There is significant money to be made
in China — and not just by large, multinational companies. Small and mid-sized U.S. companies can benefit from the
growing Chinese marketplace, where the
gross domestic product is expected to rise
7 to 9 percent annually for the foreseeable
future. However, despite an apparent abundance of opportunity, your company
should be prepared to face a few obstacles
when entering China for the first time.
Smart Business talked with George
Hoffman, vice president of PNC Bank’s
Global Treasury Management, on the potential business opportunities in China for
U.S. firms.
Is China really a hot market for middle-market U.S. companies?
As the United States’ fourth largest export market, China represents a lucrative
marketplace for U.S. companies — regardless of their size. U.S. Commerce Department statistics show that 90 percent of all
U.S. firms that exported to China in 2004
were small or medium-sized firms.
Although only a fraction of China’s 1.3 billion people are in a position to buy U.S.-made goods and services, that figure still
represents a very viable potential market.
What’s more, China has $1.2 trillion in
foreign currency reserves to pay for
whatever it wants to buy from foreign suppliers, according to the U.S. Commerce
Department.
What should a U.S. company take into consideration before entering this market?
Any U.S. company seeking to export to
China needs to consider a host of financial,
legal and cultural issues — and must learn
how to work within a business environment that is unlike almost any other marketplace. It’s essential to develop a well-planned marketing strategy. Seek advice
from professionals, such as bankers, lawyers and federal, state and local agencies
who can help you understand the risks and
rewards of going global and navigate
China’s complex web of regulatory requirements and cultural barriers.
What are some of the risks involved?
Perhaps one of the major risks of doing
business in China today is the difficulty of collecting full payment on time. Market
risk and currency exchange rate risk can
also be concerns for U.S. companies conducting business in China. Other risks
include widespread intellectual property
theft, significant pricing pressure, fierce
competition, lack of quality controls
imposed at the requisite level by governmental bodies and, conversely, government interference. However, with proper
planning and guidance from your financial
and legal advisers, these obstacles can be
overcome.
How can companies manage these risks?
- Have clear contract terms. Proceed
with extreme caution before entering into
agreements with your Chinese constituents. In your contracts, specify exact
terms of payment and performance standards — with specific timelines. Do not
rely on legal advice from your Chinese
partners; have your own legal counsel verify what may or may not be valid claims. - Protect your intellectual property.
Understand your intellectual property vulnerabilities before entering the Chinese
marketplace. Learn how to protect your
rights in China, and develop an action plan
for what to do if your company’s rights are
compromised. - Ensure payment. Spend the time and
money to analyze your buyer’s creditworthiness to minimize exposure to the risk of nonpayment. This type of analysis may be
challenging due to language barriers, varying accounting standards and the overall
limited amount of credit infrastructure in
China, but it is critical. It is also very important to work with a bank with expertise in
issuing international trade letters of credit
and other financial instruments that can
reduce payment risk. If you cannot obtain
a letter of credit to secure your payment,
require cash in advance, as Chinese companies typically do not allow unsecured
payments after delivery of goods. - Manage foreign exchange risk. If
possible, request payment in U.S. dollars to
reduce repatriation risks. Talk with your
banking adviser about hedging foreign
exchange risk using nondeliverable forward contracts, which can reduce the
uncertainty of the exchange rate with the
Chinese Yuan. - Identify a trusted U.S. financial
adviser. Find a U.S. financial institution
with extensive experience in helping businesses expand into China. It can also be
beneficial to work with one of the Export-Import Bank’s ‘Fast Track’ lenders as this
can help to streamline and facilitate working capital loans to support sales to overseas buyers. Also, a bank that maintains
close alliances with Chinese banks, as well
as the U.S. Department of Commerce, can
help ease your company’s entry into China
— and turn export opportunities into real
sales for you.
To learn more about doing business
in China, visit PNC’s Middle Market
Advisory Series at pnc.com/joinus.
This was prepared for general information purposes only and is not intended as
specific legal, tax or financial advice, or
recommendations to buy or sell currencies or engage in any other transactions,
and does not purport to be comprehensive.
Under no circumstances should any
information contained herein be used or
considered as an offer or a solicitation of
an offer to participate in any particular
transaction or strategy. Any reliance
upon this information is solely and exclusively at your own risk.
GEORGE HOFFMAN is vice president for Global Treasury
Management at PNC Bank, National Association, a member of
The PNC Financial Services Group. Reach him at (412) 768-7910.