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Business Environment in China

Executive Summary

China’s economic potential has been a source of attraction to companies in various countries, notably Australia. Various Australian companies have ventured in China market. Among these include BlueScope Still in the manufacturing industry, Elders Livestock in the agricultural sector, and Australia and New Zealand Banking Group Limited (ANZ) in the banking industry.

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The Australian Government recognizes the challenges involved in international business. Australian Trade Commission (Austrade) is one of the bodies that have very active role in supporting Australian companies and businesses persons in their international ventures. Austrade acts as a partner to companies and businesspersons looking for business opportunities in various parts of the world, including China. China economy has been experiencing consistent growth in the last two decade. Today, China is almost becoming the second largest economy with over $4.33 trillion of GDP. The country has been experiencing a GDP growth of about ten percent in the last few years.

There is a positive correlation between on the one hand, business success in China and on he other hand, a solid understanding of the Chinese culture. Many companies take several years before starting to make profit because of cultural difference. In this case, understanding of Chinese culture has a high influence on a company’s ability to forge business relation with supplies as well as customers.

Relationships, as opposed to rules, influence business operations in China. A company must be able to establish strong relationship with its partners before they can be able work together. Without a strong relationship, Chinese partners are not able to have confidence with their partners and this could lead to ineffective cooperation.

The Chinese government is highly involved in business dealings at various levels. In this case, the government has a direct or indirect involvement in business at national, provincial and municipal level. The perception of quality in China differs from that of countries in the West. Chinese companies can compromise quality by changing the inputs, procedure and other factors.

In China, language barrier is the major challenge to communication. Therefore, doing business in China requires knowledge of the language or an involvement of translators. To succeed in China, Australian companies needs to understand the Chinese culture, establish a strong business relationship with partners, supplier, distributors and customers, and use Chinese management and staff to bridge communication and cultural barriers. Translators should be utilized for communication while multicultural training can be used to ensure smooth working between Chinese and other workers.

Background

International trade is among the strategies employed by Australia to achieve economic development. Australian’s economy is one of the strongest in the world. International business is viewed as one of the ways through which a country’s economy can expand, create wealth, and provide employment for the Australian population. Australian companies have been looking for business opportunities in different parts of the world. Companies invest in different sectors such as education, manufacturing, agriculture, transport and communication, among others.

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There are a number of challenges associated with international business. For example, firms considering venturing into international business may lack information on the best way to conduct business in foreign countries. The Australian Government recognizes the challenges involved in international business. In an effort to support companies or business persons involved in international business, the Australian government has set various bodies whose aim is to promote international business. Australian Trade Commission (Austrade, 2009) is one of the bodies that are actively involved in supporting Australian companies and other investors in their international ventures. Austrade’s mission is to “help Australian companies to succeed in international business by providing advice, market intelligence and support to Australian companies so as to reduce the cost and risk involved in selecting and developing international markets” (Austrade, 2010, p. 2). Austrade is mandated with the role of advancing Australian international trade and investment. It does this by providing current information, services and advice to companies and individual investors interested in international trade. Austrade has offices in various countries in which Australia has business interest. In addition, Austrade acts as a partner to companies and business persons looking for business opportunities in various parts of the world.

China is one of the countries that Australia has high business interest in. China’s economic potential has been a source of attraction to companies from various countries. Consequently, Australian companies have also not been left behind as they endeavor to tap in the Chinese economic potential. Various Australian companies have ventured into the Chinese market. Some of these companies include BlueScope Still (in the manufacturing industry), Elders Livestock (in the agricultural sector), and Australia and New Zealand Banking Group Limited (ANZ) in the banking industry. Apart from such big companies, there are also several Australian small and medium enterprises which engage themselves in international trade with China. This report provides an assessment of the Chinese business environment. The report is aimed at providing key information to businesses intending to venture into the Chinese market.

Although China provides a unique economic potential for business, many foreign companies conducting business in China face various challenges. Many western investors admit that doing business in China is not easy, with a number of them failing to succeed. Australian companies have also experienced difficulties in establishing, running or doing business in China.

