Navigating China Guide (2012) - New Zealand Trade and Enterprise

NAVIGATING
CHINA
For New Zealand Businesses

???? CONTENTS
1 Introduction to Navigating China
1.1 Opportunities and challenges
1.2 Am I ready for China?
1.3 New Zealand-China trade and the
Free Trade Agreement
1.4 China - an overview from culture to government
2 Researching the market
2.1 Research
2.2 Market visits
2.3 Business etiquette for visits
3 Entering the market
3.1 Typical models for entering the market
Case Study: Commtest and Pan Pac
3.2 Choosing a location
3.3 Hong Kong and Taiwan as ‘Wider China’ options
3.4 Protecting intellectual property
Case Study: Hayes
3.5 Building relationships
Case Study: Waikato University
3.6 Negotiations and meetings
3.7 Chinese culture and business
3.8 Dealing with government and local authorities
3.9 Using and managing consultants
3.10 Doing due diligence and avoiding scams
4 Selling in China
4.1 Using agents and distributors
4.2 Direct sales
4.3 Online sales
4.4 Marketing
Case Study: Comvita, Air New Zealand and Digipost
4.5 Getting your products into China
5 Setting up a base in China
5.1 Finding premises
5.2 Human Resources
5.3 Accounting and auditing
6 Navigating China
6.1 Getting paid and repatriating profits
6.2 Getting legal advice and resolving disputes
6.3 Taxes and tax breaks
6.4 Managing logistics
6.5 Day-to-day communications
6.6 Language and interpreters
6.7 Business ethics and corporate responsibility
7 Manufacturing in China
7.1 Pros and cons of manufacturing in China
7.2 Options of manufacturing in China
Case Study: phil&teds
7.3 Finding a manufacturer and location
Case Study: Atrax
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This booklet provides practical advice
for kiwi businesses looking to set-up or
expand in China. As much as possible,
the advice comes from kiwi business
people and experts with hands-on
experience of doing business in China.
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1. INTRODUCTION TO
NAVIGATING CHINA
1.1 OPPORTUNITIES AND CHALLENGES
For New Zealand’s businesses, China represents both
opportunities and fresh challenges.
Geographically, China is 36 times the size of New Zealand,
has a population over 300 times the size of ours and has
a growth rate that sees the value of its economy double
every seven years. The International Monetary Fund predicts
China will overtake the USA in 2016 to become the world’s
largest economy. However, China is still only a newly
industrialised country.
China’s economic growth over the past 25 years is probably
the largest and most sustained period of wealth creation in
the history of the world. In 1800 China generated 25 percent
of the world’s industrial output. By 1975 it had fallen to 1.5
percent. It is now on its way back to 25 percent. In 2010,
China accounted for 19.8 percent of the world’s manufacturing
output. The USA had 19.4 percent, making China the world’s
largest manufacturing country.
China has also arrived at an important threshold in terms of per
capita income. It has passed the US$1,000 per head milestone
considered critical by development economists. As Japan, South
Korea, Taiwan, Singapore and Hong Kong have demonstrated,
once the US$1,000 milestone is reached the transition to
US$4,000–$5,000 per head is comparatively easy.
But experienced business people in China emphasise patience
when doing business in China. Brendan O’Toole, Managing
Partner of Summergate, a leading wine service provider in
greater China, says while China is growing rapidly, businesses
shouldn’t lose sight of the long term:
“It’s still very immature, very embryonic. The real prize to China
is 30, 40, 50 years and beyond.”
The opportunities
The opportunities arise from rapid economic growth in the
world’s largest market and the availability of a cheap
manufacturing base from which to sell to China and the world.
From a manufacturing perspective, China in the long run will
be distinguished by its overall business strength and structure,
including the huge investments made to ensure China has a
modern and competitive manufacturing sector.
New Zealand businesses need to be clear about whether they
want to sell or manufacture in China. Long-term, China business
strategies shouldn’t be based on the availability of cheap labour
– this is disappearing as China becomes wealthier.
In 2011 China had 115 US dollar billionaires – more than any
country other than the USA. There were just 15 in 2006 and
none in 2002.
A new generation of consumers is emerging in China – they are
young, well educated and familiar with non-Chinese cultures.
This ‘Y generation’ of 240 million, born between 1980 and 1990,
is now the highest earning age group in the country and is
looking for a new way of life. They typically live in the major
cities on the Eastern seaboard of China and in particular in
Beijing, Shanghai, Shenzhen and Guangzhou where GDP per
person is now over US$10.000 but corresponds in Purchasing
Power Parity terms to four times that amount.
KIWI EXPERIENCES – BIG, GROWING FAST AND RAPIDLY CHANGING
“If we capture 2 percent of the market, we’ll generate $100
million in five years. If we’re not there, we’re not truly global”.
– Wayne Oxenham, Executive vice president hospital solutions,
Orion Health
“It isn’t a scary place if you take precautions. Avoid the
negativity: China is the future.” – Sean Simpson, co-founder,
LanzaTech
“If all the Chinese in China take one bite of a piece of lamb chop,
they would clean out New Zealand’s entire sheep population in
three days.” – Danny Chan, businessman and third generation
New Zealand Chinese
“The size of this market astounds you. We ran a business in
New Zealand and if we received orders of the magnitude of
20 to 50,000 square feet we were over the moon. Today,
our average order placement with most of our customers
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is somewhere between half a million and a million square feet.
So this excites us, just the size and the magnitude of the
market.” – Keith Stevens, former General Manager, Richina
Pacific Ltd’s Ovine Garment Leather Division
“The way the economy is growing in China is really
unprecedented, so it’s been a real challenge for them to keep
up with legal, tax, intellectual property etcetera issues. They’re
doing a much better job than people give them credit for. The
fact that they can even remotely keep pace with the rate of
change is incredible.” – Scott Brown of RedFern Consulting
“What we have is a huge market that is extending and
developing so quickly it is jumping certain technology groups.
For instance, I often talk of the fact that I don’t think the Chinese
population knows what a land-line is because they simply
jumped from no phone to the high quality electronics that we
have available to us today.” – Doug Ducker, Managing Director
of Pan Pac Forest Products
The challenges
Starting to do business in China is likely to be more costly
and time consuming than in other markets.
Challenges arise because of China’s size, its ‘gold rush’ style
growth and the fact China has a very different business culture
and environment from what we are used to in New Zealand
and in other export markets.
New Zealand and China are also markedly different in size,
culture, politics, geography, history and economic structure.
These issues can present challenges for companies looking to
sell or invest in China which can only be overcome by thorough
research, spending a lot of time in-market and following a
focused business plan.
Much of the information available on China may appear
contradictory. You need to see for yourself which advice is
right for you.
“Take time to sit back and learn and understand the business
culture, the people culture. Basically it’s about not rushing in
trying to do things without understanding. That’s where people
make mistakes. It’s about learning and understanding China
prior to getting here and once you are here.” – Jon Shearer,
General Manager Fisher & Paykel Appliances, China
From a distance China appears huge. The reality is that it is
several large regional markets and numerous niche and
micro-niche markets which helps to make China more accessible
to New Zealand businesses.
Differences between the size and focus of the two economies,
rather than being an obstacle to doing business in China, often
present opportunities for New Zealand businesses.
The Chinese dairy market is typical of the mix of the opportunities
and challenges facing New Zealand businesses. Chinese
consumption of dairy products is just one fifth of the international
average, but is predicted to move more into line with the norm as
incomes rise. It is estimated that if each Chinese person drinks half
a kilogram of milk a day, the country’s dairy consumption would
equal more than a third of the world’s total dairy production.
There’s a twofold challenge for New Zealand companies wanting
to take advantage of this opportunity. Firstly every other major
dairy producer in the world is similarly focused, and secondly,
the domestic Chinese dairy industry itself is growing rapidly.
You should also not underestimate the size and quality of
your competition in China. The government’s pro-growth
policies have produced a host of businesses pursuing each
and every opportunity.
Note: This material has been designed to assist companies in the development of their own capability for the management of
business opportunities in China’s complex, diverse and fast changing business environment. It should not be used as the sole source
of information for making decisions on selling to or investing in China. That can only be done by undertaking research on China
tailored for your own company’s situation and spending a lot of time in the market.
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Other challenges include the uneven application of regulations,
local protectionism, indirect subsidies to local industry such as
low interest bank loans, intellectual property violations and the
need to build closer relationships with business partners than
would be usual in New Zealand.
While there are unique difficulties in doing business in China,
they are not as great as they sometimes seem from a distance.
Companies already in China see problems as fewer in number
and of lesser importance than those looking at China from
back in New Zealand.
KIWI LESSONS – NO INSTANT RICHES
“Don’t think you are going to get rich overnight.” – Keith
Stevens, former General Manager, Richina Pacific Ltd’s Ovine
Garment Leather Division
“The costs and trouble of entering China should not be
underestimated. It is no good attempting to enter a market
if the resources are not there to pay for a proper attempt and
potentially to have to pull out early with the loss of money
already spent.” – David Mahon, Managing Director, Mahon
China Investment Management
1.2 AM I READY FOR CHINA?
Time and commitment
China is a tough market for an initial foray into exporting or
establishing a physical presence in market.
It fails a number of tests regarding the advice of selecting easy
markets first – it’s not close, it has language barriers and the
business environment is often radically different from
New Zealand’s.
New Zealand companies with successful businesses in the
Chinese market say getting started was time consuming
and took a large commitment of their resources.
Don’t expect success to come quickly or easily.
KIWI LESSONS – TAKE A LONG VIEW
“We spent three years on an entry strategy and thought
very carefully about the where, when and how of entry.”
– David Percy, CEO, Pertronic Industries
“Take the long view. Don’t expect success to come quickly
or easily – it is not that sort of market.” – Mark Templeton,
former CEO, Actronic Technologies
Are you ready to export to China?
There are a number of steps you need to take to make sure
you are ready for exporting to China.
New Zealand Trade and Enterprise (NZTE) has outlined generic
steps which companies interested in exporting should consider
to help them assess whether they are ready for exporting to
any market.
The steps include:
Commitment
Developing the Chinese market can be costly in terms of time,
money and resources. For example, if your company wants to
be successful in China, senior managers will not get away with
a single visit to the market. Success may only come after
numerous visits.
Product
China is one of the toughest markets in the world. The
opportunities are huge, but the rest of the world knows
this as well.
It is important to know your product and its marketing
advantages in the Chinese market.
Production
You need to be confident that your product or service is
sufficiently proven and developed to take to the Chinese market.
Also if you are manufacturing in New Zealand you need to make
sure you have the production capacity to meet market
demands.
If you are looking to manufacture in China you have to factor in
the many hidden costs such as greater management overheads,
inflexible manufacturing schedules and quality management
and cost issues.
Marketing
Marketing in China is not easy thanks to the varied culture
and geography of the country, the sheer size of the population
and country and differing levels of economic development.
A one size fits all marketing strategy will not work.
It is vital to have a strong marketing understanding.
Selecting markets and setting pricing
Within China’s several large regional markets and many more
niche and micro-niche markets, prices are also variable.
You need to have done the research to validate both the
potential and the investment.
NZTE has produced a Guide to Export Pricing which includes
sample costing sheets and other helpful advice.
KIWI LESSONS – TARGET SPECIFIC SECTORS
“China has huge growth potential but New Zealand companies
need to target specific sectors and find the right partner.”
– Mark Templeton, former CEO, Actronic Technologies
“Your China price may need to be higher than it is elsewhere
as there are many ticket clippers after the importer.”
– Mark Radburnd, Chief Financial Officer, Commtest Instruments
Management and international sales management
Exporting to China requires considerable commitment of
management time and to be successful you will need to at least
consider hiring managers familiar with the Chinese market.
Does your company have the available management capacity
which will be required to develop the Chinese market?
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KIWI LESSONS – LOCAL EXECUTION IS VITAL
“You will need to visit China at least five to eight times before
you are accepted and taken seriously. I spent 18 months
establishing relationships.” – Trevor Lock, Managing Director,
Functional Nutraceuticals
“Local execution is vital. Sending expats to China, unless
very experienced and bi-cultural, is not always effective.”
– Richard Yan, Chairman and Chief Executive, Richina Pacific
Finance
As with other markets, breaking into China requires considerable
funds (research, airfares, accommodation, advertising, trade
fairs, sales promotion, new brochures, training of overseas
sales agents etc).
China is also full of hidden costs relating to language and
cultural issues and the time you need to spend building
relationships and intellectual property protection.
Are you ready to set up in China?
If you want to grow your business and have a long-term future
in the Chinese market you need to have a local presence.
This requires both deep pockets and reserves of patience
as setting up in China involves a unique set of issues.
It will also require a strong commitment to the China project
from your head office back in New Zealand. As well as investing
large sums of money (by some estimates companies need at
least a NZ$1 million budget over two years to set up in China),
senior managers have to be prepared to spend a lot of time
flying between New Zealand and China.
• first country to recognise China as a market economy
• first OECD country to start bilateral comprehensive FTA
negotiations with China.
New Zealand’s business ties with China date back to the early
19th century, starting with the seal skin trade to Guangzhou and
later the arrival of Chinese migrants coming for the gold rush.
Today China is New Zealand’s second largest bilateral trading
partner, with total merchandise trade worth about NZ$11.6 billion
in 2010. China is also a leading source of migrants, students and
tourists for New Zealand.
New Zealand only ranks as China’s 46th largest market, down
from 44 in 2002 (based on World Trade Atlas figures).
Getting preferential access to the world’s fastest growing major
economy through the FTA has the potential to deliver significant
gains to our exporters.
Over the next two decades the FTA is expected to lift
New Zealand exports to China by between 20 and 39 percent,
over and above what would be the case without an agreement.
In cash, that represents between $260 million and $400 million
a year.
The estimates from a joint study report by China’s Ministry of
Commerce and New Zealand’s Ministry of Foreign Affairs and
Trade indicate China’s gains over the same period are expected
to be between US$40 million and $70 million.
Productivity gains flowing from the FTA are expected to
make the agreement even more lucrative for New Zealand
in percentage terms.
KIWI LESSON – THINGS HAPPEN FAST
“The lead time, the speed of development, the speed of
construction, planning and execution is incredibly quick
compared with New Zealand. It’s forcing us to re-think our
whole supply chain, how we respond to that and how we can
actually capture some of this market. It’s very different from
anything that I’ve experienced before.” – Doug Ducker,
Managing Director of Pan Pac Forest Products
1.3 NEW ZEALAND-CHINA TRADE AND THE
FREE TRADE AGREEMENT
New Zealand and New Zealanders are highly regarded in China.
Chinese business people trust and respect Kiwis because of
the value we put on building personal relationships and our
straight forward attitude towards business. The Chinese and
New Zealand governments also have a good working relationship.
The most significant example of this is the fact that China has
pushed New Zealand to the forefront of its international trade
relationships by making New Zealand the first developed
country to have a Free Trade Agreement (FTA) with China.
New Zealand was also the:
• first country to start and finish World Trade Organisation
negotiations with China
1.4 CHINA – AN OVERVIEW FROM CULTURE
TO GOVERNMENT
Government
The Chinese Communist Party (CCP) has governed China since
1949 and its power extends to all levels of Chinese society.
Businesses looking to set up in China will need to at least
understand local political structures and perhaps have to work
with party officials.
While the “realisation of Communism” is the party’s ultimate
goal, it was the CCP that launched the economic and social
reforms that set the country on its path of market-led
economic revival.
At the central government level, CCP and state structures are
fused, with the leader of a ministry or commission also being
the leader of the party body associated with that ministry.
At the provincial or lower levels, the party and state heads are
invariably separate, although the party head has a high state
position and the state head has a high party position.
The President is the Head of State and is elected by the National
People’s Congress (NPC) for a five-year term. The Head of
Government, the Premier, and the Cabinet are nominated
by the President, subject to confirmation by the NPC.
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Members of the NPC are elected by municipal, regional,
and provincial People’s Congresses to serve five-year terms.
There are 22 provinces and four municipalities directly under
central government control and five autonomous regions.
The day-to-day government is carried out by the State Council
(elected by the NPC) and the Politburo (also known as the
Standing Committee). The members of the State Council are
elected by the NPC.
Below the State Council and the Politburo are the ministries
which often have very exact areas of responsibility.
There are approximately 3,000 members or deputies
representing every region of China.
Culture
For New Zealanders, aspects of the Chinese culture are familiar
thanks to a large Chinese population in New Zealand and the
vibrancy of the culture itself.
At a basic level at least, we know about Chinese customs,
language, music, arts and notably cuisine.
But for many New Zealanders, the experience of China firsthand
results in culture shock.
The endless crowds, the lack of personal space, the often
indifferent service and the apparently rude behaviour (pushing
into queues and staring are common) come as a surprise.
And once you are off the street there is a whole set of other
cultural surprises. The ground rules of Chinese business culture
are very different to those of the West. Business relationships
are much more personal than in New Zealand, the principle of
reciprocity is important and Chinese look for signs of respect
for rank and seniority.
The Chinese people take great pride in their culture and history.
They have shared a common culture longer than any other
group on Earth. The Chinese writing system, for example, dates
back almost 4,000 years.
The concept of being Chinese is a cultural concept, not one
based on race. To speak and behave like the Chinese and
accept their cultural values is to be Chinese.
There are 56 known ethnic groups in China. The Han ethnic
group is the largest, made up of about 1.3 billion people. The
other ethnic groups account for about 100 million people. The
largest minority groups are the Tibetans (Tibet Autonomous
Region), Mongolians (Inner Mongolia Autonomous Region),
Uighurs (Xinjiang Uighur Autonomous Region) and Zhuang
(Guangxi Zhuang Autonomous Region).
Throughout Chinese history, the dominant and influential rulers
and philosophers such as Confucius and Lao Zi (founder of
Taoism) were of Han ethnicity, although the Yuan and Qing
dynasties were begun by the Mongol and Man minorities.
The Han culture, ethics and belief system have considerable
influence on other ethnic groups in China, including business
culture and etiquette.
As a result, many minority groups have learned and adopted
Han values and language. For example, the emperors of the
Qing Dynasty (belonging to the Man ethnic minority group from
the north east of China) ordered all their officials to learn not
only Midland (or Central Country) culture but also the Beijing
dialect. The combination of the Man and Beijing dialects became
what’s known today as Chinese Mandarin language.
Confucius was an esteemed Chinese thinker and social
philosopher whose teachings and philosophy have deeply
influenced Chinese thought and life.
These values are broken down into:
• Li (ritual): includes propriety, etiquette, politeness, a system
of norms
• Xiao (filial devotion): respect and care for parents, elderly
• Yi (relationship and sacrifice): comradeship, ties of friendship
• Xin (credibility): honesty and trustworthiness
• Jun (humanity towards others): scholarship, nobility, loyalty
and being helpful
• Zhong (devotion): showing loyalty to the state or senior
people or businesses/companies you work with.
Confucianism focuses on individuals governing themselves first.
It promotes the idea that once everyone has a high level of
moral values, then an orderly society will follow.
History
China has a long and illustrious history, and like their culture,
the Chinese take great pride in their country’s achievements.
Until its decline in the mid 19th century, China was a
world power.
The Chinese invented the compass, gunpowder, moveable type
printing and papermaking. They were also the first to document
astronomical phenomena such as comets, sunspots and new
stars and they kept the world’s most detailed and earliest
astronomical records.
Before Europe’s industrial revolution, China’s agriculture was
more advanced and productive than the West’s and its
craftsmen were at least the equal of Europe’s.
China is one of the cradles of the human race with the earliest
known human in China believed to have lived in the region
around 60,000 BC.
Recorded Chinese history began about 3,600 years ago and
the imperial dynastic system of government was established
as early as 221 BC. Although dynasties were overturned, the
system survived until 1911.
By the mid 19th century China had fallen into serious decline
thanks to a combination of military defeats (by countries looking
to open China up) and corrupt and incompetent feudal rule.
What followed was a period of chaos which resulted in the
collapse of the dynastic system, the establishment of a republic
and subsequent civil war.
At the end of the civil war in 1949, the Communist People’s
Republic of China was created.
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For China, and the rest of the world, one of the most significant
events in the country’s recent history was the 11th National
Congress held in 1977 which set China on the path to its current
economic boom.
The importance of this event goes beyond its economic impact.
The reforms started in 1977 reflect a sea change in China’s
attitude to the world with China declaring it wanted to prosper
and return to its leading role in international affairs.
Language
About one-fifth of the world speaks some form of Chinese, but
there are huge regional variations in spoken Chinese, similar to
the differences in the Romance languages that originated from
Latin. There are also hundreds of local dialects.
The Chinese Government is committed to standardising
communication in China around the official spoken language,
Mandarin, and the already accepted standard written language.
A 2007 survey indicated that a little more than half the Chinese
population can effectively speak Mandarin, but it is more widely
used in urban areas and among the young. Mandarin, based on
the Beijing dialect, is taught in all schools.
Other common Chinese languages include Wu (spoken in
Shanghai), Cantonese (spoken in the south-eastern part of
China, especially in the Guangdong province) and Hakka
(spoken in the southern provinces, including Guangdong).
Most Chinese are bilingual, speaking Mandarin and their local
language or dialect.
English is also becoming increasingly common. China is set to
have more speakers of English as a second language than there
are people speaking English as their first.
The simplified Chinese character system is predominately used
in mainland China and increasingly outside of the mainland.
The traditional written form – sometimes called complicated
– is still used in Singapore, Taiwan and Hong Kong.
Economy
China’s economic growth has averaged nearly 10 percent
– three times the world rate – over the past 25 years, turning
a once stagnant economy into one of the most powerful
economic forces of the 21st century.
This growth, when combined with the world’s biggest
population, means China is already the world’s second
largest economy. Also the OECD has predicted that China’s
average near double-digit growth will continue for “some time”,
lifting Chinese incomes and potentially creating the world’s
largest market.
China’s growth is also having an impact on world markets.
In 1979 China had less than 1 percent of the international goods
trade which by 2005 had risen to 6.4 percent. In 2010 the
country was the world’s second largest trading nation after
the USA.
China has followed a development path different from other
Asian economies like Japan and Korea. It has hung onto its
low-skilled labour-intensive manufacturing sectors while at the
same time developing intermediate technologies and high-tech
knowledge intensive areas.
By 2004 China had become the world’s leading exporter
of information and communications technology products.
Demand among Chinese for consumer products and food
and beverages has grown along with the economy and the
emergence of an urban middle class.
But it needs to be remembered that at a national level China is
still only a newly industrialised country. Its average per capita
income is around US$4,380. Income distribution is very uneven
with urban centres such as Beijing having a per capita income
more than double the average.
This is expected to change dramatically over the next decade
as more Chinese begin to enjoy the fruits of the country’s
economic boom.
The Chinese Government still plays a direct hand in the
economy through its five-year programmes that set economic
goals, strategies and targets. But private businesses produce
more than half of GDP and most of China’s exports. They also
create most new jobs.
Currency
The Chinese currency is known as the Renminbi (RMB), literally
‘the people’s currency’.
RMB units are split into yuan (roughly equivalent to the use of
the term dollar), jiao (10 of which make up a yuan) and fen (10 of
which make up a jiao). The yuan comes in notes of 100, 50, 20,
10, 5 and 1 (there is also a 1 yuan coin). Jiao come in both notes
of 5, 2 and 1 and coins of the same amount. Fen are generally
seen as aluminium alloy coins of 5, 2 and 1 fen.
Legal system
Laws and regulations in China tend to be broader than
New Zealand’s, giving China’s courts and officials – who often
have no legal education – more discretion and flexibility in
applying laws than we are used to.
This gives rise to difficulties in determining what exactly is legal
and often results in what can be seen as inconsistent judgments
and rulings.
While having to deal with the Chinese legal system can be
frustrating, the situation is improving.
China is committed to developing a society ruled by law and
this is freeing up the legal system from CCP control. It has
staged a number of anti-corruption drives. Giving and taking
bribes can lead to life in prison and in the most serious cases
the death sentence.
7

PRC GOVERNMENT STRUCTURE
CENTRAL COMMITTEE OF THE
CHINESE COMMUNIST PARTY
General Secretary
Central Military Commission Chair
(Politburo Standing Committee
Members)
NATIONAL PEOPLE’S CONGRESS
Standing Committee
Chair
Vice Chairs
Secretary General
CHINESE PEOPLE’S
POLITICAL CONSULTATIVE
CONFERENCE
Chair
President
Vice President
NPC Committees
Directors
Agriculture and Rural
Education, Science, Culture, and Health
Environment and Resource Conservation
Finance and Economics
Foreign Affairs
Internal Affairs Administration
Legal Affairs
Nationalities
Overseas Chinese Affairs
Supreme People’s Court
President
Supreme People’s Procuratorate
President
STATE COUNCIL
Premier Vice Premiers State Councillors Secretary General Offices of the State Council*
Foreign Affairs Office
Legislative Affairs Office
MINISTRIES AND MINISTRY-LEVEL ORGANISATIONS
Commission for Science, Technology,
and Industry for National Defense
Ministry of Culture
Ministry of Justice
Ministry of Railways
State Auditing Administration
Ministry of Agriculture
Ministry of Education
Ministry of Labor and Social Security
Ministry of Science and Technology
National Development and Reform Commission
Ministry of Civil Affairs
Ministry of Finance
Ministry of Land and Natural Resources
Ministry of State Security
State Ethnic Affairs Commission
Ministry of Commerce
Ministry of Foreign Affairs
Ministry of National Defense
Ministry of Supervision
State Population and Family Planning
Commission
Ministry of Communications
Ministry of Health
Ministry of Personnel
Ministry of Water Resources
Ministry of Construction
Ministry of Information Industry
Ministry of Public Security
People’s Bank of China
Administration of Quality Supervision,
Inspection, and Quarantine†
China Banking Regulatory Commission†
China Insurance Regulatory Commission†
China Securities Regulatory Commission†
General Administration of Press and
Publications†
State Administration for Industry and
Commerce†
State Asset Supervision and Administration
Commission†
State Environmental Protection Administration†
OTHER KEY GOVERNMENT
AGENCIES*
China Post**
National Tourism Administration
State Electricity
Regulatory Commission
Development Research Center
of the State Council
State Administration
of Foreign Exchange^
State Forestry Administration
General Administration of Civil
Aviation of China (CAAC)
State Administration of
Radio, Film, and Television
State Intellectual Property Office
General Administration of Customs
State Administration of Taxation
State Sports General Administration
National Bureau of Statistics
State Administration
for Religious Affairs
Xinhua News Agency
State Food and Drug
Administration
Sources: US-China Business Council files, China Directory 2004
* These listings are not meant to be comprehensive
** Under the authority of MII
† Not included in the list of 28 ministry-level bodies released at the 2003 National People’s Congress
^ Reports to PBOC
8

Telecommunications
China’s telecommunications services are an excellent example
of the size, complexity and potential of the country.
In 2002 China became the world’s single largest telecom market.
However, much of the population has poor or no access to
phones or the internet.
In 2010, 63 percent of Chinese had a mobile phone subscription
compared with 110 subscriptions per 100 for New Zealanders.
For the internet, China had 34 users per 100 people against
80 per 100 in New Zealand. But China is catching up fast.
For example, China experienced a 337 percent increase in
broadband subscribers between 2005 and 2010, to reach
163 million. In 2008 China surpassed the USA in number
of broadband subscriptions. Subscribers are expected to
increase to 271 million by 2016.
However, telecommunications services again reflect the
urban-rural divide with service levels in cities such as Beijing,
Shanghai, Guangzhou and Shenzhen similar to those in
Western Europe or North America, while in rural areas they
can be poor to non-existent.
Population
Keeping China’s population growth down is a fundamental aim
of the Chinese Government.
The sheer number of people, and their demographics (China too
has a baby boom population), is putting unsustainable pressure
on the environment and the country’s resources.
In 1949 when the People’s Republic of China was founded, China
had a population of 540 million – 30 years later thanks to
increased fertility and life expectancy, it had grown to more than
800 million. In 2011 the population was an estimated 1.34 billion,
about 20 percent of the earth’s population, mostly concentrated
in the eastern parts of the country, especially near to the coast.
Within the next three decades, China’s population is expected
to increase by another 260 million.
Future population growth will not be the result of high fertility –
the government’s one child policy has seen the average number
of births fall below the population replacement rate – but the
upshot of the crowd of young adults of reproductive age.
Their number will continue to increase until 2015.
Like Western countries, the number of elderly people in China
will also leap over the next three decades, but the problem is
starker in China.
Declining birthrates and improved longevity mean China’s
population is aging at one of the “fastest rates ever recorded”,
according to the Population Reference Bureau.
Government figures show 119 boys are born for every 100 girls,
which indicates that about 40 million Chinese men are destined
for bachelorhood by 2020.
Religion
Religious life in China is complicated by Western standards.
Though Chinese Government figures suggest that less than 10
percent of the population practice a religion, a large percentage
follows, to at least some degree, a religion or belief. Many people
also adhere to more than one teaching.
Chinese religion consists of four main traditions: Chinese folk
religion, Confucianism, Taoism and Buddhism.
While most Chinese are not strongly religious, these often
interconnected traditions still have a grip on the way they view
the world.
This can come through in business negotiations. For example,
Chinese understanding of the paradoxical balance of opposites
that underpins yin and yang often will push them to look to
compromise rather than take a clear cut option.
The practice of these traditions is much more common in rural
areas and among the old, but even young Chinese with a
Western outlook will acknowledge, for example, the Taoist
doctrine of yin and yang and Confucianism’s need to revere
the elderly.
While religious tolerance is embedded in the Chinese
constitution, the government restricts religious practices
outside officially recognised organisations.
Time zones
Despite China’s geographical width – it spans five time zones
– the whole of China operates to a single standard time
(Greenwich Mean Time plus eight hours) all year round.
The standard time is Beijing time which is also observed in
Hong Kong. People in the far west of China have had to adapt
to this, often following later work schedules so they don’t have
to commute to work two hours before dawn.
During New Zealand daylight saving time China is five
hours behind New Zealand; for the rest of the year it is
four hours behind.
There is no daylight saving in China.
Climate
Due to its vast size, China has a huge range of climatic conditions.
In the south, for example Guangzhou and the surrounding
Guangdong province, April to September is hot and wet.
December and January can be surprisingly cold, down to zero
for short periods. Spring and autumn are mild, though they are
often wet.
Around Shanghai and the central region it is hot and humid from
April to October. Winters can be cold and wet and again spring
and autumn have conditions between the two extremes.
In the north, for instance Beijing, average temperatures range
from 19 to 40 degrees centigrade between April and September.
It is also wet and humid. In winter it’s generally dry and sunny
– from December through to February the average temperature
rarely rises above freezing. In the northern provinces it can drop
as low as 20 to 40 degrees celcius below zero.
9

Geography
China is the world’s fourth largest country – after Russia, Canada
and the USA – with an area of about 9.6 million square kilometres.
East to west it measures over 5,200 kilometres and from north
to south over 5,500 kilometres. Its geography is highly diverse,
with hills, plains, and river deltas in the east and deserts, high
plateaus and mountains in the west.
Two-thirds of the country is covered by mountains, hills and
plateaus and of the world’s 12 highest peaks, China has seven.
China’s two major rivers, the Yellow and the Yangtze, both in the
southeast, are the focus of much of China’s population growth
and agriculture.
Hong Kong And Macau
Hong Kong and Macau are Special Administrative Regions
(SARs) of the People’s Republic of China.
The “one country, two systems” agreement between Beijing
and Hong Kong extends to at least 2047. Under the agreement,
Hong Kong’s Chief Executive and legislature are able to make
independent decisions for Hong Kong. Hong Kong has its
own currency, an independent legal system and separate
customs territory.
Macau’s constitution says Macau’s social and economic system,
lifestyle, rights and freedoms are to remain unchanged till at
least 2049. Like Hong Kong, Macau’s “one country, two systems”
agreement provides a high degree of autonomy. Macau also
maintains its own separate currency, legal system and
customs territory.
Taiwan
The status of Taiwan is a sensitive issue among Chinese officials
and people.
The People’s Republic of China (PRC) considers Taiwan to be an
inalienable part of China and is sensitive about any comments or
actions that undermine its ‘One China’ principle and the eventual
peaceful reunification of mainland China and the offshore
islands that make up Taiwan.
For example, the PRC Government will not have any dealings
with another government unless it agrees and adheres to the
‘One China’ principle.
Note on flags: when producing material on doing business
in China, do not include a Taiwan flag in any of the material.
Maps and the naming of maps can also be a problem.
Because of Cold War politics, New Zealand did not recognise
the PRC until 1972. As part of a joint recognition communiqué,
New Zealand made a commitment to China to have no official
dealings with Taiwan.
However, in New Zealand’s view this does not stop it from
maintaining economic and cultural ties with Taiwan. The PRC
does the same.
Nationalist Government defeated by the communists and forced
to retreat to Taiwan.
Environment
China’s rapid economic growth and urbanisation have driven
high levels of pollution.
China is now the world’s largest source of carbon dioxide
emissions.
In 2009 20 percent of Chinese cities surveyed by China’s State
Environmental Protection Administration failed to meet China’s
national air quality standards. Acid rain pollution is still relatively
heavy. Around a quarter of China’s urban sewage in the cities
went untreated.
It is estimated that China has lost 20 percent of its agricultural
land since 1949 due to a combination of soil erosion,
urbanisation, economic development and desertification.
China’s 12th five-year plan charts the direction of economic and
social development for 2011–2015. Among its central themes are
modernisation and environmental protection. The government
plans to promote seven sectors to improve energy efficiency
and sustainable development. Key ones are new generation
information technology, new energy and high-end equipment
manufacturing, as well as biotechnology, new materials, new
energy vehicles and environmentally friendly technologies.
These sectors are expected to collectively grow more than
20 percent during the 12th five-year plan.
Travel
A huge investment in transportation infrastructure is rapidly
bringing large parts of China’s road, rail and air networks up
to standards we are used to in New Zealand.
A massive road building programme is underway. Between
2005 and 2010 the length of motorways grew by 27,000
kilometres, increasing the total length to 68,000 kilometres.
However, these roads are rapidly being filled. In 2009, China
leap-frogged the USA to become the world’s largest car market.
In 2010 13.8 million new passenger vehicles were sold.
The inequality of modern China is also apparent in roading.
In many rural remote areas roads are little more than mud tracks.
Chinese roads are among the most dangerous in the world
– by some reports they are 10 times more lethal than those of
developed countries.
The explosion in car ownership (and in pollution) has driven the
Chinese Government to heavily invest in bus and rail networks.
The regular and cheap train services are the standard way for
Chinese to get around, though they are often slow. Comfort
and speed is better on services between main cities.
There are now numerous domestic airlines in China. Most have
invested heavily in new aircraft and improving services and
prices are coming down from resulting competition.
The origins of the standoff (and the depth of feeling) date
back to the civil war that ended in 1949 with the Kuomintang
10

2. RESEARCHING
THE MARKET
2.1 RESEARCH
Researching the market
Comprehensive research is important when preparing for
successful entry into China because of unique features of
the Chinese market, including:
• geographical and cultural complexity
• size and regional variations
• the speed with which the market evolves
• rapidly changing rules, regulations and focus of enforcement
authorities
• the obscurity of consumer information and regulations
• poor public information to help understanding of processes
and rules
• lack of public data bases
• uneven roll out of compliance with, and enforcement of,
World Trade Organisation rules.
Trying to interpret in New Zealand what information is publicly
available will almost inevitably lead to wrong conclusions.
How to research
Base your business plan on research
When you are doing research on China you need to be focused
on the needs of the Chinese market, not your own company’s
needs. David Mahon, Managing Director of Mahon China
Investment Management, says too many businesses misguidedly
see China as a market that will fit into their product and sales
plans. “The most successful entrants will analyse China, note
the gaps and market forces, and modify their plans and their
products to take advantage of the appropriate level of demand.”
Doing desk research
Undertake desk research without leaving New Zealand by using
the internet, China-based researchers and the resources of
NZTE. This can give you a good picture of market opportunities
ahead of a decision to commit to China.
At an early stage you will need to commission your own
professional China-based research and you will also need to
visit the market yourself many times to personally confirm
research findings and establish crucial relationships. For
information on market visits see the ‘Researching the Market –
Market visits’ section.
Through its network in China, NZTE can help New Zealand
companies.
NZTE has five offices in mainland China – Beijing, Shanghai,
Guangzhou, Shenzhen and Qingdao. NZTE also has sector
profiles on a number of sectors in China. Contact your NZTE
client manager or NZTE for more information.
Getting help
There are a range of research organisations in China including
the big international professional and accounting firms through
to specialist firms operated by expatriates and Chinese
nationals. Contact NZTE to get a list of these organisations
as well as some based in New Zealand.
You should do some due diligence on prospective consultants
and specialists you are considering hiring.
Companies should consider research based on three levels
as outlined in the diagram. The first level is the basis for the
development of this material – more generic, to assist
companies develop a organisational approach and
understanding towards developing a China strategy.
The second level starts to narrow down the research needs.
This research can be done by companies independently.
There are suggestions in this publication to enable companies
to get this process started. The third level is where a company
has determined a specific course of action and contracts
specialists such as lawyers, tax specialists and marketing
specialists to conduct research on their behalf.
However, information available on the web on China can only
get you so far – it is often out of date, misleading and wrong,
or contradictory when read alone and out of context.
12

RESEARCH PROCESS
Level 1: Overview of what companies
need to consider when developing
a China strategy.
Level 2: Company research
programme: internet links,
secondary research,
reference material.
Level 3: Primary
research, contract
research with
specialists:
e.g. IP, Tax,
M&A.
KIWI LESSONS – RESEARCH, RESEARCH, RESEARCH
“A lot of the information is contradictory, so you need somebody
with experience in China to give you that information in context.
Don’t try and do it alone. Get good advisors – lawyers etc – and
talk to everyone you can who has been there [in China] or is
here. Go to China and draw on the world’s biggest pool of
Chinese commercial talent.” – David Mahon, Managing Director,
Mahon China Investment Management
“Do your homework thoroughly and understand the numbers
– your expenses and costs, the prices in Renminbi, exchange
rates, tariffs and taxes, salary and wage costs, commissions,
running costs and transport. Consider your own R&D and IP
costs imbedded in your product and how the loss of your
IP would impact on your business.” – Trevor Lock, Managing
Director, Functional Nutraceuticals
“As China changes, it is more useful for businesses to get
advice on the specifics involved in any situation rather than
on generics or basics.” – Richard Yan, Chairman and Chief
Executive, Richina Pacific
“Research an entry strategy that will deliver your desired
outcomes before committing major funds and check out
your potential partners carefully.” – Mark Templeton,
former CEO, Actronic
KIWI LESSON – BUT YOU’LL NEVER GET ALL THE ANSWERS
“Don’t wait until you have all the answers – you never will!
There are many answers I am still hunting.” – Kevin Maurice,
Managing Director, Atrax
KEY LEARNINGS
• Tap into the experience and knowledge of New Zealand
China veterans.
• Usually the best research comes from China itself.
• Evaluate all research on the basis of who said it, when
they said it and what part of China they are referring to.
13

