Doing business in China involves understanding conditions and direction

When you fly a kite, the wind can push the kite around. A drop in speed can cause the kite to fall. An increase in speed can allow the kite to venture higher. Doing business in China can be a little like flying a kite. The general wind direction is continuous, but the speed can change and the angle can change. As such, companies doing business in China need to be continually reviewing their strategy and their direction, planning for the long term, but feeling the wind direction and making adjustments along the way.

We have had to adapt to significant changes since founding LehmanBrown in 2001. I first learned the Chinese tax laws back in the 1990s, but these have changed significantly since then and will evolve as China's regulations mature. Industries that foreign companies can invest in have also changed, with most industries slowly opening up over the years, though some remain restricted or prohibited according to the new negative list.

Many of these are likely to open up in the not too distant future as China continues to rebalance its economy and move upstream.

The legal system has also improved, with companies enjoying better court protection than before and better intellectual property protection. Beijing, for instance, now has a specialized court for IP cases. There are, though, some archaic remnants such as having to get every document notarized or, if from overseas, approved by a consulate. These measures are aimed at eliminating fraudulent documents but they are from an age pre-dating the Internet and e-mail.

Meanwhile the Chinese market place has changed. Beijing and Shanghai are international cities and incur the costs of running a business to go with this exclusive title. This is forcing new companies entering the Chinese market to look to other cities and provinces, where costs are lower for labor, rental, utilities and logistics.

There are also new economic zones with their own characteristics. Some have state-level approval but many are a work in progress as they develop their own management guidelines. Understanding the differences between regulations and guidelines across many cities and economics zones is still as daunting to newcomers as it was when our firm opened 14 years ago.

Another thing that has changed is hiring, with the introduction of a new labor law in 2008. It was positive in that it provided more protection to employees and had tougher measures on social welfare, pay requirements and notice periods. But it took away flexible notice periods by stipulating that all employees and employers had to provide one month notice for terminating a contract, regardless of whether the contract provided for longer. So in a contract asking for three months notice either way, the current law holds the company liable for three months, but the employee for only one. Also, if a company wishes to downsize by more than 10 percent of their workforce or 20 staff, they need to apply to the local labor bureau and advise all staff in a consultation period. These requirements are fine if you are a large company, but as China seeks to encourage private enterprise and an innovative society, future jobs will increasingly come from small and medium-sized enterprises and these labor regulations are restrictive and will either slow or hinder job creation.

There are other factors to consider when doing business in China. In October 2011, Chinese regulations required foreigners to pay social welfare insurance. Beijing's administration implemented it immediately, but the rest of the country has yet to do so except for a few locations. Guidelines are still not in place for pensions, maternity leave and unemployment. Many companies would prefer that regulations did not make payments mandatory, but that insurance cover was mandatory and that private cover could allow opt out. However, the current situation just adds a degree of uncertainty when preparing business plans and budgets.

Chinese companies are venturing overseas, starting with state-owned enterprises a number of years ago and now private enterprises seeking to expand or looking for locations either closer to target markets or for a cheaper cost base. Just as China's wind conditions can change, so can those in other countries. Many countries are reviewing their tax regulations and regulations governing individuals and companies. The UK government has made the UK a very friendly place for foreign companies to do business. But if there were a change of government on May 7 after the general election, there is no guarantee that those coming into power would continue with such friendly policies. There are other risks for Chinese companies venturing abroad, but they are the same as the ones facing foreign companies coming to China: IP protection, labor practices, taxation and government reporting requirements.

Success and failure when venturing into a new market comes down to a number of factors. It is important to ask if there is a market and where that market is. Next it is important to know how much investment is needed in that market to get a return. Third, it is about knowing the local culture and adapting to it. Finally, it is being aware of how to protect oneself in that market. When a foreign firm comes to China or a Chinese firm ventures abroad it needs to be aware of the local culture, customs and practices. However, they also need to protect themselves, by acting within the law, having proper policies, processes, procedures and internal controls in place.

Regardless of a company's nationality, when flying a kite in a different location, make sure you know how to fly it there: learn about the wind conditions and its direction and take advice from experts that know. That way the kite will not come crashing to the ground.

The author is managing partner of LehmanBrown International Accountants in Beijing. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 04/17/2015 page9)