Importance of China to Australia

The Chinese economy has been experiencing consistent growth in the last two decades. Currently, China is almost the second largest economy with a Gross Domestic Product (GDP) of over $4.33 trillion. The country has been experiencing an approximate 10 percent growth in its GDP for the last few years. The country’s economic growth is amongst those with the highest GDP growth in the world. In addition, China’s GDP growth is expected to be high in the foreseeable future (Xi, Witzel, Ambler, 2008, p. 18). It is anticipated that with this consistent growth, China could replace the US as the world economic leader in the future. China’s economic growth has been the main contributor to global economic growth in the last few years.

The country has ventured in many areas of the economy with its potential being felt by the presence of Chinese companies in various part of the world (DFAT, 2008, p. 1). Owing to the Chinese’ economic potential, many companies have ventured in the country with the hope of gaining from its consistent economic growth. With a population of over 1.3 billion, China provides a huge market for investors. Apart from the large population, China has a large reserve of natural resources making it one of the most potential business investment destinations in the world (Xi, Witzel, Ambler, 2008, p. 21). Currently, China is the largest trading partner to Australia. By 2006, Australian investment in China was averaged $3 billion. China has approved approximately five thousand investments from Australia (DFAT, 2008, p. 1).

The strong business relationship between Australia and China has been there for many years. It is estimated that approximately 3200 companies had exported their products to China by April 2006 (DFAT, 2008, p. 1). Australian companies were involved in various lines of opportunities which include agribusiness, mining and energy, construction, manufacturing, technology, consultancy, financial and legal. Australia’s exports to China in 2006 included iron ore, cooper ore, wool and coal.

Australia is considered among the top six major importers of Chinese products. More than 1000 Australian companies are involved in the export trade with China while more than 400 Australian companies engage in various business activities in China including education, insurance, business service, manufacturing, property, information service and mineral exploration (Austrade, 2009, p. 3).

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The importance of China to the Australian economy is evidenced by the number of high level business negotiations between leaders from both countries. Negotiations for a free trade agreement between Australia and China that began in 2005 show the high economic interdependence between the two countries. Free trade agreement is aimed at easing trade relations between China and Australia. Therefore, an evaluation of business environment in China is of great importance to Australia as a whole.

Motivation to do business in China

There is a high interest among Australian companies to do business in China. Australian companies are among other companies in the world that have showed high interest in conducting business in China. There are various reasons that motivate Australian companies to invest in China. Some of the key reasons include the size of the market, business growth opportunity in the country, need for western technology in China, growth of Chinese market due to increasing wealth, low competition in China and declining Australian market (Brahm, 2004, p. 64). Some companies are pushed to invest in China by customers or suppliers who have already ventured into the country. Some companies invest in China with the intention of reducing operational costs, considering China’s popularity. China’s increasing economic and political importance in the world has also been an important attraction into China.

Growth Opportunities

Growth opportunities in China are a major source of attraction for Australian companies. China’s stable economy, consistent economic growth, large market and availability of resources provide growth opportunities. Many Australian companies view China as the most appropriate destination to attain a high growth in their business especially when faced with the challenge of diminishing Australian market. China has demonstrated that it is a viable investment destination. China’s economy is considered stable and predictable making China to be a preferred location for companies that wish to expand their business (Xi, Witzel & Ambler, 2008, p.23).

China’s large market presents a great growth opportunity for Australian companies. China has a large market that is not yet exploited. Most Chinese live in the rural areas. However, the country is witnessing a significant rural to urban migration. The Chinese market is relatively new in comparison with western countries. The large market however is not fully developed. The large market provides great opportunities to Australian companies. Sectors such as education, finance and insurance present a great opportunity for growth (Forta, 2005, p. 3). General increase in wealth among Chinese citizens created a high demand for high education, insurance service, financial products and manufactured products. Areas with high potential for growth include the agricultural industry, building and construction, transportation, education, tourism, manufacturing and the food industry. Apart from increasing wealth among the Chinese, there is a taste for western products thus creating high potential for growth.