2.2 MARKET VISITS
Visiting the market
“Rather than read 10,000 pages of a book, it is better to walk
10,000 miles.” (Chinese proverb)
After doing as much research as possible in New Zealand, you
will need to visit China to confirm the results of your research,
develop a deeper understanding of potential markets, establish
relationships and eventually negotiate contracts and
agreements. Business visits to China require patience,
understanding and commitment.
“Not only are you going to have to go [to China] once, you are
going to have to go up there 30 times. So if you can’t afford to
go once, forget it.” – Rod MacKenzie, Regional Director, China,
New Zealand Trade and Enterprise
Kiwi oasis in Shanghai
If you are visiting Shanghai on business, consider using NZTE’s
New Zealand Central (NZC) as a temporary office or a venue
for events.
NZC located in the upbeat Xintiandi district, is a practical,
affordable and professional platform to help Kiwi businesses
get started or expand in China.
There are packages for both frequent and casual visitors.
If you join as a member you can get use of a convenient
short-term office location that includes hot desks, internet
access, business facilities and a business lounge.
KIWI LESSON – ALLOW TIME
“Whereas a business trip would take one day in Australia or the
UK, you should allow three days in China. You cannot just put
your agenda on the board and move it along.” – Dave Foreman,
General Manager International, Vitaco
KIWI LESSON – SHOW YOUR FACE
“People like to see Kiwi faces. It shows your commitment
to the market.” – Vivian Zhang, Chinese businesswoman
Making the most of your visits
Visa requirements
A business visa is recommended for travel to China.
In most cases for a business visa you will need a letter of
invitation from a Chinese company.
If you are going to be a regular visitor to China, it will pay to
have a look at getting an APEC Business Travel Card which
provides accredited business people with streamlined access
to participating APEC countries (including China). Go to
www.dol.govt.nz to apply for the APEC card.
Benefits include:
• express immigration clearance through special APEC lanes
on arrival and departure
• no requirement to apply for visas or entry permits
• multiple entry to participating countries for a stay
of up to 90 days on each visit.
The types of business visa are:
• a three-month single entry visa valid from date of issue
• double entry visa which is valid for two visits within three
months of issue
• six month multiple entry visa which is valid for six months
after issue.
Visas are required to transit China to territories such as Tibet.
You should allow three weeks for business visas to be processed.
The official 10 working days from receipt of application
and invitation letter is getting very tight with the volume
of applications.
For more information contact the Embassy of the People’s
Republic of China in Wellington or the Consulate General
of the People’s Republic of China in Auckland.
Consular Section, Embassy of the People’s Republic of China
Address: 2–6 Glenmore Street, Wellington or
PO Box 17257, Karori, Wellington, New Zealand
Tel: 04 472 1382
Fax: 04 474 9632
Email: visa@chinaembassy.org.nz
Consulate General of the People’s Republic of China
Address: 588 Great South Road, Greenlane, Auckland,
New Zealand or PO Box 17123, Greenlane, Auckland,
New Zealand
Tel: 09 525 1785
Fax: 09 525 0733
Visa application forms can also be obtained from the Embassy
of the People’s Republic of China’s website.
What will it cost?
Compared with visits to Western markets, your time in China
will be relatively cheap, though some costs in the major cities
approach those you’d expect to pay in London or New York.
This is particularly true for big ticket items such as
accommodation and domestic air travel, while costs
such as food, drink and taxis are lower.
Your major costs are likely to include:
• Airfares
Air New Zealand flies direct between Auckland to Shanghai
and Auckland to Beijing. China Southern launched its daily
flight from Auckland to Guangzhou in November 2011.
• Accommodation
Rates vary according to the time of the year and room
availability. Prices for a good 4-star hotel in Guangzhou will
typically start at about NZ$110 a night, in Beijing NZ$170
and Shanghai and Shenzhen NZ$200.
In second-tier cities, you can expect to pay from NZ$90
a night for a 4-star hotel.
A service charge of 15 percent, including room and food,
is charged at all 4 and 5-star hotels.
Be aware of when you travel as major events in China will
have a huge impact on pricing. Events such as the Canton
14

Fair in Guangzhou and the F1 motor racing in Shanghai
can double and triple hotel costs, if you can manage to
get a booking at all.
• Transport
Domestic air travel – this is not expensive by New Zealand
standards. For example, a return flight between Shanghai and
Beijing can cost NZ$570. Tickets are easy to get if booked
well in advance. It is possible to book domestic travel from
New Zealand. If booked in China it can be done from the
China Travel Service desk at many major hotels. Domestic air
tickets can be bought and or confirmed in the larger hotels.
Taxis – these are cheap by New Zealand standards. Flag falls
for taxis in Beijing, Guangzhou and Shanghai range between
10 RMB in Guangzhou to up to 14 RMB in Shanghai. Rates per
kilometre range from 2 RMB to 3.9 RMB. Getting from Beijing
airport to the central city will typically cost NZ$20-$25; the
75-minute journey from Shanghai’s Pudong International
Airport to the city costs between NZ$27 and NZ$33; and the
airport to city run in Guangzhou NZ$27-$40. Taxi costs are
similar in second and third tier cities. If your meeting is not in
the city centre, it’s best to have the taxi wait and pay for
example 200 RMB an hour or 600 RMB per day. Taxis can be
hired with the help of your hotel. Some drivers will still want
to charge you a fixed fee which is often above the metered
charge so it is recommended you always use the meter.
Note: most taxis do not have rear seat belts in China.
Metro – the underground Metros are cheap, fast alternatives
to taxis in Beijing, Shanghai and Guangzhou. At the most a
single journey will cost you about NZ$3.
Buses – these are even cheaper than the Metros but it is not
advisable to travel by bus if you want to arrive at a meeting
on time and relaxed.
A good piece of advice is to hire a driver on your first visit
to China. This will help you avoid a lot of stress.
• Interpreters
A qualified interpreter (as opposed to a student) will cost
NZ$900-$1,200 a day. They are more expensive (and usually
better) in the main cities.
• Food
The cost of eating out ranges from very cheap (less than
NZ$5 per person for a meal in a basic restaurant, but little
English will be spoken) through to prices you’d expect to pay
in a top class restaurant in New Zealand. A Big Mac, medium
fries and medium drink at a McDonald’s in Beijing will set you
back about NZ$3.30. In the bigger cities you can expect to
pay NZ$20-$30 for a decent meal.
Beverage prices (approximate):
– small bottle of water: 3 RMB
– small bottle of beer from a corner shop: 10 RMB
– draught pint of beer in a bar: 40-75 RMB.
Time differences between China and New Zealand
New Zealand is four hours earlier than Beijing time, or five hours
earlier during New Zealand daylight saving. There is no daylight
saving in China.
Public holidays and business hours
When planning your business trip to China, avoid arranging
business meetings before, during and after Chinese festivals
and public holidays. Many businesses close for festivals and
holidays for up to two weeks. It’s also very difficult to book
transportation or accommodation during these times. Visiting
China for business during public holidays or the weeks before
and after public holidays is not recommended.
Major Chinese public holidays are:
• New Year’s Day – 1 January (two-day holiday which can
extend to 5 days)
• Spring Festival, ie Chinese New Year, the date varies from
year to year, usually falling in late January or early/mid-
February (one-day holiday)
• May Day – 1 May (one-day holiday)
• Dragon Boat Festival – early June
• Mid-Autumn Festival – mid-September
• National Day – 1 October (three-day holiday)
It is a common practice for government departments and
private companies to ‘borrow’ weekends to make two or
three-day holidays into two-week long holidays.
Government offices are usually open Monday to Friday between
8am–9am, close for two hours around midday and then re-open
until 5pm or 6pm. Private companies are usually open for longer.
Make contacts before you leave
To get the most of your visit you need to be well prepared
before you arrive so you can hit the ground running. Don’t waste
valuable time in China doing what you can do back in
New Zealand.
Make sure as many of your meetings as possible are prearranged,
you have addresses for the meetings and you have
information on the people you are meeting with. It is also
recommended that you reconfirm meetings a day in advance.
Get a map to the company or office you are visiting if at all
possible. The minimum is the address written in Chinese
characters for the driver.
There are organisations and consultants who can tailor a visit to
China for you, including organising meetings with appropriate
executives and officials. Contact NZTE for more information.
Generally speaking, Chinese people prefer to be formally
introduced to someone new, preferably through a go-between,
especially when making first contact.
• Tips
Most people never tip as a service fee is often included in the bill.
15

However, cold calling (for self introduction) is becoming more and
more common. If you decide to make a cold call, it’s useful to:
• first contact the company in writing – both in Chinese and
English
• make contact by email, but if you’re unsure if your message
was received send a fax; in China internet connections are
not always reliable
• outline the reason for wanting to meet
• provide information about your company – include names
and job titles of your staff (the Chinese will likely try and
provide equally titled staff for the meeting)
• get someone to call and check they have the information and
to confirm the appointment
• be flexible and don’t be surprised if last minute changes take
place or meetings are cancelled
Even if you set up a meeting, there is always the chance that
the person who has agreed to meet with you fails to show.
This is often because their manager or a government official
has instructed their presence at a conflicting event. So it is
not meant as an insult, but regardless it can be both upsetting
and frustrating.
Don’t turn up on someone’s door step unannounced and expect
to get a meeting.
If you are visiting China for the first time, it can pay to
acclimatise for a day or two to get a feel for the country before
getting down to serious business. One good way to get insight
into the Chinese business mentality is to visit local markets and
do some bargaining.
Maintaining your personal safety
China is generally a very safe place to visit provided you take
some sensible precautions. New Zealanders who have been to
China suggest the following:
• Driving in China is not for the faint hearted. You’ll need a
Chinese driver’s license to drive in China – an international
driver’s license is not enough. Motorists drive on the
right-hand-side of the road. It’s not difficult to hire a car with
a driver and it is not too expensive.
• Be careful when crossing roads. Never assume you have
the right of way. Crossing roads with the locals is a sensible
thing to do.
• When taking taxis, it’s a good idea to provide your taxi driver
with maps and details in Chinese characters – not just Pinyin
(Chinese phonetics).
• Try not to make yourself a crime target by visibly displaying
wealth. Carry RMB in small denominations.
• Be wary of unsolicited approaches from people in tourist
areas inviting you to speak English with them over tea or
to view local art. These are often scams.
• Leave a copy of your itinerary with someone you trust at
home and in China. It’s a good idea to log in as a visitor with
the New Zealand Ministry of Foreign Affairs and Trade
website. That way, if something goes wrong someone
knows where you are.
• Don’t leave your bags unattended.
• Keep your passport in a safe place.
• Carry a Chinese phrase book.
Contact details and emergency services numbers
• Police/fire/traffic accidents – dial 110
• Ambulance – dial 120
• New Zealand Embassy/Consulate General contact details:
New Zealand Embassy, Beijing
1 Ritan Dongerjie
Chaoyang District
Beijing 100600
People’s Republic of China
Tel: +86 10 8532 7080
Fax: +86 10 6532 5261
Email: beijing.enquiries@mft.net.nz
Office hours: Mon–Fri 0830–1700hrs
New Zealand Consulate General, Shanghai
Room 1605–1607A, The Centre
989 Chang Le Road
Shanghai 200031
People’s Republic of China
Tel: +86 21 5407 5777
Fax: +86 21 5407 5907
E-mail: shanghai.enquiries@mft.net.nz
Office hours: Mon–Fri 0830–1700hrs
New Zealand Consulate General, Guangzhou
Room 1055, China Hotel Office Tower
Liuhua Road
Guangzhou 510015
People’s Republic of China
Tel: +86 20 8667 0253
Fax: +86 20 8666 6420
E-mail: guangzhou@nzte.govt.nz
Office hours: Mon–Fri 0830–1700hrs
NZTE Qingdao
Room 912, Crowne Plaza Qingdao,
76 Xiang Gang Zhong Lu
Qingdao 266071
People’s Republic of China
Tel: +86 532 8572 1396
Fax: +86 532 8572 3780
Email: qingdao@nzte.govt.nz
Office hours: Mon–Fri 0830–1700hrs
NZTE Shenzhen
Room 535, Podium Building, Caju Square
5 Guihua Road, Futian Free Trade Zone
Shenzhen 518038
People’s Republic of China
Tel: +86 755 3391 1656
Fax: +86 755 3391 1657
KEY LEARNINGS
• A well-planned trip is more likely to result in successful
business.
• Before leaving for China, arrange contacts and appointments.
• If possible, avoid travelling or trying to conduct business on
public holidays.
• Maintain contact with NZTE or the New Zealand mission
in China.
16

2.3 BUSINESS ETIQUETTE FOR VISITS
Make the most of your visit and avoid cultural gaffes
At times cultural differences and protocols in China may
seem overwhelming.
China’s larger cities and southern and coastal regions are
becoming more in tune with international business practices.
There’s also a new generation of internationally educated
Chinese coming through.
However, most people will largely conform to the Chinese way
of doing things. This affects the way you establish relationships,
behave at meetings and dinners and even how you hand out
your business card.
To get the most out of your visits to China it helps to understand
the differences and avoid giving offence.
Through all this, the most important thing is to be flexible and
be yourself. Enjoy the opportunity of being a New Zealander
doing business in China.
KEY LEARNINGS
• Spend time understanding Chinese culture and etiquette
– this is more important than knowing the language.
• Plan as much as possible in advance. Find out who will be at
the meetings, including their positions and names. Also find
out as much as possible about the company or agency you
will be dealing with.
• Be aware that traffic conditions can delay you (more so than
in New Zealand).
• As a general rule, formal dress is a sign of respect. It is also
the safest option if you’re not sure what to wear.
Understand the protocols
Greeting ceremonies
Tips:
• You may be met on arrival at the airport or at the first
meeting by the main participant on the Chinese side, with
other participants following in descending order of seniority.
• The most senior Chinese delegate will often have an
interpreter standing to one side and slightly behind him or her.
• The interpreter will provide the names and titles of the senior
Chinese to your delegation.
• If you don’t have your own interpreter, the host’s interpreter
may also introduce the names and titles of your delegation to
the Chinese side. Focus on your Chinese counterparts, not
the interpreter.
• Greeting ceremonies may also take place at meeting venues
or restaurants. Sometimes people will stand up when being
introduced.
• If you visit a workplace, you may be greeted with applause
as a sign of welcome. Respond by applauding back.
• Chinese business people generally appreciate foreigners
taking the time to learn some Chinese and something
about China.
Presenting your delegation
Tips:
• When meeting your Chinese hosts, the most senior person in
your delegation should be first in the reception line.
• Others should follow in order of seniority. Sort this out before
the meeting.
• Your interpreter should stay close to the head of the line to
introduce your most senior person.
• Those greeted should move down the line shaking hands,
without pausing too long for conversation.
Handshaking
Tips:
• Shaking hands is now the standard form of greeting in China.
• Always shake hands with the most senior person first.
• A short, not too firm handshake is the customary start
to a business meeting.
• If you have an established relationship with someone it is
not uncommon to hold a handshake for longer, or to cover
the handshake with your other hand.
• Nor is it uncommon to sit close to someone with whom
you have an established relationship.
• Normally a man would wait for a woman to extend her
hand first.
Addressing people
Tips:
• You should address and acknowledge the most senior person
first in meetings.
• In China, family names come first followed by given names.
• In business/formal settings, people normally address each
other by their family name or title, such as “Mr Chen”, or
“Director Huang”.
• In business/formal settings, don’t call someone by just
their first name unless specifically asked or if you are
long-time friends.
• A married Chinese woman usually retains her maiden name.
• It is common to link names with positions – so you would call
Mr Chen “Director Chen”, or “Director”. This shows respect
for their social status.
• It is customary to address deputies by skipping the word
“deputy” – for example, Deputy Chief would just be called
“Chief” – unless their superiors are present.
• Chinese who frequently deal with foreigners or travel abroad
on business may adopt an English first name. They may also
put their family name after their first names on business cards.
• If in doubt, simply ask “What shall I call you?”.
Using business name cards and company profiles
Tips:
• Business cards (called mingpian) are essential so have a good
supply.
• Have your business cards printed in English on one side and
Chinese on the other.
• Before your cards are printed check that you can use your
company name in China. For more information see the
“Entering the Market – Protecting IP ” section.
• Translate your name, job title, company name, special
qualifications and your professional title (e.g. Dr, Professor
etc.) on your business card. There is no need to translate the
address into Chinese.
17

• Seek advice on the choice of characters for your name and
company – some characters have better meanings than
others. Having a well-chosen Chinese name will leave a good
impression with your counterparts. For information on how
to do this, see the “Selling in China – Marketing” section.
• If your company is one of the oldest or largest in
New Zealand, or has another prestigious distinction,
this could be highlighted on your name card or pamphlet
in Chinese.
• Be sure to use simplified Chinese characters for mainland
China, not the traditional characters used in Hong Kong
and Taiwan.
• Business cards are routinely exchanged at the beginning
of the first meeting.
• The proper procedure for exchanging business cards is to
give and receive cards with both hands, holding the card
corners between thumb and forefinger.
• With a bilingual card, hold out your card using both hands
and present the Chinese side face up.
• Cards should be exchanged individually (one-on-one). People
normally don’t toss or ‘deal’ business cards across the table.
• When receiving a business card, read it and keep the card
out on the table during the meeting.
• Don’t write on the cards in front of your hosts/guests.
• If you are starting out marketing your company in China,
bring a quality one-page company profile in Chinese with
you. You will be taken more seriously if you bring a full
Chinese version of your brochure. Be careful not to include
any proprietary information.
Giving and receiving gifts
Tips:
• Gifts and gift-giving are an important part of creating and
building relationships in China and expressing friendship. See
the “Entering the Market – Building Relationships” section.
• Try to bring a unique gift that represents New Zealand or
your company.
• Say the gift is from the company you represent.
• Explain what the gifts mean.
• Present the gift to the leader of the Chinese negotiating team
first – the most important person in the group receives their
gift before the others.
• It’s a good idea to present a better gift to senior people or at
least a gift perceived to have a higher value than that given
to junior staff.
• Normally, the Chinese side would give gifts to everyone
in a visiting/hosting delegation – if you give a gift to each
member of the Chinese side, make sure they are of similar
value (apart from the most senior person’s).
• Bring an extra supply of gifts in case you are caught
short-handed.
• If in doubt, ask an intermediary what they think should
be given as a gift.
• Gifts are usually exchanged at the end of a banquet
or meeting.
• Normally people present gifts using both hands. Gifts offered
with two hands should be received with two hands.
• Traditionally, it was customary to open gifts after guests had
left. But if you sense they are waiting for you to unwrap the
gift, just ask if you can open it.
• Younger generation Chinese more used to Western business
practices are usually comfortable opening gifts in front
of guests.
• Give gifts to your driver and/or interpreter to help maintain
good relationships.
The best choice for the initial meeting is a gift that expresses
some unique aspect of New Zealand, such as:
• paua shell products
• omega 3 and other health products
• hand cream and other New Zealand lotions
• picture books and calendars featuring New Zealand
landscapes
• Maori art, carvings or other handcrafts
• New Zealand wine
• wooden bowls, plates, or other wooden products
• honey and other nature products
• cuddly soft toys, e.g. sheep or kiwi
• gifts made of wool and leather
• items with a corporate logo
• items that can be displayed on walls or in offices
(especially for government officials and company leaders)
• well packaged New Zealand stamp sets.
To be avoided:
• clocks – the pronunciation of the words “to give a clock”
sounds similar to a phrase that means “sending someone
to the grave”
• avoid giving a man a green hat – the Chinese saying “wearing
a green hat” means someone’s wife is committing adultery
• gifts in sets of four – the number four is considered very
unlucky, as the word is pronounced similarly to the word
for death
• cash – can be seen as bribery
• knives or scissors – symbolise conflict
• items such as straw sandals or handkerchiefs – associated
with funerals
• fans – the Chinese pronunciation of ‘fan’ can also mean
“to lose” and “death”
• gifts of excessive value making it difficult for your
counterparts to reciprocate and risk causing loss of face
• empty boxes, even if they have been carved or decorated,
are considered packages without a gift.
• black or white wrapping paper or ribbons. White and black
colours are typically associated with funerals. Red or gold
wrapping paper are best as they represent happy occasions.
• writing anything in red ink. This symbolises the termination
of a relationship.
18

What to wear
Business attire
Tips:
• Dress formally for business occasions.
• Check the weather from websites.
• Generally, formal dress is a sign of respect. It’s also
the safest option if you’re not sure what to wear.
• For formal business in China, conservative suits are the
norm for men and women. Ties are commonly worn.
• A short-sleeved shirt without jacket or tie is acceptable
in the summer for informal meetings.
• Jeans are acceptable for men or women in a casual setting.
Shorts are generally only worn for exercising.
• If you’re not sure about what to wear, simply ask ahead
of the meeting or dinner.
Eating and drinking
In General
Tips:
• If you are invited to a dinner, the protocol is that guests
arrive right on time or a few minutes early.
• If you are hosting be there in plenty of time to greet your
Chinese guests – be prepared they may arrive up to half an
hour early.
• A business dinner is usually reserved for more serious
business, for people who have a good business relationship,
or to celebrate a deal.
• Use similar protocols when arranging reciprocal dinners
and lunches.
Dinners and banquets
Tips:
• Dinners, including banquets, are normally held in a private
room at a restaurant or hotel. Very senior people may be
present at a banquet.
• Dinners or banquets generally last for around an
hour-and-a-half.
• The serving of fresh fruit will mean it is the last dish, then
the host will announce the dinner or banquet is at an end.
• If you are the host, the Chinese guests will wait for you to
signal the end of the dinner with a last toast or a few words.
• Photo opportunities may follow at the end of dinner (if this
is the first dinner with your Chinese counterparts).
• The principal guest is expected to leave first followed by
other guests. Prompt farewells are appreciated.
• Alternatively, your host may invite you to a karaoke bar, night
club or sauna. You may want to make a night of it. If not, tell
them you have a delegation meeting or are tired after a long
day, or that you will stay for a short while.
• A typical Chinese dinner or banquet will consist of eight
to 12 courses, served consecutively.
• On formal occasions, each dish is served away from the table
and individual portions placed before diners.
• Some very interesting and potentially odd dishes
– by Western norms – can be served.
• Rice is generally more popular in the south, while noodles
are preferred in the north.
• If you are entertaining guests, remember most Chinese are
not used to cheese or butter and lamb is not always popular,
so consider omitting these items from the menu.
• It’s important to accept dishes, there’s no compulsion to eat
every serving. You can leave dishes you don’t want to eat
to one side.
Speeches and toasts
Tips:
• It is normal for the host to make a speech of welcome and
toasts at the beginning of the meal.
• The principal guest may respond straight away, or choose
to respond after a few courses have been served.
• Chinese normally respond very positively if the New Zealand
delegation conclude their speech with a waiata.
• Toasts are normally very short. It may include a simple
welcome (or thank you) and a brief substantive comment
on the visit.
• Safe topics for toasts are friendship, cooperation and
mutual benefit.
• Key message at the end of toasts may also include:
– the success of the business cooperation
– the friendship between the two companies
– the friendship between the two countries.
Seating
Tips:
• Dinners will normally be at round tables. A long table
is used occasionally.
• Dinner seating arrangements are generally pre-determined
and indicated by name cards on the table/s.
• If a long table is used, the guest of honour sits directly across
the table from the host.
• If you’re not sure where to sit because there are no name
cards on the table, then a good strategy is to sit at a lower
place and be invited up, rather than be asked to drop down
a level.
• Alternatively, you can wait to be seated.
If hosting, the seating plan for a round table may look like
the following:
Interpreter
NZ 4
China 1
NZ 1
China 3
China 4 China 2
NZ 2
NZ3
NZ 5
19

If the Chinese side is hosting a dinner, the seating arrangement
for a round table may look like this:
NZ 1
China 1
NZ3
Interpreter
China 4
China 3
China 5
NZ 4
China 2
NZ 2
Entertainment
In general
Tips:
• Once you have established relationships, you are likely
to be invited to other forms of entertainment.
• This may include golf, night clubbing, a sauna or karaoke.
Karaoke venues normally have a good selection of English
songs, and almost everyone is expected to sing.
• Hosts are generally expected to pick up the bill for dinner
or other entertainment.
• It is not custom to split the bill.
• As a guest, you can insist on paying the bill a couple
of times, but know when to give in and offer to pick
up the tab next time.
• Once a relationship is established, guests may also be invited
to be entertained at home. Arrive on time, remove shoes
before entering a private house, and take a gift.
Chopsticks or knife and fork?
How to use chopsticks
1. Hold one chopstick between thumb
and middle finger.
2. Place the other chopstick between thumb
and forefinger. The chopstick should rest
against the tip of your thumb. The top of
the chopstick rests against the pad of the
forefinger. Be sure the tips of the two
chopsticks are parallel.
3. Keep the first chopstick still while
moving the second chopstick toward
the stationary one.
Try to avoid vertically sticking chopsticks on top of a bowl.
That represents serving food for ancestors or the dead.
If you can’t manage chopsticks, knives and forks will be
provided swiftly in restaurants. However, you may wish to
practise using chopsticks before heading to China as it may
earn you more kudos.
Business breakfasts and business lunches
Although business breakfasts and lunches are becoming more
popular in parts of China, they are generally seen as less
important than dinners.
A working lunch in China is much more formal than in
New Zealand, similar to a dinner meeting here.
Drinks and gan bei
Gan bei literally means ‘dry glass’. It’s an invitation to empty
your own glass alongside the person proposing the toast.
Tips:
• Gan bei is one way to build or test comradeship or firm
friendship.
• Foreigners with ‘hai liang’ (large capacity to drink alcohol)
become instant legends.
• At most dinners and banquets, each diner may have three
glasses: one for beer or mineral water; one for grape wine;
and a small one for a grain spirit such as maotai.
• It is customary for individuals to toast others collectively
or individually throughout the meal. If toasting individually,
usually the host or chief guest is toasted first, or the person
sitting next to you.
• If toasting individuals, you may find you end up drinking quite
a lot. Therefore, you may choose to toast with something
with lower alcohol content. You can sip rather than draining
the glass by saying “sui yi” which means “at your own
discretion”.
• If you prefer not to drink alcohol, make it clear at the
beginning of the dinner. It’s acceptable to toast with a soft
drink, juice, mineral water or tea. If you start drinking alcohol,
you will be expected to continue.
Health awareness in China is growing and the excessive intake of
alcohol is decreasing. However, wining and dining is often a key
part of building relationships. Drinking baijiu, which is 80–120
proof, and the demands of ‘gan bei’ (or in the Kiwi vernacular
‘scull’) is an important bonding ritual among Chinese
businessmen and you will often be encouraged to take part.
20

3. ENTERING THE
MARKET
ENTRY MODES
Non Equity
Direct selling
Appointing
agent or
distributor
Forming an
alliance
Technology
transfer
Equity
Representative
office
Wholly
foreign owned
enterprise
Joint venture
TIME, RESOURCES AND COMMITMENT
This illustration is only indicative of the time and resources you will need to dedicate to a particular entry mode – these will vary case by case. Any decision on
mode of entry needs to be based on a thorough understanding of the market.
3.1 TYPICAL MODELS FOR SETTING UP
IN CHINA
Getting your presence in China right
You need a local presence if you want to grow your business
and have a long-term future in the Chinese market. Entering
and setting up in this market involves a unique set of
regulatory issues.
The structure you choose should be based on research specific
to your industry and your product.
Follow a strategy
Before deciding what model you want to use to set up in China,
you should complete your China strategy covering objectives,
finance, experience, capacity, markets, products and pricing.
This strategy must guide any decisions on how you plan to
enter China.
In preparing a plan for China, remember some hurdles in
China are larger than most other markets. For example:
• the level of time and financial commitment needed
• cultural and language difficulties
• intellectual property management.
KIWI SUCCESS – STICK TO THE PLAN
“We have a good plan, we are following that plan and now we
just have to remain focused and build on the solid base we have.
That’s quite often the hardest thing for companies to do. There’s
an enormous amount of opportunity available to companies like
ours in China and it’s simply not possible to follow all options.
By having a tight strategic framework we have a guide for what
we should and shouldn’t spend our time on. Otherwise, one
could waste an enormous amount of resource and energy.”
– Scott Coulter, Chief Operating Officer, Comvita
“Our biggest success was taking the time for a planned entry
and finding the best professional advice at each step.” – Mark
Radburnd, Chief Financial Officer, Commtest Instruments
22

Testing the waters
New Zealand companies typically take a staged approach
to setting up in China. They start by exporting a small amount
to test the market, then engage an agent or distributor, then
set up an office in China, and finally they set up a Chinese
company or joint venture and, where applicable, their own
manufacturing operation.
The least complicated business models are licensing into China
or having a contractual relationship with a Chinese company
or simply setting up your own Chinese company.
Testing the market is relatively straight forward if your goods
are exported from New Zealand to China. However, if your
goods are made in China and delivered in China it is deemed
a domestic sale and the transaction must be completed in
renminbi (RMB). You can only repatriate profits with a registered
entity after taxes have been paid. (The exception is the
representative office.)
Also not having your own registered China entity to issue a
China value added tax (VAT) invoice raises the issue of who
does this for you. Be aware if it’s your factory filling this role,
you are both putting them in direct contact with clients and
entrusting them with your revenues.
If you are providing a service it may be possible for the client
to pay offshore as long as you can prove the work was not
executed in China. Otherwise a business wanting to pay hard
currency overseas must have proper justification and
importation documents or it will be subject to withholding
tax of up to 20 percent.
China now allows foreign companies to set up direct sales
channels and to sell directly to store buyers. But setting up
these direct sales channels can be a big undertaking.
Using agents and distributors
Companies that need to manage their business in China from
New Zealand can use China-based agents and distributors.
An agent sells goods on your behalf and is paid a commission.
A distributor buys goods from you at one price and sells them
to others at a higher price, making their income from the margin.
Using an agent or distributor in China can be an attractive
option because they:
• provide access to established sales channels and potential
customer bases
• can greatly reduce set up costs and time taken to enter
the market
• give you access to local knowledge and contacts when
dealing with regulatory problems and other issues.
However, using agents and distributors can have drawbacks,
including:
• raising your costs and selling price
• reducing your control over sales and marketing
• potentially increasing the risk of your product being
counterfeited.
Many Chinese agents and distributors work for trading
companies which are authorised to deal in a wide range of
products. Some of the larger companies have offices in other
countries, along with a network of offices and affiliates in China.
However, large agents and distributors sometimes manage so
many products that yours may not get enough attention.
China’s size and regional diversity also means you will need
to engage several agents to cover different areas.
Remember, payments can only be repatriated easily if the goods
were imported. If they are China produced, agents can only
repay funds after end of year tax has been paid.
KIWI LESSONS – GOOD DISTRIBUTORS ARE EXPENSIVE
“If a distributor is very good, they will be very expensive
and using a product from a multi-national. They will invariably
run their own brand and will not be willing to deal with
you exclusively. If a distributor is interested in selling only
your products, you have to ask about their track record.”
– David Percy, Chief Executive, Pertronic Industries
23

AGENTS
“The best agents are developed over time and result from
friendship.” – Dr Anatole Bogatski, former Student Services
and Marketing Director, AIS St Helens
For more detailed information on using agents and distributors
see the “Selling in China – Using Agents and Distributors”
section.
Establishing an on the ground presence
For companies wanting an ‘on the ground’ presence in China
the most common options are to set up:
• a representative office – which has limited powers and
cannot conduct sales
• a wholly foreign-owned enterprise (WFOE) – increasingly
popular
• a joint venture (JV) with a Chinese partner – fewer and
fewer companies use this option.
Setting up a representative office
Setting up a representative office is the easiest way to establish
an ‘on the ground’ presence in China.
But Scott Brown, founder of RedFern Consulting, warns that
representative offices have very limited uses and a company
would need strong justification for setting one up.
“They can employ people, thus they could be useful for a simple
presence of checking up on manufacturers.
“You certainly cannot manufacture with anything other than a
manufacturing licensed wholly foreign owned enterprise or JV.”
Representative offices are limited to research and liaison
activities and cannot conduct any business transactions.
They also cannot issue invoices or receive any revenues.
Invoices must come from outside China.
They can, however:
• help with market development and market research
• help build business relationships
• cut out the need to hire some middlemen or consultants
• manage manufacturing and help protect intellectual property
• assist with after-sales service
• assist with introducing new products
• assist with dealing with government officials
• help local administration work
• help getting visas for visits
• show commitment to the market which can open doors with
customers, suppliers and officials.
If everything goes according to schedule, and you have filled
in all the forms correctly, office incorporation can take about
three months.
The Hong Kong Trade Development Council website has
information on the process of setting up a representative office.
PROS AND CONS OF REPRESENTATIVE OFFICES
Advantages:
• lower set up cost (no capital investment required)
• shorter set up period
• flexibility to exit
• full control.
Disadvantages:
• restricted scope of business activities (e.g. no formal sales
function or invoicing allowed, and value-added services
cannot be performed)
• more rigid labour regulations (e.g. you must use government
employment agents)
• not tax efficient.
(Source: China Business Solutions website)
KIWI LESSONS – EXPENSIVE AND TIME CONSUMING
“The volume of paperwork is considerable, especially for
a representative office only.” – Mark Templeton, former
Chief Executive, Actronic Technologies
“A rep office is expensive to run and must deliver value for
money.” – Chris Hopkins, Managing Director, Scott Technology
Setting up your own company
A wholly foreign-owned enterprise (WFOE) is a private, limited
liability company that is 100 percent-owned by a foreign entity.
It is now the most popular option for foreign companies to
establish a permanent presence in China.
Many companies prefer to set up WFOEs (as opposed to joint
jentures with Chinese partners) as this ensures the foreign party
retains 100 percent control.
WFOEs are able to issue invoices and receive payments in
RMB and any profits can be remitted back to New Zealand
as dividends after all taxes have been paid. It is also easier
to protect intellectual property rights using a WFOE than
a joint venture.
WFOEs come in different types, depending on what business
operations will be carried out:
• Service/Consulting
• Manufacturing
• Trading (otherwise known as FICE – Foreign Invested
Commercial Enterprises).
The time required to set up a WFOE varies according to the
type of entity chosen.
The type of WFOE you want to use needs to be decided early
during the application process because this will affect the scope
of your business licence.
A Chinese-incorporated company can only undertake business
that falls within the scope set out in its business licence. Once a
WFOE has been set up, it is very difficult to change its business
scope. Plan ahead and ensure the WFOE has enough scope and
flexibility to develop its operations as the business changes.
It is possible to set up WFOEs in bonded or export processing
zones which means that the entity would not be subject to
import restrictions and import tariffs, particularly for goods
being re-exported.
The minimum capital required for a WFOE is RMB 30,000, but
in reality the amounts requested by the approval authorities is
24

much higher than this. The authorities will approve a capital
amount based on the type of WFOE, its location, the industry
and business scope. They will only approve what they deem to
be sufficient registered capital for your WFOE’s operations.
Some types of business also have a minimum registered capital
in order to qualify for VAT tax registration, without which you
cannot invoice.
Registered capital may be contributed in one lump sum within
six months of the WFOE’s business licence being issued, or in
instalments. If the registered capital is to be paid by instalments,
then 20 percent of the total registered capital must be paid in
within three months of the business license issue date. The
balance must be paid within two years.
Setting up a WFOE in China is subject to the examination and
approval by various approval authorities.
Once your company name and application to set up a WFOE
is approved, you need to apply for a business licence. This
generally takes 60 days. You then need to register the business
with several government agencies, including tax, customs and
foreign exchange administrations.
Foreign companies in the previously off limit areas of China
trading (import-export, retailing, wholesaling and distribution
sectors), though classified as WFOEs, are referred to locally
as foreign invested commercial enterprises (FICE).
When getting help to establish a WFOE, be wary of using a
local agent who intends to follow the standard steps without
considering your particular requirements or needs. The worst
case scenario is a company finding itself unable to perform
some ‘assumed’ functions. The business scope or articles are
very difficult to change later so you need to get it right from
the start. Get help from someone who understands your
particular needs and will not do a pro forma application.
Adding certain clauses to the WFOE’s standard articles may
help you deal with issues that could arise in future. These clauses
might relate to scope of business, total investment, management
control, intellectual property registrations and royalty streams,
currency repatriation and liquidation conditions. If accepted by
the authorities, the clauses can save time and effort.
For a list of consultancies and professionals that could help
Kiwi companies establish WFOEs, contact NZTE.
PROS AND CONS OF WFOES
Advantages:
• full control over management and operation
• more flexibility in company strategic issues
• easier to repatriate profits (you can send them back
once taxes are paid)
• better protection of intellectual property rights
• demonstrates commitment to the market.
Disadvantages:
• higher registration capital required
• longer time to gain access to local knowledge, contacts
and market.
KIWI LESSON – IT CAN BE EASY
“Our WFOE was relatively easy to set up and no more difficult
than in Australia.” – Mike Lowe, General Manager, Hayes
International
Joint ventures
A joint venture (JV) is a business jointly owned by a Chinese
and a foreign partner. For a long time this was the only option
available for foreign investment. JVs are still the only way you
can set up a permanent presence in China.
RedFern Consulting’s Scott Brown says you need to have very
good strategic or regulatory reason to want to, or need to, go
down the JV path. “They are notoriously difficult and if you can
use a WFOE, do so.”
Forming a JV can be a drawn out process and it can be hard
for New Zealand companies to negotiate a favourable position.
Reasons for JV failure include:
• mismatches in expectations
• concerns over conflicts of interest
• violations of intellectual property rights
• poor choice of JV partner.
JVs are demanding on your time and resources. They need
constant monitoring in critical areas such as finance, personnel
and basic operations for them to succeed.
If you do decide to go down the JV route, it is essential that
you carry out thorough due diligence checks on your potential
partner. Plan for your exit from a JV from the outset. It is rare
that JVs are permanent and it’s better to have a ‘pre-nuptial
agreement’ rather than a messy divorce.
There are two types of JV arrangements:
• equity JV where profits, risks and losses are shared in
proportion to the parties’ respective contributions to the
registered share capital
• cooperative JV where each party is responsible for making
its own contributions to the venture, paying its own taxes
derived from the venture and bearing its own liability for risks
and losses. Each party’s rights, liabilities and risks are clearly
stipulated in the underlying contract.
It’s important to use local or experienced lawyers to draft all
JV documents and contingencies for exit, arbitration and other
issues. Many industries restrict foreign ownership to 49 percent
or less. In these cases you need to try to influence operational
control through the agreed appointment of key senior
management and board members.
PROS AND CONS OF JVS
Advantages:
• immediate access to local knowledge, government
relationship, and management talents
• able to leverage established domestic brands, marketing and
distribution channels.
(Source: China Business Solutions website)
25

Disadvantages:
• significant set-up costs
• differences in management styles and company culture
• potential conflicts of interest with the Chinese partner.
(Source: China Business Solutions)
Note: In some sectors representative offices and WFOEs are
not an option for foreign investment, for example education.
KIWI LESSON – BE CAREFUL…
“Scott looked at a joint venture but these are fraught with
danger. Setting joint ventures up is a very complex process and
you may find you are still negotiating details of the agreement
through to the termination of the contract term.”
– Chris Hopkins, Managing Director, Scott Technology
“Our experience with the JV mode of operation in China has
been ambiguous.” – Dr Anatole Bogatski, former Student
Services and Marketing Director, AIS St Helens
…BUT CAN BE GOOD
“It won’t work for everybody, but for us it has been a very
successful business structure to have that JV because it does
open all sorts of doors for us that don’t exist if you come in
simply as a foreign company.” – Garth Smith, co-founder,
BioVittoria
Investing in China
The wholly foreign-owned enterprise (WFOE) and joint venture
(JV) options will require capital investment.
A number of Kiwi companies have successfully invested in
operations in China, though total New Zealand investment into
China is a fraction of that into longer established markets such
as Australia.
Like other foreign direct investment into China, most
New Zealand investment is orientated towards re-export.
However, as the Chinese economy develops, particularly with
the rapid growth of the consumer market and easing of
restrictions, the proportion of goods and services going into the
domestic market is increasing.
Investment aimed at supplying the China market enters you into
what is often a much tougher game where you will face intense
competition and possible IP protection issues.
Foreign investment is welcomed in China, particularly in priority
or encouraged industries such as high-tech manufacturing,
including new and alternative energies. Incentives, such as
greater flexibility of foreign ownership, lower levels of
governmental review and tax and other investment incentives,
are available for these priority sectors.
The Free Trade Agreement (FTA) has given New Zealand
businesses thinking about investing in China a stable base to
work from. Knowledge of when a tariff will be phased out, gives
you more certainty about the future than competitors from
other countries.
The FTA also offers Kiwi businesses a level of political
endorsement that can be handy in China. It is a signal to your
partners, and people you have to deal with, that China has a
good relationship with New Zealand.
Difficulties
Investing in China is difficult and high risk. It is costly and
absorbs time and money. Even large companies experience
problems.
Make sure you get the right partners and do as much due
diligence as you can.
You need to get professional help
There are four foreign investment categories: encouraged,
permitted, restricted and prohibited. Encouraged, restricted
and prohibited categories are detailed in the Foreign
Investment Industrial Guidance Catalogue. Industries
not listed are permitted.
Investment in some encouraged and restricted industries
can only be done through Sino-foreign joint ventures or
other entities with limited foreign investment.
Restricted and prohibited sectors include value-added
telecommunications, mining, domestic trade, wholesale and
retail, banking and insurance, leasing, public utilities and
domestic transportation and the production of wine and
liquor. Investment in these sectors requires additional
government approvals.
An English version of the 2012 catalogue is available
on the Dezan Shira & Associates website.
Chinese investment in your business
Another route to establish a market presence in China
is to attract Chinese investment in your business.
This can represent an injection into your business of customers,
market knowledge, networks and expertise, as well as capital.
Food businesses, especially dairy, are attractive to Chinese
investors. The other popular category is high technology,
including clean technology and high-value manufacturing.
KIWI LESSON – BRING SOMETHING SPECIAL TO THE TABLE
“You need to approach potential Chinese partners with a sharp
focus on what they can offer that is special. You have to bring
something to the table that’s unique, that they want and which
gives them an edge.” – Tony McKenna, Head of Market and
Product Development, Synlait. The Canterbury-based dairy
company is 51 percent owned by China’s Bright Dairy.
The type of Chinese investor interested will depend on the size
of your company. Sovereign wealth funds and large companies
gravitate towards large companies and natural resources.
If you are smaller, a possible source of investment is potential
migrants – high net worth individuals who want to set up a base
in New Zealand. One recent survey showed that more than half
of China’s millionaires want to secure residency offshore for
their family.
The hard part is finding and attracting them. A lot of investors
are not good English speakers and are worried about investing
in what they see as risky small businesses.
Chinese investments typically seek control, in particular of
natural resources. Most of the Chinese investments into
New Zealand to date have had a controlling interest.
26

