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Reporter's Notebook: How Hospitable Is China to Small Business?

Reporter's Notebook: How Hospitable Is China to Small Business?

I’m on a two-week fellowship in China and am taking advantage of it to report on entrepreneurship here in a series of blog posts. Check out my previous posts in the archives section of this blog.

China has now surpassed Germany as the world’s third largest economy. The government’s economic reforms coupled with its explosive growth is attracting scores of American businesses who want to tap into the tantalizing prospect of a market comprised of 1.3 billion potential customers. Start-up costs are a fraction of those in the States, the country has a well-educated and highly-skilled workforce, and living costs are incredibly low. As China’s economy and consumerism continues to grow there seems to be numerous openings for small and medium size outfits to do business here, often serving as a bridge between the two countries. Indeed, even before the economic slump in the U.S. China looked like the land of opportunity.

But how hospitable is China to small business? Well, depending on who you’re talking to the answer varies falling anywhere between frosty and lukewarm. It is definitely doable but there are roadblocks all along the way.

The bottom line is that for a foreign business there are huge challenges and costs associated with opening up shop here. There are regulations that can change on a dime, and the amount of money needed to keep up with an endless array of red tape requires the kind of deep pockets that most small businesses don’t have.

I met Toby Marion at the American Chamber of Commerce in Hong Kong. Marion along with his wife Eileen founded the Hong Kong-based Golden Gate Wine Company selling over 80 brands and 400 different wines from California, Oregon, and Washington to the growing wine market in Hong Kong and China. Marion, who did the Peace Corps in Afghanistan in the early 1970s and has worked in a number of multinationals in Asia over the past 30-years, says that it’s a constant balancing act.

For Marion, like all wine importers, there are reams of red tape that include licensing approvals, import tariffs and taxes – all of which add considerable costs per wine bottle. At the same time all imports of wine are subject to inspection and quarantine control. As well, according to Marion, the government is allowed to take two bottles of wine per case which for a small importer, who can’t necessarily absorb the loss through volume, this can be an extreme cost disadvantage. That is especially so when applied to pricier wines. On top of that the rules that apply to all of the above scenarios can and do change regularly.

Of course, in some cases the regulations are not just a matter of bureaucracy but public safety In July, the government enacted its Food Safety Act in the wake of the recent melamine scandal in which pet food, milk products, and other items were found to be contaminated with melamine, causing numerous hospitalizations, liver damage, and was linked to several individual deaths. (Note: Zheng Xiaoyu, the former head of the State Food and Drug Administration was found guilty of corruption and executed over the scandal.)

And while it has always been challenging for companies to deal with China’s shifting regulations and policies, long-time businessmen here say that it is even worse now. There are more companies wanting to get into China and the country is now bound by World Trade Organization Rules.

Another challenge that applies to companies of any size is that American’s are prohibited from paying foreign officials bribes as a result of the Foreign Corruption Practices Act that was put into play in 1977. This can put U.S. companies at a distinct disadvantage because in many cases doing business in China requires various “payments” to officials to smooth the way of certain transactions such as getting one’s products through customs.

Another obstacle, say some is the unspoken understanding that the Chinese are happy to have foreign companies do business here but they also put up a glass ceiling on just how big and successful it can become. For one, the government often puts new restrictions on components and parts in various industries, insisting that they are locally made. Add to that, the constant shift in regulations, a legal body that is in flux and the difficulty in getting legal cases ruled on let alone enforced, and the whole proposition can be dizzying.

While scores of American entrepreneurs have viewed China’s business opportunities with wide eyes, in recent years, heading straight to the Mainland to open shop, with many (flattened by the experience) are now rediscovering Hong Kong as a business hub. Long considered the Gateway to and from China and a longtime liaison between businesses in and out of the country, Hong Kong is once again resuming its role as a successful platform in order to navigate China. Bypassed recently with the opening in China, many businessmen are now finding the territory’s longtime expertise in dealing with China, its transparency and rule of law, makes it an attractive hub despite the fact that is considerably more expensive here. In fact, because of Hong Kong’s rule of law a number of companies doing business in China are building in a clause in their contracts to do arbitration here.

Another bonus is that as a result of the long time ties between Hong Kong and China, setting up a successful business here can give one’s enterprise a high degree of visibility in Hong Kong. One success story is Pacific Coffee, a Seattle-style specialty coffee house that Seattle native, Thomas Neir launched in Hong Kong in 1993 (seven years before Starbucks landed here) before spreading to Singapore and China where he opened four shops in Beijing. Neir, who previously worked as the finance director for a Silicon Valley company, noticed the lack of specialty coffee houses in Hong Kong. But with its large expatriate community rooted in coffee culture and a sizeable number of Chinese who had lived abroad and had experienced the west’s fascination with a good cup of coffee, Neir thought Pacific Coffee had a real shot at success. Indeed he was soon nicknamed “Hong Kong’s coffee millionaire,” in 2005 Chevalier iTech Holdings, an investment holding company, acquired the growing coffee chain for $26.4 million.

Despite the hurdles, many will still try their luck in China. The constant refrain I have heard has been the following: this is a country of 1.3 billion people, even if you only capture 5 or 10% of the market imagine the sales on that.