The large Chinese population provides an opportunity for growth. China’s population is more than 1.3 billion. On the other hand, Australian population is about 20.3 million. Many Australian companies view the large population as vital element for growth. The large difference in population between Australia and China is a major motivator of companies seeking growth opportunity.

Influence of Culture on Business environment

Culture is a major factor in China’s business environment. Chinese are a very cultured people. Their culture influence the way in which they conduct business. Chinese culture influences the way business operate in China and the way in which Chinese business persons conduct business among themselves or with international businesses persons (Graham, 1995, p. 6). Culture, whether expressed overtly or implied, has a significant influence on business dealings in China. The culture influence a company in many ways including client engagement, product and program development, manufacturing, human resources, quality issues, intellectual property, and sales and marketing.

Business success in China highly depends on a solid understanding of the Chinese culture. Many companies take several years before starting to make a profit because of cultural differences. Understanding of the Chinese culture was found to have high influence on a company’s ability to forge business relation with supplies as well as customers (Graham, 1995, p. 7). This implies that failure to understand the culture will translate into huge financial losses to the companies involved. Unlike in Australia, it takes long to build stable business relationships with business partners. In order to succeed in China, a company has to establish a good relationship, including understanding communication issues. Companies leaving Australia for China make many changes in the way they conduct business in order that they may attain success Melbourne Business School is one of Australian companies that had to make substantial changes to its operations for it to be successful in China. Culture difference has affected almost all aspects of business operation including programs offered and the way teachers interact with students.

Relationships

Relationships are very important in the Chinese culture. Relationship is captured in the concept of guanxi (Graham, 1995, p. 7). This simply means relationship in the business context and it extends to the network of people that one cooperates with in conducting business. Relationships, as opposed to rules, influence business operations in China. A company must be able to establish a strong relationship with its partners before they can be able work together. Chinese business partners perceive their western business partners to be in a hurry to make business deals rather than establishing a relationship (Chung & Smith, 2007, p. 8). Without a strong relationship, Chinese partners are not able to develop confidence with their business partners and hence, ineffective cooperation.

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The development and management of relationships play a very important role in business engagement between Chinese business partners and their counterparts. Some of the business issues that are vital in establishing business relationship include quality of manufactured products, viability of a business contract, and project progress. The nature of relationship between business partners was found to influence the ability to win a contract and hence reach a business deal. In addition, the level of relationship was found to determine various elements such as prices, quality of products and terms of payment. For small businesses doing business in China, relationship is a vital ingredient (Graham, 1995, p. 8). This is because small companies have low trade volumes and hence may not be of great importance to Chinese suppliers. As a result, they have to rely on good relationships for business success. It takes time to establish strong business relationships. In this case, engaging the Chinese in social activities rather than normal commercial discussion is vital in the establishing business relationship.

Government

Despite the economic reforms that allow individuals to own and operate businesses, the Chinese government has a significant influence on businesses. The Chinese government is highly involved in business dealings at various levels. The government was found to be directly or indirectly involved in business at the national, provincial and municipal level. For example, almost every aspect of commercial environment in China is regulated by the government. Apart from administering and regulating business activities, the government is highly influential in business deals involving large projects (Collins & Block, 2007, p. 87). Some of the ways in which the government is involved in business dealings include government tenders and providing blessings for a business deal. The local government is involved in business dealing by determining viability and eligibility of business within their jurisdiction.

In China, the relationship that an organization has with the government influences its success. For example, approval of business and obtaining licenses may be influenced by the relationship existing between a firm and the government. Legal requirement for business operations are not explicit thus leaving room for government influence (Forta, 2005, p. 4). In some cases, influence of government authority is required for an organization to be issued with a license of operation. Government support is required of a business to be successful in such areas as the education sector. The ability of an organization to build its business around the central government’s priority can influence its success. In addition, the ability of an organization to demonstrate its contribution towards the national goal may be a competitive advantage in China. Melbourne Business School is among the organizations that have succeeded in structuring their programs in line with the government’s education priorities.