Other options
• Coat-tailing – taking advantage of established channels set
up by larger companies in China can be a good way for
smaller Kiwi companies to get started. For example,
production systems maker Scott Technology says it found
life easier working with multi-national companies where
quality was demanded and a premium was paid.
• Selling online – more and more foreign and Chinese
companies are using the internet to promote and sell their
products. Holding the e-commerce sector back are the low
use of credit cards and inadequate operator billing systems,
but both situations are rapidly improving.
KEY LEARNINGS
• Develop a China strategy before deciding on how to enter
the Chinese market.
• Avoid going into China cold – get a foot in the door first.
• Use China-based experts who are familiar with the
bureaucracy and can keep up with the rapidly changing
rules and procedures.
• Take care over who you use.
• Make sure you are directly involved in the setting up process.
• Allow time for bureaucracy, both filling in forms and waiting
for approvals.
COMMTEST INSTRUMENTS
CASE STUDY
When a distributor is not enough – setting up
a base in China
Commtest Instruments began exporting to China through a
China-based distributor. But the Christchurch-based company
soon realised it needed to set up its own base in China.
Pros and cons of a distributor
Commtest makes vibration analysis and data collection
instruments which enable engineers to diagnose faults in
industrial machinery before these faults develop into
catastrophic breakdowns.
The company began selling in China in 2002 after being
approached by a well-qualified distributor who had previously
worked for one of its competitors. It was a good time to enter the
market, says Commtest’s former General Manager John Cochrane.
“With China’s State Owned Enterprises modernising and factories
moving from the US and Europe to China the timing was spot on.”
The distributor focused on Beijing and northern China, and was
so competent he required little management oversight. Initially
sales grew strongly but a little more than two years later they
began to flatten, Cochrane says.
“We realised that, like many independent sales channels, our
China distributor worked his existing customers until sales
began to plateau. Then, rather than find new customers for us,
he took on other product lines to sell to the familiar customers.
These products didn’t compete directly with ours, but they
caused a loss of mind share.”
Adding sales channels
Commtest realised it needed additional sales channels in
China; knowing that these couldn’t be managed effectively
from New Zealand it decided to set up a China office.
“We thought that if we could do so well in a small part of China
(Beijing and the north) with one distributor, how much better
could we do with several distributors and a much wider
geographical coverage?”
With the help of NZTE in Beijing, Commtest found several
China-based advisers to help it set up a representative office.
Representative offices are the easiest type of entity to set up
in China but they have limited uses. Officially they can only be
used for market research and liaison activities, and they can’t
conduct sales or issue invoices. Commtest’s representative
office opened in Beijing in May 2007.
Local staff versus expatriates
The company opted to hire Chinese locals, largely because of
the cost of hiring non-Chinese expatriates (expats) already living
in China. “We were bowled over by the size of the packages
expats expect – I can hire three or more local staff for the same
cost. Many expats I met also live in a peculiar expat bubble
separated from the local people. And in China having strong
local connections (Guanxi) is paramount.”
The quality of local staff is excellent, Cochrane says. “Many
of them have been educated overseas and they are bilingual,
bicultural and professional. As of 2011 Commtest had 14 staff
in China, all Chinese nationals.”
Commtest used Mahon Investment China, a Chinese firm run by
an expat New Zealander, to shortlist and conduct due diligence
on candidates for the post of country manager. Cochrane says
there was over-choice when it came to hiring sales and support
staff, and the few regulatory requirements around employment
were easy to complete.
One unexpected cost, however, was the “13th month”
– a traditional payment relating to the Spring Festival and
Chinese New Year. “It’s not mandatory but it’s a very common
practice so we included it in our annual salary calculations.”
Setting up an office
The company chose Beijing to be close to its State Owned
Enterprise customers. Having ready access to key financial
decision makers should be among the highest criteria in
deciding the physical location of the China operation.
Cochrane says the regulatory requirements of opening a
representative office were fairly easy and quick to comply
with, but setting up the physical office took longer than
expected – five months in all – largely because the building
owners didn’t have any experience of foreign tenants.
“It was easy to purchase office equipment but top quality
electronics equipment was surprisingly often more expensive
than in other countries
27

There were other surprise set up costs, like an inspection fee for
the fire sprinklers, and at US$1,000 here and there Cochrane
says these costs soon added up. That said, the overall cost of
setting up the representative Staff who understand your
company and the culture
Looking back, Cochrane says setting up in China did put a
bigger than expected strain on senior management. As global
general manager, he spent at least one month of every quarter
in China since 2006. And in 2008 and 2009 he spent
approximately half of each year there. Cochrane emphasises
that senior management commitment to the market is essential
for success. In hindsight, he can also see benefits in sending
someone from the New Zealand office to live in China full
time to oversee the business.
“If I were to do this again I would seriously consider filling
the senior position with someone from home office who lives
and breathes the company culture, who is adaptable, and who
has experience of working overseas. The best option would be
to start the process early and either recruit or promote from
within energetic managers who can be groomed to live and
work overseas for extended periods. This would be far
preferable to hiring an ex-pat already residing in China, but
who otherwise is new to the company. The bi-directional
information flow and cross cultural exchange that results
from such an overseas posting is truly invaluable to both
the company and the employee.”
PAN PAC CASE STUDY
Coat-tailing – a short-cut into the market
Forestry and wood processing company Pan Pac has found that
coat-tailing on the success of another company is a good way
to enter the Chinese market – so long as the risks are managed.
Finding the right partner
In 1997, Napier-based Pan Pac Forest Products went looking for
new customers in China and met up with Markor International
Furniture, which happened to be seeking a suitable wood
source for its factory in Urumqi, Xinjiang.
Pan Pac Managing Director Doug Ducker says there was a
good match between the type and volume of product Pan Pac
had available and Markor’s supply requirements, and the two
companies soon built a supportive business relationship.
“Over the first few years of working with Markor we saw a
demonstration of values we could identify with,” Ducker says.
“They were focused on high quality and high performance,
and put effort into building a supportive relationship
between Pan Pac as supplier and Markor as customer.”
The confidence to expand
The relationship provided Pan Pac with a measure of security
and encouraged the company to set up a presence in China.
In 2004 it established a 6500 square metre warehousing
operation near Markor’s new factory in Tianjin. Markor built the
warehouse and leases it to Pan Pac.
Staffed by nine local Chinese, the warehouse serves a dual
purpose. It ensures that Pan Pac always has enough volume on
the ground to supply Markor, and also provides a platform for
future growth in China.
“It has been a base to service our major customer as well as
develop sales into a wider local customer base. The other
benefit of the warehouse is that customers interacting with
Markor become aware of our presence and are more likely
to approach us,” explains Ducker.
Pan Pac now exports 167,000 cubic metres of lumber to
China each year.
Challenges of coat-tailing
Coat-tailing on the success of a Chinese customer is not
without its challenges.
Markor continues to be Pan Pac’s largest customer in China.
The strength of the relationship has allowed both companies
to ride through the cyclical changes in the market over a
twelve year period.
Markor’s demand for timber can surge and ebb, making it
hard for Pan Pac to meet its customer’s “just-in-time” supply
demands. Surges in demand can also mean there is no stock
left to offer smaller customers. The warehouse is also a
significant overhead that the company has yet to fully recover
through the sales development process, although it expects
this will happen eventually.
The long-term future of some Chinese furniture manufacturers
may also be challenged by growing competition from Vietnam
and other Asian countries and high tariffs imposed by the USA
to prevent dumping.
Managing the risks
Pan Pac manages these risks by maintaining customer diversity
in its overall business. “We’re not putting all our eggs in the
Chinese market. About 40 percent of our current volume is
committed to China.”
It also maintains a close and honest relationship with Markor.
“We reach into their organisation where possible to support
them. For example, we placed one of our engineers in their
factory to see how Markor is using our product and how
we can improve it.”
Pan Pac is also frank about its ability to continue to supply
Markor’s needs. One of the mutual strategies between the two
companies is that neither will be totally reliant on the other.
This means an agreement to a mutually agreed portion of
supply. This has been aligned with the output growth of each
of the two companies.
Despite the challenges, coat-tailing on Markor’s success has
proved a good way to enter and then further develop the
Chinese market, Ducker says. “Success came from working
28

closely with them at all levels, on taking costs out of the
process, better supporting our partnership, and growing
the business jointly.”
www.panpac.co.nz
3.2 CHOOSING A LOCATION
Choosing the right location
New companies looking to enter the China market have a great
number of options regarding where to invest. You need to
thoroughly research which is the best option for you.
Locations are becoming increasingly focused on serving specific
niches and less on trying to offer all things to all customers.
Understand the options
Most companies entering China have targeted the three river
deltas as the best way to get to the majority of the Chinese
market. The deltas are the:
• Pearl River Delta (Hong Kong, Shenzhen, Guangzhou
and inland)
• Yangtze River Delta (from Shanghai to Nanjing and further
down the Yangtze River)
• Bohai Bay corridor in northeastern China (includes the cities
of Beijing, Tianjin, Dalian, Jinan and Qingdao and their
provinces).
The deltas account for:
• about 3 percent of China’s land mass
• 20 percent of its population
• half the national gross domestic product (GDP)
• more than two-thirds of exports
• more than two-thirds of foreign direct investment.
Opportunities abound in the deltas, but competition with other
world economies to have a slice of the China market is also at its
toughest here. As these regions become more developed and
affluent inflation will set in and prices escalate.
Some global companies have adopted a ‘15 gateway cities’
vision. The aim is to expand beyond the three river deltas and
select from among the 15 major provincial cities (also commonly
known as ‘second tier cities’) that will experience phenomenal
growth as infrastructure is extended into the north-east and
west of China.
Factors to consider when deciding where to locate:
• proximity to market
• proximity to suppliers
• quality of logistics
• costs – for example land, labour, utilities
• reliability of local infrastructure, particularly the power supply
• availability of a good agent or distributor
• fast growth and high costs versus low costs and low
competition
• entering through a gateway like Hong Kong and Taiwan
• availability and longevity of tax or other incentives
• coat-tailing on someone else’s existing marketing and
distribution network
• leveraging off an existing New Zealand relationship in a
region, like a sister-city or existing New Zealand business
• the level of local authority support for foreign businesses
• where your competition is located
• using a foreign trading zone, trade development zone
or special economic zone
• why another New Zealand company chose a particular
entry point.
KIWI SOLUTION – ASK THE RIGHT QUESTIONS
“How we went about [finding a location] was taking quite a lot
of time, researching what style of company we wanted and
most specifically where it was going to be located. In the end,
that proved to be the decision that took us the longest amount
of time and was the most difficult to get information about as
well. And in the end, we realised it was about us asking the
right questions.
Our own way of achieving that was also to seek consultation
with people who were already operating here in China in all the
various forms, and that included the government agencies as
well as other expatriate based company associations that we
had.” – Don Johnson, Marketing Manager Lumber, Pan Pac
Forest Products. Pan Pac has a warehouse and distribution
centre in the Tianjin Free Trade Zone. It took the company
two years to decide to locate there.
Common entry points
Shanghai
Shanghai (population over 20 million) is China’s business
hub and the gateway to east China.
Shanghai is economically advanced and the outside world
is getting attuned to its rising status as a strategic economic
centre in the Asia Pacific region.
It is very difficult to get good quality industrial space in
Shanghai, either because the industrial parks are full or
because prices are too high. As well as steep land prices,
utility, living and labour costs have also risen.
The Shanghai government is seeking more higher-end
manufacturing and large investment projects and
recommending that smaller investments be made
in the satellite cities around Shanghai.
Shanghai is the top city in China in terms of demand for
New Zealand products.
Shenzhen and Guangzhou
Shenzhen and Guangzhou are cities of high economic
development and well-established infrastructure located
in the Pearl River Delta.
The Pearl River Delta Economic Zone covers 14 cities, including
Guangzhou and Shenzhen. The province has the advantage of a
Closer Economic Partnership with Hong Kong, allowing goods
to come into China more easily from Hong Kong. The region
has a good logistics system.
29

Shenzhen has the highest GDP per capita and is the information
and communications technology (ICT) and manufacturing
hub of China, exporting machinery, sports equipment, toys,
apparel and furniture.
The city’s Special Economic Zone is the business and
financial heart of the city and the reason why most visitors
come to Shenzhen.
Beijing and the Binhai business zone
Beijing is home to the Chinese Communist Party, central
government, the country’s finest universities and research
institutes, and is the leader in research and development.
The capital city also offers ‘Zhong guan cun’ – the Chinese
Silicon Valley.
The city is also home to the China head offices of many
major international companies and a large, wealthy
expatriate community.
Of the first tier cities, Beijing (population 15 million) has the most
room for future expansion. Unlike Shanghai and Guangzhou,
Beijing is not at the centre of a wider economic development
region, meaning its commercial infrastructure and industrial
sector are relatively less developed.
However, this is likely to change with the further development of
the nearby Binhai New Area business zone. China plans to turn
the Binhai New Area, located 120 kilometres southeast of
Beijing, into the country’s third economic engine. Tianjin city is
the largest city in the Binhai area and has the largest port in
North China and its international airport is the largest cargo
freight centre in China.
Beijing and Tianjin are the leading cities in the Bohai Rim Region
strategy. This initiative is an effort to attract the sort of
development to the central and coastal areas of northern China
that has been so successful in the Pearl River Delta region.
The Rim also includes the cities of Dalian in Liaoning province
and Jinan and Qingdao in Shandong province.
China’s second and third-tier cities
The so-called second tier cities are promoting themselves by
focusing on developing modern industrial zones, new
infrastructure projects, the best telecommunications networks,
and providing enough energy to prevent shortages.
Infrastructure developments to ease transport to and from
the coast to these cities are also under construction.
Labour costs are 20 to 30 percent lower than what local
employees are asking in the coastal cities. Salaries are also
increasing at a slower rate than in the already established
industrial cities.
However, in the second and third tier cities it can be extremely
difficult to find qualified and experienced employees who speak
fluent and comprehensive English. In general the quality of
education in these cities is lower than the first tier cities.
They also have limited access to foreign schools. They are
not ideal destinations for foreign or even local managers
coming from the first tier cities.
Skellerup Industries has a factory in Baochang village on the north
bank of the Yangtze River, east of Haimen and Nantong cities.
From Shanghai it takes 90 minutes to reach the river crossing.
The boat ride across the river takes a further 30 minutes and
from there it is around one hour’s drive to the village.
The central government is doing its best to eradicate
disadvantages for expats to bring stability and further
development to these regions. One such incentive is that the
government provides and ‘pushes’ business licenses onto key
industries of foreign enterprises.
Intensifying competition in retailing is also forcing retailers to
expand to China’s second-tier cities which offer more than twice
the number of consumers (albeit with a lower per-capital
disposable income).
The advantages of second and third-tier cities include:
• rising demand as manufacturers shift operations to smaller
cities to cut costs
• lower accommodation and wage costs
• less competition
• a growing middle class fuelling demand for consumer goods.
Second-tier cities cover other key regions, including cities such
as Shenyang, Dalian, Tianjin and Harbin in the industrial north
east. The metropolises of Chongqing, Chengdu and Wuhan
cover the more developed areas of western China. Nanjing,
Suzhou, Hangzhou and Ningbo cover the eastern coastal areas.
The third tier cities are numerous and catching up rapidly. Many
are key cities in the far west, the south west and central China.
They serve areas that are economically undeveloped and less
well provided for in terms of infrastructure.
Trade development zones and special economic zones
Special Economic Zones, and the hundreds of development
zones, have in the past offered foreign investors incentives
that include reduced income taxes, land use fees and import/
export duties. They also offer favoured treatment in areas
such as getting infrastructure and utility services and
government approvals.
Don Johnson, Marketing Manager Lumber, Pan Pac Forest
Products, which has a warehouse and distribution centre in the
Tianjin Free Trade Zone, says you need to be aware of your
business scope in the future because once it is established
it can be limiting as well as empowering.
“For us, it was about planning for the future and also planning
contingencies. And this zone in particular gave us the flexibility
to do what we wanted, whereas other zones didn’t.”
The direct financial incentives to foreign companies are being
phased out by the central government to level the playing field
between local and foreign businesses.
KIWI LESSON – GO TO A ZONE
“I think location is the most important thing in China if you’re
going to do what we did which was manufacture. If you’re
contract manufacturing that is different, because the
responsibility for everything lies with the contract manufacturer.”
– Keith Curry, Skellerup’s former China Chief Executive
“In my opinion, in China, you should not go outside any of the
recognised zones – the recognised zones are managed by
professional people and they haven’t got a political input.”
30

KEY LEARNINGS
• thoroughly research on the options
• get advice from businesses already in China
• competition is toughest, and costs higher, in and around
the main business centres.
3.3 HONG KONG AND TAIWAN AS “WIDER
CHINA” OPTIONS
Depending on your type of business and the nature and scale of
your target markets, Hong Kong and Taiwan maybe gateway
options for China.
For companies uncomfortable with some aspects of dealing
direct in China, both provide bases from which to launch into
China. These options should be considered alongside other
models for setting up in China.
The opening up of China has brought greater commercial
integration with Hong Kong and Taiwan and the pace of
integration is speeding up. More businesses are adopting
“wider China” market strategies recognising the mainland,
Hong Kong and Taiwan complement each other as parts
of a diverse “wider China” market mix.
Hong Kong
Hong Kong is now so open to southern China that some see
Hong Kong as part of a Pearl River Delta market made up of the
Special Administrative Regions of Hong Kong and Macau and
China’s Guangdong Province. The mainland China part of the
Pearl River Delta is home to over 40 million people and accounts
for 10 percent of China’s GDP and 30 percent of its exports.
Guangdong’s growth partly stems from decades of Hong Kong’s
manufacturing industries relocating to southern China and
increasingly the development of new industries. Significantly
for businesses looking to sell to industrial customers, the
headquarters of these companies tend to remain in Hong Kong
along with functions such as sales and marketing, procurement,
finance and logistics.
Thanks to its strategic location, open international business
environment and supportive government policies, Hong Kong
is also a recognised location for regional offices servicing
Asia generally.
More recently, Hong Kong has become a ‘technology multiplier’
proactively seeking international links with companies looking to
convert ideas or technologies into products quickly and cheaply.
This utilises Hong Kong’s involvement with manufacturers in
China in conjunction with its experience in overseeing Chinese
business operations on behalf of foreign partners.
KIWI LESSON – VISIT CHINA CONTINUALLY
Gallagher Security has a regional office in Hong Kong.
Every week the majority of the Hamilton-based company’s
clients across China will see a member of the Gallagher team.
“People are seeing more and more of us. You need to keep
going into China continually to maintain relationships and ensure
the New Zealand office has quality information about local
Chinese developments and needs.” – Peter Francis, Regional
Manager Asia Pacific and Middle East, Gallagher Security
The large number of Chinese tourists visiting Hong Kong
(60 percent of a total 40 million arriving in 2011) make
Hong Kong a great test market for consumer goods,
particularly for southern China.
New Zealand has a Closer Economic Partnership (CEP)
agreement with Hong Kong which, read alongside Hong Kong’s
own Closer Economic Partnership Arrangement (CEPA) with
China, gives Hong Kong companies domestic status for trade
and investment. For Kiwi businesses this opens up opportunities
for easier access to China by partnering with CEPA-qualified
Hong Kong businesses.
Duty reductions under the New Zealand-China Free Trade
Agreement mean shipping goods through Hong Kong for China
is becoming less attractive, unless there is some customising
done in Hong Kong before entering China.
Taiwan
Taiwan has increasingly looked to China to boost its growth,
driving ongoing investment in Chinese businesses. From an
initial concentration on manufacturing this investment has
diversified alongside China’s own development and is now
more pronounced in services, distribution and supply chains.
Taiwan’s commercial links with China present opportunities for
New Zealand businesses to enter or build markets in the mainland.
Taiwan can be a source of customers in China, usually through
piggy-backing existing relationships in Taiwan and offering new
or complementary lines to existing channels or supply chains
into China. For New Zealand exporters this approach can
mitigate contractual and performance risks.
But expansion into China will often be governed by the interests
and operations of the Taiwan partner. Your partner may offer to
take your products into the mainland, but if your relationship is
strong, it is worth asking the partner about using their channels
for selling in China.
Entering China with a Taiwanese partner need not be exclusive.
The mainland is big enough for multiple channels to most
markets and, properly controlled, can build market share quicker
than with just one channel, especially if the Taiwan channel is
Taiwan owned or controlled.
Marketing your products in China through other channels can
be managed from a Taiwan base, giving you closer control over
direction and process. This is an alternative to remote
management from New Zealand where the perception of a
situation in China can often be very different from reality.
Taiwan is a good test market for products aimed at Chinese
consumers. With its 23 million people in an area the size of
Canterbury, it is densely populated with high income consumers
and product adaptation for mainland consumers can be
managed quickly by Taiwanese partners.
Foreign companies, including ones from New Zealand,
sometimes chose Taiwan as home for their Asia regional offices.
This is especially popular among high-tech businesses reflecting
Taiwan’s strengths as a global manufacturer and supplier along
with recognition of Taiwan’s high level of integration with China.
31

Taiwan and China have an Economic Co-operation Framework
Agreement (ECFA), essentially a free trade agreement,
providing for tariff cuts on goods, reducing non-tariff
barriers, opening up service sectors and further lifting
investment restrictions.
KEY LEARNINGS
Hong Kong and Taiwan are options for entering or building
a market in mainland China. To varying degrees, both offer
broadly similar benefits including:
• identification of partners and customers in China
• management of marketing and distribution in China by
Chinese companies
• opportunities to commercialise technology, utilising China
• test markets for development and adaptation of products
for sale on the mainland
• strategic locations for regional offices servicing wider
China and Asia.
3.4 PROTECTING INTELLECTUAL PROPERTY
Protecting intellectual property
Protecting intellectual property (IP) – including products, design
and processes, trademarks and patents, promotional material,
user manuals, trade secrets and domain names – is one of the
biggest issues New Zealand businesses face when entering China.
There is a considerable risk of piracy, counterfeiting and reverse
engineering in China. The US Government estimates that on
average 20 percent of consumer products sold in China
are counterfeit.
There are laws to protect and enforce IP rights, but China’s
businesspeople do not have a long tradition of intellectual
property compliance. There can also be inconsistencies of
court proceedings on IP.
In addition, China’s IP laws are different from New Zealand’s.
China has a first-to file system that requires no evidence of prior
use or ownership, leaving registration of popular foreign marks
open to third parties who register famous marks before the
legitimate owner. It can be difficult, time-consuming and
expensive to recover these marks, so it is far better to register
trademarks early.
These legal differences and the risk of IP breaches mean that
a New Zealand business entering the market needs a well
researched and executed strategy to protect its IP.
But you shouldn’t let fears of IP losses alone dominate your
decisions on entry into the Chinese market. The business
opportunities are huge, the risks can be managed and the
situation – both in terms of the dangers and the remedies
– is improving.
You need to take steps as early as possible to protect your IP
and you should have a clear plan that takes timing into account.
For example, trademarks take 18 months to be granted, design
patents take six to eight months and copyright recordal
procedures can take three months.
Luke Minford, partner of global IP consultancy Rouse and Co
International, says after you have registered your rights early
it’s “primarily a case of then making sure you have a clear
strategy and good local knowledge about what is going
on in different areas”.
While some companies may see IP protection as imposing costs
and delays when they need to move fast in the market, his
advice is that “in the long run they will thank themselves
because China is not going to go away – it will continue
to grow solidly over the next decade.
“The companies that will succeed long term will be those
companies that have put IP protection in place and been
sensible in terms of making sure that the basics are right.”
Luke Minford says there are three essential steps to protecting
your IP. You need:
1. A budget for intellectual property. IP rights are long-lasting
assets that should be invested at the parent company level
and not left to local business units to find budget for.
2. A strategy before you arrive that breaks down all your IP
assets and identifies how you are going to obtain rights,
protect, commercialise and enforce them.
3. Support on the ground in China for your strategy, whether
that be good local counsel, or a reliable partner that
understands IP.
The best way to protect your IP in China is to register
whatever rights you can, including patents, trademarks
and recordal of copyright.
If you do not register your IP with the Chinese system, you have
no rights. So register early and use the system pro-actively.
For help doing this you should contact a qualified lawyer or
agent with experience of working in China.
Including China as part of a process of applying for international
patent or trademark protection can be beneficial. These benefits
include streamlining the legal process and reducing the risk that
IP could become public in one country before it is protected
in China.
Contact NZTE for a list of IP specialists in China.
KIWI LESSON – AVOID PARALYSIS
Kevin Maurice, Managing Director of Atrax, says no exporter
should be paralysed by the fear of intellectual property theft
in China. Whenever the Auckland-based specialists in aviation
and logistics weighing technology use a subcontractor in China,
they never divulge what they are making will be used for.
“Some of these things are in conflict with Western management
styles,” Maurice says “but I’m the only guy who knows all the
parts of the jigsaw.”
Understanding risk versus opportunity
The risk to IP needs to be balanced against the considerable
opportunities presented by China. While enforcement can
be challenging (see section below) it would be wrong for
companies to assume that IP is not enforceable – by believing
this you may be giving away IP that you could and should
be protecting.
32

It is also important to put IP issues in perspective. Some
companies in China are prepared to accept borderline imitation
of their products because they feel it does not harm their core
business. Others want to take a tough line against infringers
because they fear infringements will multiply if they are seen
to be passive.
You should also outline with your local partners and/or counsel
what you, as the rights owner, are prepared to accept in the
market and what you are not.
You should also be clear and firm about your IP with your local
partners. Many IP problems arise within supply chains and sales
channels, because your partners abuse your IP, deliberately or
otherwise. Ensure that you have Non-Disclosure Agreements
signed before you reveal any confidential information and have
contracts in place that ensure your partner cannot take liberties
with your IP.
Prevention is the best strategy. Communicate to your partners
early and often that your IP is important and do not brush
issues under the carpet. You should not enter into relationships
on blind trust or assume that contracts cannot be enforced –
they can.
Protecting patents
Under China’s Patent Law three types of IP can be protected:
• invention patents – lasting 20 years
• design patents – 10 years
• utility model patents – 10 years.
Food, beverages, flavourings, chemical and pharmaceutical
products are all patentable. There are some items that cannot
be patented in China, including plant varieties and, scientific
discoveries. Software can be protected as a patent for certain
applications.
Applications to register a patent in China go to the State
Intellectual Property Office (SIPO). New Zealand companies
which do not have a business office in China must apply through
a registered patent agent.
Applications must be in Chinese and include relevant drawings,
details of any claims and a description of the technology.
Design patent applications require drawings or photographs
of the design.
If SIPO decides the application complies with the Patent Law it
will issue a certificate, register the patent and issue its decision.
Patent rights are effective as of the date of publication.
There are two key dates:
• publication, whereupon the previously filed patent can be
viewed by the public and objected to
• the grant, which can be some years later.
After the patent is published, the patentee has the right to
request damages from any alleged infringers, but this right is
not yet enforceable. Once the patent is granted you can go back
and claim damages for any infringement during that period.
You also have a fully fledged patent right, meaning you can
claim proper damages calculated from the date of granting as
well as court injunctions to actually stop infringers. At present,
publication of invention patents in China is always either six
months from when the patent is filed in China or 18 months
since it was first filed anywhere, whichever comes later.
Design and utility patents usually take about a year to register,
though it can take two to three years to register an invention
patent. You can register a utility model and invention patent
simultaneously for the same invention, meaning that the utility
model is granted first, then if the invention patent is granted,
you have to abandon the utility model. This is more expensive
as you are filing two applications, but allows you to obtain quick
protection from the utility model first, and then your protection
switches to the invention patent. This can be useful for very
valuable inventions that you want some early protection for.
Protecting trademarks
The best way of protecting your trademarks is registering them
so they are covered by Chinese law initially for 10 years, but this
is renewable.
You should register both an English and Chinese translation
of your trademarks, logos and domain names with China’s
Trademark Office.
If you don’t have a physical presence in China, you must register
your marks through a trademark agent. However, lawyers or
your Chinese agent may prepare the application. If you have a
Chinese company or a representative office they can register
your trademarks directly.
Failure to create and register a Chinese version of your
trademark opens up the chance that the market will give your
product a ‘nickname’ which you may not like and have no rights
to. Also someone else in China could even register your
trademark or the Chinese ‘nickname’ as their own, forcing
you to buy it back.
Trademark applications can cover words, designs, letters,
numbers, three-dimensional signs and colour combinations,
as well as combinations of these elements.
If you let another party use your trademark under a licensing
arrangement, under Chinese law you must execute and register
a trademark licensing contract. This is not only good practice
but allows the licensee to remit royalty payments overseas in
foreign exchange.
The cost of having an application prepared to trademark one
brand in one class is around NZ$650. This includes the official
filing fee, administration fees and disbursements. The application
must be accompanied by specimens of your trademark and all
documents must be submitted in Chinese.
China uses the International Classification of Goods which
categorises commodities and services into 45 classes.
A trademark must be registered in connection with at least one
particular class of goods. Each category must be registered
separately in Chinese.
Registering a trademark can take 18 months, although
examination periods are now falling to close to 12 months.
33

KIWI LESSON – ADDITIONAL RISKS
“You do need to be careful about protecting your intellectual
property if you are operating in China. Of course this is true of
doing business anywhere, but it is generally accepted that there
is additional IP risk in China where companies have found that
it can be difficult to enforce intellectual property rights.”
– David Thorrold, CEO, BioVittoria
Protecting copyright
Unlike patents and trademarks, you do not need to register
copyright to obtain protection. China gives automatic copyright
protection to nationals of countries that are party to the Berne
Convention which includes New Zealand.
However, you can register voluntarily with China’s National
Copyright Administration, which provides you with a certificate
and is a convenient way to prove ownership if you need to
enforce the copyright. Registration of a copyright licence with
the copyright administration may also be required to remit
licence and royalty payments abroad.
Another important fact you should consider is that if you need
to file for Customs recordal to facilitate seizures of pirated
copyright material by China Customs, a copyright registration
certificate is necessary.
There is copyright protection for graphics or arts related to:
• product designs
• diagrams and manuals
• computer software
• musical, video, dramatic and artistic works
• architectural works
• photographs.
Copyright protection applies for 50 years.
In some cases, you can protect product design as an ‘artistic
work’, but this can be challenging in respect of everyday objects.
To protect the shape and exterior design of a product in China it
is better to file a design patent when the design is first created.
Dealing with unfair competition and trade secrets
China’s unfair competition law prohibits the theft and disclosure
of trade secrets. It also deals with attempts to ‘pass off’ a fake
product as legitimate, or in a way which creates confusion.
In relation to trade secrets, companies should take the following
steps to protect trade secrets in the workplace:
• Identify your trade secrets and review who has or could have
access to them.
• Control access to trade secrets by implementing proper
security measures and restricting access to relevant
computers and equipment, documents and areas.
• Documents and materials that are trade secrets should
be labelled.
• Impose a strong and clear contractual obligation on
employees at each level to protect your trade secrets.
Upon hiring, companies should ask each employee to
sign an agreement that confirms the employee’s obligation
to protect the firm’s trade secrets.
• Seek advice of labour lawyers or HR specialists in China
on what is enforceable in employment agreements.
In relation to ‘passing off’, you are protected if your product or
service has a reputation in China and if the infringer’s imitation
may cause confusion, even if you have not registered any
trademarks or other rights, or if the infringer has not used the
same trademarks. However, it is essential that your product or
service is already sold in China to demonstrate reputation.
The threshold for proving whether the alleged infringer has
caused confusion is a subjective one and such cases can be
challenging. Having good records of your marketing activities
can improve your case.
(BPMC (2005). Protecting your Trade Secrets in China.
Hong Kong: Alibaba Group)
What can I do if my IP is violated?
While China has a reputation for having weak IP enforcement,
in reality, standards of enforcement have improved dramatically
in recent years. This is mainly because many Chinese companies
are themselves IP owners and are also taking legal action
against infringers.
While there is still inconsistency between different IP agencies,
the courts and between different locations, you should not
assume that the odds are against you. It is more likely that, if
your rights are in place and you have a clear case, you will be
successful, although the level of punishment of the infringer
may be less than you expect.
“It’s not so much in terms of how the law is interpreted anymore,
it’s the threshold that the authorities set for you in terms of how
much evidence you’ve got to produce and how much you’ve
actually got to convince them.” – Luke Minford, Rouse and Co
International
He says there’s been a huge increase in the number of cases
going to court and that has really improved the quality of the
judges. “It’s improved the impartiality of the decisions. We’re
seeing some very good, fair, fast decisions coming out of the
courts. The cost of enforcement can be a lot less than in
New Zealand.”
New Zealand companies should be prepared to act quickly
and decisively regarding enforcement.
There are several enforcement options for dealing with
violation of your IP:
• administrative enforcement
• civil litigation
• criminal enforcement
• cease and desist (C and D) letters.
34

Administrative enforcement
The main way to deal with infringements is to file a complaint
with one of the Chinese enforcement agencies that have specific
powers to enforce IP rights:
• for patents this is the State Intellectual Property Office
• trademarks – the Administration for Industry and Commerce
• copyright – the Copyright Administration.
Customs and other agencies such as the Technology
Supervision Bureau also have powers to deal with counterfeit
goods.
While their powers vary, these administrative agencies can
usually fine infringers, seize goods or equipment and issue
penalties. However, they do not have powers of arrest and
cannot award compensation.
While the administrative enforcement is usually very quick and
low cost – it does not require any court procedure – it can be a
limited deterrent and fines may be small. For complex IP cases,
you may need to use the courts and for very large cases, you
may want to try criminal prosecution (see below).
An administrative action can cost US$4,000–$8,000.
Civil litigation
Companies can take civil action through a local People’s
Court or an Intellectual Property Tribunal. The courts are
suitable where:
• you have a more complex case that cannot be handled
by administrative authorities
• you want to obtain damages, or send a strong message
to the infringer.
Civil litigation is more suitable where the infringer has assets
and has the ability to pay damages.
Though slower and more expensive than administrative action,
more and more companies are going down the litigation route.
Although damages awards for IP infringement are much lower
than you might expect in New Zealand, they have been rising in
recent years. You can consult the website www.ciela.cn which
gives useful statistics on IP cases in China’s civil courts.
You should try to bring your case in courts in larger cities, such
as Beijing, Shanghai or Guangzhou, rather than in local courts
which may have less IP expertise or which may be subject to
local bias.
Criminal prosecution
China’s criminal law allows for prosecution of serious cases of
piracy and counterfeiting. Only cases which are relatively large
scale, and where trademarks or copyright have been exactly
copied, are eligible. The threshold for prosecution is based on a
specific monetary value of the case, although valuing the case
(by the number of counterfeit goods sold or seized) can be
challenging. The police, as in many other countries, have limited
resources and may be reluctant to investigate cases which they
consider small scale.
Generally you need to prepare the details of the case in advance
and report to the police – they will not simply act on preliminary
leads. It is common for a case to be transferred from the
administrative authorities (see above) if it’s large enough.
Criminal cases require investment of time and resources to
investigate the leads and guide the case through the prosecution
process. Costs can range from US$ 20,000 – 40,000.
Cease and desist
Cease and desist (C&D) letters can be an effective way of
getting an infringer to stop, if you believe the infringer is too
small scale or not serious enough to merit spending a lot of
money. For example, traders on the internet are a suitable target
for C&D letters if you want to demand that they take down any
infringing products or logos online.
To be most effective, the letter should be written in Chinese,
sent by a Chinese law firm and followed up with calls. While
C&D letters are not likely to be effective against a hardened
counterfeiter, do not rule out the effect that a simple letter
can have in dealing with a problem.
KEY LEARNINGS
• Take steps as early as possible to protect your IP.
• Have a clear intellectual property plan and budget that
anticipates risks.
• Get expert support on the ground in China ahead
of market entry.
• Educate your own employees and partners about IP
and ensure your contracts fully protect you.
• Be prepared to act quickly and decisively regarding
enforcement.
(Source: Chris Bailey, Partner and Deputy Country Manager
China, Rouse and Co)
It is possible to combine administrative and civil action, so that
you can conduct an administrative ‘raid’ first and then file a civil
suit to claim compensation.
Costs for civil litigation can vary considerably depending on
the complexity of the case, but may vary from US$ 20,000 –
100,000.
35

HAYES INTERNATIONAL
CASE STUDY
Keep risks in perspective – protecting intellectual
property
Hayes International has developed an active IP protection
strategy for its manufacturing operations in China based on
keeping all critical operations in New Zealand and contracting
out the rest to Chinese suppliers. Developing and maintaining
strong personal relationships with Chinese partners is also seen
as an effective way of keeping IP safe. In more than 16 years of
selling in China, Hayes is not aware of one breach of its IP.
“Don’t let paranoia over intellectual property paralyse you,”
says Mike Lowe, General Manager of engineering company
Hayes International.
“In the 19 years I have been going to China, I have never had
an experience where anybody has intentionally gone out
of their way to rip me off.”
Get patent protection
That said, Lowe advises companies to invest in patent protection
before entering China.
“We have had patent protection in China on two of our
machines which have quite unique features, but there is nothing
to stop anyone pulling apart our machinery and copying it.”
However, he notes that patents are now being honoured more
than in the past, and they are enforceable.
The Rotorua-based roll forming machine designer and
manufacturer also has a strategy to protect its IP in China based
on doing as much activity as possible in-house and getting to
know its Chinese partners personally.
Hayes sold its first machines to China in 1991 and today sees
the country as central to its global growth strategy.
Keeping key operations in New Zealand
At the core of its IP protection strategy in China is making
everything that is critical to its business in New Zealand.
Lowe says design and tooling are what defines Hayes machines
so the company does its research and development and tooling
in New Zealand and they are owned by the company. It also
manufactures all its vital components in New Zealand and ships
them to its factory in China.
Subcontractors in China then make low value, straightforward
components such as steel chassis, guards and brackets.
All the Chinese subcontractors are doing is fabricating
equipment to hold the tooling up,” Lowe says.
The Hayes-owned factory finally assembles the
complete machine.
This approach, on top of helping to safeguard Hayes’ IP,
also halves the import component of its machines, thereby
lowering the level of investment of their local customers.
Confidentiality agreements
Hayes makes all staff sign a confidentiality agreement, though
Lowe wonders how effective this is.
“If your business is dependent on the fact that there is a
document hanging like the Sword of Damocles over your staff
then you probably shouldn’t be in China.
We treat staff the same as we do in New Zealand. There is an
induction programme and the guys appreciate that the material
they see is the company’s property. The risk for us is quite low.”
Hayes has an advantage over many other companies
manufacturing in China and worried about IP protection.
Its relatively small number of customers (in 2007 it had
45 in China) allows it to strike up close personal relationships
with customers which creates an environment where its IP
is looked after.
The company also makes the point of visiting all its
customers regularly.
“It is central for us to meet our customers”, says Lowe.
“The Chinese expect you to treat them like a friend, but we
don’t hand out drawings of our machines. If a customer
has a broken part, we will make it and deliver it to him.
But the reality is, whatever you are doing, you’ve got to know
your Chinese partners well. I would not ship a machine to a
customer I did not know.”
He advises companies to develop a good personal relationship
with any contract manufacturers they use. “If you have a good
relationship you can apply a bit of personal pressure if
something goes wrong. If your manufacturer delivers
components that are below quality you can go back to them
and express your concerns, and they will take that on board.”
Tips:
• Keep critical operations in-house in New Zealand.
• Develop close personal relationships, for example with
subcontractors.
• Have staff sign a confidentiality agreement but back this
up by treating staff with respect.
www.hayesint.com
36

