Why is China important for business?
The economy of China has transitioned from a centrally-planned system to a more market-oriented economy since 1978, which as of today ranked as the second largest in the world by nominal GDP.
The outlook of the market opportunity in China remains promising despite the recent slowdown of the economy due to Covid-19. Key underlying demand drivers (e.g. urbanisation, the emergence of the middle class with increased spending power, macro policy shift towards the support of a more consumption-driven economy, industry positioned as a key growth pillar) continue to hold.
However, the business operating environment in China is very complex: economic, political, legal and socio-cultural systems; and is very different from the Western world.
Competition is getting increasingly fierce and played out across different industries. With the recent surge of high publicity cases of multinational companies due to a lack of cultural knowledge, it is paramount that foreign companies have an understanding of how China works. This requires us to have an acute awareness of invisible and subtle differences between Chinese and Western culture, mindsets, behaviours and ways of working and to have an informed understanding of up-to-date business environment in China.
Overlaying those is the need to build cultural intelligence capabilities of your people to drive long-term success in China.
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Key Risks for Doing Business in China
Organisations doing business with China know that the operating environment is complex and very different from the western world. However, the market opportunity remains promising, despite recent challenges from the coronavirus pandemic. Success depends on identifying and managing a number of China-specific risks, including the following:
- Current organisational leadership capabilities, structure and culture may not effectively support business performance. Many multinational organisations have a dominant western mindset and a lack of cultural intelligence. Others have corporate functional and regional silos which hinder business performance. It is vital that multinationals understand how China works. They need to be aware of the many invisible and subtle differences between Chinese and western culture, mindsets, behaviours and ways of working. Leaders require an informed understanding of the current business environment in China. Companies working in China must increase the ability of their leaders to manage cross-cultural teams, and they should develop a supporting organisational structure that matches the specific challenges of the Chinese business context.
- Organisations may not foresee and adjust to significant changes in the business environment in China. The Chinese government’s austerity drive and the war on corruption have become permanent fixtures since 2012. Multinational companies are under increased government and public scrutiny, with stronger regulatory oversight, so businesses need tighter corporate governance and a focus on improving government relations. This is not just about gaining market access (getting approvals, licenses, land etc.), but it extends into managing risk. Risk management should focus on understanding regulatory threats, closing control gaps, and having an effective crisis-response team in case a regulatory investigation is launched. As companies improve their understanding of the implications of new laws and regulations, and seek to adjust and adapt their operations, the importance of building a pristine business reputation will be more critical.
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