Business Operation

Talent and skills

In China, the capability and commitment of managerial staff has a great influence on the success of an organization. Having Chinese nationals in managerial position is one way through which an organization can gain a competitive edge in the market over its rivals. This is because such individuals can aid an organization in gaining market knowledge necessary for business success. Incorporating Chinese nationals in management positions is considered a good alternative to seeking advice from consultants. Chinese staff will help in solving complex cultural issues within the Chinese business environment (Collins & Block, 2007, p. 88). The attainment of cultural skills and talents would enable a firm to effectively deal with suppliers and distributors. In addition, this would enable an organization to overcome various barriers that would call for additional costs. A Chinese national holding a managerial position at a firm is considered to be a way of internalizing such external costs as cost of consultants, agents, cost involved in developing contacts and relationships and cost of translators.

The success of doing business in China is highly dependent of the level of interaction with Chinese partners. Having Chinese nationals in business plays a role in helping an organization build this business relationship. It also has a key role of bridging the cultural and communication gap. Although having local staff is important is business success in any country, nonetheless, in China, this greatly influences business success. This is because dealing with Chinese people and organizations calls for deep understanding of the Chinese culture. In addition, a deep understanding of Chinese social structure as well and organizational hierarchies is vital is negotiations.

Quality

Quality is a key consideration for firms considering venturing the Chinese market. In China, the perception of quality is different from western countries (Forta, 2005, p. 4). The importance given to quality by Chinese companies varies significantly to that of Australian companies. Chinese companies can compromise quality by changing the inputs, procedure and other factors. Companies may be motivated by need to lower production cost while is some cases it result from lack of appreciation of quality.

Communication

Communication is vital for business success. Communication is a major challenge for companies doing business in China (Chung & Smith, 2007, p. 8). Language barrier is the major communication challenge in China. Chinese is the main language in China. Doing business in China therefore requires knowledge of the language or use of interpreters. Learning Chinese is a major challenge for foreign company’s staff and management. For communication, intermediaries, especially translators, are required for communication.

Conclusion

China has a great economic potential that Australian companies can utilize to achieve growth. The country has registered a GDP growth of about 10 percent for the decade and the growth is anticipated to continue into the foreseeable future. With a population of above 1.3 billion people and an under- exploited large market, China will continue to be a driver to global economy. Despite the high potential of Chinese market, many Australian companies find it difficult to do business in China. Different business environment that is highly influenced by Chinese culture is a challenge to foreign investors in China. Cultural influence, involvement of government in business, communication barriers, difficulties in establishing business relationships and quality issues are some unique challenges in china. Understanding the business environment is vital in being successful in china. The following recommendations are important for Australian companies to succeed in China.

Recommendations

  • Australia should take advantage of the economic growth in China to not only grow by get an opportunity to venture into the global market.
  • Australain companies intending to do business in China should seek to understand the country’s culture.
  • Establish strong business relationship with partners, supplier, distributors and customers
  • Make use of joint ventures and partnership to enter Chinese market
  • Use Chinese nationals in management and staff to bridge communication and cultural barriers
  • Have clear requirement for quality and ensure the standards are met
  • Use translators for communication and where possible learn Chinese
  • Facilitate Multicultural training to enable smooth working between Chinese and other workers

Reference List

Austrade (2009), Current business situation. Web.

Austrade, (2010). About us. Web.

Brahm, L. (2004). Doing business in China: the Sun Tzu way. London: Tuttle Publishing.

Chung, M., & Smith, W. (2007). Overseas Chinese as expatriate managers in China – Is their recruitment a solution to cross-cultural management problems for multinationals operating in China? Web.

Collins, R., & Block, C. (2007). Doing Business in China for Dummies. New York: For Dummies.

DFAT (2008). China: Economic Fact Sheet. Web.

Forta, P. (2005). Cooperative joint ventures. The China Business Review 17(2).

Graham, J. (1995). The influence of Culture on the process of business negotiation: An exploratory study. Journal of international Business studies, 13(2).

Xi, C., Witzel, M., Ambler, T. (2008). Doing Business in China. New York: Taylor & Francis.

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