3.5 BUILDING RELATIONSHIPS
Building and maintaining relationships
In China you will probably need to develop deeper
relationships than would be expected at home or in other
Western markets. Most of the time a potential Chinese
partner will want to establish trust with you before
business negotiations get underway.
Chinese prefer to do business face-to-face with people
they know and trust, or with those they’ve met through
people they know.
The strength of your relationship is more important than
any contract.
You’ll hear what appears to be contradictory advice about the
importance of ‘guanxi’ – roughly translated as ‘it’s not what you
know, it’s who you know’, or ‘the old boys’ network’. Its power
is declining, but guanxi is still powerful in some regions and
parts of the economy and government.
Also, China is one of the world’s less predictable markets thanks
to the amount of discretion given to government officials and
the rapidly evolving political, legal and economic systems.
Relationships with key officials can help you stay on top
of changes.
KIWI LESSON – ORGANISE AN INTRODUCTION
Danny Chan, businessman and third generation New Zealand
Chinese, says organising an introduction or recommendation
from a mutual associate can advance relationships and
potentially fast-track your timeline. “They will check you
out by talking to others.”
KIWI LESSON – A 24/7 OPPORTUNITY
“Take full advantage of the 24/7 nature of Chinese business.
Be prepared to meet prospective business associates in social
setting on evenings and weekends.” – Peter Francis, regional
manager Asia Pacific and Middle East, Gallagher Security
Develop an understanding
The power of relationships ranges from the long-term ones you
need to develop and maintain with your Chinese partners and
other key stakeholders through to the bonds of ‘deep’ guanxi
– the network of people who liaise, cooperate and support
one another.
The former is a universal necessity for doing business in China;
the latter is in decline, especially in the main centers as China
modernises and the government cracks down on corruption.
Relationships can also be important in dealing with government
tax, customs and quarantine officials.
For more information on guanxi see the “Entering the Market
– Chinese Culture and Business” section.
Another important concept to understand is ‘mianzi’ (or face)
which represents a person’s image, pride, reputation and social
status. It’s an important part of relationship building.
KIWI LESSONS – QUALITY IS A NUMBER ONE ISSUE
“The number one thing is to have a good product, a quality
product. Apart from that of course, you have to have a good
relationship with people. Then you have a better chance.”
– Frank Zang, General Manager Hayes International, Shanghai
“Today time is money for these very busy [Chinese] executives
and owners of companies and the wining and dining is not the
be all and end all of relationships. The primary factor is meeting
their quality specifications.” – Keith Stevens, former General
Manager, Ovine Garment Leather Division, Richina Pacific Ltd,
Shanghai
Know who you need good relationships with
When building relationships you should pay attention to
key people at all levels of an organisation, not just the top.
Business partners
Being successful in business in China is often about interacting
with business partners in social situations that help to build up
and maintain trust. And because the Chinese are usually looking
for long-term relationships, you have to show that you are in
China for the long-haul. They will also be looking for win-win
situations so you need to highlight mutual benefits.
Face-to-face meetings (both social and business) are important
to the Chinese so you will need to make time to do this.
However, don’t rush up to China every time you are invited or
contact is requested. Before you decide whether or not to go,
consider the reasons for the visit, what will be achieved and
what alternatives there are to a face-to-face meeting.
KIWI LESSON – JUST THE START
“Businesses should recognise that their first Chinese partnership
could be beneficial beyond the deal on the table.” – Trevor Burt,
Chairman Ngai Tahu Holdings
Officials
The influence of government officials on the way business is
conducted in China is strong (though declining) so it pays to
take the time to meet and build relationships with key officials.
You should at least take steps to understand the environment
these officials operate in.
Chinese laws and regulations give officials a large degree of
discretion on enforcement, resulting in different interpretations
in different places. You must never try to sway officials in how
they do this, but a good relationship with officials can give
you a clearer idea regarding how they will interpret laws
and regulations.
It’s a good idea to start with a courtesy call to relevant
government officials. This will alert officials of your existence
and what you’re doing and demonstrate your transparency and
respect. As a result, officials may provide advice and assistance.
In the main business centres, the legal and regulatory “grey
areas” are shrinking as law making becomes more transparent.
Businesses find they don’t need such close relationships with
officials to stay on top of issues. For information on how to deal
37

with government officials see the “Entering the Market – Dealing
with Government Officials” section.
KIWI LESSONS – THE IMPORTANCE OF FRIENDS
The first rule is to focus on building relationships rather than
talking money. “It’s not a quick thing. One dinner is not going
to do it. It’s more about time rather than throwing money at it.”
– Sean Simpson, co-founder LanzaTech
“Knowing and being ‘friends’ with the government officials who
control regulations in your business sector is essential to
business growth and development. Correspondingly, having
bad relationships with officials in your business area is likely to
make business growth and development almost impossible.”
– Dr Anatole Bogatski formerly with international education
provider, AIS St Helens
“Generally officials might have a lot of discretion in terms of
perhaps applying a policy or interpreting a policy, and obviously
they will use that discretion more favourably if they like you
rather than not like you.” – Rob Young, China-based Kiwi
businessman
Distributors and agents
It is important to have a good relationship with your distributors
as you lose a lot of control over the sale of your products when
you hand them over to a distributor.
It is also important to support and motivate your agent to get
the best out of them.
Sales support trips into China not only help concentrate agents’
and distributors’ minds on your products and sales
opportunities, but they also are an opportunity to build
relationships directly with your client base rather than hearing
everything second hand. Training sales staff can achieve the
same thing.
Good relationships can help both sides understand each other’s
objectives and help you keep tabs on what the distributor or
agent is doing with your product.
Many Chinese agents will not let you get too close to their
customers. But if you can, do it. If your plan is to get to know
the customer so you can deal with them directly and cut out
the agent be careful, as the agent’s relationship may prove
to be the strongest.
KIWI LESSON – GOOD PARTNERS HARD TO FIND
“It is vital to find the right business partners, but it is often the
hardest part. Finding appropriate distributors is particularly
challenging.” – Tim McIver, Managing Director, Lanocorp Pacific,
Kiwis in China
Don’t forget that there are many Kiwis in China who can and
want to help. These range from business people who have been
there for decades to relative newcomers and organisations such
as KEA, the New Zealand Embassy and NZTE.
Using the informal and formal Kiwi networks can provide
invaluable contacts and advice to help you on your way in China.
How to build good relationships
Building a good relationship will take time and persistence –
it won’t happen overnight. If it appears to have happened
overnight, watch out.
Some ideas for building a relationship include:
• Entertain key stakeholders with meals, other social and
sporting activities. For more information see the “Entering
the Market – Chinese Culture and Business” and
“Negotiations and Meetings” sections.
• Find a champion to introduce you and vouch for you – this
will go a long way to opening doors and minds.
• Written references or letters of introduction are also
common. But a whole network of acquaintances and
business contacts around the country is much more useful
than a single sponsor. Finding a champion or a sponsor can
be difficult for businesses entirely new to China – contact
NZTE and KEA for help.
• Paying for your partners in China to visit your operations in
New Zealand is a good way of keeping them informed and
motivated. It’s also an opportunity to train Chinese staff.
Don’t completely fill up the programme with work. About
half should be devoted to rest and relaxation, leaving time for
building the relationship and an affinity for New Zealand and
New Zealand products.
• When hosting Chinese guests, remember the effort they
put into hosting and looking after you in China and
reciprocate this.
• Investigate placing some of your Chinese staff in your
New Zealand operation on a longer term basis. (Help ensure
all visa applications to New Zealand are filed on time and
appropriately).
• Use events like Chinese New Year to send greetings to
important Chinese contacts and friends. Also give your
Chinese-based staff a budget for these events.
• If China is likely to become a significant part of your business,
consider hiring a Mandarin speaking member of staff. Longer
term you can commit to the two or so years it takes to
become a proficient Mandarin speaker yourself.
• Be polite and sensitive to Chinese culture.
• Make an effort with the language – even a little Chinese can
go a long way.
KEY LEARNINGS
• Understand the business and commercial environment and
the importance of relationships within it.
• Personal relationships are a powerful force in Chinese
business life.
• The extent of this power depends on who you are dealing
with and where.
• Building a good relationship will take time and persistence.
• The relationship you develop with an individual also
represents your relationship with their organisation.
• Show that you are in China for the long-haul.
• Meet and build a relationship with key officials, or at least
take steps to understand the environment they operate in.
• Build relationships with the many Kiwis in China.
38

WAIKATO UNIVERSITY
CASE STUDY
My customer, my partner – the importance
of relationships in China
Good relationships are important for success in any country, but
Waikato University’s Dr Ed Weymes has found that building and
maintaining strong personal relationships is a make or break
issue for the university’s education business in China.
The university’s Pro Vice Chancellor International manages the
university’s joint degree programmes in China. Under the
programmes, Chinese students do half their degree in China,
taught in part by Waikato staff, then come to New Zealand to
complete their study.
Weymes says the importance of personal relationships is
probably the key difference he’s experienced between doing
business in the West and in China. “Historically, China never had
a strong legal system, so business has been conducted on the
basis of relationships,” he says. “In the West a business
agreement is cemented with the contract. In China the contract
is less important and business is conducted first and foremost
between people.”
As a result, he’s had to develop more than just working
relationships with his Chinese counterparts; he’s had to develop
personal relationships with them. In China this concept of
working through personal relationships is called guanxi, which
represents the relationship and obligations between individuals.
While Westerners are unlikely to attain guanxi, a trusting
relationship is critical to any business venture.
Developing these relationships takes many visits and dinners
and is established over time. For example, it took two years
before Weymes’ counterpart in China – who spoke fluent English
– would speak anything other than Chinese during formal
meetings. When the switch finally came it was a sign that a
relationship of trust had finally developed.
Build relationships with senior staff
Weymes says you need a relationship with a senior member of
the Chinese organisation, otherwise your project might not get
noticed. “I maintain a relationship with the presidents of the
Chinese universities I am dealing with. I may not meet with them
on a regular basis but I have their cellphone numbers so if there
is a problem and I need to talk to a decision maker, I can actually
reach one.”
When dealing with problems protect the relationship by raising
the issue indirectly. Don’t accuse your partner outright or issue
threats. “Deal with it the Chinese way – quietly and indirectly.
Tell them there is an issue you are concerned about. Don’t insist
on an immediate response, but wait for them to deal with it,”
says Weymes.
Maintain your key relationships
To maintain essential relationships Weymes visits China four to
six times a year. “If an issue arises you can discuss it by email or
fax. But at the end of the day if you want to get it dealt with
quickly you need to jump on a plane.”
Relationships with government officials and State Owned
Enterprises tend to be more formal, while dealings with private
companies – particularly in the developed southern and eastern
regions – are becoming more like those in the West.
Because business is based on personal relationship rather than
contracts, you need a continuity plan for when key staff leave,
Weymes says. “We were about to sign a contract when there
was a change in senior personnel on the Chinese side and we
were asked to put things on hold until the new senior
administration got to know us. It took six months to get back
on track.”
Tips:
• In China it’s who you know, not what you know, that
sometimes counts.
• Don’t try to form a quick relationship because it won’t work.
• Accept that it will take time – two or three visits just to get
things started.
Use Chinese nationals to bridge the culture gap
Having a Chinese national as a mentor can be valuable. “When
I first started going to China 25 years ago we had a Chinese
history professor who would come on our visits and explain
the subtleties and nuances of what was being said in meetings.
He advised us on what we should and shouldn’t accept.”
A Chinese national on the staff also helps Weymes navigate
cultural differences. “Your Chinese counterpart may feel more
comfortable raising delicate or difficult issues with a Chinese
national than with a Westerner like you, because this will avoid
a loss of ‘face’ or embarrassment.”
He uses an interpreter rather than a translator to ensure he
understands what is really being said. “China is a country where
yes can mean no and no is never said. You need to understand
what level of yes is being expressed: ‘Yes I understand you’;
‘Yes I agree with you’; or ‘Yes we are committed to that’.
An interpreter who knows your organisation can explain
the nuances of the responses.”
Negotiations Chinese style
One of the best places to learn about negotiating in China is the
country’s local markets, Weymes says. “If the stallholder asks
you for RMB 700 for a nice shirt you should offer RMB 40 and
then walk away from the store at RMB 80. When you start
walking, nine times out of 10 you will hear the words ‘Come back
– okay, okay’.”
The Chinese are tenacious negotiators, so you need to have a
bottom line and you need to stick to it, Weymes advises. “If you
acquiesce to a request then another request will be made. If you
acquiesce to that, a third one will be made. While you keep
acquiescing your partners will keep pushing.”
When you reach your bottom line stick to your guns. “I had a
situation where I was meeting with my Chinese partners at 9am
to spend 45 minutes reviewing all the terms we had negotiated.
Well, 11 o’clock came and we cancelled our first train, 12 o’clock
came and we cancelled that train. When our partners tried to
renegotiate the financial aspects I just drew my line in the sand
39

and wouldn’t budge. And when they saw that I was just letting
trains depart and that we were intent on staying there we
reached a final agreement.”
To ensure the negotiations don’t collapse in confusion and
frustration, prepare yourself for a completely different approach
to negotiations. “When we negotiate in the West we tend to
work logically through the topics, signing each one off then
moving onto the next. In China things don’t work that way. You
can reach agreement on an issue and then find that a few hours,
days or a month later it will come back to be relitigated. If you
ask why something that’s already been signed off is being
relitigated the response might be: ‘We just wanted to see
whether you have changed your mind’.”
And remember you are never off duty. “Never be flippant.
A casual comment to a Chinese second stringer over a beer
in the evening is likely to get repeated back to you at the
formal meetings the next day.”
3.6 NEGOTIATIONS AND MEETINGS
Managing meetings and negotiations
When entering business meetings and negotiations in China
be aware of a set of protocols and expectations that are
different from what you’d be familiar with in Western markets.
Understanding these differences can be the margin between
success and failure.
Chinese people have traditionally done business on the basis
of mutual trust rather than by written contracts. In this
environment you will need to gain the trust of the key people
you are negotiating with as well as being well covered
contractually. You will also need to develop an accurate
opinion on whether you can trust your counterparts.
This means a successful conclusion to business talks can take
longer than expected. The first meetings are likely to be social
‘get to know you’ events such as dinners rather than pure
business meetings.
The Chinese also have a reputation for being tough negotiators
who will push and push to get what they want. You have to be
prepared to say no.
Negotiations
KIWI LESSON – IT’S A COURTSHIP
“Foreign businesses will fail if they do not understand the Chinese
way of doing things. There is no need to adopt these ways but
merely to adapt to them. For instance your ace New Zealand
negotiator may not be the best person to send to China.
They may be too direct, too forthright and used to drawing
a line in the sand and defending it against all challengers.
A negotiator with a high level of emotional intelligence and
intercultural communication skills is preferable – someone who
is able to read body language and to empathise. Negotiation
in China is a courtship process: you both go out for a while
and get to know each other better, then you move on to the
engagement (prenuptial contract). Things then move quickly
and become more direct – when sufficient trust has been built
up both take the plunge.” – Dr Ed Weymes, Pro Vice Chancellor
International, Waikato University who has more than 30 years
experience in developing partnerships with Chinese enterprises.
Understanding the goals of your Chinese counterparts
‘One bed two dreams’ – This Chinese proverb highlights the
different expectations that parties to a negotiation may have.
Serious misunderstandings occur when one or both sides at
the negotiating table assume that the goals of the negotiations
are shared.
Understanding what the other side really wants is made more
difficult in China because of language and cultural differences.
At a Chinese negotiating table, everything is negotiable. When
you have a contract you should fully expect to have to negotiate
it again as part of an ongoing long-term relationship.
Where to get help
For help understanding Chinese negotiation techniques talk to
NZTE, and New Zealand or Australian business people already
in China.
‘Understanding China – Building Bridges for Business Success’
by Ed Wymes also introduces New Zealand executives and
managers to the business practices they will encounter in China.
KIWI LESSON – DEFINE OBJECTIVES
“I think a vital ingredient is to make sure you clearly define to
your business partners what your objectives are and what you
believe their part of the bargain is. A lot of companies don’t do
this. They do not put penalty clauses into their contracts and
they find in time that things go sadly astray…be very, very sure
of what your objectives are and put penalty clauses in your
contracts for non-performance.” – Keith Stevens, former General
Manager, Ovine Garment Leather Division, Richina Pacific Ltd
KIWI LESSON – HAVE A BOTTOM LINE
“Our relationships have been renegotiated over the years. China
is a tough place to negotiate and different from other markets.
Negotiating does not always involve finding a middle ground. In
other markets you can open with your ideal position and end up
with your middle position some while before getting to your
walk away position. In China you usually end up very close to
your walk away position. You have to have very firm ideas on
what your walk away position is otherwise you can end up
losing a lot and ending up with a deal you cannot live with.
Make sure you know what is your absolute bottom line – what
you cannot move on (price, length of relationship, company
reputation, standards etc).” – Dave Foreman, General Manager
International, Vitaco
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Meetings
Understanding meeting protocols
Meetings normally begin with small talk such as your positive
experiences in China and of Chinese people, the weather and
travel. Once people feel comfortable with each other, talk turns
to more formal business matters.
It’s helpful to have prepared some notes on your hometown, city
and company. You should also arm yourself with knowledge
about China and the places you’re visiting.
You can share this knowledge during conversation, perhaps by
seeking confirmation about something you’ve read or heard.
Understanding seating arrangements
Formal meetings in China usually take two forms
– participants either sit in a semi-circle in armchairs,
or around a conference table.
Meetings where participants are seated in armchairs tend to be
less work orientated. The armchairs are arranged in a horseshoe
shape (see diagram below). If the Chinese side is hosting, the
Chinese host will take the seat at the left hand side at the centre
of the horseshoe, while other Chinese participants will be seated
on the left hand side of the semi-circle.
The most senior New Zealand guest will be escorted to the right
hand side of the centre of the horseshoe, and the remaining
New Zealand guests will be seated on the right hand side of
the semi-circle.
Interpreters normally sit behind the host and chief guest and
interpret for their respective side.
If you are the host, consider hiring a formal meeting room
in a hotel. This can be expensive, so make sure the meeting
warrants the expense.
SEATING ARRANGEMENT BELOW IS CASE
WHEN CHINA SIDE IS HOST
SEATING ARRANGEMENT BELOW IS CASE
WHEN NEW ZEALAND SIDE IS HOST
If you are the meeting host, you should arrange to have your
delegation sit on the left hand side of the semi-circle, like this:
Interpreter 1 Interpreter 2
Interpreter 2 Interpreter 1
NZ 1
China 1
China 1
NZ 1
NZ 2
China 2
China 2
NZ 2
NZ 3
China 3
China 3
NZ3
NZ 4
China 4
China 4
NZ 4
NZ 5
China 5
China 5
NZ 5
Where there is formal business to discuss, meetings will often take place around a conference table. Seating will normally be allocated
by name cards. Generally, the delegation leaders face each other at the centre of the table and other participants alternate in order of
seniority toward each other, like this:
China 5 China 3 Interpreter China 1 China 2 China 4 China 6
NZ 6
NZ 4 NZ 2 NZ 1 Interpreter NZ3
NZ 5
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Understanding speaking protocols
Discussions are primarily between the two leaders, although
either may elect to include others in the exchange. Select one
person – usually a senior team member – to be your group
spokesperson.
Meetings begin with the introduction of the delegations.
The Chinese side (if hosting) will then launch into a reasonably
long and formal introductory presentation. The discussion
normally begins with general issues, before turning to more
specific topics.
The New Zealand delegation is expected to reciprocate, and
the chief guest should prepare key messages for delivery.
Some Chinese people are not used to directly saying “no”.
Instead, they may respond with “I’ll look into it” or “I’ll see what I
can do on this”. Certain phrases such as “It can be inconvenient”,
“I am not sure” and “maybe”, may in fact mean “no”.
Think about your own strategies for saying “no”. You don’t have
to come out with direct answers. Be non-committal or evasive
if the situation calls for it.
The key messages from the Chinese side may be delivered
rather late in the meeting.
How to end a meeting
If the Chinese side is hosting, they will normally signal the end of
a meeting by referencing the busy schedule of your delegation,
or an appreciative remark about how good the discussion has
been. Your interpreter and senior leader should listen carefully
for those comments.
If you’re not the host, then there is generally no need for you
to take the initiative to bring the meeting to an end (unless the
discussion is dragging on unproductively or you have another
commitment to go to).
At the end of a meeting, a simple handshake and goodbye
(‘zaijian’ in Chinese) is enough. If it is the first formal meeting,
gifts may be exchanged at this time or at lunch/dinner if there
is one. Guests are expected to leave before the hosts.
KEY LEARNINGS
• Be thoroughly prepared, patient and observant.
• Do not put your ‘cards on the table’ – New Zealanders
can be too open and honest in negotiations.
• Stay calm and don’t lose your temper.
• It may be possible in some circumstances to involve embassy
officials and trade commissioners – this can open doors.
• Designate the most senior member of your team as
spokesperson.
• Ensure the technical people on both sides have time
for discussions.
• Use Powerpoint presentations if possible.
• Translate handouts.
• Expect ambiguity.
• Do not race to the bottom line.
• When dealing with a panel, ensure you know
who are the key decision makers.
• Bargain hard – it’s expected.
• Nothing’s agreed until everything’s agreed, so returning
to a point you thought was covered is not unusual.
• Get experienced professionals to review draft contracts.
• Have a bottom line and don’t cross it. No deal is better
than a bad deal.
3.7 CHINESE CULTURE AND BUSINESS
Dealing with China’s culture and protocols
China’s culture and protocols are often very different from
New Zealand’s and may seem overwhelming and mystifying.
The Confucian traditional belief system, ethics and behaviours,
along with relationships and the concept of ‘guanxi’ (or
functional business connections/ relationships), remain
at the heart of business culture and etiquette in China.
Chinese people generally place great importance on
relationships, ranking and protocols.
China’s larger cities and southern and coastal regions are more
familiar with international business practice and are more likely
to be aware of what is required for international trade.
There are also some younger generation Chinese who, with
an international education, have a more modern approach
to international business. Despite this, they will still largely
conform to Chinese ways of doing things.
Understanding traditional values
Confucian values and concepts were designed to build a clean,
honest and orderly society where responsibilities and
obligations are observed. However, in practice they also have
negative effects. For example, guanxi can be used to bribe and
corrupt public officials or people in more senior positions, or
encourage practices such as insider trading.
The key business concepts derived from Confucian values are:
• adherence to a hierarchical system – including respecting
government representatives and the elderly
• collectivism – group or family orientation rather
than individualism
• the concept of ‘mianzi’ or face throughout
business interactions
• the concept of ‘neiren’ vs ‘wairen’ or inner circle vs outsiders
• the importance of guanxi or relationships in business.
When in China, the most important thing is to be prepared,
flexible, patient and be yourself. Enjoy the opportunities
of being a New Zealander doing business in China.
Understanding guanxi or the old boys’ network
Guanxi equates to: ‘It’s not what you know, it’s who you know’,
or ‘the old boys’ network’.
It describes the relationship or network among various parties
who liaise, cooperate and support one another. In the past it has
been a critical part of doing business in China. However, times
have changed.
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Deep guanxi is a strong feeling of interpersonal relationship,
loyalty and trust, and moral obligation to maintain the
relationship from both parties.
It can also refer to those people one has a connection with.
In practice, it is an ‘in’ to many aspects of life, from being
introduced to a new business partner, helping smooth the
path of an application through a government office or
securing a business opportunity.
A good relationship with the people around you can lead you to
a new network which in turn will lead you to their networks. In
this way you’re building up a valuable social and business asset.
New Zealanders who have been involved in China agree
good guanxi enables you to get things done more easily.
But there are negative aspects to guanxi that can present
some moral dilemmas.
For example:
• If something goes wrong, your relationship can be
challenged.
• If you tap into your guanxi’s experience, resources and
networks or have received a gift you have incurred a debt
of guanxi. Though nothing may be said, you will be expected
to pay back the debt in the future by providing assistance
or favours either to the individual or their network. There is
no time limit on the debt. It can be decades or generations.
But if you don’t reciprocate when required, your guanxi will
be very hard to maintain. This is the moral dilemma of guanxi.
• You may feel obliged to do something you are uncomfortable
with such as receiving requests for favours.
• In order to preserve the relationship and to save face for both
sides, your Chinese partner may offer to provide assistance
that’s not needed, rather than just saying they can’t help.
• When providing advice, guanxi can be the main determinant
for a referral. For example when asked which part of China is
the best place to do certain business, your business partner
may recommend their home city or province. This may not
be the best or most appropriate place, but it’s where they
have an understanding, a network and guanxi.
• Guanxi can also be used as a negotiating tactic – for example,
you have to deal with this person, or hire that person because
of the debt from your guanxi. This kind of situation can be a
critical turning point in a business relationship and one you
should be aware of.
How to establish guanxi
The main way of establishing guanxi is usually by introduction
through a third party. This may be one of your own Chinese
employees, friends, or New Zealand overseas missions. In a
modern China it can also be through a simple meeting or a trade
event. These connections can come from anywhere at any time.
Find some common interests, learn some Chinese history and
culture and speak some Chinese phrases. These are all useful
tools to help build up guanxi in the early stages.
Nurturing and maintaining guanxi
The way to build up guanxi is to either visit or live in a Chinese
environment or to regularly meet with your Chinese business
counterparts face-to-face.
This includes visiting China often or inviting your business
partners to visit New Zealand frequently.
Reciprocating generosity and hospitality is part of maintaining
guanxi. This means you need to consider returning the
hospitality you received when your business partners visit
New Zealand.
Maintaining regular contacts provides opportunities to enhance
old guanxi and establish new guanxi through these contacts.
Developing and nurturing guanxi can be time consuming and
resource intensive. Consider it a worthy investment in
establishing a strong long-term relationship.
Experience from New Zealanders who have been involved in
the China market suggests that if your contacts claim to have
guanxi in China, make sure they do. Although it’s difficult to do,
check with them what kind of guanxi they have, how deep their
relationships go and how relevant they are to your business.
Focus on those people who have contacts with key influencers
or decision makers. More importantly, establish guanxi directly
with those influential senior officials yourself.
How not to offend
In China, “mianzi” represents a person’s image, pride, reputation
and social status. It’s an important part of relationship building.
A person’s face is also their organisation’s face. The relationship
you develop with an individual also represents your relationship
with their organisation.
Chinese people can be extremely sensitive about gaining,
maintaining, giving or taking away face in all aspects of life.
Two of the easiest ways to cause a person to lose face are:
• to criticise them in public
• disrespect their seniority or status.
This can cause unnecessary barriers to relationship building.
When dealing with Westerners, mianzi has a more complicated
meaning for Chinese.
On one hand, the Chinese may give non-Chinese special mianzi
and treatment on account of their foreignness.
On the other hand, many Chinese recall the Opium War, foreign
invasions and colonisation of the 19th and 20th centuries.
Those events are considered to be a source of humiliation or
‘loss of face’ by most Chinese.
Today, Chinese people try to balance the need to attract foreign
investment while remembering aspects of history that caused
loss of mianzi.
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What you can do to give face:
• If you are coordinating a meeting or hosting a dinner for a
Chinese delegation, arrange seating according to seniority.
For more information on how to set up a meeting or host
a dinner see the “Entering the Market-Negotiations and
Meetings” section.
• Respect your counterpart’s seniority in front of their
subordinates.
• Arrive on time or early for an appointment. Arriving late
may be seen as a lack of respect.
• Provide better gifts for senior managers and/or officials
rather than providing the same gift for everyone.
• If providing gifts to the whole team, it’s also a good idea
to give a gift to the interpreter/s.
• Publicly thank your counterparts for their cooperation.
For example, raise a toast to them at dinner.
• If playing a game – such as golf – Chinese often allow their
opponent (someone in a much senior position) to win,
even if they are the better player.
• Focus on common interests and win-win issues. Though
Chinese tend to point out conflicts and disputes in early
stages of the negotiation, they prefer to leave them for
discussion at a later stage. If there are critical issues that
could undermine the whole deal, it’s a good idea to
scope them out early.
Numbers and colours to avoid
There are traditional taboos around numbers. Some business
people are especially sensitive to numbers in China, especially
in the southern part of China.
Lucky numbers:
• 3 – when pronounced in Chinese, especially Cantonese
(spoken in Guandong province and Hong Kong), sounds
similar to the word for promotion or being promoted
• 6 – when pronounced in Cantonese is similar to the
word for happiness
• 8 – when pronounced in Chinese, sounds like a similar
word which means prosperity
• 168 – when pronounced in Chinese, sounds like a similar
phrase which means money flowing in easily
Unlucky numbers to be avoided:
• 4 – when pronounced in Chinese, sounds like the word for
death (especially in Guangdong province and Hong Kong)
• 250 – when pronounced in Chinese, sounds like the word
for dumb/stupid
In some lifts, you’ll find there is no number for the 4th, 13th
or 14th floors.
Red and gold are for happy occasions. Black and white
are for funerals.
How to build trust
In China, there is a strong sense of ‘neiren’ – inner circle
and ‘wairen’ – outer circle.
There’s a very high level of trust, confidence and loyalty
associated with anyone considered neiren. People in this
circle have common interests and common languages and can
get things done quickly.
Generally speaking, people from the same extended family, the
same town, even the same province, or friends, colleagues and
acquaintances are treated as neiren – inner circle.
When interacting with foreigners, neiren and wairen have
another meaning. People of Chinese nationality are sometimes
treated as neiren while other foreigners are wairen. However,
overseas born Chinese are still expected to conform to the way
things are done in China. If not, they can sometimes also be
treated as ‘foreigners’ or wairen.
This concept is also applied within China and within Chinese
relationships. Someone from another city or another part of
China can be treated as a ‘wai di ren’ – an outsider by Chinese
from another part of China.
Employing Chinese-speaking staff, establishing your networks
and making use of your Chinese business agents can help break
the ice.
Understanding hierarchy and decision making
The concept of hierarchy influences all aspects of Chinese life
– work, school and home.
Simply put, the individual is traditionally subordinate to the
organisation; the minority view is subordinate to the majority;
and the lower ranked official is subordinate to his/her superior.
Although a company director or president may be the ‘boss’,
the real decision maker in the Chinese system can be someone
in a seemingly innocuous position; in the case of government
departments or State Owned Enterprises someone from a
parallel Communist Party Department. While potentially difficult,
at least attempt to identify the real boss or decision maker as
early as possible.
As a result, the decision making process may be confined
to just a few people and may not be readily transparent.
Hierarchy has a huge influence in Chinese business settings. It
determines who enters a meeting room first, how introductions
are made, how seating is arranged in meetings and at dinner,
who speaks, and who makes decisions.
In China the emphasis is on equal seniority of like-counterparts.
For example it is common practice for director to meet director,
manager to meet manager and so on. However, in practice,
this may not always be possible when meeting with your
business partner.
If you can arrange it, a senior person from your business should
visit China. Doing so sends a positive message that you’re
sincere and that you consider your relationship with them
to be important.
These meetings also help your representatives in China to be
more effective, because when their position and activities are
supported by senior management they are taken more
seriously by their Chinese counterparts.
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Entertaining
Evening banquets are necessary for hospitality, relationship
building and entertainment. They are also a popular and
essential process for business interaction.
KEY LEARNINGS
• The Chinese generally consider relationships, rankings
and protocols very important.
• They are sensitive about gaining, maintaining, giving
or losing face.
• Hierarchy influences all aspects of Chinese life.
• Be prepared, flexible, patient and be yourself
– enjoy the opportunities.
3.8 DEALING WITH GOVERNMENT AND LOCAL
AUTHORITIES
Dealing with government officials
Regulation is perhaps one of the most opaque subjects in
China, especially when it comes to understanding how laws
are interpreted and implemented by officials. The actual
legislation is often available in both Chinese and English,
but by New Zealand standards tends to be some what
ill-defined, partly to give government agencies and their
officials the flexibility they prefer.
Research is essential; practical ways of dealing with laws
and regulations, and the people who administer them, can
only be found on the ground by the company itself or by
well-qualified advisors.
“China can be very confusing with a plethora of civil servants
and no apparent decision makers,” says Howard Wilcox, Director
Sales and Marketing at financial services company KVB Kunlun.
How to deal with officials
Most officials simply require the basic respect of you having
visited them out of courtesy and being honest about your
company’s intentions. The Kiwi straightforward, honest and low
key approach is best, but also be conscious about what you say.
Stay in regular contact with key officials, pay them visits on
special occasions or in times of success and don’t just turn up
when you need them for something. Many officials are in office
for only three to four years so do not expect any cultivated
influence to last past then.
Chinese government officials have a high social status based
on their place in the hierarchy, so interaction with government
officials tends to be more formal.
Mayors and other local officials in China often have far more
power than we are used to in New Zealand. The majority of local
officials are parochial and where they can, they will use the lack
of clarity of in laws and regulations to further local ends.
The Chinese deference to hierarchy can mean that lower ranked
officials are reluctant to speak up, particularly if they are in the
company of their superiors.
If they do not directly answer a question after repeated
attempts, and it seems they do not know, do not push the point
and potentially embarrass them. Back off and ask for the answer
to come later.
Time estimates for how long something will take can be very
difficult – often they are highly under estimated, though in some
cases approvals can arrive far quicker than anyone expected.
Chinese officials often show respect to guests through special
treatment. This may include queue-jumping, over-riding a long
series of traffic lights, or moving around major cities in
motorcades, headed by a police car with lights and siren.
Be wary of matchmaking activities with local Chinese companies
provided for you by local authorities. Often local authority
sponsored events, such as trade missions, are more about what
is good for the politicians, their region and its businesses than
what is in your company’s best interests.
Remember there are lots of alternative ways of entering China
other than getting into bed with local authorities.
KIWI LESSON – HELP TURNS TO PRESSURE
Early on, when Skellerup wanted to start up in Jiangsu, local
authorities and politicians were very accommodating and
helpful, says former company Managing Director and Chief
Executive, Donald Stewart. “But once our roots were down in
Jiangsu the level of support changed and the local authorities
became very demanding. They continually put pressure on
Skellerup to invest more capital in the venture.”
Skellerup believes these demands are made so officials can
meet their own KPIs. This constant pressure for more
capitalisation has been difficult for Skellerup. Although the
demands are delivered in a non-combative way, they have been
persistent. Stewart says Skellerup’s response has been that the
company is looking at continuing to expand over the next five
years if all goes well. “The Chinese authorities have appeared
only to have heard ‘expand’ and not the caveat ‘if all goes well’
and the pressure continues.”
KIWI SUCCESS – “MANAGED ESCALATION”
When Air New Zealand was laying the ground for the
establishment of its direct Auckland–Shanghai air service, its
central strategy in dealing with government officials was
‘managed escalation’. Air New Zealand and its allies made every
effort to resolve potential issues at low levels of the bureaucracy
rather than going straight to the top. This built up credibility and
support among stakeholders.
How to find and meet decision makers in government
Finding the actual decision maker in a government agency can
be difficult for an outsider.
There are consultants who can play matchmaker between you
and officials in your region or industry. Be wary that some
people may talk up their networks and level of influence.
Every local has a friend, relative or classmate in a high place.
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One way to meet government officials is to network. Be on the
look out for New Zealand Government, NZTE and embassy
events where Chinese officials will be attending. Also consider
participating in events organised by other countries such as
Australia, Britain and the USA, especially the American Chamber
of Commerce.
KIWI SUCCESS – USE AN AGENCY
International financial services company KVB Kunlun eased
the way for the establishment of a branch in Hong Kong by
hiring a professional agency to introduce the company to the
Securities and Futures Commission which is responsible for
regulating the securities and futures markets in Hong Kong.
The company says the agency “helped us with the minimum
amount of fuss” by facilitating licensing and other legal and
regulatory requirements.
Dealing with government-owned businesses
It can be easy to forget, but China is a communist country and
the government plays a direct hand in all key parts of the
economy and in strategic enterprises. There are still hundreds
of ‘listed’ State Owned Enterprises and the Chinese Communist
Party is involved at all levels in their corporate governance.
The more sensitive the industry, the more important the
government’s role. Most heavy and infrastructural industries
are still government/state-owned enterprise dominated (for
example, energy, telecoms, transport). This can mean unwieldy
but well-resourced competitors and much interference.
In contrast, consumer goods tend to be left much more
to the open market.
There are also regional variations in the degree of government
involvement or interest you will have to deal with. In general, on
the east coast your interactions with government officials will be
at a lower level than you can expect in central and western areas.
KIWI SUCCESS – REGARD OFFICIALS AS FRIENDS
“Our relationships with government officials are exceedingly
important, particularly in Guangxi (province where BioVittoria
has a facility). They’ve been hugely supportive, and it’s from the
highest level to the lowest level that we’ve got the support
and that’s worked exceedingly well for us.” – Garth Smith,
co-founder, BioVittoria
Finding out if there is a government connection with
prospective partners is an important part of doing due diligence.
Such a connection is not necessarily a bad thing, but it pays to
understand a company’s ownership structure and choose
localities with care.
Party officials still frequently retain a majority of the seats
on strategic company boards of directors.
Its military enterprises have also established wide trade
connections and technical cooperation agreements with
thousands of companies and manufacturers.
However, direct government influence in businesses themselves
is being rolled back. The military has sold off its assets,
however it still has some influence without having direct
ownership or control.
KEY LEARNINGS
• Network to find out who the key government officials are.
• Visit key officials out of courtesy and be honest about
your company’s plans.
• A good relationship with officials can help you stay up to
date on law changes and official thinking.
• Interaction with government officials tends to be formal as
officials have a very high social status based on their place
in the hierarchy.
• Be wary of local authority matchmaking activities with local
Chinese companies.
3.9 USING AND MANAGING CONSULTANTS
Using and managing Chinese consultants
There’s no shortage of advisors (or advice) on entering and
setting up a business in China. The question is ‘who are the
best advisors for you?’
Cultural and language differences make it more difficult to find
good advisors and determine if you’re getting good advice for
your particular situation.
A simple place to start is to use China-based advisors. China’s
markets and rules and regulations are changing so quickly it is
virtually impossible for consultants and advisors to keep up
unless they are locally based.
Forget about trying to do it yourself.
At some stage you are likely to need the advice of lawyers,
accountants, interpreters and translators, business entry
consultants, human resource advisors and real estate agents.
How to get the best advice
“Keep it simple”, says Scott Brown of Shanghai-based RedFern
Consulting. “With all the current focus and mythology
surrounding China as a market, investors often over think the
issues and lose sight of the simple things that got them to that
point or that they would normally have at the top of their list
for any other market.”
You can burn up a lot money and mental energy trying to get
the correct answers to the wrong questions. In China the gap in
knowledge covered by ‘you don’t know what you don’t know’
is huge.
Advice may also appear contradictory, but needs to be put into
context. This is why local advice is essential. Chinese markets are
so complex, diverse and fast moving, being out of the country
for even a couple of months will leave you out of date.
If you are looking to use New Zealand-based advisors on the
basis of their connections and associations with China, make
sure they have strong and well-placed connections relevant to
your business. There are also cost implications as they will add
a margin onto whatever services are provided from China.
As well as the big-name professional advisory companies,
there are smaller consultancies (in some cases staffed by
Kiwi expats) that may be suited to the smaller size of
New Zealand companies.
46

