008; 2009 will bring in the Year of the Ox.