Finding Your Way Through The Many Investment Options

In the years after Deng Xiaoping first opened China’s doors in 1978, both Western companies and the Chinese Government, unsure of each other and of how this new experiment would work out, preferred for Westerners to invest via joint ventures. This is no longer the case. China is now a member nation of the World Trade Organization, and its regulatory standards have changed considerably in thirty years. These new regulations tend to favor, for the first time, Wholly Owned Foreign Enterprises over joint ventures.

Investment Option N° 1: Manufacturing

One popular option for direct investment has long been local manufacturing. According to conventional wisdom, China’s large pool of inexpensive labor makes this a great way to cut costs and keep to budget constraints. However, as a consequence of entry into the WTO, costs are rising in China. Labor is still cheaper in China than the West, so decentralization is still a good way to cut costs, but labor costs are not the only variable.

Moving your manufacturing center to China may lower your costs, but that does not mean it will lower them enough. Western companies have enormous difficulty competing with Chinese companies in low-skill manufacturing sectors, so you will want to pay close attention to the competition in your sector before delocalizing your manufacturing.

If your product is targeted towards local Chinese consumers rather than overseas ones, make sure you carry out extra thorough market research. The Chinese market is quite different from Western markets and it is important that you develop a thorough understanding of the tastes of local customers so that you can adapt your product, your marketing strategy, or both as needed.

Finally, make sure you take into account the Chinese bureaucracy when you calculate costs. It will take time to acquire the right connections, go through all of the necessary procedures and file all of the necessary paperwork – probably more time than you think. Make sure you figure the cost of this time into your plans.

Investment Option N° 2: Outsourcing

Outsourcing is an alternative to setting up your own manufacturing center in China. There are suitable local manufacturers, large and small, in almost all sectors, especially in the textile and automotive sectors, so finding a manufacturer should not be a problem. From there, the decision becomes a simple risk analysis.

Though there are many large state-owned or former state owned manufacturers in China, most of manufacturers are still quite small and local. This can cause supply and quality control problems, because a single factory may not be able to supply you with the quantity you need. In addition, the local character of these companies can make them difficult to deal with from a Western perspective.

Another difficulty is the need to rely on specifically appointed agencies to export finished products. This is a government measure designed to control the flow of foreign investment, but it is also necessary because each agency works with a network of small factories to organize production in such a way as to ensure supply.

The benefits of outsourced production are mostly derived from economical convenience. It allows you to take advantage of the relatively cheap, increasingly specialized, local workforce without bearing the costs of establishing a production facility of your own. Even with the costs of the necessary authorizations, the export license, and the export agency, outsourcing often works out to be the cheaper option.

For some, however, the lack of security involved in outsourcing offsets the benefits of the lower costs. Outsourcing requires particular attention to the risk of supply chain problems, a risk every company should adequately prepare itself against. In addition, in-house manufacturing gives you more control over the training of your work force, which in turn gives you more control over product quality.

One way to indemnify yourself against these risks is to do your outsourcing through an intermediary company based in your company’s home country. This way you will not have to deal with cultural misunderstandings. If there are difficulties with the outsourcing process – whether they be supply-chain problems or quality control problems or something else altogether – you can deal with those problems through the intermediary and in your home country and courts. The costs of this method are higher, but the risks may be lower.

Conclusions
China is a challenging country to do business in, particularly in today’s hyper-competitive environment. One cannot simply to take advantage of lower labor costs without first doing a certain amount of leg-work. If you do not carry out thorough market research and write a comprehensive business plan before deciding to do business there, you will surely fail. Once in China, focus on your strengths and your ability to innovate and you will find it easier to survive.

References:
http://www.cbbc.org/market_intelligence/presense/investment.html
http://ezinearticles.com/?Investing-in-China---China-101-for-Small-and-M...

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