On it’s website, NZTE has a list of consultants that may
be suitable for New Zealand companies.
You should be wary of advisors who claim they can cover
all bases for you. In China it is highly unlikely anyone can
do this effectively.
You should also be cautious around people saying ‘they will
take care of everything’. You need to control processes such
as registering local trademarks and getting customs recordal
and not cede them completely to advisors or consultants.
It is advisable to do some form of due diligence on
potential advisors to gauge their trustworthiness,
competence and experience. This is also important
for protecting intellectual property.
KEY LEARNINGS
• Don’t do anything without local Chinese advice.
• Be wary of advisors who claim they can cover
all bases for you.
• Do due diligence on potential advisors.
• Be careful regarding how much control of business
processes you give advisors.
• While making use of advisors, make sure you have
access to other sources of information.
3.10 DOING DUE DILIGENCE
AND AVOIDING SCAMS
How do I make sure I don’t get deceived?
Performing due diligence in China can be a lot more difficult
than in other countries, but it is an absolutely necessary part
of every China entry strategy.
As with many developing countries, corruption and scams are
not uncommon. And while the situation is improving, anyone
operating in China needs to be aware.
On top of difficulties such as distance and culture and language
differences, companies looking to research Chinese business
people and companies have to deal with a shortage of accurate
and up to date information. There’s no national company
registration system and Chinese companies are also notoriously
non-transparent.
Despite these difficulties it is essential to research any
Chinese companies or individuals you are considering
doing business with to ensure that they are legitimate,
credit worthy, reliable and can do what they say they
can do. This includes independently verifying all
important information that they provide you.
A wrong move in China can later prove to be very costly
in terms of time and money.
KIWI LESSON – TALK TO A LOT OF PEOPLE
“The advice I have for New Zealand businesses seeking to enter
China, above all else, is to emphasise patience and due diligence.
Talk to a lot of people, do plenty of reference checks up stream
and down stream, get credit reports on those shortlisted
companies before making your decision.
“I think one of the frustrating things for exporters to China
is that the number of genuinely capable companies who
operate with integrity and that can reach the broad market
is very limited.
“If you can’t find a partner to work with that fulfills the criteria
that you are seeking then don’t be frightened to hold off.
Sometimes it’s better to wait than to enter too soon to work
with the wrong partner and have a set of problems to recover
from and repair that could potentially take you several years
to get over.” – Brendan O’Toole, Managing Partner,
Summergate International
Use local experts
Kiwi Scott Brown of China-based RedFern Consulting says
simple checks can be made in China through companies such
as RedFern that are capable of verifying the credentials of
Chinese businesses and business people.
He also suggests:
• where possible get public information from government
agencies and other authorised bodies such as law firms
• do a legal background check to ensure that ownership,
structure and registrations are clear
• consider contingent liabilities. Who really owns the shares
or the parent company? Who really owns the land and what
kind of rights do they have to it? What may seem reputable
may often not be
• meet company managers and judge their willingness to open
their books, answer questions and provide legal documents.
If a company is nationally reputable, or exports to large
foreign clients, it will likely have been through this before
• if the company has international clients, ask for the list and
double check it
• for quality assurance issues, you can use independent third
parties to do an audit.
Do not trust financial data unless you have had this physically
audited by experienced professionals. It is very common in
China for local firms to carry multiple sets of accounts for
tax or ‘management’ purposes.
China-based consultancy Dezan Shira & Associates suggests
getting a Capital Verification Report to check how much of
a company’s registered capital has actually been paid up.
In China registered capital, one measure of financial size,
isn’t automatically paid up just because a business licence
has been issued.
NZTE can provide a list of agencies capable of doing due
diligence or seek recommendations from China veterans.
KIWI LESSONS – TAKE A HOLISTIC VIEW AND MINIMISE RISK
• “Due diligence is not just about numbers. It’s also about
understanding the Chinese culture.” – Jude Hooson,
Managing Director of The Providence Group
• “Allow time to validate and verify what is being sought.”
– Doug Ducker, Managing Director, Pan Pac Forest Products
• “Choose partners carefully and have an unhitching strategy
in case things go wrong.” – Bruce Heesterman, former
General Manager International, Airways Corporation
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Getting credit checks done
The four big credit rating agencies – Standard & Poor’s; Moody’s;
Dun & Bradstreet; and Fitch Ratings – are all present in China
and/or Hong Kong. There are also some local rating firms such
as Xinhua Far East China Rating; Chongqing Business Credit
Investigating and Consultation Centre; and Huaxia International
Credit Group.
NZTE can provide referrals to companies that can be
commissioned directly. The work is out-sourced to local credit
companies. The cost can range from a few hundred to a few
thousand dollars depending on what is requested, the speed the
report is required, the location of the company being checked
and how much information is provided on the Chinese company.
How to do due diligence on potential manufacturers
While many Chinese factories are modern and automated, some
are not. New Zealand fire detection equipment manufacturer
Pertronic Industries warns that some of China’s manufacturers
can appear very impressive on the surface, but the quality
control is abysmal and products are shoddy.
Alibaba.com recommends the following steps to ensure you are
talking to the right manufacturer:
• examine their financial health, production capacity, quality of
goods, client references, export history, intellectual property
performance and level of experience with Western
companies
• compile as broad a list of potential factories as possible
• get product samples – poor quality or unreliable delivery
should immediately eliminate candidates
• narrow down the field to three to five suppliers that look
good on paper and produce good-quality products at a
satisfactory price
• order a detailed factory audit in China.
The last step is for your company to make a detailed, secondlevel
assessment that integrates buyer requirements into the
evaluation. This process usually rates the candidate as a whole,
including all business practices, with a specific grading scale for
each set of criteria. Your company can then either choose one
candidate or start a bidding process between the potential
suppliers on your shortlist.
Ask questions such as:
• Does the Chinese vendor run its own compliance checks
on quality control and have sufficient oversight?
• Is the Chinese supplier likely to outsource the order?
Second-degree outsourcing makes it more difficult for
companies to monitor supplier quality and ensure that
there are no environmental, health, safety or child labour
violations in the manufacture of its goods.
(BPMC (2004). Sourcing from China, Part 3: Assessing the costs.
Hong Kong: Alibaba Group)
Always visit the candidate factories before making
a final decision.
How to avoid scams
As with many developing countries, corruption and scams in
China are not uncommon. And while the situation is improving,
anyone operating in China needs to be on their guard. In
Transparency International’s 2010 Corruption Perceptions Index,
China scored 3.5 out of 10 (a mark of zero represents highly
corrupt) and ranked 78th out of the 178 countries surveyed.
As well as putting your integrity on the line by getting involved
in scams or corruption, you are exposing yourself to severe
penalties because the Chinese Government is cracking down
on corruption.
How to deal with unsolicited enquiries
Only a small percentage of Chinese trade enquiries are of a
dubious nature. Most are genuine enquiries that do not make
unrealistic demands. NZTE is able to provide information on
commissioning a report on the Chinese company if New Zealand
exporters believe the trade opportunity is genuine and want to
follow up independently.
It’s common for first time exporters to be convinced that
they have found the right partner through an email contact
or an internet trading portal. There are innumerable cases
of businesses transferring ‘spotter-fee’ funds to China and
finding that nine times out of 10 the receiver of these funds
has given a false address and pursuing them would be futile
and very expensive.
The important point is not so much that all cold contacts are
scams but that due diligence, checking on bona fides and credit
worthiness, is vital before entering any transaction in China.
Relying on an online site or an email contact to provide this
is very unwise.
Points to consider when you get an enquiry include:
• Does the enquiry fit your company strategy in terms
of market and the sector within the market?
• Is the suggested market entry strategy one that has
been used by you in other markets?
• How much does the enquirer appear to know about
the China market, and about the details of entry and
of the various legal requirements?
• How much do you know about exporting and specifically
about exporting to China?
• Is your brand protected in China?
Some simple checks can be done to attempt to determine the
credibility of the enquirer. If the enquiry comes from China:
• look at the email address – the address of an ISP or a portal
(e.g. gmail, hotmail, yahoo, sina, sohu, 123.com etc) often
indicates a new or small company or an individual calling
themselves a company, or an individual using a legal
company’s name
• check the company name on Google – even if the site
is all in Chinese that is a start
• insist on the Chinese company providing a copy of
their business licence as well as full contact details
48

• ask for details on the company’s trading history,
including products and markets
• ask for their experience
• ask for references from other companies they have
dealt with in New Zealand and internationally
• do not be afraid to ask the hard commercial questions
(e.g. how will you remit the funds to me).
Who can help?
NZTE has five offices in mainland China – Beijing, Shanghai,
Guangzhou, Shenzhen and Qingdao. Through its network
in the region, NZTE stays up to date on scams and other
market intelligence.
KEY LEARNINGS
Due diligence
• Do not use the term due diligence in front of Chinese
business people – in Mandarin it translates as ‘investigation’
which is likely to give offence. Better to use words like
‘research’ or ‘information gathering’.
• Be ready for Chinese partners to discourage an ‘investigation’
– stick to your guns, but be polite.
• Do due diligence on prospective consultants and specialists
you are considering hiring to do due diligence.
• To keep due diligence manageable, confine it to your
potential partner’s intentions, abilities and judgment.
• Don’t neglect hard questions for the sake of getting or
maintaining a relationship.
• If the relationship is at risk, transfer blame for the need to
do this research to a third party, e.g. banks, the board etc.
Avoiding scams
• Be extra careful with unsolicited approaches.
• Bear in mind the old adage – ‘If it looks too good to be true,
it probably is’.
CHINA CUSTOMS TERRITORY
49

4. SELLING IN CHINA
4.1 USING AGENTS AND DISTRIBUTORS
Finding and managing agents and distributors
Before making any decision on how to sell in China, thoroughly
research and then visit the market to build relationships and
seek first-hand advice and information from various sources.
If you decide to contract out the sales process, then you need
to decide between an agent or a distributor.
• An agent is your company’s direct representative and
is paid commission.
• A distributor buys your products and then sells them on to
customers through a third party. Their income comes from
the difference between their buying and selling price.
Issues such as the size of the market, language and cultural
differences and the sheer amount of choice available make
finding the right agent or distributor, and then managing
them, challenging.
Advantages and disadvantages of agents
The advantages of agents are:
• the principal has greater control over terms of sale
• the freedom to choose customers with whom to deal
• direct contract between manufacturer and customer
• greater control over methods of marketing
• the manufacturer is able to retain risk of stock
• the commission paid to an agent is typically lower
than the margin of profit a distributor will make.
The disadvantages of agents are:
• agents have the right to claim a lump sum compensation
upon termination of agency agreement
• sometimes a principal will be treated as trading in
a territory if he has an agent there, which could have
tax implications. Consideration should be given to
local law and double taxation
• maintaining stock inventory can be costly.
In all likelihood an agent will also be selling similar products
to yours and this has to be managed.
(Poon, K. (2005). Business Guides. London: China-Britain
Business Council.)
How to find an agent
There are a number of ways you can get in touch with potential
local sales agents.
• Discuss with your partners in China to get a recommendation.
• Commission research through consulting firms.
• Get a recommendation from another company already
operating in China.
• Attend and make the most of networking at trade shows,
seminars and exhibitions in China and Hong Kong.
• Use reputable business matching websites.
Before making a final decision on who to use, you should do
thorough research and go to China yourself to check out
firsthand what you are getting yourself into. Business people
in China also prefer to meet business face-to-face and build
up friendship and trust to underpin the business relationship.
Be very wary of ‘walk in’ agent candidates. It has been fairly
commonplace for businesses to recruit someone as an agent
on a sight unseen basis via a website. Large sums of money
have been lost in this manner.
Likewise be cautious about taking on someone you have met
casually at a trade show who vaunts their extensive networks or
their abilities as an interpreter. Being bilingual is not sufficient in
itself to make an effective representative for your company.
Ask the question – you might be the best partner for them,
but are they the best partner for you?
It is important to do a thorough due diligence on any agent,
distributor or customer before you hand over any goods,
money or intellectual property.
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KIWI LESSON – BEWARE OF OVERPROMISING
“Many agents in China will promise much and deliver little.”
– Dr Anatole Bogatski, former Director Student Services
and Market Development, AIS St Helens
What to look for in an agent
An agent is your direct representative so it is important to
make the choice right. Attributes you should look for in an
agent include:
• good references
• proven track record
• English language skills
• enthusiasm and fit with your product
• the number and quality of sales staff
• solid finances and payment record
• client coverage
• good networks
• geographical coverage
• network of sub-agents
• knowledge of market/market segments
• familiarity with your product.
What should be in a contract with an agent?
Contracts need to be detailed and well put together as there’s
not much Chinese law governing agents and distributors.
A contract should:
• guard against exclusive agreements. No agent can cover the
whole country and it is recommended to keep your options
open by having several regional agents to introduce an
element of competition between them. If one regional agent
does particularly well you can negotiate for them to set up a
sub-agent network beyond their immediate region. When
introducing competition, keep an eye on any undercutting
of prices that may result
• have escape clauses, including performance reviews
• control risks, for example transportation and warehousing
• contain the terms of the standard individual sales order
• allow for arbitration in case of dispute.
Managing performance and incentives
It’s up to you to get the best out of your agent(s) by supporting
and encouraging them.
To keep the agent on track you should:
• link performance to incentives and agree on milestones
• have regular reports on progress and prospects
• write a marketing and sales plan
• provide regular training for the sales staff and after-sales
training for the technical staff (in New Zealand and China)
• do sales support trips to keep your products and services
front of mind. This will also help ensure they are not taking
on competing suppliers who pay higher commissions.
Sales commission should only be paid to agents when the
customer has paid. This incentivises the agent to encourage
customers to pay on time, and to not deal with customers who
are late payers.
All advertising and promotional material must be verified by
you, especially material written in Chinese. Agents will often
demand marketing ‘budgets’ and they need to be tightly
controlled. Translate all your own materials, print them and
deliver to your agent without hidden margins.
You should also have access to a Chinese speaker who can
verify for you any material being produced in market. A number
of New Zealand companies have been caught out by claims
made in promotional material by Chinese partners that the
New Zealand company does not only disagree with, but have
never even heard of.
Advantages and disadvantages of distributors
The advantages of distributors are:
• the supplier can pass a greater degree of risk
to the distributor
• greater incentive for the distributor to sell the product
• avoids the need for the supplier to have an established
place of business in the territory (reduces costs)
• supplier only needs to monitor the accounts of one
distributor rather than for each customer
• no compensation payable on termination.
51

The disadvantages of distributors, suggested by Penningtons,
a British law firm, are:
• loss of control over activities of the distributor
• exclusive distributor is the supplier’s entire credit risk in
respect of sales rather than with each customer
• distribution agreements will be regulated by competition law.
How to find a distributor
Do lots of research first. Industries are not structured the
same as in New Zealand or other Western countries. For
example, many large Chinese firms have large procurement
departments in-house which go direct to manufacturers
and not through distributors.
You may need to integrate your products into complementary
ranges. Find win-win scenarios.
Companies should consider China in a regional framework,
with the primary commercial areas being the coastal regions
of Bohai Gulf, Yangtze River Delta and the Pearl River Delta:
• Northern China; the provinces of Heilongjiang, Jilin,
Inner Mongolia
• Bohai Gulf; the cities of Beijing and Tianjin and the provinces
of Liaoning, Shandong and Hebei
• East China/Yangtze River Delta; the city of Shanghai
and the provinces of Jiangsu, Zhejiang and Anhui
• Central China; the city of Chongqing and the provinces
of Shanxi, Henan, Hubei, Shaanxi and Sichuan
• Western China; the autonomous regions of Xin Jiang,
Tibet and the provinces of Qinghai, Gansu, Ningxia
• Southern China/Pearl River Delta; Guangdong (includes
Guangzhou), Fujian, Hunan, Yunnan, Jiangxi, Hainan Island,
Guizhou, Guanxi (includes the autonomous region of
Zhuang). Also included in southern China are the Special
Administrative Regions of Hong Kong and Macao.
The Chinese government is promoting the investment into
the western provinces, but for most New Zealand companies,
the coastal cities and provinces will be the first areas to
concentrate on.
Consider having a different distributor and strategy in each,
possibly including pricing and market channels.
There are a number of ways you can get in touch with potential
distributors:
• via your agent or other Chinese partners
• recommendation from another company already operating
in China
• attend and work the foot traffic at trade shows, seminars
and exhibitions in China
• use reputable business matching websites
• research through consulting firms or NZTE.
Despite the size of the country, you may find that there are
only a few very good representatives in some industries
(for example wine).
It used to be common for foreign suppliers to appoint Hong Kong
companies to act as their distributors in China. Payment may be
easier to get out of Hong Kong, but China is now much more
open and the Hong Kong route may simply add additional costs.
It pays to keep in mind that China does not have an efficient
nationwide distribution system. Distribution channels are
dominated by regional and provincial players whose abilities
vary enormously. Smaller cities and rural areas in particular are
badly served. For more information on China’s logistics see the
“Navigating China – Managing logistics” section.
Finally, get independent due diligence done before signing
any agreements.
KIWI LESSON – WATCH OUT FOR OPPORTUNISTS
“Identifying the appropriate distributor is particularly
challenging. There are lots of opportunists clouding the
view and taking advantage of newcomers.” – Tim McIver,
Managing Director, Lanocorp Pacific
KIWI LESSON – GOOD ONES ARE EXPENSIVE
“If a distributor is very good, they will be very expensive and
be using a product from a multi-national. They will invariably
run their own brand and will not be willing to deal with you
exclusively. If a distributor is interested in selling only your
products, you have to ask about their track record.”
– David Percy, Chief Executive, Pertronic Industries
What to look for in a distributor
When looking to engage a distributor, factors you should
consider are whether the distributor:
• has a stable financial background
• has enough quality sales staff
• is enthusiastic and right for your product
• has foreign trading rights (or a good relationship
with an import/export company)
• has an appropriate business focus
• can store and distribute your goods adequately.
You should also check out:
• the types of outlets the distributor covers
• their after-sales service
• their marketing abilities
• English language skills (and not just at head office).
Again, as with an agent you need to look for a representative
that knows your industry and has the links.
A distribution agreement
Distributor contracts need to be detailed and well drafted
as there’s also little Chinese law in relation to distribution.
The supplier-distributor relationship is primarily governed
by the contract.
The contract should:
• guard against exclusivity (most Chinese distributors want
exclusive rights for the whole country even if their network
is limited to one province or even an area within a province)
• agree on volume targets
• manage risks, for example transportation
• cover intellectual property issues
• contain the terms of the standard individual sales order
• have escape clauses including performance reviews
• allow for arbitration in case of dispute.
52

Before signing a contract with a distributor, make sure they
can directly enter into contracts with foreigners.
Also be wary of using the Ministry of Commerce’s standard
sale contract. They favour the distributor.
Contracts signed in China often need to be in Chinese which is
the binding language as well. Always have a qualified law firm
review any translated documents and English ones for
compliance with local laws.
As with agents, you need to be cautious when granting
exclusive territories.
Managing performance
It’s up to you to support and encourage distributors
to do their best. Ways to do this include:
• regular visits to the market to meet with them
• performance agreements
• regular reports on progress and prospects
• write a marketing and sales plan and tightly control
marketing budgets
• provide regular training for the sales staff and after-sales
training for the technical staff (in New Zealand and China).
Resolving disputes
Avenues to resolve disputes include arbitration, litigation and
mediation. For more information on ways to resolve disputes
see the “Navigating China – Getting legal advice and resolving
disputes” section.
KEY LEARNINGS
• Thoroughly research your options before making a decision.
• Always do due diligence on any prospective agent or
distributor.
• Be aware of conflicts of interest – does the agent or
distributor sell products or services similar to yours?
• Look for a representative who knows your industry and is
well connected.
• Make sure contracts are detailed and have escape clauses.
• Keep a close eye on what your representative does with
your marketing material.
4.2 DIRECT SALES
How do I sell directly to customers in China?
An alternative to having your own base in the market, or using
agents and distributors, is making direct contact with buyers
and end users.
The do-it-yourself option, though low cost and a good way
of getting a relatively low-risk feel for China, is not an easy
route to market.
The Chinese market is the opposite of the New Zealand
market. Whereas a small number of large players dominate
in New Zealand, 90 percent of the Chinese retail market
is run by small ‘ma and pa’ operations.
Positives of doing it yourself.
• It cuts out the middlemen.
• You get an understanding of buyers or end users’ technical
needs and an ability to customise accordingly.
• It’s an opportunity to learn the hard way, though this
should always be on the back of a lot of preparation.
Negatives of doing it yourself.
• Not having a physical presence in the market can make
it difficult to get business in China. Some Chinese clients
will not do business with companies with no presence or
representation in China.
• New Zealand dollars can’t directly be paid offshore.
Payments will first have to be made in currencies convertible
into RMB, usually US dollars. If the product you are selling
is imported into China, the buyer must either import it
themselves or have an import agent do this on their behalf.
• If your product is made in China it is deemed a domestic sale
and the transaction must be completed in RMB which you
can only repatriate with a registered entity after taxes have
been paid. If it is a service, it may be possible for the client
to pay offshore as long as you can prove the work was not
executed in China. Otherwise a firm wanting to pay hard
currency overseas must have proper justification and
importation documents or they will be subject to withholding
tax of up to 20 percent.
Issues you need to consider.
• The frequency of visits needed to China
• High maintenance for the home office
• The lack of a presence on the ground can lead to
communication problems
• You need an effective technical interpreter who understands
your business and approach
• Daily follow up of genuine leads in China can come second
to home business
• Delays could lose you good will and business
• Prompt troubleshooting cannot be done remotely
and will require additional visits
• Competitors with a local presence will have an advantage
• After-sales commissioning and service will tie up your
technical people and require Chinese language capability
• A commitment to a presence will have to be made at
some stage should the business continue to grow
• The possibility of losing control of the transaction
Getting started
The recommended steps to start direct selling are:
1. Use NZTE or private consultants to conduct market research
and draw up a short list of pre-qualified buyers.
2. Your Chief Executive writes an introductory letter and
brochure in Chinese for the preferred buyers identifying how
the product can meet their needs. For more information on
how to address people in China and translate marketing
materials see the “Researching the market – Making the most
of your visit” section.
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3. NZTE or the consultants can then set up meetings in China
with prospective customers over a one to two week period.
Senior management and a marketing/technical person
should make the visit, the latter to ensure both Chinese
decision makers and technical advisors are briefed.
Contact NZTE for a list of consultants.
KEY LEARNINGS
• Direct selling can be a low cost way of selling in China,
but you need to be wary of hidden costs.
• Do thorough research before committing to the market.
• The lack of a physical presence in the market can make
it difficult to get business in China.
4.3 ONLINE SALES
Online sales are becoming an increasingly large part of the
Chinese marketplace.
New Zealand businesses are joining in, but as usual there
are special challenges. Your online strategy targeting
Western markets will not work in China.
KIWI LESSON – BE PATIENT
“Online shopping is definitely worthwhile investigating if you
are prepared to take the time to research the market, be patient
and remain focused over the longer term.” Andrea Wouters,
Export Product Manager, Good Health Products
Pricewaterhouse Coopers expects annual online shopping sales
in China to nearly double, year-on-year, over the next few years.
Affluent city dwellers in particular have embraced buying online.
This growth needs to be kept in perspective – in 2010 online
retailing was only 3.4 percent of total Chinese retail sales.
However it is driven by two powerful trends; the exponential
growth of internet usage in China and, among internet users,
the rush to shop online.
Chinese companies are aggressively making the most
of this opportunity.
Online retailing is much more popular in the larger cities.
For example, in Shanghai online retailing represents about
8 percent of sales and this number will be higher for shoppers
of imported products.
The survey of online shoppers by Pricewaterhouse Coopers
found that while Chinese consumers are relatively new to
buying on the internet, they already shopped more regularly
online than their Western counterparts.
Crucially, they were also found to have different online tastes.
As well as visiting online stores for books, movies, electronic
goods and computer products popular in the US and Europe,
Chinese consumers are also interested in clothing and footwear
and beauty and personal care products. The medium to high
end of the latter is one of the fastest growing online categories.
KIWI LESSON – YOU ALSO NEED A PHYSICAL PRESENCE
“We see a combination of retail and e-tail as being the future
of our business. You need the physical presence so people can
sample and experience your product. But you also need online
because people see that as convenient.” – Scott Coulter,
Chief Operating Officer, Comvita
Sites must be in Chinese
To communicate with potential Chinese customers your only
option is to offer your website in Chinese.
This will also show that you are serious about reaching out
to your Chinese clients. Many companies are incorporating
a Chinese language option on their existing English sites.
Your website can be made both in China or New Zealand,
but if you are doing the latter ensure that it is with a
reputable translator.
KIWI LESSON – TRANSLATION CRITICAL AND TIME CONSUMING
When healthcare product company Manuka Health set up a
Chinese language option on their website it worked with a
web agency based in China.
“To get the best agency we asked around and relied on word of
mouth,” says the Te Awamutu-based company’s Chief Executive
Kerry Paul. “We got our Chinese distributor to work with the
agency to make sure that the Chinese language on the website
was correct.”
“That’s most critical – making sure that we are confident that
the messages that are on our website are correct.”
“This can take months to happen.”
How China is different
• Up to a quarter of online demand is for products
consumers can’t find in physical stores.
• Most shoppers start their search with online retailing
marketplace Taobao.com which in 2010 accounted for
80 percent of ecommerce volume.
• The high use of social networking sites to check for
product recommendations.
• Price is not everything. Online shoppers are also
concerned with finding unique products not available
offline, better service, convenience and the fun of the
online discovery process.
• Chinese consumers buy a wider range of products on line
than their Western counterparts. The top five categories
account for only half of the Chinese market compared
with 70 percent in leading Western markets.
(Source: Boston Consulting Group)
While Google dominates web searches in the West, Chinese
consumers are more likely to use its Chinese counterpart Baidu.
The China online marketing blog China Internet Watch says Baidu
had more than 75 percent of the Chinese search engine market
in 2011. Google was a distant second and falling in popularity.
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KIWI LESSON – LOGISTICS ARE STILL A CHALLENGE
“Things are improving, but ensuring that goods bought online
turn up in good condition is still challenging in China because
the logistics industry is not as developed as in other countries.
You need to partner with a good local company that can make
sure the product arrives in good condition, and solves any
problems with the customer quickly.” – Scott Coulter,
Chief Operating Officer, Comvita
Getting paid
Until recently the low use of credit cards and poor billing
systems were barriers to the growth of online shopping in China.
This has been overcome by third-party online payment systems,
however cash on delivery is the preferred way of payment.
Top payment methods:
• Cash (cheques, money order or cash) on delivery – This is the
most popular payment method in China. Products or services
are delivered to the buyer and payment is received upon
delivery. This service benefits the buyer as they are not
required to make payment until they are satisfied with their
product. For the seller it can mean higher costs and a longer
wait for payment which is organised through a third party
delivery service.
• Third party – Payments are made from the consumer to the
buyer through a third party such as Alipay, TenPay and 99Bill.
To protect both the buyer and seller in a transaction the
payment is in the control of an independent and licensed
third party. When both parties verify the transaction has been
completed, the money is released. If at any point there is a
dispute between the parties in the transaction, the process
moves to a dispute resolution. All payments are made in RMB
and require a Chinese bank account.
• Debit and credit cards – Credit cards are not widely used in
China because of a lack of trust in online transactions and the
fear that once sellers have obtained the buyer’s banking
details they will be misused. Although debit card penetration
is far higher than credit cards, they are still used mainly for
withdrawing cash from ATMs.
(Source: Digital Jungle)
Using Taobao, China’s top online store
Taobao is the main place to buy and sell online in China.
The Boston Consulting Group says more products were
purchased on Taobao in 2010 than at China’s top-five
brick-and-mortar retailers combined.
The site is similar to eBay with many independent stores listing
their products and shipping directly. All prices are fixed.
A number of New Zealand companies sell on Taobao.
There is no English version of the site. One way around this is to
use a Taobao agent. These agents can help overcome the three
big obstacles international sellers and buyers face; payment,
communication and shipping.
Agents are the only recommended way for foreign companies
to list on Taobao. Setting up an account and exchanging logos,
business licences and brand trademarks is complicated so it is
best to use someone who understands the processes in China.
Also, companies should keep in mind that their contract with
Taobao requires them to advertise on the Taobao site.
Taobao has an online “Field Guide” to help English speakers.
Dr Mathew McDougall, Chief Executive of Digital Jungle
says before committing to listing on Taobao it’s important to
take into account that it’s not as simple as just listing your
products online.
“There are a lot of costs involved in design, advertising and
offering Chinese speaking customer service support. Each
company should decide if it is a cost effective option for
them and not simply jump on the Taobao bandwagon.”
4.4 MARKETING
How do I market?
The Chinese market is huge and is predicted by market research
company Nielsen to be the world’s second largest consumer
market by 2014. China is now the number two consumer of
luxury brands with annual sales increases of 16 – 20 percent over
the last several years.
McKinsey Global Institute forecasts that the number of
households with income between 100,000-200,000 RMB will
rise from 13 million in 2010 to 76 million in 2015. The number of
households earning more than 200,000 RMB will rise from 4.5
million to nearly 11 million.
But it’s not an easy market to get your products and services in
front of thanks to the varied cultural backgrounds, the sheer size
of both the population and the country and differing levels of
wealth and sophistication.
The marketing of a product or service may need to change for
China. The product or service itself may also need adapting to
the Chinese consumer and to meet Chinese regulations.
Apart from wealthy modernised pockets of population, the idea
that you can market and position your products and services is
a relatively new one in China. In many places China is still a
developing country. For example, in urban areas hypermarkets,
supermarkets, convenience stores and retail malls account for
65 percent of consumption, compared with 20 percent in
rural areas.
The best way of dealing with the complexities of the Chinese
market for marketing and advertising is to hire local knowledge
and there are both Chinese and international companies to
choose from.
Consumer trends
A 2011 survey of Chinese and multinational companies in China
identified three key trends expected to affect consumer
behaviour.
• Improved access to information technology
• Greater mobility of the population
• More exposure to Western lifestyles
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Evolution of the Chinese family unit, and greater emphasis on
health, nutrition and work-life balance, are other consumer
trends noted in the survey, by the American Chamber of
Commerce and Booz & Co.
The survey provided a profile of Chinese consumers who
might be affected by these trends and who might be a
target market for international businesses in China.
The profile of these Chinese consumers includes people:
• aged between 21 and 40
• living in tier 1 or 2 cities
• earning a middle-class income of between 10,000
and 50,000 RMB a month
• who are internet-savvy
• who are more likely to spend money on travel
and leisure than their parents’ generation.
Those aged under 30 would probably have no siblings
and would be the focus of family life in their homes.
How to identify your target market
China should be approached as a collection of markets
segmented by region, as well as by demographics within
the region.
When considering markets to target, the quality of infrastructure
and distribution channels need to be factored in. It is also
important to identify consumers who can afford your products
and services. With populations in some cities and municipalities
reaching 28 million, it may be that one city is enough of a
market to start with.
Tom Doctoroff, advertising agency J. Walter Thompson’s Chief
Executive for Greater China, prefers to subdivide the country’s
population into four major categories: youth, the emerging
middle class, women and the old – each of which he says
demands a customised approach.
Comprehensive market research and consumer insight
data in China is mostly poor or lacking, so research may
need to be commissioned.
Basic information on the regions and urban areas and some
demographic information can be found in the latest China
Statistical Yearbook.
The Hong Kong Trade Development Council publishes market
profiles on Chinese cities and provinces which include general
background information on the province as well as more
detailed statistics such as GDP per capita, the leading industries
and a breakdown of household spending.
How to check out the competition
Business directories and the internet are a useful way of finding
information about the number of competitors operating in a
particular market and who they are.
Another avenue for finding information about competitors is
by searching either current or past trade fair directories to get
an idea of the companies that are operating in a market.
How to hire local knowledge
The best way of dealing with the complexities of the Chinese
market, marketing and advertising is to hire local knowledge.
For a list of specialists used by New Zealand companies
in China contact NZTE.
How to differentiate in China
Not only will you need to adapt your products and services for
the Chinese market and meet its regulations, you will need to
change the way you market them.
Don’t assume that China is a market that is always on a par with
other developed nations – most of the country is still developing
and with this comes all the associated risks. For example, the
variability of the quality of infrastructure and distribution
channels makes national campaigns difficult.
Before you start a marketing campaign you should fully
understand factors influencing Chinese buying decisions relating
to differences in geography, culture, age, education and wealth.
Even major international companies have come to grief with their
Chinese marketing campaigns because they have not invested
sufficient time and money in understanding markets in China.
Simple examples of cultural traps for the uninitiated include
using inauspicious numbers or colours or inadvertent slights
to Chinese national pride. Also promoting individualism runs
counter to Chinese culture.
Foreign products and services are especially appealing to
younger Chinese, but older ones remain fiercely patriotic
in their buying decisions.
All are decisively price driven. This is partly due to the lack of
credit and the Chinese inclination to save rather than spend.
Another key factor in buying decisions is the ‘Little Emperor’
phenomenon – China’s one child policy means children have
a strong influence over household purchasing. Thanks to China’s
economic boom and internationalisation, they also have much
more money and are consumer savvy.
Obviously the best way to communicate in the spoken word to
consumers in China is in Chinese, either in the national language
Mandarin (although only about 50 percent of the population
speak Mandarin, they are the most highly educated), or if
appropriate, a local language. Written Chinese in the simplified
form is the same nationwide.
You will also need to consider adapting your packaging
to suit the requirements, tastes and budgets of regional
Chinese consumers.
The best way to do all this is to hire some expert local
knowledge, including a quality translation service. Local means
the city or region where you are planning to do business.
How to set prices
When setting prices, remember costs will very likely be higher
than you expect. Examples of additional unanticipated costs
include; translation costs, tariffs, regulations and protecting
your intellectual property.
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You should also build into your prices the likelihood that there
will be changes to agreements and contracts. The Chinese have
flexible attitudes to these and they expect their partners to be
the same.
One New Zealand exporter to China advises that the China price
may need to be higher than elsewhere because of the number
of additional costs faced after products leave the importer.
You should also allow for the fact that it will almost certainly
take longer than you expect to get your product or service
into the market in China.
Watch for exaggerated first orders. When you offer a price
based on a high number, the Chinese can come in with a low
first order, resulting in a non-profitable sale. You should base
your price on the agreed order, or use a scale of prices.
Don’t start out with your ‘best price’ in negotiations – leave
yourself sufficient room to move on price.
KIWI LESSON – DO THE BASICS FIRST
“Marketing at the point of sale is the most effective place.
We’ve seen examples of companies spending a lot of money
on advertising before they’ve even built distribution for
their product.”
“A lot of the marketing in the early stages is oriented towards
what we call trade marketing, investments at the point of
purchase, investments that support the building towards
distribution. I think as the market matures, and it goes through
its evolutionary cycles, the nature of the marketing will change
as it would in a mature market, and one will get sophisticated
about segmenting and targeting segments. But at this stage in
China it’s still very early days – the basics are appropriate and
one doesn’t want to get ahead of oneself, patience is very
important.” – Brendan O’Toole, Managing Director,
Summergate International
How to create and market brands
Brand equity; the identity, history and heritage underlying
a brand is a whole new ball game in China.
The Chinese language and culture represent unique challenges
for the creation and marketing of brands. Whether an English
or Chinese name is used, a professional assessment should be
done to assess cultural compatibility, double meanings and
whether the brand name sounds like another word which
could be a problem in China.
Chinese culture is full of visual symbolism and this affects
brands. For example, the colours red and gold, and the numbers
8, 6, 9 are viewed positively. Black and white and the numbers 4,
14 and 24 are viewed negatively.
You also need to be careful not to breach Chinese intellectual
property, especially relating to calligraphy.
The brand name has to mean something to the Chinese. Chinese
characters are either pronounced phonetically or visually
conceptualised. This means that when you register your
trademark you will need to register the English language name
and a transliteration of that name (Chinese characters that
approximate the actual sounds of the English version) but
which should also strive to have an auspicious meaning.
For example, Kiwi natural healthcare products company
Comvita selected the characters Kang Wei Ta as a phonetic
translation. They also mean Health Safeguard People.
The Chinese like names that express longevity, good health and
luck, happiness and wealth, so it is often difficult to translate
Western brands into Chinese. Safety also has a high appeal
in China and many major Chinese companies place higher
emphasis on the corporate brand over the product brand to
take advantage of this.
Chinese middle class consumers focus on brands. They want to
know which new trends will give them added status and they
will buy luxury goods not because they necessarily like them,
but because they are representations of success.
Brand imitation is a problem in China and it’s essential to protect
your brand before you enter the market.
KIWI LESSON – THE STEPS TO CREATING A NEW NAME
“With respect to choice of brand names for the China market,
the way we do it is to have a team from across our offices,
people who have shown they are good at this sort of thing,
naming names. We will put a team together and they’ll take
an English brand name and work on coming up with a range
of options.”
“Some of those will be simply phonetic interpretations of the
original English name, some of them may also reflect the brand
attributes, the identity of the brand itself. Obviously we will
discuss that with the brand owner.”
“We’ll go through all of those options with the brand owner and
the best case scenario will be to come up with a name that
phonetically reflects the brand well and that also reflects the
identity and attributes, the essence of that brand, the personality
of that brand, and one that really resonates with Chinese and
they enjoy and like and is easy to recognise and remember.
“That’s the process we go through and I think it is an important
exercise. I think there is real value in coming up with a really
good name.” – Brendan O’Toole, Managing Director,
Summergate International
Using advertising
Traditional advertising in China often does not have the
influence on purchasing decisions you’d expect in the West.
Chinese are more reliant on third-party endorsements from
friends and colleagues or their own research and reading.
Many decisions are made at the point of sale. Also, especially
among the elderly, there is not the brand awareness needed
for successful advertising.
That said, spending on traditional media advertising (including
TV, newspapers, magazines and radio broadcasts) is growing.
According to Nielsen, in the third quarter of 2010 it reached
17.5 billion RMB. This was an increase of 7 percent compared
with the same period a year earlier.
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There are around 40 newspaper groups, 2,000 daily
newspapers selling 100-plus million copies, 287 TV channels
broadcasting to over one billion people and 9,000 magazines
for every topic imaginable.
Almost every Chinese household has a TV. China Central TV
(CCTV) is the national broadcaster and its 19 channels capture a
third of viewers’ time. However, the ‘Post-80s’ generation with
much of the spending power watches very little CCTV, preferring
online video sites such as tudou.com and youku.com where they
have more choice over content.
All the major international advertising firms are present in China.
There is also no shortage of local agencies that can provide
smaller scale tactical advertising such as flyers, internet ads or
mobile advertising.
Advertising in China is heavily regulated by advertising law
which says adverts should “be good for the physical and mental
health of the people” as well as “conform to social, public and
professional ethics and safeguard the dignity and interests of
the State”. This law can be confusing and lead to inconsistent
and arbitrary interpretations, especially from region to region,
highlighting the need to use experienced local specialists.
Using the media
Print and broadcast organisations have enormous reach in
China. As noted earlier, there are an enormous number of media
outlets that reach a huge number of people. There are also over
800 million mobile phone users and mobile devices are
increasingly used to stay connected to media.
So using the media requires careful segmentation to ensure your
message is getting to the right demographic. You may need to
use different channels to do this.
It is difficult to get stories placed in the mainstream media as
there are strict limitations on space and lead times can be long.
New Zealand companies may find it more useful to target one of
China’s myriad of specialist publications, though not many are
published in English.
One public relations tip is for companies to align their key
messages with recent government directives. For example,
when the Chinese government passes a new economic plan, a
good message for a company might be: “Xx as a New Zealand
company is supporting the goals of the plan by providing
sustainable products and technologies.”
Note: Plagiarism and unauthorised pick-ups of stories is
common in China and fake news appears occasionally to
attract consumers.
Influential Chinese media
CATEGORY
TV & Newswire
NAME
• National level: CCTV; Xinhua News Agency
• Regional level:
- Beijing: BJTV
- Shanghai: STV, CBN TV(business channel)
- Guangdong: GDTV
General Newspaper
• National level for the government: People’s Daily, Reference News, China Youth Daily
• National level for the public: Southern Weekend, Global Times
• Beijing: Beijing Youth Daily, the Beijing News, Beijing Evening News;
• Shanghai: Xinmin Evening News, Shanghai Morning Post, Oriental Morning Post;
• Guangzhou: Guangzhou Daily, Southern Metropolitan News, Yangcheng Evening News.
Business/Economy
Newspaper
Economic Observer, 21st Century Business Herald, China Business News, Economic Daily
Business/Economy
Magazine
Caijing Magazine, CBN Weekly, China New Century Weekly
English Newspaper
China Daily, Global Times, (South China Morning Post and Shanghai Daily are available
in Hong Kong and Shanghai)
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Trade media
CATEGORY
Food and Beverage
NAME
• Trade: China Food Daily
• Lifestyle: Restaurant Review, Wine Press, Trends Food and Wine, Timeout, New Western Cuisine
ICT
People’s Posts and Telecommunications News, China Information World, Communications Weekly
Agritech
Farmers’ Daily, China Dairy Cattle
Specialised Manufacturing
• Aviation: CAAC News,China Civil Aviation
• Clean energy: CleanTechnology
• Security: China Security Protection
• Industrial equipment: China Industry News
• Biotechnology: Biotechnology
Not all of the listed media are appropriate for all New Zealand
companies. Companies should target the top title in their target
market to reach the target audience.
For more information get a copy of NZTE’s Public Relations
Toolkit – China from NZTE.
Internet and social media
China has nearly 500 million internet users and social media is
growing in popularity, including blogs, bulletin board systems
(similar to a forum and very popular in China) and microblogs
(tweets). That means the potential to influence customers
through social media is huge.
However, transplanting your New Zealand social media strategy
to China will not work.
Chinese prefer Chinese language social media and the
government’s Great Firewall blocks sites such as YouTube,
Facebook and Twitter. Relatively few Chinese use English
language social media sites such as LinkedIn and MySpace.
But most of these sites have Chinese equivalents.
A large number of users access sites via their mobiles.
Hot social media in China
• SinaWeibo or Sina Micro Blog – the most popular
microbloging platform in China, similar to Twitter.
• Pengyou – social networking site run by Tencent. Pengyou
and Weibo are considered to be the leaders among
Chinese social channels.
• Sina Blog – biggest blog service in China, with 10 million
registered users including many celebrities.
• RenRen – most powerful student social network service
in China, similar to Facebook.
• Kaixin001 – networking and blogging site popular with
white collar groups.
• Youku and Tudou – video sharing portals similar to YouTube.
• Tencent QQ/Pengyou – instant messaging, networking,
ecommerce, games.
• Douban – (reviews and recommendations for movies,
books and music.
Sina.com and Pengyou’s owner Tencent QQ are comprehensive
internet companies offering social networking, web portals,
e-commerce and online games.
Chinese middle and upper income consumers are heavily
influenced by the perceived status and safety offered by
particular brands. They use online social media to research
products and report their experience of them. Companies in
China often try to create a “buzz” around their products online
using rapid in-store cycles, events or celebrity endorsement.
Many international companies are active in Chinese social media
including Starbucks, Coca-Cola and Air New Zealand (for how
Air New Zealand uses social media in China, see the case study
at the end of this section) . Chinese companies are also active,
for instance there are over 5,000 companies on Sina Weibo.
A 2011 survey of Chinese companies by PR company Newswire
found nearly 90 percent of respondents used social media on a
daily basis. Email, search engines and instant messaging were
the most popular ways of using social media. Three quarters
of the companies had set up a microblog.
Dr Mathew McDougall, Chief Executive of Digital Jungle, says
potential customers in China don’t usually check official
websites before making their purchase. Instead, they tend to
look for feedback from other internet users who they think will
be more trustworthy. That means it’s important to have a good
social media presence. “Traditional media sources, such as TV
news, newspaper, radio, are losing points in terms of trust
compared to social networks.”
Currently there is no English-language equivalent of Weibo
(similar to Twitter), so most international brands need third
party support when planning and executing a Chinese social
media campaign, McDougall says. “An error in translation could
be very costly for your brand’s image.”
In China it’s easy to buy ‘fans’, so beware of using the growth
of fans as a success criteria, he says. “Instead use a combination
of indicators such as the number of clicks, number of unique
individual visitors, number of page views, time spent
on page, etc.”
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Tips on using microblogging sites like Weibo:
• Only about 15-20 percent of your posts should directly relate
to the business. The rest should be on relevant topics that will
add value to your feed. Look at varying your context with
images, videos and text.
• Using Chinese language provides so much more information
within the 140-character word limit than English.
• Post at least 40-50 times before you begin promoting your
Weibo site. Plan on posting five to eight times a day.
• Use the Weibo groups and search functions to find potential
users to follow. You can locate users based on interest or
geography. If you follow them, they will be more likely to
turn around and follow you.
• Some people will complain or be negative about your
business. Choose to be transparent and accepting rather than
trying to stop the comments. Being honest and engaging
those people in conversation will go much further with
them and others than trying to stifle the comments.
– Dr Mathew McDougall, Chief Executive, Digital Jungle.
Attending trade events and promotions
As with other potential markets, attending trade shows and
exhibitions can be a good way to gauge the level of interest
in your products and services, develop leads and make sales.
Taking part in shows and exhibitions in China can be expensive,
so take time to ensure that the trade show or exhibition is
appropriate for your company. Also take care negotiating all
the official requirements for attending a trade show in China.
In general, goods brought in for display or demonstration at
tradeshows and exhibitions are exempt from customs duty,
provided they are re-exported within three months. The status
of exhibits for food and beverage shows can be tricky as the
‘not-for-sale’ sample-entry rules are not clearly defined and
appear randomly applied.
Biosecurity New Zealand maintains summaries of the
phytosanitary requirements required by other countries for
plants and plant products within documents called Importing
Countries’ Phytosanitary Requirements. The New Zealand Food
Safety Authority (NZFSA) maintains Overseas Market Access
Requirements, which are documents outlining requirements for
animal and plant products exported from New Zealand. These
documents are password protected and restricted to
New Zealanders registered with Ministry of Agriculture and
Forestry/NZFSA as exporters or operators.
Each show has its own assigned agent. Unless you have the
product in the country, NZTE generally recommends using the
assigned agent for the show, however it pays to research their
services and fully understand and negotiate costs. The show’s
organisers can also provide advice on Chinese regulations relating
to bringing in materials for their show. It is not advisable to bring
in exhibits as hand luggage.
Business.newzealand.com has a general guide called Ensuring
Success at Trade Shows.
KEY LEARNINGS
• Use Chinese-based experts.
• Break China down into digestible pieces.
• Don’t take research results at face value – cross check
the results.
• Remember a small Chinese niche is huge by New Zealand
standards.
• Carefully research a brand name before launching into
the Chinese market.
• Watch out for cultural traps around colours, numbers
and images.
• Adapt your packaging.
• Price is a crucial factor in sales.
• When setting prices, remember costs will very likely
be higher than you expect.
• Tailor your social media strategy to China.
COMVITA CASE STUDY
Online sales and marketing in Mainland China
Health supplements company Comvita says “making sure
consumers can find us” will be key to the success of its planned
online sales channel in mainland China.
“Our marketing efforts will focus on driving people to the new
site, primarily by making sure they can find us on search engines,
but also by building a community on the site using social media,”
says Comvita Chief Operating Officer, Scott Coulter.
“Our other key focus is to give customers a really good
purchasing experience, by offering a site that’s easy to use and
works well, and a delivery service where the product arrives on
time and in good condition.”
Comvita already has 400 retail outlets in mainland China
operated by its local partner GP Enterprises. In partnership with
GPE Comvita will launch an online sales channel in early 2012.
This is in line with its global strategy of offering consumers the
choice of in-store or online sales, Coulter says. “We want our
customers to be able to access our products in the way that’s
convenient to them.”
Comvita will work with its existing distributor in the online site.
“We will provide the online marketing support and site design. Our
Chinese partner will do the local delivery and customer support.”
The site will be hosted in mainland China, because that will make
it faster.
Coulter says Comvita puts considerable effort into making sure its
sites rank highly in search engine results. “There are technical
things you can do to make it easier for search engines to find you.
We also advertise with search engines to improve our rankings.”
The same approach will be used in China, though Comvita will
work on improving the site’s rankings with popular local search
engines like Baidu, Soso and SoGou.
Making it easier for customers to share experiences online is
another focus for the company.
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“Recommendations are a company’s most powerful marketing
tool. So we want to encourage that process by making it easier
for people to have online conversations about our products.”
The company’s existing global websites all carry a blog, and
links to Comvita on Facebook, Twitter and YouTube.
The new China website will use different social media channels
because Chinese prefer Chinese language social media.
However, the strategy remains the same. “The focus of our social
media activities will remain on making it easy for people to make
and share comments on our products.”
Comvita will work with a local advertising agency with
experience in social media to help launch the site. “We’re talking
to someone who has done this before and who can guide us on
the most effective way to reach consumers.”
One great thing about online marketing – wherever you do it
– is that it’s so measurable, Coulter says. “You know the next
day whether or not it’s working.”
www.comvita.com
DIGIPOST CASE STUDY
Time, commitment and money – attending trade
shows and events
Attending events is not something a company should take
lightly. “You’ve got to do it full on – you need to make a big
commitment of time and money and see events as an element
of your long-term business plan for China,” says Stephen
Douglas, former General Manager, Digipost.
Getting your marketing right
Post production and visual effects company Digipost advises
companies to prepare marketing material well in advance to
make sure it is right for China and arrives on time. Douglas, a
regular visitor to China, says leaving shipment to the last minute
creates a real danger of material not arriving in time.
He says translated material should include:
• business cards (and lots of them)
• a well chosen Chinese name for your business
• a one-page company profile in Chinese or preferably
your brochure
• an area on your website for Chinese visitors – this area should
contain information relevant to the event or show and should
be up before you arrive and stay up for a month or more
after it ends.
Arranging meetings
Douglas says he only sets up meetings (usually by email)
a couple of days or so before leaving New Zealand.
Get a knowledgeable interpreter
Douglas has found language a real barrier to doing business in
China, impacting for example on how to make the most of a
trade show or event. Unless you know otherwise, it’s best to
assume whomever you deal with in China can’t speak English.
Douglas says while in China he’s often accompanied by a
Chinese speaking person, someone he knows or has a
connection with from the Chinese television commercial or film
industry. “Getting an interpreter who knows your industry is
essential if you want to get fruitful conversations going quickly.”
An interpreter who needs to have common technical terms
explained causes frustration on both sides. It also increases
the risk of bad translations.
Another payoff of having an interpreter around is that they
can help reduce the stresses and strains of everyday activities
in China such as getting to meetings.
“If I do it alone it can be exhausting. For example if I have an
appointment for a meeting when I’m by myself I have to leave
really early because I’m scared of being late after losing my way.
Having an interpreter along wipes out a lot of that type of stuff.”
Douglas advises companies to work their networks in China
and New Zealand to find an interpreter.
Commitment to follow up
The key to creating a successful long-term business in China
is building lasting relationships, he says.
“You’ve got to be consistently in the market and make the
Chinese believe you are there for the long haul.”
“After you have been to China you have got to follow up
– after a week or two find an excuse for dialogue and email
the contacts you have made.”
Douglas says don’t treat a visit as a one-off event – it should
be part of an all-year plan.
Tips:
• Present a professional international image in everything
you do. You need to do this both in China and at home
– a poor look at home could destroy any positive image
you have created.
• Work with other Kiwi companies in China where you can.
• Have two phones – one for New Zealand calls and one for
local calls in China. For the latter, pick up a local SIM card
at the airport when you arrive in China.
• Make sure your marketing material has interesting, bright,
colourful covers and images.
• Have lots of giveaways (there’s a voracious demand for
them) and brand everything.
• Take presents that are unusual in China.
www.digipost.co.nz
“The Chinese hate to commit ahead of time and you have
to be prepared for cancellations.”
61

AIR NEW ZEALAND
CASE STUDY
Setting the scene for success
Air New Zealand launched direct services between Auckland
and Shanghai in 2006, and direct services between Auckland
and Beijing in 2008.
Air New Zealand’s Group General Manager International Airline,
Christopher Luxon says, China was an opportunity the airline
could not ignore and today it is New Zealand’s fourth largest
inbound market.
As a small airline with very modest budgets for international
marketing, Air New Zealand has had to work hard and think
outside the square to differentiate itself in what is recognised
as a complex and challenging market.
Air New Zealand has also recognised the need for patience
– the airline had a general sales agent in China for six years
prior to the launch of its Shanghai services.
Luxon says that one of the key lessons from the launch was
the need to be patient and to factor in the long lead-times
of major business projects in China.
The planning cycle for the inaugural flight took up to two
years and relatively simple negotiations in China have to
go through complex hierarchies.
And once you’ve established your presence in such a vast
market you simply can’t rest.
Air New Zealand has employed a number of successful
campaigns in China including experiential marketing and a
programme of engaging influential Chinese stars from film, hip
hop music and the arts who blogged about their experiences.
Some of these stars have websites that attract 50 million hits a
year and the inclusion of beautiful New Zealand scenic images
and content allowed the airline to reach an audience of a young
and highly affluent middle class that couldn’t possibly be
reached through television or print.
Embracing new technology, online and social media platforms
has also been important to achieving a much greater reach
than through conventional press or television. It has allowed
the airline to establish personal one-on-one relationships
with potential customers by contrasting the escapism and
the natural New Zealand landscape with life in busy
metropolis like Shanghai and Beijing.
Experience new you
Air New Zealand in 2011 launched an “Experience New You”
campaign, which revolved around new brand ambassador
Kevin Tsai Kang Yung – a well-known television personality
awarded ‘King of microblog’ by Sina.com in January 2011
with nearly 10 million fans on his Weibo microblog and
named one of GQ China’s Men of the Year in 2011.
A significant focus of the campaign has been on generating
video content and other content suitable for social media sites
leveraging Kevin’s popularity and influence. The involvement
of Kevin Tsai Kang Yung has provided exposure beyond the
advertising dollar through PR exposure across key print
and online channels, focusing on his relationship with
Air New Zealand and experiences in New Zealand.
The campaign launched in September 2011 through
airnewzealand.co.nz and in the few first months generated
several million dollars worth of media coverage and more
than one million video views.
It prompted more than 20,000 submissions to a competition
run in conjunction with the campaign and boosted
Air New Zealand’s Weibo fans by more than 100 percent
over the initial five-week campaign period.
In addition, the airline ran two early-bird offers to entice Chinese
customers to book at least six months ahead of their travel dates,
which prompted an encouraging response from the market.
On 4 November 2011, Kevin, together with several of
Air New Zealand’s VIP trade partners in China, competition
winners and media representatives flew Shanghai-Auckland
to celebrate the airline’s fifth anniversary of flying into China.
Each of the competition winners was given the opportunity to
experience a different type of New Zealand holiday ranging
from adventure tourism to food and wine, arts and culture and
luxury breaks. Written reports from each of them appeared on
social media sites and other portals to help educate Chinese
travellers about planning their New Zealand trip.
The airline’s new brand ambassador also surprised and delighted
customers travelling on the service when he donned an apron
and served drinks in the Economy cabin. This created more
‘talk-ability’ for the airline as passengers took photographs and
videos to show their friends and family and upload to their sites,
and sought autographs.
During his visit to New Zealand Kevin filmed a video to promote
activities such as golfing, yacht cruising, scenic helicopter rides
and shopping in Queenstown, Wellington and Auckland. He also
had the opportunity to meet with and interview a number of
well-known Kiwis such as Sir Richard Taylor from Weta
Workshop and Air New Zealand Consultant Chef, Rex Morgan.
Content generated from the promotion is being used in a
number of campaigns to further drive sales and the airline is
working with Tourism New Zealand to maximise its impact in
the market. World Traveller will feature Kevin’s New Zealand
experience in key programming across 31 cities in China and
the campaign will continue to build with Kevin positioned as
a true Air New Zealander.
Air New Zealand has simultaneously been rolling out a series
of joint promotional initiatives with selected trade partners to
drive sales and to continue to educate, engage and get them
committed to selling New Zealand.
www.airnewzealand.co.nz
62

Chinese television personality and ‘King of microblog’ Kevin Tsai Kang Yung in an Air New Zealand promotion.
63

4.5 GETTING YOUR PRODUCTS INTO CHINA
Dealing with Chinese Customs and other regulations
To get your products into China you’ll need to navigate your way
through Chinese Customs and other border agencies and their
border control rules, standards and regulations. This is definitely
not an area for doing it yourself.
Dealing with Chinese border officials
Your Chinese importer (for example your agent or distributor)
will normally pull together the documents you need and provide
them to Chinese Customs agents.
The documents required vary from product to product, but
standard ones include:
• certificates or origin
• customs declarations
• sales contracts
• bills of lading
• commercial invoices
• packing lists.
Other documents that may be required include import permits
and Quality Supervision, Inspection and Quarantine inspection
(AQSIQ) clearance. This clearance is often on the basis of export
certificates from the relevant New Zealand agency such as the
New Zealand Food Safety Authority or MAF Biosecurity.
Please consult your importer or distributor well in advance
of shipment, or seek advice via NZTE.
KIWI LESSON – PRETTY STRAIGHTFORWARD
“The China Customs bureau is not as complex as a lot of people
portray it to be. It’s pretty straightforward. The product arrives
at the wharf or airport, you register it with the Customs bureau,
the Customs bureau will raise a bill to you, you pay the bill and
the goods are cleared. There are inspections, but as a company
with a good track record over many years working with
Customs, we don’t get inspected all that frequently. I guess my
key gripe with Customs and China Inspection and Quarantine is
the length of time it takes to get clearance.” – Brendan O’Toole,
Managing Director, Summergate International
Import licences
Most imports to China do not need an import licence if they are
registered with China’s Ministry of Commerce. An import permit
may be needed from AQSIQ or other specialist departments to
import food products such as meat, dairy, fish and other aquatic
products. Registration for imports is the responsibility of the
importer, but they may ask for back-up documents out of
New Zealand.
Generally, items that face some form of import licensing or
permit procedures are:
• all products with import restrictions – including chemicals
that may be used for military weapons, toxicants, drugs and
ozone depleting materials
• products that are automatically licensed but are subject to
monitoring – including poultry, vegetable oil, wine, tobacco,
asbestos, copper ore and concentrates, coal, terephthalic
acid, plastic raw material, natural rubber, synthetic rubber,
waste paper, synthetic fibre cloth, cellulose diacetate filament
tow, copper, aluminium, mechanic and electrical products,
iron ore, crude oil, processed oil, alumina, chemical fertiliser,
pesticide, sliced or chipped polyester, automobile tyre,
terylene, steel and steel billet
• food, fibre, and animal feed products considered to have
some health risk associated with them.
Normally, MOFCOM or other agencies may ask you to provide
samples for selective examination.
If you are using an agent or distributor in China you should
check whether they have an import licence. Where a distributor
or agent does not have a licence they can subcontract this to an
importer. This means more paperwork and links in the chain and
therefore higher costs. It can also lead to possible delays in
delivery and payment. For example, the importer will need to
present the documents to Customs for clearance and then pass
to the agent or distributor to arrange delivery and payment.
Tariff rates
For more information see www.ChinaFTA.govt.nz
Rules of origin
For more information see www.ChinaFTA.govt.nz
Meeting food safety and biosecurity requirements
For information on regulations governing animal products and
food inspection, sanitary and certification requirements, see the
New Zealand Food Safety Authority’s Overseas Market Access
Requirements (OMAR) for China (www.nzfsa.govt.nz). They
outline China’s sanitary and certification requirements for
animal products.
For information on China’s zoosanitary, phytosanitary inspection
and certification requirements for live animals, animal
germplasm and plant and forestry product exports
to China, contact MAF Biosecurity New Zealand
(www.biosecurity.govt.nz).
Complying with labelling requirements
The inspection of import labels is the responsibility of China
Inspection and Quarantine (CIQ) offices at the port of entry.
Before packaged products are imported or distributed into
China, labelling verification must be sought from CIQ. This takes
one to two weeks. When going through this procedure you
should consider specifying in your contract with the importer or
distributor that you retain ‘ownership’ of the label after approval.
This will make it easier to work with other distributors in the
future should the need arise.
The main items required for verification of labelling are:
• completion of the Application Form of Import Food labelling
Verification
• brief explanation of the original English label in Chinese.
According to the National Standard of the Labelling of Foods
(GB7718-1994), the label should include the details stated below
• certificate of Origin
64

• registration information and qualifications of distributors
or dealers
• samples of Chinese label (see content below)
• sample of product for inspection.
The mandatory items for the Chinese label are:
• name and trademark of the product
• ingredients
• net weight and solid content
• name, address and telephone number of the manufacturer
• production date (y/m/d) and storage instructions
• packer/distributor (name and address)
• batch number
• country of origin
• quality guarantee and/or storage period (y/m/d)
• usage instructions.
Although the law bans the use of temporary adhesive labels,
some foreign exporters continue to attach small and simple labels
(translated into Chinese) on the outside of the package. This is
done either prior to delivery to China or by the Chinese importer
under the supervision of the CIQ in the nominated bonded
warehouse. This is a risky option and is something that may be
more stringently enforced in the future by Chinese authorities.
Always consult closely with your importer or distributor.
KIWI LESSON – HARD BUT ALSO AN OPPORTUNITY
“Many people will talk about Chinese labelling as a negative
– a hurdle and obstacle – and having to comply with some very
detailed and onerous regulations that relate to that. The whole
application and approvals process is not an easy one and can
take a long time. But there are two sides to that coin and I think
that while those application approval processes aren’t easy,
there is an under-utilised opportunity to communicate a lot
more information to Chinese consumers that can really help
them to understand and appreciate the products that much
better. As well, most Chinese read Chinese, not English.”
– Brendan O’Toole, Managing Partner, Summergate International
Using Hong Kong
Hong Kong is a separate territory from mainland China for
many functions of interest to exporters. It has its own rules
and regulations which are administered by Hong Kong’s
Customs and Excise Department or Food and Environmental
Hygiene Department.
Import-Export Flow Chart
Filing and registration of foreign trade operators
Appointment of foreign trade corporation as
import-export agent
FIEs handling own import-export not required to apply
Customs registration
Customs registration not required if agent is appointed
to complete customs declaration
Application for import-export quotas and licences
(prior to declaration)
(applicable to commodities subject to quota and
licensing control)
Signing of foreign trade contract
Completion of foreign exchange formalities
Application for inspection of import/export
commodities subject to inspection and quarantine
Meeting product and safety standards
For more information see www.ChinaFTA.govt.nz or seek NZTE
assistance for introductions to specialist consultants as the
undertaking of research.
There are standards consultants who can help you manage
standards and certification processes. For a list of consultants,
contact NZTE.
Customs formalities (customs declaration,
tariff payment, inspection and delivery)
Verification and cancellation formalities
KIWI LESSON – STANDARDS ARE EXACTING
“When importing products into China, the business elements are
the same as almost anywhere. It’s about managing and keeping
a close eye on inventory. Shipping frequency, product
presentation, quality of product are all standard import issues
and that’s really no different in China than anywhere else.
In fact today I would say some of the standards that we’re being
required to meet in China are as exacting as any of our more
traditional markets. The needs that we’ve identified are ensuring
that we deliver on time, that we deliver as intended and that we
meet the customer’s needs.” – Doug Ducker, Managing Director,
Pan Pac
(Hong Kong Trade Development Council (2007).
Guide to Doing Business in China.)
KEY LEARNINGS
• Get professional help. Do not DIY.
• Use customs agents registered with China Customs.
• Clearing Chinese Customs can sometimes be
time consuming.
• Numerous government agencies control quality
and safety standards.
65

5. SETTING UP A BASE
IN CHINA
5.1 FINDING PREMISES
Finding premises
Finding, buying or leasing premises presents many of the
predictable challenges of setting up a base in China – the
size and unfamiliarity of the Chinese real estate market,
new legal and financial rules to negotiate and cultural
and language difficulties.
Scott Brown of RedFern Consulting warns that you need to be
careful when finding premises as part of setting up a new legal
entity, such as a wholly foreign owned enterprise (WFOE).
Make sure that the registration address requirements of the
entity match with the premises you are considering.
Land and buildings will be designated as industrial, residential or
commercial. Different entity types have different requirements
which have become increasingly strict. Few jurisdictions or
entity types allow for ‘virtual offices’ (letter boxes), so you may
be required to rent in the district which you are registered in.
Check this first as signed leases are very difficult to get out
of and registration authorities can be inflexible.
Where to get help
As in New Zealand, it is helpful to use a real estate agency to
help you find premises. They will also be able to help you to find
and lease or buy commercial or residential premises as well as
undertake registration, source furniture and fittings and
complete installation.
There are many international and local Chinese agencies to
choose from.
You should check that any firm you are considering using has a
licence and try to contact agencies independently rather than
using third parties who will charge a commission.
Law firms can also help with the translation of leases. This
translation may not be enforceable in a court, but it is critical
to make sure you understand what is being signed.
For a list of agencies contact NZTE.
What are the costs?
Rents in downtown Shanghai have increased significantly in the
last few years and are rapidly approaching a level comparative
to other international cities in the world.
In second and third tier cities rents are considerably cheaper
than in New Zealand’s main centres.
Land prices are also increasing rapidly. For up to date
information on rents and land prices in China contact a real
estate agent.
How to lease premises
As in New Zealand, before entering into any negotiations for an
office lease make sure you have fully researched issues such as:
• market rental trends
• the best locations
• future property developments.
Leases are usually for two to three years, but longer lease
periods also exist.
Leasing premises is a key step towards meeting regulatory
requirements to set up a representative office or WFOE in
China. You need to make sure that the building or office you are
considering leasing as your representative office is permitted to
be used in this way. Most cities only allow representative offices
in grade A (top quality) buildings.
You also need to make sure that the location you have in mind is
in an area approved for your type of business.
KIWI LESSON – GET A PRESTIGIOUS ADDRESS
Financial services company KVB Kunlun says consider getting
a “prestigious address” which will help you be taken seriously.
“Be prepared for the extra costs involved if window dressing is
important in your type of business.”
KIWI LESSON – BE CAREFUL WITH LEASE AGREEMENTS
“Small errors in detail can sometimes add weeks to the process,”
says Bruce McNabb, Pertronic’s former Technical Director for
China. “For instance the building number on our lease
66

agreement was missing (should be A803A instead of 803A)
– that added another few weeks to the process, as well as
requiring notarised board resolutions in New Zealand and more
expense in setting up the office.”
Pertronic realised the need to be very alert to the process
and to ensure it was complied with at every step. The lawyers
monitored the legal documents for the rental of the office
premise; and added some clauses that would protect the
company if the WFOE application was not successful. This
precaution paid dividends as when the office lease was being
transferred to Pertronic Trading (the WFOE), the landlord
attempted to get Pertronic to pay the tax on the lease payments
and refused to sign the transfer documents. After meeting with
the lawyer the issue was resolved in our favour. This added
another three or four days to the process.
“Pertronic managed to negotiate a good leasing rate for two
plus one years. To fit out the office we got three quotes, one
from a European company and two from local firms. We chose
a local firm and found that they were excellent to deal with.”
How to buy premises
Generally foreign companies can only get land use rights
(not ownership of land as we know it in New Zealand)
through a WFOE or a joint venture.
No foreigner can currently own land in China, although
ownership of land for Chinese nationals is currently
under review.
KIWI LESSON – WATCH WHO OWNS THE LAND
“A lot of people have been burned by property purchases
after they are told by government officials that the property is
available to them. I’ve had this recently. We looked at property
and when I dug into it, they didn’t own the property. They didn’t
have the right to offer me the property. They thought they were
going to get it but they had to get approval from Beijing.” –
Keith Curry, former China Chief Executive, Skellerup
Using serviced offices
Start-up businesses or those with a limited budget have the
option of using serviced offices.
Serviced offices provide an array of business services, including
bilingual secretarial support, as well as the usual handling of
mail, fax and telephone calls and courier services.
This one-stop approach to setting up an office allows many
companies that are new to China to focus on core business
activities by bypassing the technical difficulties of finding an
office and hiring staff.
KEY LEARNINGS
• Research the market.
• Use local expertise.
• Check titles and leases carefully through a law office in China.
• Do due diligence on agents.
• Do a careful inspection of properties.
5.2 HUMAN RESOURCES
Managing human resource issues
You will probably have to spend more time on human resource
(HR) issues in China than in other markets. A survey of US
Business Council members found recruitment and retention
was their number one operational issue in China.
One of the major drawcards for Western companies in China
is relatively low wages, this is disappearing within some job
categories in some regions and industries. This is particularly the
case for well qualified technical and management staff in the
main cities. In Shanghai professional salaries can match what
you’d have to pay in large Western markets. Skill shortages are
also a major problem with many companies listing this as the
biggest brake on their growth in China.
The salary of a New Zealand expatriate working in China
would typically be higher than that of an equivalent role in
New Zealand, and sometimes pushed higher still with housing
supplements or company housing and schooling, medical,
travel and entertainment allowances.
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Another issue is looking after your New Zealand staff who have
relocated to China (or expatriates).
Who to hire
David Mahon, Managing Director, Mahon China Investment
Management, says the simple rule in China is to hire whoever is
best for the job. “Do not feel obliged to send over an expatriate
nor to hire the first Chinese graduate of a New Zealand
university who comes through the door. Companies need
people who can understand their own culture, and products and
who can also understand the Chinese market. Someone with a
commerce degree from the University of Otago who has never
worked in China is unlikely to be the best fit, as is someone who
sells themselves on their ‘connections’.”
He says the tradition of the great trading houses and many
successful multi-nationals in China of employing a reliable
company “man” (an expatriate), who can bring company culture,
product knowledge and oversight to the operations, supported
by a bright (Chinese) mainlander, has been proven to work.
Kiwi companies already operating in China say employing locals
to help you make business decisions is a must. Keith Curry,
former CEO for Skellerup’s China operations says you have to let
the Chinese manage the Chinese. “Chinese managers are very
good on detail. They know their jobs. They manage people
differently from us.”
Curry says critical staff members include an accountant you can
trust and a good purchasing person. He says Chinese
accounting is different from Western practice and your
accountant has got to be familiar with both.
However, accounting and auditing practises in China are moving
more into line with New Zealand. For more information see the
“Setting up a base in China – Accounting and auditing” section.
Be careful not to put too much emphasis on language abilities
when deciding who to hire. Anyone you hire must also have the
relevant business expertise you need, and be able to fit in with
your corporate culture.
Some Kiwi businesses have also employed Chinese nationals
who have worked or lived in New Zealand and found these staff
invaluable in China.
Choosing between expatriate or local hire
Advantages of expatriates are:
• they come from a similar business culture and if they are
already an employee they will know the company
• they can carry clout in China
• there is less risk around hiring, such as CV fraud
• they are more readily accepted as the company
representative than a local hire.
Disadvantages of expatriates are:
• lack of market knowledge
• unfamiliar with language and culture
• expensive – a generous package may be needed to get
them to work in China
• there is a danger of poor adjustment to living in China.
Scott Brown from RedFern Consulting says don’t localise your
staff too quickly as the added cost of keeping expatriates
(expats) on board will be worth it in terms of management and
communication benefits. He also says don’t try to develop your
new business by regular trips to China alone – the Chinese, like
anyone else, will respect and follow those who are on the spot,
prepared to roll up their sleeves and demonstrate commitment
to them.
KIWI LESSON – HIRE A MIXTURE
“A strategy around having a mixture of local and expat staff is
really the starting point. How you then mould your company and
structure around whether it’s more local or more foreign is all
part of your business plan going forward. It’s not something
you’ll see straight away. You’ll have to be in China for a while to
really understand that. We’re still trying to determine what the
right mix is.” – Clive Richardson, Former General Manager China
Operations, Beca Engineering Consulting, Shanghai
Expats and their families can find it difficult to adjust to life in
China, particularly if they are based away from the main centres
where there are likely to be few people who can speak English
and a small or non-existent expat community. Schooling,
sporting, social opportunities and medical facilities, other than
those for the Chinese, are limited.
To help reduce expat burn out many companies give generous
travel allowances for employees and their families.
KIWI LESSON – OFFER REGULAR VISITS HOME
“I think in terms of relocating staff to China, whether it is
short-term or long-term, it’s quite important to start with people
getting regular visits back home. In my own case and that of a
colleague, we worked up here for three or four weeks and then
went home for two weeks. It was really necessary. It got to you
after a while, working here. We were working seven days a week.
But now that I’m living here permanently, it’s different. I go home
every four months for a quick one-week trip just to see my
daughters. I miss China now when I go to New Zealand.”
– Keith Curry, former CEO China Operations, Skellerup
When employing expats you need to check the rules regarding
permanent residence and effects on worldwide income. If you
are paying a portion of an expat’s salary offshore, be consistent
in your management accounts. Officials are not silly and know
the market value of expat managers. Also remember to consider
New Zealand taxation rules.
Foreign employees need a residency visa (Z Visa or working
visa) and a residence permit to work in China. Employers need to
arrange for social insurance for their foreign employees as well.
Hiring ‘half-pats’
Hiring ‘half-pats’ – Chinese nationals returning home or ethnic
Chinese with foreign citizenship – can have the advantages of
both expats and local hires. They can bring with them market
knowledge, bilingual language skills and a familiarity with both
Chinese and Western business cultures. However, you need to
be sure that they have maintained their Chinese connections.
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How to make contact with ‘half-pats’:
• Use New Zealand universities with alumni networks
• The New Zealand alumni network in China
• New Zealand China Association in New Zealand
• New Zealand China Trade Association.
How to hire
Common recruitment channels for managerial and technical
expertise in China are:
• specialist recruitment agencies – this is recommended
by Kiwi companies
• advertising
• e-recruiting
• head hunters
• universities and technical institutes
• referrals and networking.
The latter can be effective in China because of the emphasis
placed on personal relationships.
To hire workers for factories a more direct approach can work.
Skellerup, which is based outside of a main centre, says it puts
up a notice on its factory gate when it needs staff and gets
40 takers.
But it’s likely to be more difficult in places like Shanghai.
Keith Stevens, former General Manager of Richina Pacific Ltd’s
Ovine Garment Leather Division based in Shanghai says:
“We’re entering into the one child family syndrome and most
Shanghai people would prefer that their sons and daughters
were working in an office environment, certainly not in a tannery.
So most of our labour force now comes from the neighbouring
provinces. Probably the education level of the workers is not as
high as the people that we have employed in the past from
Shanghai, but we can overcome that by putting in place good
training schemes.”
Background checks by professional external consultants are
essential when hiring senior staff, particularly because of the
danger of intellectual property loss.
Exaggerated and fraudulent CVs are also more common
than in New Zealand.
For a list of recruitment agencies and consultancies
contact NZTE.
Remuneration in China
While China remains a relatively cheap place to hire factory
workers, particularly in the less developed cities and regions,
skill shortages and rising standards of living in the main centres
are pushing up salaries for management and technical staff to
levels similar to Western countries.
English speakers are costly and in short supply outside the
main centres.
Typically there are four components to salaries in China:
• Annual base salary – the minimum wage in China is set
by individual cities and rises every year.
• Guaranteed bonus – becoming less common as employers
roll it into the base salary.
• Cash allowance – a small traditional payment at Chinese
New Year and traditionally paid in a red envelope.
• Bonuses and incentives – becoming more common.
When investigating staff costs make sure that all costs are
transparently listed. These contributions can include; housing,
meals, pensions and health insurance (which can add a third
to the basic pay rate).
Also, if you are hiring factory staff you will often have to
hire more workers to do a task than would be needed in
New Zealand.
All workers must have a contract which sets out employment
terms and conditions.
One thing to watch for is that employees talk more openly
about pay than they do in New Zealand. As a result it may be
a good idea to be transparent about what you pay and why.
Attracting and retaining staff
Attracting and retaining staff can be challenging in China’s
competitive job market where skilled and valuable staff are
regularly headhunted.
There are severe shortages of skilled and internationally savvy
staff and workers have few qualms about leaving if they are
not happy.
Also once someone has had experience working in a Western
company, their skills become highly sought after. It’s rare for
someone to stay in a key position with the same company
more than six years, for example experienced accountants
could have had four or five jobs by the time they turn 30.
In this environment you need to look after your existing staff
and make your workplace attractive for job hunters.
KIWI LESSON – IT’S NOT ONLY ABOUT THE MONEY
“It is no longer so much a question of new entrants making
tempting salary offers to your staff as it is to get the right
cultural fit. Of course you have to pay what it takes to get the
best people, but provided the match is right staff tend not to
leave for the money. In addition, to attract and retain the best
people you need to be able to offer opportunities, stability,
challenges and rewards – the whole gamut.” – Richard Yan,
Chairman and Chief Executive, Richina Pacific.
Executive and vocational training is an important part
of this mix.
Many of the skill shortages are caused by China’s education
system which relies on rote memorisation and testing which
doesn’t prepare Chinese workers for modern workplace realities.
Traditionally, Chinese businesses have not invested in training
staff though they are now starting to catch up with best
Western practice.
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Chinese respondents to a 2011 survey by recruitment specialists
Hudson indicated they were motivated by more than just
additional monetary rewards. “Education and training, employee
recognition programmes, high performance incentives and
long-service rewards are all more popular in China than in the
other markets surveyed.”
Options for providing executive and vocational training
You need to be ready to provide ongoing education for most of
your Chinese staff to get them up to speed. Ways you can do
this include:
• Financial positions – there’s a shortage of experienced
Western-savvy professionals with English language skills,
regulatory knowledge and international experience.
Ongoing education solutions:
– posting to your New Zealand operation, or other
international branches
– degrees, diplomas and courses at New Zealand
educational institutions
– mentoring
– using specialist Chinese or foreign training providers
and programmes.
• Engineers – Chinese engineering students get little practical
experience in projects or teamwork.
Ongoing education solutions:
– posting to your New Zealand operation, or other
international branches
– degrees, diplomas and courses at New Zealand educational
institutions
– mentoring
– inclusion in a Kiwi project team working in the region
– using specialist Chinese or foreign training providers
and programmes.
• IT specialists
Ongoing education solutions:
– posting to your New Zealand operation, or other
international branches
– degrees, diplomas and courses at New Zealand
educational institutions
– mentoring
– using specialist Chinese or foreign training providers
and programmes.
Finally there is a set of generic skill gaps across all
professions and occupations. These include:
• Confidence in speaking English.
Ongoing education solutions:
– English language lessons
– mentoring by a more fluent colleague
– visits to New Zealand.
• An understanding of Western and business cultures
(including risk taking).
Ongoing education solutions:
– mentoring
– attending meetings between Kiwi manager
and Chinese counterparts
– visits to New Zealand.
• Lack of creativity
Ongoing education solutions:
– mentoring
– visits to New Zealand.
Overseas training is highly sought after. Offering your best
employees an opportunity to train in New Zealand builds
company loyalty and helps develop the international awareness
and business skills often missing among Chinese managers
and staff.
Tips:
• Work in with a partner’s plans (for example, a channel
partner) to help cover your training needs.
• Do a comprehensive orientation course for new recruits.
• Use their skills immediately and provide constant challenges.
KEY LEARNINGS
• Watch out for contradictory advice on HR issues
– you need to find out what is right for your company.
• Check the CVs and references carefully.
• Make the final selection yourself.
• Look after your expats.
• Value your Chinese employees.
• Look out for hidden wage costs.
• Invest in vocational training and head or regional
office placements.
• Conduct exit interviews.
If you ‘inherit’ staff via an acquisition or joint venture don’t be
too quick to pick and choose who you will keep or let go. Some
labour laws prohibit layoffs in certain circumstances, but you
don’t know in the short term who actually plays which key roles,
or more importantly in China, who is related to whom.
5.3 ACCOUNTING AND AUDITING
What are the accounting and auditing requirements?
Foreign and Chinese businesses must keep accounts that meet
the Chinese Accounting Standards for Business Enterprises.
As China’s accounting system is different from New Zealand’s,
New Zealand companies need to get to grips with different
rules, systems, legislation and standards.
You can use a registered Chinese accounting firm or an
international accounting firm to set up systems that comply
with Chinese law. Several New Zealand accounting firms also
operate in China, including large international first and second
tier accounting firms.
You may need to produce one set of accounts that comply
with China’s regulations and then adapt this to meet Generally
Accepted Accounting Principles that apply to the New Zealand
parent company. There are only two approved accounting
systems in China and any other accounting software used there
must be approved by the Chinese Ministry of Finance.
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Accounting records must be kept in Chinese (they can also be
written concurrently in a foreign language) and financial reports
must be in RMB. Foreign-invested enterprises (FIEs) are required
to keep their accounting records, statements and supplementary
memorandum for at least 15 years.
Keith Curry, Skellerup’s former China Chief Executive, says one
of the critical employment issues for companies in China is
having a good accountant who is familiar with Western
accounting practices.
“Chinese accounting is quite different to Western accounting.
The accountant you have has got to have done Western
accounting. It’s as simple as that.”
He suggests a good investment is sending your China
accountant to New Zealand for work experience.
You also need to be sure that the person managing the accounts
process is doing so in China, not New Zealand, which incurs an
additional cost.
Richard Yan, Chairman and Chief Executive of Richina Pacific,
says China’s business environment is becoming more ‘normal’
by Western standards with the range of legal, accounting and
intermediate services available growing every year.
Audit requirements
All FIEs must be audited annually by certified public
accountants. The annual financial statements and the auditor’s
report should be completed before the end of April to meet
the May 31st tax filing deadline.
FIEs must also submit an Annual Taxation Consolidation
Reporting Package to the tax bureau by the end of May each
year. In this reporting package, all taxes should be verified on
the basis of the audit result. If the audited taxes are different
from the taxes paid, the FIEs should discuss the discrepancy
with the tax bureau.
KIWI LESSON – GET IT RIGHT FROM THE START
Instrument maker Commtest says “you need to have ongoing
audit and compliance systems in place from the beginning
so you have a clear understanding of expenses.
Networking, entertainment, gifts and other expenses can
expand considerably if not defined and monitored.
(Source: Dezon Shira & Associates)
While many of China’s accounting regulations are the same or
similar to international practice, there are some differences
between Chinese and Western accounting practice, for example,
tax deductibility and depreciation of capitalised assets. You
should pay particular care in these areas.
For a list of accounting firms in China, contact NZTE.
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6. NAVIGATING CHINA
6.1 GETTING PAID AND REPATRIATING
PROFITS
How to get paid and repatriate profits
To get paid by your Chinese customers into your bank account
in China, you’ll need to navigate China’s banking system,
regulations and different attitudes towards business
transactions.
Although China’s banking system has been largely deregulated
there are still some restrictions on the types of accounts
different banks can offer, and on what accounts foreign
businesses can open.
New Zealand businesses also need to be careful to meet
regulatory requirements when setting up in China, otherwise
they can run into tax or other compliance issues when trying
to repatriate profits.
Equally important is to have a good plan to minimise the risk of
a customer defaulting on payment, because forcing payment
through China’s legal system is likely to be difficult and costly.
Traditional Chinese attitudes towards contracts and contracted
prices can be different from Western ones, and New Zealand
businesses want to avoid the risk of customers trying to
renegotiate prices after goods have been sent.
Getting paid
If you don’t have an on-the-ground presence (a representative
office, wholly foreign owned enterprise (WFOE) or joint venture
(JV) payment must be remitted to your New Zealand bank
account by your agent or distributor or by the customer if you
are selling directly to customers in China.
If you have an on-the-ground presence either through WFOE
or JV, you can open local bank accounts and get paid into your
local accounts for your trade and services. If you have a
representative office, you still can open local bank accounts,
but these accounts can’t be used for trade or service purposes.
It can only be used for administrative purposes.
Setting up bank accounts
If you have an on-the-ground presence you can set up local
currency (RMB) and foreign currency bank accounts in China.
These can be opened with local Chinese banks or foreignowned
banks that have a licence to operate RMB accounts.
You will need to complete regulatory requirements and show
your business licences to the bank before you can open any
accounts.
If you are setting up a WFOE you will need to establish a capital
account and remit in the required capital before you can open
your local accounts.
Be aware that the regulations around banking and finance
change frequently.
Choosing a bank
Not all foreign banks operating in China can open capital and
RMB accounts. For a list of banks that operate in New Zealand
and also offer local and foreign currency accounts and capital
accounts in China, contact NZTE.
Be prepared for the banking system to be slower and less
efficient, says Kiwi education company AIS St Helens. It found
that transferring large sums of money could take a week and
had to be done in smaller sums. Retail branches are often full,
meaning you have to wait for your number to be called before
you are served.
How to invoice
Many Chinese companies prefer to be invoiced in US dollars,
particularly if they are already doing business with the USA,
although the currency will be determined by the contract.
Reducing the risk of customers defaulting on payment
In China it can be difficult to know who is going to be a good
payer and who isn’t. New Zealand companies have had widely
differing experiences of getting paid. The advice is to go for
the most secure form of payment you can get.
When you are dealing with a new customer you should always
use Letters of Credit (see below) to secure payment, as well
as doing due diligence on the customer and having an
enforceable contract.
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If you have a long-standing relationship with a customer and
want to use an alternative payment method, like Document
against Acceptance (see below), take out trade insurance
against the risk of default on payment.
Because some contracts are so small, the costs associated
with a Letter of Credit don’t make this option viable.
You need to calculate the financial consequences of
your small contract not being honoured.
It can be difficult and costly to use China’s legal system to
recover payment owed for goods that have already been
delivered. Chinese attitudes to legal contracts also differ
from those in the West.
Don’t agree to releasing documents of title without payment
being secured unless you have insurance to cover your
counterparty risk, says Jeff McKenzie, former Regional Head
Commodity and Trade Finance North Asia with ANZ in China.
Even companies that have 10 years trading experience with a
Chinese company have been caught out when the counterpart
went bankrupt, he says.
KIWI LESSON – RECOVERING DEBTS CAN BE TRICKY
All the commercial risks – credit, getting paid, understanding the
costs and compliance – are the same in China as in New Zealand.
“Where they tend to be a little tricky here [in China] is that the
system of recovering debt is a lot more complicated and less
robust than in New Zealand, so that makes us a little more wary
up front.” – Don Johnson, Marketing Manager, Pan Pac
Methods of payment used in China
• Letters of Credit (or documentary credit, import credit,
export credit)
Letters of Credit guarantee payment and receipt of title
from an independent party – the bank.
They are internationally recognised and are the least risky
way to secure payment from new customers. Most Chinese
commercial banks and foreign banks with licensed Chinese
branches can issue a Letter of Credit.
Generally there is no problem with Letters of Credit from
Chinese banks being accepted by New Zealand banks,
although you should check this with your bank if the
transaction involves a Chinese regional bank. Also ensure that
all Letters of Credit are received via SWIFT (the Society for
the Worldwide Interbank Financial Telecommunication).
It is very important that the documents submitted to banks
exactly comply with the strict conditions of the Letter of
Credit. It has been estimated that half of Letters of Credit are
rejected by banks at first presentation because they do not
meet stated conditions. Check the Letter of Credit against
the terms of the purchase contract and ask the buyer to
make any necessary amendments before you go to the bank.
Do not send up documents that contain discrepancies unless
these have been pre-approved through the banking system
or you risk losing the protection of the letter of credit.
• Documents against Acceptance, or Documents against
Payment
These are used in ongoing business relationships as they
provide some protection and some risk for both parties.
They are easier to use and less costly than Letters of Credit.
With Documents against Payment, the documents needed
to obtain the goods are only delivered to the importer after
they have paid for the goods. With Documents against
Acceptance, the documents needed to obtain the goods
are delivered to the importer after they have accepted
the exporter’s bill for payment at a fixed later date.
Documents against Payment are obviously safer than
Documents against Acceptance because the buyer only
gets the goods after they’ve paid for them. Trade insurance
is often used to cover the risk of default where Documents
against Acceptance are used.
The New Zealand Export Credit Office provides credit
guarantees for exports to China. However, it only provides
longer-term cover (more than a year), so normal trade
insurance must come from commercial insurers.
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If you can’t get trade insurance be cautious about using
Documents against Acceptance.
• Cash in advance
This payment method is only used when the Chinese buyer
has a strong degree of trust in the foreign seller.
• Open account
This is when the buyer agrees to pay for the goods within a
certain period of shipment, generally 30, 60 or 90 days. It is
the least secure form of payment for New Zealand exporters
to China and leaves you fully exposed to the buyer getting
title to the goods then defaulting on payment. Companies
using open account would normally cover their payment risk
with trade insurance.
Your bank can assist you with these methods of payment
Dealing with slow payers
You can avoid the problem of slow payers by using Letters of
Credit or Documents against Payment.
If you sell using less secure payment methods and strike a slow
payer, deal with the problem as soon as payment falls overdue.
If you have an agent get them to contact the buyer and seek
payment immediately. If that doesn’t work contact the buyer
immediately yourself or ask a ‘friend’ in China to contact the
buyer on your behalf. This ‘friend’ might be a business associate
or other influential person who is willing to work on your behalf.
If all else fails, consider legal action or arbitration which is the
most popular way to resolve disputes between Chinese and
foreign companies.
Note that municipal owned and local government owned
facilities can be slow to pay.
Financing your China operations
Representative offices can’t borrow money in China, so all
working capital will have to be remitted from New Zealand.
WFOEs set up by New Zealanders tend to fund themselves
using cash flow from China, or a loan facility from a foreign bank
with offices in both New Zealand and China. It is possible to
get financing from a Chinese bank, but generally this is only
practical for very large businesses.
Overdrafts aren’t used in China – the credit account stays in
credit and is topped up using a loan account that is drawn
down at three, six or nine month intervals.
Foreign banks will also provide home financing in China
where they have a link or relationship or they can establish a
relationship with the New Zealand parent who can support
the WFOE in China.
Paying your bills in China
Most supplies must be paid for in advance or on delivery using
cash or credit cards. Chinese companies rarely extend credit
until you have a well-established relationship. You may also
be asked to pay a deposit for utilities like office telephones.
Representative offices and WFOEs can open US dollar accounts
and RMB accounts for paying local expenses. When paying
international bills you will need to provide evidence of the bill
to remit money out of China.
To pay salaries you will need to open a payroll deposit account.
Although use of credit cards is growing extremely fast, only
a small fraction out of several million merchants and retailers
accept credit cards. ATMs for cash advances are few and far
between with most in major cities.
Be aware that the commission paid to credit card companies by
retailers could be added to your bill, for example when paying
for travel in China by credit card 2.5 to 4 percent commission
is normally added to the cost.
Repatriating profits
You can repatriate up to 90 percent of profits. However, care
needs to be taken when you first set up your business because
if you do not comply with all the regulations you may not get
the approvals needed to send profits out of China.
Before you can remit profits you must file your fourth quarter
tax return with China’s State Administration of Taxation (SAT) to
confirm the amount of Foreign Enterprise Income Tax payable.
You can then finalise your net profit.
Not all profit can be repatriated or reinvested. A portion (at least
10 percent for WFOEs) must be placed in a reserve account.
This reserve is capped at 50 percent of the company’s
registered capital. To distribute the remainder you must get a
board resolution authorising distribution and file an application
with SAT (in Chinese) that includes an annual audit, tax receipts
and other documents.
SAT will then issue a Foreign Enterprise Income Tax Payment
Certificate; this certificate enables the bank to convert RMB
and then remit funds.
Foreign exchange controls
When a WFOE or joint venture is set up it must register with
China’s foreign exchange authorities State Administration for
Foreign Exchange (SAFE) within 30 days of getting a business
licence.
It can then buy and sell foreign currency (including exchanging
RMB) at authorised banks for current account items, such as
importing or exporting goods and services. However, sufficient
documentary proof of the transaction’s status must be available.
Authorisation is needed from SAFE for capital account
transactions – those that increase or decrease a company’s
capital. These include things like direct investment, new loans
and investment in securities.
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These foreign exchange controls are likely to continue for the
near future, although China has promised to eventually end
them. Generally, funds flowing out of China are subject to
stricter control compared to funds flowing into China, although
China has recently been restricting funds flowing into China in
an endeavour to cool growth.
Getting help
If you are using consultants to help you with payments and
profit repatriation make sure you conduct proper due diligence
on them.
Some international banks have offices in China and
New Zealand, e.g. ANZ, HSBC, Westpac.
KEY LEARNINGS
• There are restrictions on the type of bank accounts you can
open.
• Stay up to date – regulations around banking and finance
change frequently.
• The banking system can be slower and less efficient than
we are used to in New Zealand.
• It’s hard to know who is a good payer and who isn’t
so go for the most secure form of payment you can get.
• Recovering debts is more complicated than in New Zealand
6.2 GETTING LEGAL ADVICE
AND RESOLVING DISPUTES
The Chinese Legal System
While China is continuing to make significant improvements to
its legal system, particularly in the area of commercial law, doing
any form of business in China continues to present foreign
businesses with numerous challenges.
In common law jurisdictions, such as New Zealand, court
judgments generally have binding legal effect. However,
China’s legal system follows a civil code system.
This means that laws in China are derived from a myriad of
national laws and national and local regulations, supplemented
by court interpretations, departmental notices and, importantly,
local practice. Legally speaking, a hierarchy of legislation exists,
under which national laws take priority over sometimes
inconsistent lower-level regulations. However, in practice
different interpretations of the same regulations are often
applied. Local protectionism, variable enforcement and a lack
of transparency, particularly in lesser-developed regions, may
heighten uncertainty.
It is therefore essential for anyone looking to establish or
operate a business in China to secure impartial and wellinformed
legal advice before taking the plunge. Working from
a solid foundation only increases the chances of success and
reduces risks. You will need to be prepared to commit additional
time, energy and resources at the outset but this will only
increase the chances of a successful future.
Finding a good lawyer
China’s commercial legal system, although still in its early stages,
is developing quickly. Networks of independent law firms
operate across the country offering a range of legal services.
Some of the larger firms now offer a full service package and
regularly assist international clients with complex and largescale
transactions in China.
Numerous international law firms operate in China, particularly
in the larger commercial centres of Shanghai, Beijing and
Guangzhou. Unlike their local Chinese counterparts,
international firms are not allowed to provide formal legal
advice on matters concerning Chinese law or to represent
clients in the Chinese courts.
However, foreign firms are able to advise on the Chinese legal
environment in the context of international practices. In practice,
they can assist clients with managing projects, drafting
contracts and other legal documents, and other similar matters.
When needed, this can be done in conjunction with local
Chinese law firms.
It is advisable to work with a firm that has experience with
international clients. Such firms will invariably have in-house
English language capabilities and, importantly, an understanding
of Western business culture. Many Chinese lawyers have studied
and worked overseas and can effectively communicate with
overseas clients and understand their complex needs.
Legal fees, as in any jurisdiction, vary depending on the location,
the size of the firm and the nature of the work involved.
Generally speaking, local Chinese law firms charge less than
their foreign counterparts in China although the gap is
narrowing and some of the larger Chinese firms charge
international rates. For a well-established local firm, with an
international client base, hourly rates in the region of US$200-
400 would be typical. It is common to agree project-based fees,
or in contentious matters, success fees, which might typically be
20-30 percent of the winnings. This will vary from firm to firm
and should be agreed in advance.
Basic tips for finding a good lawyer
• As anywhere, personal references and introductions from
friends, business partners or other sources, including NZTE,
chambers of commerce and other business affiliations, can
be invaluable.
• Conducting some basic internet research, including a review
of the firm’s website, can reveal much about a law firm, its
size, capabilities and industry ranking.
• Make an appointment to talk with the firm – the first
consultation should normally be free of charge – and discuss
your situation. This will enable you to get a feel for in-house
expertise and professionalism.
• Law firms with a presence in China will invariably have
the most up-to-date knowledge and experience of China
legal matters.
• A number of New Zealand law firms have strong links with
China and can be a useful resource.
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Commercial disputes
In any business dealings, the potential for disputes can never be
eliminated. Economic, cultural and legal differences, as well as
differing expectations between international businesses and
their local Chinese counterparts, add to the uncertainties.
Traditionally, disputes in China, whether of a commercial nature
or otherwise, have generally relied on negotiation and mediation
for settlement. However, recent years have seen the fast
development of a legal framework offering different options
for dispute resolution.
In most cases the parties to a commercial arrangement involving
foreign parties are free to elect either court litigation in the local
Chinese courts or domestic/international arbitration. There are
advantages and disadvantages to each such approach.
Litigation
In recent years Chinese court proceedings have seen marked
improvements in the processing of claims through local courts,
particularly in the more developed cities of eastern China, and
foreign companies are increasingly turning to the courts to
settle disputes. As always, professional legal representation,
ideally by Chinese lawyers with local knowledge, is essential.
Foreign lawyers may not officially represent clients in Chinese
courts, but may observe the proceedings.
Enforcement of Chinese court judgments overseas, and foreign
court judgments in China, is virtually impossible. Accordingly,
a New Zealand court judgment against a Chinese company
will be unenforceable.
Arbitration
Arbitration may be arranged in China or, in cross-border
disputes involving foreign and Chinese parties, outside of
China. Hong Kong, Singapore, London, Paris, Stockholm
and other major arbitration centres have been popular
venues for foreign arbitration.
Numerous arbitration commissions have been established in
China, including the China International Economic and Trade
Arbitration Commission (CIETAC). This is based in Beijing and
has branches in Shanghai and Shenzhen. CIETAC’s rules of
arbitration broadly follow international arbitration principles
and a number of foreign arbitrators are listed on CIETAC’s
arbitration panel. CIETAC is reportedly the world’s busiest
arbitration commission and is generally recognised to
adopt international standards.
Local Chinese arbitration awards are enforceable in China.
Foreign awards granted in most major jurisdictions (including
New Zealand) are also enforceable in China through the
Chinese courts. However, the challenges applicable to court
enforcement in China can make enforcement problematic.
Administrative enforcement
China relies heavily on the enforcement of regulations by
government administrative authorities. These authorities have
wide-ranging powers to investigate and punish commercial
wrongdoing, including issuing fines, confiscating illegally earned
income and, in serious cases, cancelling business licences.
This underscores the fundamental importance of ‘local
knowledge’ since the approach of the various local
government administrative authorities may differ
significantly from one location to the next.
Keeping evidence
Chinese courts and arbitration commissions attach great
weight to documentary evidence when processing
commercial disputes.
Suggestions for avoiding commercial disputes
• Have clearly defined contract terms. All the parties’ key rights
and obligations, such as payment and performance
expectations, should be clearly referenced.
• Set out the applicable dispute resolution procedures in the
contract. Litigation or arbitration should be the last resort.
• Do due diligence on potential Chinese customers, suppliers
and Chinese partners. Don’t underestimate the importance
of this and be prepared for the associated time and costs.
• Try to understand your Chinese partner’s goals and
objectives. They may be different from yours. For example,
a state-owned company may be more concerned about
preserving employment than profits.
• Ensure that the person representing the Chinese partner
has the authority to do so. Request copies of powers of
attorney and other evidence of corporate authority.
• Agree on execution formalities for contracts. Initialing each
page of the contract is recommended and, when signing
contracts with a Chinese company, ask the company to
affix its official seal.
• Agree on which language version of the contract is to prevail
in the event of a discrepancy. Careful and thorough
translation is imperative.
• Make certain your project is economically viable on its own
terms. Do not rely on promises of subsidies, special
considerations or non-market sources of income to generate
a profit. Beware of generous local incentives as these may
not be legally enforceable.
• Understand the relevant industry sector. The Chinese state
still plays a very significant role in the market place.
• Pay careful attention to how you get paid, when you get paid,
and in which currency. If you have agreed to be paid in RMB,
verify that you can convert profits to US dollars. Use Letters
of Credit or other financial instruments to protect yourself.
• Do a thorough risk analysis and limit your exposure. Be realistic
about how much risk you are willing to accept. Set milestones
for performance and have an escape strategy for each stage
of the project, even though you don’t plan to use it.
• Mind the store. Projects and sales in China require constant
attention. Do not assume they will run themselves.
KEY LEARNINGS
• Always seek sound legal advice before making any
commitment.
• Use China-based lawyers as they will have the necessary
local knowledge and experience.
• Ensure accurate and professional English/Chinese
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translations in all cases – it’s all too easy to end up
‘lost in translation’.
• Due diligence, due diligence, due diligence – this is essential
at every stage.
• Maintain clear and accurate documentary records at all times.
(Source: Jeremy Sargent, Partner, JS Associates Guangzhou)
6.3 TAX AND TAX BREAKS
Understanding China’s taxation system
China’s taxation system is more complex than New Zealand’s.
There are many exemptions available in different sectors and
development zones and the central government has sometimes
used fiscal policy to address rapid economic development.
As a result, tax issues may feature strongly in decisions about
how you set up and operate in China. But tax should not be the
deciding factor as tax laws are constantly changing and many
tax breaks and incentives are disappearing.
All preferential tax treatments given to foreign-invested
enterprises (wholly foreign-owned enterprises and joint
ventures) over their domestic counterparts have been axed, or
have started to be phased out. In addition, the corporate income
tax rate for foreign-invested enterprises and local enterprises is
unified at 25 percent.
However, favourable treatments are still available, for example
in industries or regions where authorities wish to channel
investment. The Corporate Income Tax Law allows exemptions
and reductions to be granted for:
• income from agriculture, forestry, animal husbandry and
fisheries projects
• infrastructure projects with key support from the state
• some environmental protection or energy and water
conservation projects
• some technology transfers.
Hire local expertise
Because of the complexity and fast changing nature of
China’s taxation system, you need to get expert local advice.
Using the services of a China-based tax consultant will ensure
you comply with all the tax laws and that you can take
advantage of any exemptions on offer. Many of the major
international tax consultancy firms are in China. There are
also many reputable Chinese firms.
For a list of tax consultancies in China contact NZTE.
The main taxes you need to know about
The information below is high level and for guidance only.
You need to contact a tax expert to get advice that fits your
own particular circumstances.
The main taxes are:
• Corporate Income Tax (CIT or Foreign Enterprise Income Tax) –
a rate of 25 percent (could be lower if exemptions are given)
is levied on an enterprise’s net income after reasonable costs,
expenses and losses.
All foreign businesses operating in China are subject to this
tax, including companies using agents and distributors and
those with representative offices. Preferential rates of 20
percent are available to certain low profit ventures and 15
percent for high technological enterprises.
• Business Tax (BT) – a turnover tax levied on revenue
generated from taxable services, the transfer of ownership
of intangible assets, or the sale of immoveable property.
It is payable by all enterprises and individuals doing
business in China.
Rates vary according to your industry:
– Transportation, construction and engineering, post and
telecommunications, culture and sports – 3 percent
– Services (such as travel agency, warehouse, advertising
services, etc.), selling immovable properties and transferring
the possession of intangible assets – 5 percent
– Finance, banking and insurance – 5 percent
– Entertainment – 5 to 20 percent.
• Value Added Tax (VAT) – generally levied at 17 percent on all
enterprises and individuals engaged in production, import
and export and commercial business in China. Reduced rates
may apply to some activities such as agricultural production
and if you are a small-scale business.
Shanghai began a pilot VAT reform scheme in 2012. This
replaces business tax with VAT in the transport sector and
several ‘modern service’ sectors which includes research and
development, technology, information technology services,
electrical circuit design and testing, cultural and creative
services, logistics support and consulting services. The VAT
rate is 11 percent for transport services and 6 percent for
‘modern services’.
• Consumption Tax (CT) – on luxury goods, including alcohol,
cigarettes, cosmetics, jewellery, yachts and wooden floor
panels. It has to be paid by all enterprises that import,
manufacture or process these goods. Rates range from 3 to
40 percent.
• Individual Income Tax (IT) – foreign nationals living in China
pay progressive tax rates from 3 percent to 45 percent
according to their income, after deducting a fixed amount of
RMB 4,800. IIT affects foreigners who live in China for at least
183 days a year or those who have a management role in a
Chinese legal entity. Foreign residents who have spent less
than five years in China are taxed on their China-sourced
income; after five years their global income becomes taxable.
You must register with the tax bureau if you intend on
working in China.
• Withholding Taxes – foreign enterprises sending profits out of
China as dividends are usually subject to a 10 percent
withholding tax. Foreign companies must pay withholding
tax on certain other amounts received from China including
royalties, interest payments, asset rentals and other income
from China deemed taxable by the Ministry of Finance.
Other taxes include an Urban Real Estate Tax. For Shanghai,
the Urban Real Estate Tax is 1.2 percent of the building’s
original value, less a tax deduction from 10 to 30 percent
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levied on all owners of real estate. There’s also a Stamp Duty
(0.003 to 0.01 percent) on contracts, property leasing,
property insurance, certificates and licences and other
specified documents.
Foreign-invested enterprises must also pay Urban
Maintenance and Construction Tax (UMCT) and Education
Surcharge (ES). The UMCT rates are 7 percent, 5 percent
or 1 percent of a company’s turnover tax, depending on
the location of the business. In Shanghai, the ES is fixed
at 3 percent of a company’s turnover tax. Various major
municipalities have also started imposing a local education
surcharge of about 2 percent. These surtaxes will be paid
monthly along with turnover taxes such as VAT, CT and BT.
Taxes on representative offices
Representative offices have to pay tax even though they don’t
trade or earn income. The taxes payable are calculated based
on a deemed profit, which is estimated using the level of
expenses for the representative office.
The relevant taxes are:
• Business Tax on the total monthly overheads
• Corporate Income Tax
• Sales tax and VAT.
Representative offices must assess their liability for corporate
income tax using either the cost-plus or actual revenue
methods. Under each method, the deemed profit margin must
be no less than 15 percent. Most representatives are required
to adopt the cost-plus method because they can’t carry out
business transactions or generate profits. This means that the
representative office’s projected income can only be calculated
based on its expenses.
Representative offices will not receive tax exemptions from the
tax authorities. They must also keep valid accounting records in
line with the relevant laws and regulations.
Enforcement
Penalties for late payments, non-payment and other
contraventions of tax laws can be severe, for example
up to five times the amount due plus the original liability.
Businesses also face having their licences withdrawn and
assets seized in serious cases.
KIWI LESSON – INCENTIVES
Airport baggage handling system maker Glidepath established
a Wholly Foreign Owned Enterprise in the Kunshan Economic
and Technology Development Zone (KETD) in Jiangsu province,
80 kilometres west of Shanghai.
KETD was set up to encourage IT and the production of
computers and electrical components. A number of incentives
are offered to qualifying companies, including no requirement
for an import/export quota or export licence; and an import
duty; exemption on raw materials, parts, components, packaging
and machines imported for production and infrastructure. The
incentives are conditional on half or more of the production
being manufactured for export.
KEY LEARNINGS
• Use local experts.
• Exemptions and concessions can vary depending on where
your business is located, the sector you operate in and legal
structure you use.
• Penalties for late and non-payments can be severe.
(Source: Dezon Shira & Associates)
6.4 MANAGING LOGISTICS
How do I get my products from A to B?
Getting your products from A to B will cost you more in China
than in developed markets.
At their worst, logistical costs and problems can wipe out
the advantages of being in China in the first place.
China’s logistics costs are falling but as a percentage
of gross domestic product they are still high compared
to developed countries.
And though the logistics market has been opened up
to competition, there’s still a variety of regulatory-driven
inefficiencies in the system.
The situation is improving with the arrival in China of
multinational logistics companies, but the transport
infrastructure they and their Chinese partners and
competitors rely on is often stretched to breaking point.
Use local expertise
The Economist Intelligence Unit says the key to successful
distribution in China lies in partnerships with local operators.
Using third party logistics companies (3PL)
3PL providers are becoming key players in the Chinese logistics
industry, though their share of the logistics market is still small,
but it’s on the rise.
This is thanks to government encouragement and more
companies outsourcing their logistics operations.
3PL providers provide a full logistics service including customs
clearance, warehousing, freight consolidation, inter-modal
transportation and distribution. Many also offer ‘just-in-time’
and ‘just-in-sequence’ delivery services, inventory services
and radio frequency identification tracking.
Basic transportation, warehousing and customs clearance
services are the most common ones outsourced to 3PLs.
KIWI SUCCESS – ONE STOP SHOP
Christchurch-based Commtest Instruments has found that
outsourcing to Christchurch 3PL provider SB Global Logistics
means lower supply chain costs and removes the headache of
working out its own piecemeal solutions. Through its
international partners in China, SB Global provides a one-stop
shop, from collection and packing the product at the factory
door in Christchurch to customs clearance and delivery at the
other end as well as taking care of commercial invoicing.
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Using e-logistics
China faces a number of challenges when implementing
e-commerce, notably economic and educational barriers, lack
of ICT infrastructure, high telecommunications costs, lack of
payment mechanisms and security and trust concerns.
These issues are compounded in e-logistics by the poor shape
of the logistics sector.
Future trends
• Improved service and lower costs with the marriage
of multi-national expertise and low local labour costs,
plus the effects of deregulation.
• Further entry by multi-national logistics companies.
• Consolidation – the logistics industry is undergoing a major
overhaul and competition from foreign entrants which will
see many smaller inefficient players fall by the wayside.
• The transport infrastructure will continue to struggle to
cope with economic growth despite investment.
• Skill shortages as the logistics sector grows.
KIWI LESSON – AT TIMES SLOW
“At times the logistic services, ie shipping product from point
A to point B, is a little longer than what we would expect in
most developed countries. However, transport has improved
dramatically in recent years. Our major markets are in Shandong
province which is approximately 700 kilometres north of
Shanghai. The transit time is about two days which in reality isn’t
too much different than what we would expect in New Zealand.”
– Keith Stevens, former General Manager, Richina Pacific Ltd’s
Ovine Garment Leather Division
The state of China’s transport system
The Chinese Government is heavily committed to fixing the
country’s infrastructure and has a massive road, port, rail
and airport construction programme underway.
• Road – The Federation of International Trade Associations
says China’s road network is often badly conceived and
of poor quality.
Current government efforts are concentrated on the
implementation of the National Trunk Highway System,
a system of inter-provincial toll motorways including 12
corridors on 35,000 kilometres. According to the China
Ministry of Transport, as of the end of 2010, China had
74,000 kilometres of expressways. By 2020 China will
have a total of 85,000 expressways, up from 60,000 in
2008. This network, planned over 30 years, should connect
95 cities, each with more than 500,000 inhabitants.
• Rail – Rail transportation has been growing due to heavy
investment by the Chinese Government. China’s high-speed
rail network stretches 7,531km and by 2020 the government
plans to expand the network to 16,000 kilometres.
• Ports – China has become the largest country for harbour
and port operations in the world with 8.02 billion tons of
freight (refers to the total volume in harbors and ports
above designated size) throughput in 2010.
In 2009, nine of the world’s top 20 ports were in China and
Shanghai has become the world’s busiest port in terms of
cargo throughput in 2010. River transportation and river
ports have also been given priority in infrastructure
development to meet China’s growing trade.
• Air – There is significant growth potential for the airport
industry as flights per capita in China is at a much lower level
than in developed economies. In 2007, the Civil Aviation
Administration of China (CAAC) began long-term
developmental plans to increase the total number of
airports to 244 by 2020.
Total passenger throughput at domestic airports increased
strongly from 284.4 million people in 2005 to a forecast
634.3 million people in 2011, representing annualised growth
of 16.1 percent. The Chinese government’s investment in rail
and road infrastructure has been and will continue to be a
threat to air travel, as rail and other road transportation
remained the most economical means of transportation.
The International Air Transport Association predicted that by
2014 the Chinese Mainland will become the second fastest
growing air freight market in the world, just behind Hong
Kong, and will become the fifth largest international air
freight market globally.
KEY LEARNINGS
• The quality of China’s logistical and transport systems
is patchy.
• The situation in both is improving.
• Look at partnerships with local operators.
• Cool store facilities are lacking, but availability is also
improving.
6.5 DAY-TO-DAY COMMUNICATIONS
Getting the communications technology right
Businesses in the leading cities have all the communications
services you’d expect at home, but as is often the case, services
in the rural and outlying areas are not as well developed.
However, mobile communications coverage in many rural places
is just as good or even sometimes better than in New Zealand.
Although internet usage as a percentage is still low by Western
standards it is growing rapidly. In 2011 the number of internet
users rose above 500 million, up 12 percent on a year earlier.
If you are dealing with major Chinese companies that operate
internationally it is likely that your day-to-day communications
by phone and email will be with an English-speaking person.
Domestic companies, however, are unlikely to have English
speaking staff and even if they do you will need to be confident
in that person’s English. If you are not, arrange to get all
important written communications translated from Chinese
to English.
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Telephones
If you are calling a company make sure that you have a Chinese
speaker on hand unless you are confident you can get through
to the person you are calling.
Cold calling is more difficult. Unless you know someone at a
company you may find it difficult to connect with the right
person.
When contacting a company they will ask up front what
business you are involved in and will directly ask what you want
with them. Regardless of what you say they are unlikely to
continue the conversation, preferring to ask that information
about your company be sent to them in writing.
This information is best sent in Chinese and English; although
there may be people in these companies who can communicate
in English, more often than not the decision makers do not so
you would be relying on someone else’s translation or
interpretation.
Mobile phones
Mobile phones are less expensive to operate than in
New Zealand and in some respects more sophisticated as
Chinese telecommunications companies have invested heavily
in the most modern mobile infrastructure.
The Chinese are also very up to date with their phones, with the
quality and technology of the mobile phone being a status
symbol.
Chinese business people spend a lot of time on their mobiles,
rarely turning them off regardless of the situation. This is not
a personal affront or a sign of disrespect.
Internet
China does have a modern internet system, but the growth rates
are such that the service providers and the system are often
under pressure. In addition, there are a limited number of
qualified technicians.
The internet in China is closely monitored, so if necessary for
your business encryption could be considered. It is wise to
operate on the assumption that messages, wherever written
or sent, could be reviewed by people other than the intended
recipient.
Laptops
The use of laptops is as common in China as it is in New Zealand.
Wireless internet is also increasingly common in coffee shops,
hotels and in buildings. Security is an issue, so you should take
care to protect yourself, but the system is reasonably reliable.
Email
Email is also an increasingly common form of communication,
but the set up of company systems is less standard so it’s
common for companies to use a Yahoo address or other similar
service providers.
Be aware that people will change service providers on a regular
basis. When they forget a password they will also just start a new
address, without access to the previous one. So unless you are
frequently in contact by email with an individual or organisation,
don’t assume that they have received an email communication.
The Chinese law does allow for electronic signatures, but the
reality is that the Chinese ‘chop’ (seal) is what is preferred
– a hard copy signed and chopped is what will be most
acceptable to most companies.
Mail
China has a marginally efficient postal system – it will take
several days to several weeks for mail from China to reach
New Zealand, depending on whether air or surface mail is used.
International courier firms such as Federal Express, DHL and
UPS are more reliable.
Fax
Faxes are still a commonly used form of communication,
although less in the main centers than in outlying areas. Faxes
are often not connected to the phone system independently,
so they will need to be switched over manually.
You will need to call first to ensure that the fax is addressed to
the correct person, then call back to ensure that it has been
received and then call again to ensure that it has been followed
up on. Again, there are no guarantees they will receive the fax.
Face-to-face
Face-to-face meetings are always the most effective means
of communication and are critical in establishing a long-term
relationship with a company or organisation.
The Chinese prefer face-to-face meetings, but this doesn’t mean
that they will always have the desired outcome, nor make the
progress expected from the New Zealand end. So it is important
to do as much preparation as possible before any meeting,
especially one that requires international travel.
Handling invitations
When sending out invitations to an event or activity the
recommended process is:
1. If you do not have a contact within a company call the
company and source someone to send the invitation to.
Make sure that you have the contact details of the person
who has provided you with this information.
2. Then by email or fax, send information on your company,
the event and what you want from the invitee.
3. Once it has been sent, contact them again and confirm that it
has arrived and that the appropriate person will receive the
information.
4. At a later date you will need to contact them again to
confirm that the information has been received and acted on.
This is not a guarantee that the information will arrive and will be
acted on, but the other option is to have no idea at all. This is a
case where persistence will pay off more than assuming that
everything will be alright on the day.
KEY LEARNINGS
• If your size justifies it, have a Chinese speaking person on
your staff.
• If you are not confident in the English of a major client who
is communicating with you, arrange to get communications
translated from Chinese.
• Always have a back up means of communication.
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6.6 LANGUAGE AND USING INTERPRETERS
Language
How do I deal with language problems?
Chinese is clearly very different from English and is a hard
language to learn for English speaking people.
Kiwis in China (like most Westerners) have mixed feelings about
how difficult it makes doing business. Some report they are
frustrated at not knowing what’s being said at meetings and
having to rely on interpreters while others love the challenge.
Ways to overcome language problems include employing
Chinese speaking staff and using interpreters. The use of English
in business and trade circles is also becoming increasingly
common, particularly in the large cities of the south east.
One common piece of advice is to spend more time
understanding the Chinese culture than the language.
There are many successful Western business people who have
been in China for many years who have only a smattering of
the language.
What language should I deal in?
English is becoming increasingly common particularly in the
large cities of the south east, but unless you have been told
otherwise you should assume that the Chinese you are dealing
with can’t speak English and will generally conduct
conversations and negotiations in Chinese. Regional dialects
are also common.
The Chinese Government is committed to standardising
communication in China around Mandarin – the official spoken
language. Most Chinese outside the Beijing region are bilingual
and are able to speak Mandarin and their local language
or dialect.
Take the time to learn a little Mandarin before you go to China
– it will go a long way towards impressing your hosts. You can
start with learning greetings and common courtesies such as
please and thank you and introducing yourself. Even just
learning to pronounce Chinese correctly will be seen as an
investment into the relationship.
However, you need to be aware of the huge regional variations
in spoken Chinese.
Other common Chinese languages include Wu (spoken in
Shanghai), Cantonese (spoken in the south-eastern part of
China, especially in the Guangdong province), and Hakka
(spoken in the southern provinces, including Guangdong).
Using interpreters
Tips:
• If possible, use a mainland Chinese interpreter.
• If you bring an interpreter with you from another country
or region, make sure s/he speaks standard Mandarin.
• If you want to establish a long-term business in China you
need to seriously consider having your own interpreter or
bilingual staff.
• Fully brief your interpreters before important meetings or
negotiations. Where necessary provide them with a list of
terminology well in advance of the meeting.
Using a local interpreter
Although a growing number of younger Chinese managers
and government officials speak some English, you will almost
always need an interpreter for formal meetings and negotiations
in China. The Chinese will usually provide an interpreter for
their side.
Using a mainland Chinese interpreter is important. They not only
speak standard Chinese but also understand the mainland China
environment, mentality and context – which are all very different
from other regions such as in Hong Kong, Taiwan or Singapore.
A mainland Chinese interpreter might be more familiar with
Chinese culture, business etiquette, practices and guanxi,
as well as China’s social, economic and political environments.
If you decide to bring an interpreter with you from Hong Kong,
Singapore or other overseas country, ensure they speak
standard Mandarin and have a good appreciation of mainland
China’s social, economic and political environment.
Interpreting and translating are two different professions with
totally different skills. Interpreters are for oral interpreting and
translators are for written translation. Though many people
have both skills, some of them specialise in one discipline.
Decide which one you want.
A good interpreter is either professionally trained or
experienced. Just because someone is bilingual doesn’t
automatically mean they are a good interpreter.
How do I find an interpreter?
The best way to find the right translator or interpreter is to
rely on the recommendation of someone you trust who has
used the interpreter before. Remember, just because someone
speaks Chinese doesn’t mean they will be a good interpreter
or translator.
Ways to find translators/interpreters include:
• approach NZTE in China for advice
• approach the several foreign Chambers of Commerce
in China
• China Council for the Promotion of International Trade
(CCPIT)
• China-New Zealand business associations at home
• advisor list on NZTE website
• other New Zealand businesses active in China.
It’s not advisable to hire an interpreter or translator straight off
the web or a trade directory unless they have reputable third
party endorsements.
KIWI LESSON – PAY TOP MONEY
“Don’t use a mate’s daughter. Get an experienced interpreter.”
– Danny Chan, businessman and third generation New Zealand
Chinese
81

Interpreter costs
In Beijing or Shanghai a good simultaneous interpreter (one who
interprets at the same time as you or your Chinese counterpart
speaks) can cost about NZ$2,000 a day. A consecutive
translator (one who interprets after you or your Chinese
counterpart has finished speaking) will cost NZ$400–$1000
a day. Rates in other cities such as Chengdu will be a lot less.
When calculating the cost of a translator/interpreter, don’t
forget their incidental costs such as travel and food.
Payment can be either in cash if they are working as individuals
or by contract if they are provided by an organisation such
as the CCPIT.
Your own interpreter
To establish a long-term business in China, seriously consider
having your own interpreter or bilingual staff. You could either
find someone in New Zealand or arrange for an interpreter
in China.
You need an interpreter you can trust, someone who will give
you confidence in communications and presentations.
If you rely on the interpreter from the other side of the table,
you have no control over the conversation. There are also subtle,
behind the scenes interactions, which your own interpreters will
be able to give you advice on, for example whether the meeting
went well, what they really expect, or how to advance the
next meeting.
It would be an advantage to find Chinese who have been living
in New Zealand to interpret for you, as they are well-placed to
understand the practices of both sides.
Most importantly, your own interpreter is likely to work in the
best interests of your business.
Understanding the limitations and strengths of an
interpreter
It’s important to be aware of an interpreter’s limitations.
Interpreting is a tiring profession. One interpreter working for
both sides from Chinese to English and vice-versa may get tired
and start missing the meaning or detail of what’s being said.
Interpreters require background information well in advance to
familiarise themselves with the subject matter and terminology.
Brief them fully before important meetings or negotiations and
where necessary provide them with a list of terminology well
in advance of the meeting.
If interpreters haven’t been well-briefed they will probably not
be able to cope with technical or specialised terminology and
may not be able to record or remember everything.
Large numbers are particularly tricky and can be misinterpreted
– sometimes leading to a mistake between millions and billions.
For example, ten thousand is one ‘wan’ therefore 10 million
translated into Chinese is “1000 wan (1000 ten thousands)”;
100 million has its own character as ‘yi’; and 1000 millions or
one billion translates as “10 yi”. Understanding Chinese numbers
will be beneficial in these situations.
Consecutive interpreting is most commonly used for meetings.
This means you speak, pause and then your interpreter
interprets. If you are giving a speech or presentation, remember
that the need to interpret everything consecutively will
approximately double your speaking time.
Some interpreters may be more familiar with British or American
English and may have some initial difficulties with the
New Zealand accent.
Establishing a good working relationship with interpreters is
very important. Interpreters can be the key to successful
communication between you and your Chinese business
counterparts.
An interpreter can therefore be a very powerful person.
For example, you may say something unconsciously that’s
potentially offensive. An interpreter working in your best
interests may put it in a polite way that both sides will be
comfortable with. Interpreters can help smooth the way
through negotiations.
In some formal conference situations, simultaneous translations
are provided. If you want to use simultaneous translations the
equipment is very expensive. It requires at least two interpreters
(each interpreter interprets for a maximum of 20 minutes
alternatively). Use prepared speeches if you can.
How to work with an interpreter at meetings or negotiations
• When working with an interpreter it helps to speak directly
to your counterpart (not the interpreter) and always use the
first person. For example: say “thank you” rather than “tell
him I thank him”.
• Use full sentences. It’s easier to interpret and get the correct
ideas across.
• Use simple language. This prevents misunderstandings on
the interpreter’s part and safeguards against
misinterpretation to your Chinese counterparts.
• Explain any difficult terms or concepts. An interpreter’s job
is to take the source language and convert it to the target
language – but they usually won’t add their own knowledge
or understanding to explain something.
• Pause frequently at an even pace. Pause after a thought is
complete, or after you have made a major point. Avoid long,
complex sentences. If your speech is too long it may make it
difficult for the interpreter to remember what you have said.
• Appreciate that interpretations may take much longer than
the original speech – especially when interpreting from
English into Chinese.
• Speak slowly and clearly, particularly if the interpreter is not
used to the New Zealand accent.
• Listen to how your interpreter interprets what you have said.
If you have given a lengthy explanation but the interpreter
reduces it to a few Chinese words, it may be that s/he has
not fully remembered or understood what was said. Check
the interpreter has adequately conveyed your point to the
Chinese side.
• It’s a nice gesture to give your interpreter a gift for his/her
services.
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Things to avoid:
• leaving sentences unfinished. Your interpreter might find it
hard to translate the meaning if you have left a sentence
hanging
• jargon or colloquial expressions like “let’s get the ball rolling”
(which when interpreted may have a different meaning)
• jokes often don’t go down well in a different culture or
when interpreted.
The importance of your business partner’s interpreter
Your Chinese business partner’s interpreter could be
arranging your meetings, planning your itinerary, or ordering
for your banquet.
More importantly, s/he could be the key contact for your next
trip or business opportunity. They could also be the mediator
between you and your Chinese business partner or Chinese
Government official when things don’t go according to plan.
What needs to be translated?
Though it can be a big commitment, as much material as
possible about your company and its management should
be translated well ahead of time. This particularly applies to
documents relevant to your meetings or negotiations. It is
an investment that will pay off.
You must have appropriate translations of:
• business cards
• a well produced one-page company profile including a list
of reference projects and clients
• a power point presentation and/or DVD and any handouts
• technical terms and specifications.
When deciding what to translate remember that the person you
are dealing with now may speak English, but they may not be
the person or the only person involved in making the decision.
For example in the educational section potential students may
speak English, but their parents or grandparents who make the
decisions may not.
If you are looking to sell in China, it’s essential that your
company and product names are properly translated.
A sign that you are serious would be a full Chinese version
of your brochure.
KEY LEARNINGS
• Learn a little Mandarin such as greetings and common
courtesies – it will impress your hosts.
• Pay attention to correct pronunciation.
• Understanding Chinese culture is more important than
learning the language.
• Use a mainland Chinese interpreter.
• If you are looking to do long-term business in China,
consider having your own interpreter or bilingual staff.
• Interpreting and translating are two different skills.
6.7 BUSINESS ETHICS AND CORPORATE
RESPONSIBILITY
How do I deal with corruption?
There’s a lot more corruption in China than in New Zealand,
however don’t think that corruption is generally accepted
in China and be aware that the vast majority of people you
will deal with in China are not corrupt.
That said, it’s always best to be on your guard.
What types of corruption are common?
Examples of corruption you may come up against include:
• outright requests – usually through agents
• contracts are agreed, then an amount is added
that you are expected to pay in cash
• requests for, and giving, expensive gifts
• misuse of funds or inside information
• ignoring labour and environmental rules.
There are also well known problems concerning intellectual
property (IP) violations. For more information on how to protect
your IP see the “Entering the Market Protecting IP” section.
The frequency and seriousness of corruption varies according to
the business sector, region and type of business. In general the
situation is improving with the government engaged in a
corruption crackdown.
At an operational level you are most likely to run into nepotism
or patronage, conflict of interest and excessive exchange of gifts
and favours.
Before entering into any contracts or relationships you should
also do due diligence.
Tips for dealing with corruption
• Stick to best practice.
• If you come into contact with corruption, don’t get involved.
• Understand as much as possible about China.
• If you are sub-contracting manufacturing seriously consider
including a code of conduct in your agreement.
• Have an unhitching strategy in case things go wrong.
Understanding reciprocity
Further complicating Western ethical judgments in China is
guanxi – the close personal relations between individuals that
often underpin business deals and relationships.
Guanxi creates ethical gray areas for Westerners.
To understand gift giving see the “Researching the Market
– Business Etiquette” section.
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Implementing a code of ethics
A number of international companies have fallen foul of publicity
campaigns highlighting labour or environmental abuses in their
factories.
Also be aware of factory managers who are willing to cut
corners – sometimes with serious consequences for consumers
– to deliver the lowest possible price.
If you sub-contract manufacturing in China consider a code of
conduct for the factory as part of your agreement. If properly
implemented this can protect you against serious financial and
public relations fall out. Also consider contracting a third party
inspection and audit agencies.
You need to be careful how you write and present your code
of conduct. Don’t take a ‘holier than thou’ attitude and impose
a translated version of your existing code. Work as much as
possible with your Chinese managers and partners to write
a code that Chinese workers will understand and follow.
Corporate social responsibility in China
Corporate social responsibility has not made big inroads into
the operations of Chinese businesses; they mostly continue to
have a narrow focus on profit maximisation with human and
environmental considerations coming second.
The Chinese Communist Party is anxious about growing social
unrest throughout the country, wanting a redistribution of
wealth from the affluent urban areas to the poorer rural
regions to restore ‘social harmony’.
In an effort to engage business in this objective a Chinese
Association for Corporate Social Responsibility (CACSR)
was established to encourage businesses to engage in both
business-related activities such as ‘employee care’ and the
use of environmentally friendly materials and public activities.
New Zealand businesses looking to set up in China, regardless
of size, should at least have some type of corporate social
responsibility (CSR) programme on their radar for all the
same reasons they would have one back home.
KIWI SUCCESS – “LEAVE SOME SALT ON THE TABLE”
“It’s very important when you are doing business in China to
‘leave some salt on the table’. I think that is the Chinese way.
We are in their country so getting accustomed to their way of
doing things is very important.” – Dr Garth Smith, co-founder,
Biovittoria
For more information on CSR in China see:
• the US-China Business Council’s best practice on Corporate
Social Responsibility
• the Hong Kong Corporate Social Responsibility Charter
KEY LEARNINGS
• Corruption is the exception in China.
• Always be on your guard against corruption. Doing due
diligence provides good protection.
• Enforcing a ‘China friendly’ code of ethics can protect
your business’s reputation.
• ‘Leave some salt on the table’ – look at implementing
a CSR programme.
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7. MANUFACTURING
IN CHINA
7.1 PROS AND CONS OF MANUFACTURING
IN CHINA
Should I manufacture in China?
Manufacturing in China is both challenging and changing.
Traditionally, manufacturing in China (either direct or
outsourced) has been seen as a way to cut costs and increase
profits. Increasingly companies now see it as taking a strategic
position that fits their global aspirations, including in China itself
or further afield.
If you are investing in China for the long haul, your business
strategy needs to be driven by factors other than low costs.
The perceived advantage of low cost labour is disappearing in
certain areas, eroded by rising labour and other costs. And in
the case of Guangdong, a province in southern China, there
is in fact a labour shortage.
In some cases companies have found that manufacturing in
China wasn’t much of an advantage once all costs were taken
into account. High intellectual property protection burdens,
quality control issues, management overheads, logistics
overheads and other hidden costs mean manufacturing
in China sometimes isn’t as cheap as it first looks.
What China has done though is invest heavily in large scale
manufacturing equipment and facilities.
In the long term China will be distinguished by is its overall
business strength and structure. For example, its complete
business chains, including logistics and key component
suppliers, which when combined with relatively low cost labour
and mass production means manufacturers can get the best
price and delivery in the best time.
Be strategic
The reasons for considering manufacturing in China generally
hinge on reducing manufacturing costs for some products,
especially products for the mass market and product lines in
order to maintain competitiveness in existing markets. In other
cases companies have invested in manufacturing in China to
supply their China-based clients or for on-selling to a third
country. Strategies can also be positioned around reducing
component costs in existing or future product lines while
retaining research and development, design and other
high end manufacturing in New Zealand.
For New Zealand companies the emphasis should be on
strategic engagement in manufacturing with Chinese partners,
making the investment into people and structures and
determining involvement based on indirect as well as
all direct costs.
Companies will need to gradually develop language and cultural
skills in-house (or outsourced), looking at a staged process over
time, not a ‘great leap forward’. This is arguably less difficult for
larger companies, but it is critical for small to medium
enterprises to determine up front the benefits versus the costs.
At the end of the day it’s a long-term commitment that requires
a lot of planning and preparation.
Reasons to consider manufacturing in China
• To maintain international competitiveness through lower
costs:
– Labour; it is estimated that a company that manufactures
in China can cut costs by between 30 and 80 percent
depending on how labour intensive the product is
– Manufacturing; efficiencies and economies of scale
– Incentives offered by Chinese agencies.
• Access to China’s rapidly growing domestic market.
• Brings production closer to Asian and European markets.
• Proximity to downstream manufacturers (increasingly
based in China) for makers of intermediate goods.
• Lower capital costs.
• The entrepreneurial spirit of the Chinese and Chinese
managers.
• Getting access to increasingly competitive and sophisticated
Chinese research, science and technology, both in personnel
and technologies.
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Low labour costs, while remaining an important factor in
decision making, should not alone justify moving or setting up
Chinese manufacturing operations.
Keith Stevens, former General Manager of Richina Pacific Ltd’s
Ovine Garment Leather Division in Shanghai, says labour costs
in China are competitive with a lot of the other Asian countries.
“But I wouldn’t say it’s cheap. In sophisticated cities like
Shanghai, the cost of labour is increasing quite dramatically.”
• The danger of production overruns by contract
manufacturers and leakage of products onto the
Chinese domestic and overseas markets.
• Variable quality of logistics, though this is improving
around major metropolitan areas.
Many of the above represent hidden costs. Sometimes,
especially for smaller companies, these indirect costs and
issues can outweigh the direct benefits.
KIWI LESSON – PROXIMITY TO CUSTOMERS AND QUALITY
MOST IMPORTANT
“Being competitive with your labour costs is important to being
successful in any business, but there are other important factors.
I think being close to your customer base and producing a
quality product probably even outweighs the cheaper cost of
labour. You must put an effort in here in China. You must ensure
you have good quality systems and you have excellent training
systems in place.” – Keith Stevens, former General Manager of
Richina Pacific Ltd’s Ovine Garment Leather Division in Shanghai
Factors that make manufacturing in China difficult
• Language and cultural differences – it can be hard
to get messages across.
• Commercial law is also a work in progress.
• High intellectual property protection costs.
• Risks to your brand.
• Long start-up times.
• Increased management overheads – for example
communication difficulties, the need for stringent
quality controls and the need to redesign operations.
• Long supply chains.
• Distance from New Zealand or other markets.
• Energy shortages and other operational problems.
• Inflexible manufacturing schedules.
• Variable quality control.
• Longer lead times.
• High staff turnover, especially engineers and senior
management.
How to manage quality
A big issue facing companies considering manufacturing in
China is quality control. It has been rated the most important
operational issue faced by New Zealand companies in
this market.
New Zealand fire detection equipment manufacturer Pertronic
Industries says local Chinese manufacturers have difficulty
meeting new safety and quality standards. “Lots of Chinese
firms have very poor quality control, including the products used
on major government projects. These companies don’t have a
long established background of quality manufacturing.”
Pertronic warns that China can appear very impressive on the
surface in that many products look good, but the quality control
is “abysmal and products are shoddy”.
The Chinese manufacturer Pertronic deals with is ISO approved
and Pertonic says its quality control is “impressive”.
Skellerup is another Kiwi company that has conquered the
quality control issue – its quality control systems in China are
the same as in New Zealand.
You can outsource quality inspections for your products.
Independent inspection companies can visit your manufacturing
partner’s plant and do quality controls and production audits.
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BUSINESS MODELS
Least
Cost and operational control
Greatest
CONTRACT MANUFACTURING
No Investment
No Legal & Tax Presence
Maximum Flexibility
No Operational Control
MANUFACTURING SERVICES
(3RD PARTY CONTRACTORS)
Minimal Investment
No Legal & Tax Presence
Flexible Contract Terms
and Risk Management
Full Operational Control
WFOEs JVs
SUBSTANTIAL INVESTMENT
Legal & Tax Presence Required
Limited Financial Flexibility
Complete Control
(Chinafactoring Solutions. (2004). Manufacturing in China: Business Models. Brighton, Michigan)
KIWI LESSON – HAVE A QUALITY CONTROL MANAGER IN CHINA
Kiwi sheetmetal, rollforming and folding equipment
manufacturer Hayes International says quality control can be a
real problem in China. In the past the company tried to manage
the problem from New Zealand, but has now put in place a
full-time quality control manager in China.
KEY LEARNINGS
• When examining the pros and cons, make sure you consider
the options in the context of what is right for your company.
• A long-term business strategy should be driven by factors
other than low labour costs.
7.2 OPTIONS FOR MANUFACTURING IN CHINA
What manufacturing model should I choose?
Businesses wanting to manufacture in China must balance their
need to keep costs down and exert operational control of the
factory. At the low cost/low control end of the spectrum is
outsourcing manufacturing; at the high cost/high control
end is direct investment in a manufacturing operation.
Whichever model you choose there will be the usual challenges
of operating in China and any decision should be guided by your
long-term business strategy. You should also consider your
options in the context of what is right for your company.
One important issue is where your China-made products are
going. Are you selling them all in China, exporting them all,
or a mixture of the two; this will have different implications
for your choice of manufacturing set up.
How to get advice
Before making any decisions you should get expert advice on
your options from a private specialist advisor, preferrably one
based in China. NZTE can also put you in touch with specialists.
What are the options?
The manufacturing options are:
• contract manufacturing
• licensed manufacturing and technology transfer
• buying an existing manufacturing facility
• setting up a manufacturing facility
• joint venture.
It is common for companies to gradually increase their financial
commitment to manufacturing in China from outsourcing
through to ownership of a factory.
If you have set up a wholly foreign owned enterprise or a joint
venture you can own manufacturing facilities. If you have only
set up a representative office or are running your China
operations out of New Zealand you cannot own a factory
though you can manage outsourcing (without being able to
invoice or accept revenues) through your representative office.
For more information on these business models and location
issues see the “Entering the market – Typical models for setting
up in China” and “Choosing a location in China” sections.
Contract manufacturing
Contract manufacturing can be a particularly good option for
small New Zealand companies. It is a popular set up for Western
companies wanting to manufacture in China because it is
flexible and low cost.
Other advantages include:
• making your business more competitive globally and in
New Zealand
• the ability to handle higher production volumes
• lower storage costs
• speed from decision to actual production
• you don’t have to establish a legal and tax presence.
Disadvantages include:
• the amount of control the contract manufacturer has,
for example over production schedules
• high ongoing management commitment required
to anticipate and deal with problems
• managing communications
• managing quality control issues
• risks to Intellectual Property (IP) and brand.
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Licensed manufacturing and technology transfer
Licensing is becoming more popular as IP enforcement
improves, but you still need to thoroughly research any
moves into either patent licensing or technology transfer.
You should also understand the business objectives of
your Chinese partner – they may be different from yours.
Owning your own manufacturing facility
Wholly foreign owned enterprises (WFOEs) are the most common
vehicles used by foreign companies set up a manufacturing
company in China. For more information on WFOEs see
“Entering the market – Typical models for entry” section.
The advantages of owning your own factory include:
• complete control, including production cycles, quality and IP
• greater profitability as you retain the manufacturing margins.
Disadvantages include:
• amount of research needed on issues such as location,
regulations and staffing
• length of time needed to get manufacturing underway
• significant investment, including capital and management
time and resources
• having to deal with government regulations and local laws.
Scott Brown of RedFern Consulting says you need to know the
relevant industry regulations first, then develop a strategy or a
target list for acquisition; this should include an existing skilled
labour force and possibly important licences and permits.
Starting from scratch and building your own factory can be a
good way of putting your company’s mark on a factory and
overcoming the entrenched problems you’d encounter with
a joint venture or an existing facility.
But this option does put greater strain on most companies
already limited resources of experienced and competent
managers who are familiar with the local environment and can
speak Chinese. You also shouldn’t underestimate the amount
of management attention needed back home to open a new
factory in a distant site.
KIWI LESSON – WHERE DO YOU FIND THE BOLT YOU NEED?
“Until we began setting up our factory we did not truly
understand the difficulties we would face in finding suppliers
of products and services, for example just where do you find
that bolt you require?” says Donald Stewart, former Managing
Director and Chief Executive of Skellerup. “There are no Yellow
Pages for our region, and even our local staff members were of
little use as they tend to work within family structures. This was
a most frustrating time, as until you have built your supplier
network everything goes so slowly.” Skellerup’s factory is in a
relatively remote area (albeit beside a village of 60,000, and
less than 30 minutes from a city of 300,000 and less than an
hour from a city of three million).
Joint ventures
Forming a manufacturing joint venture (JV) can be a drawn
out process and it can be hard for New Zealand companies to
negotiate a favourable position. For more information on JVs
see the “Entering the market – Typical models for entry” section.
JVs are demanding on your time and resources and need
constant monitoring in critical areas such as finance, personnel
and basic operations in order for them to be a success.
Advantages include getting immediate access to local
knowledge and networks.
KEY LEARNINGS
• Manufacturing in China is a balance between keeping
costs down and exerting operational control.
• Get expert advice before making any decisions.
• Consider all options in the context of what is right for
your company.
PHIL&TEDS CASE STUDY
Contract manufacturing – financial and
strategic benefits
When nursery products company phil&teds started
manufacturing in China the set up phase was time and cash
consuming. But the move has enabled phil&teds to increase
capacity, get better economies of scale and match the cost
structure of competitors.
Outsourcing versus owning a factory
phil&teds sells nursery products in some 40 countries, including
the US, UK and Europe, Australia and New Zealand. The
company has a head office, sales and design centre in
Wellington, but manufactures in China.
Management opted to outsource manufacturing to a Chinese
company rather than set up its own factory in China for financial
and strategic reasons, says phil&teds chief cook and bottle
washer, Campbell Gower. “We’re realistic about our strengths
– which are in design and marketing – so we outsourced
manufacturing to bring in expertise and capability.”
“As a private company, our financial resources are limited so we
have to invest where we are going to have the most impact
– which is in intellectual capital rather than fixed assets.”
phil&teds chose a contract manufacturer in Shanghai which was
far enough away from the city centre to have reasonable costs,
but not so far away that logistics and infrastructure are a
problem. Finished goods are exported out of China by
international logistics and freight forwarding companies.
Building a relationship
Since outsourcing manufacturing to China phil&teds has moved
three times to new and bigger factories as its business grew and
capacity constraints were hit. “We now have a factory where we
are the only customer,” Gower says. “The benefits of this are
focus, service, open pricing, risk sharing and mutual dependence.”
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Finding and building a relationship with the contract
manufacturer wasn’t difficult because phil&teds had a clear idea
of its needs, he says. Management were prepared to spend time
visiting the factories and meeting with the Chinese company.
“Relationships are key. While we don’t own the factories used to
produce our goods, we are their only customer. The 450 people
working at these factories make products exclusively for
phil&teds.”
Gower says there were no hidden costs in going to China.
But the company has found that managing outsourced
manufacturing takes nearly as much time as managing a
factory in New Zealand. Communications with China are
handled through onsite personnel, online chat, VoIP, email,
direct computer asset and “lots of visits”.
Managing quality
Quality is an important issue. phil&teds complies with ISO9000
internally, and has met seven product safety standards for
various categories in eight different jurisdictions.
Management has worked hard on product quality control,
which has improved from 70 percent defect free for any
one product in 1999 to more than 99.5 percent in 2007.
“This has been achieved with a process that included hiring
Mandarin speaking Chinese nationals, better production
engineering, key relationship building with local Chinese
suppliers, and the introduction of ISO9000 practices.
This means we are much more confident of our product
quality for consumers – especially as all product is
shipped directly from China to market.”
Protecting intellectual property
phil&teds has a strategy to protect intellectual property (IP)
in all its forms – from design registration, to confidentiality
agreements, to IP ownership of designs. New Zealand patent
attorney AJ Park advised the company on this strategy, which
includes protecting IP in China. “Our budget for external costs of
IP protection is $140,000 this year – we take it seriously. We want
a reputation for being jealous guardians of our IP. We register our
IP in key sales markets, and also in supply markets like China.”
To avoid any environmental or social responsibility issues the
company has an ethical policy/code that is included in its
supplier relationship agreement. It also has a policy of
viewing any factory where its goods are made.
Tips:
• Be realistic about your strengths and invest where you can
have most impact.
• Be clear about what you need in China.
• Spend time building relationships and visiting the factories.
• Ensure an ethical code is included in your supplier
relationship agreement.
www.philandteds.com
7.3 FINDING A MANUFACTURER AND
LOCATION
How to get the right manufacturer
If you do a Google search on “find manufacturer China” you will
find page upon page of Chinese manufacturers whose
specialties range from prom dresses to semi conductors.
The challenge in finding the right manufacturer is to cut through
this cast of thousands touting their abilities. The internet and
unsolicited emails are not good places to start.
Manufacturing in China, whether you are outsourcing or setting
up your own factory, is a huge investment for most New Zealand
businesses and the cost of getting it wrong can be crippling.
Getting it right requires thorough research.
Getting help
It is important to get advice from experts and specialists who
understand China, know your company and your needs.
There are a number of options:
• Contact NZTE.
• Use specialist agencies and consultancies. Employ ones
based in China or who travel to China on a regular basis.
• Contact Kiwi companies and individuals who have “been
there, done that” in China and are willing to help newcomers.
Another option is contacting the New Zealand-China Trade
Association.
If you are making contact with specialists you need to take great
care. There are many horror stories of companies investing time
and money in China-based research for little or no return.
You should do due diligence on any specialists you are planning
to use, including any China ‘affiliates’.
One low risk way is to use New Zealand-based China experts
where possible, but the experience of most New Zealand
companies is that they eventually need to have specialists on
board in China.
KIWI LESSON – USE KNOWLEDGABLE KIWIS
When Skellerup Industries was establishing a manufacturing
plant in China, it turned for initial advice to a Kiwi with more
than 10 years’ experience living, trading, establishing and
running factories in China. It then used two more Kiwis — one
born in China who was fluent in Mandarin and with a deep
understanding of the Chinese culture — to help finalise due
diligence and find a suitable factory site.
The steps to finding a manufacturer
Companies looking to find the right manufacturer need to take
the following steps:
1. Discuss your expectations and business model with a local
consultant.
2. Learn the regulatory requirements of your target industry
in China.
90

3. Research the market or industry to find the structure or
normal channels – it is likely to be very different from what
you assume.
4. Define your needs accurately and have someone on the
ground in China research and vet them for you as a first step.
5. Short list the candidates and get quotations or references.
6. Do a proper legal background check on the final candidates
to verify the information provided, including ownership,
registrations and business scope.
7. Go and personally visit the top candidates with a trusted
translator and experienced resident.
8. Use a proper legal translation from a law firm for final
contracts but do much of the structure work yourself
prior to that to save costs.
(Source: Scott Brown of RedFern Consulting)
How to do due diligence
It is important to research any manufacturers you are
considering doing business with to ensure that they are reliable
and are capable of doing what they say they can do.
There are three basic quality levels of Chinese products:
• low quality destined for the Chinese domestic market
– these factories compete on cost not quality
• middling quality destined for the home and less affluent
export markets
• high quality, international standard products.
You need to make sure you are dealing with the latter, including
the factory’s suppliers and sub-contractors. Ask for reputable
client references, but don’t be surprised if none are forthcoming.
A factory ‘outsourcing the outsourcing’ can be a difficult issue
to get to grips with. A number of international companies have
come to grief not because they chose the wrong factory, but
the factory was using sub-standard components supplied by
a sub contractor.
Factories often will not be upfront about their outsourcing.
It’s not necessarily a bad thing – it can help to cut costs
– but you need to be aware of it because it can complicate
quality assurance.
If you can, go to the sub-contractor’s factory and see
it for yourself.
New Zealand fire detection equipment manufacturer Pertronic
Industries warns that China’s manufacturers can appear very
impressive on the surface, but the quality control can be
abysmal and products shoddy.
However, there are also many Chinese factories that are
as modern and automated as any in the world.
It can be hard to verify whether a factory is committed
to the labour and environmental standards that you need
to be able to sell your products.
Finding the right location
Getting the location of your factory right is not such a big issue
when you are outsourcing – the Chinese factory owner has to
cover most location-related issues.
However, it is probably the biggest single issue if you are
planning to build or buy a factory. Getting your location wrong
can be costly. Factors you should consider regarding where to
site your factory include:
• how good is the local infrastructure, for example
electricity supply
• how close is the support structure you need, for example
the availability of skilled workers and technical experts
• how good is the local logistics system.
The advice of some Kiwi companies in China is to first look at
locating in a special economic zone (SEZ), which not only offers
financial incentives but also assistance managing issues such as
utilities, factory support and logistics. The costs may be higher,
but the benefits may be worth it.
If there is a chance that you may place a New Zealander in China
to manage the venture or the investment then ensure that it’s in
or close to a part of China that the average New Zealander
could cope with.
KIWI SOLUTION – ASK THE RIGHT QUESTIONS
“How we went about finding a location was taking quite a lot of
time researching what style of company we wanted and most
specifically where it was going to be located. That proved to be
the decision that took us the longest amount of time and was
the most difficult to get information about. In the end we
realised it was about us asking the right questions.” – Don
Johnson, Marketing Manager Lumber, Pan Pac Forest Products
Pan Pac has a warehouse and distribution centre in the Tianjin
Free Trade Zone. It took the company two years to decide to
locate there. “Our own way of achieving that was to seek
consultation with people that were already operating in China in
all the various forms; that included government agencies as well
as other expatriate based company associations that we had.”
KEY LEARNINGS
• Thoroughly research your options by doing due diligence
on the ground and vetting options.
• If you employ specialist agencies and consultancies,
use ones based in China, or with strong links to China.
• Internet research options can be dangerous, but can
be a starting point.
• Be careful of the “What do you make? What do you want?”
manufacturing generalists.
• Don’t read too much into locals’ claims of ‘guanxi’ –
everybody has a cousin or connection, few turn out
to be genuine or useful.
• Investigate what a factory can actually do versus what
they say they can do.
• Make sure you are comfortable with the factory’s
environmental and labour records.
• Visit shortlisted factories – more than just once.
• Consult with Kiwi companies that have “been there,
done that”.
• Set your quality standards before making any manufacturing
commitments.
• Do due diligence on final selections.
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ATRAX CASE STUDY
Sourcing from China to build a global business
Atrax founder and Managing Director Kevin Maurice says
moving his manufacturing operations to China meant he could
source parts and materials at more competitive prices, leaving
him better placed to compete with his international rivals.
Atrax, which makes weighing and measuring products used in
airports, began manufacturing in China after Maurice sold off
the domestic arm of his business to focus on exporting.
But in order to build a global business and compete
internationally he had to be able to source parts and raw
materials at the best prices. And that’s what China offered,
he says.
“I can buy the same European-branded parts in China much
cheaper than I can buy them in New Zealand or Europe. If my
competitors are accessing parts at those prices I need to do
the same, otherwise I’m at a disadvantage right from the start.”
For some products the difference in prices between China and
New Zealand can be as high as 60 percent.
“Manufacturing in China isn’t cheaper just because of the lower
wages – which are actually rising fairly quickly. Other things go
into the mix, like the price of raw materials and the fact that
China is so much closer to international markets.”
Atrax products, from the small scales that weigh in your check
in baggage to the large scales used to weigh cargo for air
freight, are in 101 countries. The company is well-positioned in
China to take advantage of the surging middle-class demand
for air travel and resultant expansion of airports across Asia.
Atrax rents a factory in southern China in collaboration with
another New Zealand company. The two businesses have
complementary technology, but are in unrelated industries.
Maurice set up a Chinese company – a wholly owned foreign
enterprise – to operate the factory and has installed Atrax staff
alongside the Chinese managers to run it.
To ensure the factory manufactures goods to a consistently
high standard, he put considerable effort into documenting his
processes and employed an engineering manager who spends
around half his year in-market. Maurice himself spends at least
three months a year in China.
He says manufacturing in China has involved “surprises”, but not
all of them were bad. “The bureaucracy is difficult; it’s very hard
to understand. But the quality we’ve been able to achieve in
particular areas has been better than I expected.”
The threat of intellectual property (IP) is an issue, as it is in other
countries. But this is just another issue to be managed and
shouldn’t stop exporters going to China, he says.
While ensuring Atrax has all the necessary registrations in place,
Maurice has also taken some practical steps to protect his IP.
He has segmented his business so that there is little contact
between the design capability in New Zealand, the
manufacturing plant in southern China and the sales centre
in Shanghai.
He routinely ships bulk goods back to New Zealand where the
products are then loaded up with the software. And whenever
he uses a sub-contractor in China, he will ask them to make a
piece of steel or electronic part but never divulge what it is for.
His advice to other Kiwi manufacturers considering a move to
China is don’t expect it to be like New Zealand and don’t judge
it from a New Zealand view point. “Some of the things they
do seem unusual to us. But we’re a country of 4 million and
they’re a country of 1.3 billion – so who’s to say they’re the
odd ones out.”
He also advises Kiwis to use their networks. “Talk to other
people up there. Not just New Zealanders but other Westerners
(or Westerner savvy Chinese) in China or Hong Kong.”
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USEFUL WEBSITES
INTRODUCTION
New Zealand – China Free Trade Agreement Website
www.ChinaFTA.govt.nz
The Ministry of Foreign Affairs’ overview of China
www.mfat.govt.nz/Countries/Asia-North/China.php
New Zealand Trade and Enterprise’s guide to doing
business in China
www.nzte.govt.nz/explore-export-markets/north-asia/
doing-business-in-china/pages/doing-business-in-china.aspx
RESEARCHING THE MARKET
Intelligence
JLJ China Market Entry Handbook
http://cn.jljgroup.com/page/en/21/China-Market-Entry-
Handbook.html
Deloitte report – Succesful business models for New Zealand
companies in China
www.nzte.govt.nz/explore-export-markets/North-Asia/
Doing-business-in-China/Documents/Successful-businessmodels-for-New-Zealand-companies-in-China-2010.pdf
Victoria University report Service Succes in Asia
www.international-services-research.vuw.ac.nz/downloads/
Service_Success_-Full_Report_-_Volume_1.pdf
The National Bureau of Statistics of China
www.stats.gov.cn/english
List of the “12 best blogs” about business in China
www.bschool.com/blog/2011/50-best-blogs-for-followingasian-business
The Central Intelligence Agency’s World Fact Book’s entry
on China
www.cia.gov/library/publications/the-world-factbook/geos/ch.
html
Economic policy information from the National Development
and Reform commission
http://en.ndrc.gov.cn/
China Briefing
www.china-briefing.com
Media in China
China Daily (widest circulation of all Chinees English-language
print newspapers)
www.chinadaily.com.cn/index.html
ChinaToday.com’s general information base
www.chinatoday.com
Newswebsite operated by the China Centre Government
www.xinhuanet.com/english/
Visiting China
The Chinese Ministry of Foreign Affair – Introduction Chinese
visa procedures and applications
www.fmprc.gov.cn/eng/ljzg/3647/3648/t18417.htm
Embassy of the People’s Republic of China in New
www.chinaembassy.org.nz/eng/
Travel advice issued by the Ministry of Foreign Affairs and Trade
www.safetravel.govt.nz/countries/china.shtml
Blog on China travel and society
www.china-mike.com
ENTERING THE MARKET
Hong Kong
Hong Kong Trade Development Council
www.hktdc.com
Invest Hong Kong
www.investhk.gov.hk
Taiwan
New Zealand Commerce and Industry Office Taiwan
http://nzcio.com
PWC introductory guide to for companies doing business
or looking to invest in
Taiwan
www.pwc.com/tw/en/publications/doing-business-in-taiwan.
jhtml
Taiwan Directorate General of Customs
http://web.customs.gov.tw
93

Protecting intellectual property
Introduction to intellectual property and civil litigation in China
by Rouse and Co.
www.iprights.com/content.output/287/287/Resources/
Brochures/China.mspx
Detailed information on registering patents from the State
Intellectual Property
http://english.sipo.gov.cn
IP-related blogs on Danwei website
www.danwei.org/intellectual_property
IP Dragon blogspot
http://ipdragon.blogspot.com
IP-related information and news from a consortium
of international companies
www.qbpc.org.cn
Getting your products into China
For information on import quotas, tariff rates, rules of origin
and product and safety standards
www.ChinaFTA.govt.nz
The New Zealand Food Safety Authority’s Overseas Market
Access Requirements (OMAR) for China
www.nzfsa.govt.nz
Information on China’s zoosanitary, phytosanitary inspection and
certification requirements for live animals, animal germplasm
and plant and forestry product exports to China
www.biosecurity.govt.nz
China State General Administration for Quality Supervision,
Inspection and Quarantine (AQSIQ)
www.aqsiq.gov.cn
Building relationships
Kea China provides a great contact point for Kiwis
throughout China
www.keanewzealand.com/asia/groups/kea-china
Negotiations and meetings
ChineseNegotiation.com assists international investors
and managers
www.chinesenegotiation.com
Dealing with government and local authorities
An overview of China’s political structure (including
who’s who and links to government websites)
http://english.gov.cn/
SELLING IN CHINA
Marketing
Nielsen report on market trends in China
http://cn.en.acnielsen.com/trends/index.shtmlBiztradeshows.
com’s list of trade shows in China, grouped by city and industry
www.biztradeshows.com/china/Test if your website is accessible
from China
www.websitepulse.com/help/testtools.china-test.html
Online marketing
Chinese searchengine
www.baidu.com
SETTING UP A BASE IN CHINA
Finding premises
A directory of real estate agencies from MyChinastart.com
www.real-estate.mychinastart.com/
Hiring staff
Accounting firm Lehman Brown’s FAQs on employment issues
and standard employment terms.
www.lehmanbrown.com/FAQ-HR.htm
Lehman Brown’s FAQs for personal financial management for
expats
www.lehmanbrown.com/FAQ-PFM.htm
Practical tips on recruitment and retention from recruitment
firm Pacific Bridge
www.pacificbridge.com/publication.asp?id=81
Hewitt provides information on HR issues
www.hewitt.com
Accounting and auditing
Lehman Brown’s frequently asked questions and answers
on accounting in China
www.lehmanbrown.com/FAQ-Acc.htm
Executive search company DaCare’s China Employment
Handbook
http://blog.dacare-group.com/index.php/2006/08/11/
china_employment_handbook
Chinese online selling point/marketplace
www.taobao.com
94

NAVIGATING CHINA
Getting paid and repatriating profits
The Hong Kong Shanghai Banking Corporation’s banking FAQs
www.hsbc.com.cn/1/2/misc/faqs#a
The Hong Kong Trade Development Council’s explanation of
invoice management
www.tdctrade.com/chinaguide/6-2.htm
Lehman Brown’s run down of China’s debt collection system
www.lehmanbrown.com/PTODec2005.htm#top
Getting legal advice and resolving disputes
Comment on legal issues from China Law Blog
www.chinalawblog.com
Dispute resolution article from alibaba.com
http://resources.alibaba.com/article/156/Dispute_Resolution_
in_China.htm
Managing logistics
News, reports and research from the China Supply Chain Council
www.supplychain.cn
China Federation of Logistics and Procurement’s website
www.chinawuliu.com.cn/en/news/content/200609/20062859.
html
Research and reports from the Logistics Institute – Asia Pacific
www.tliap.nus.edu.sg
95

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ISBN NO: 9780478379198 / March 2012