CFOs put eggs in BRICs basket - but China is not easy to crack
The risk-reward dynamic is changing for companies pursuing
investment opportunities overseas. And, as a result, CFOs face a quandary.
In 2011, red tape and bureaucracy topped the list of CFOs’
concerns when investing abroad - but in 2012 the focus is set firmly on the
threats presented by currency fluctuations and geopolitical risk. CFOs are telling
us that they face greater risk for the same reward.
So, what to do? Go for broke and take a gamble abroad, or stay
home and hoard the cash? Driven by pressure to grow, the consensus is to do
something in between and take a ‘better the devil you know’ approach to
Based on a survey of over 1,000 CFOs from mid-sized
companies across 14 markets, we
know that two thirds of CFOs planning foreign expansion are setting their
sights on the BRICs, the US, the UK and Germany. When it comes to the BRICs
specifically, nearly half of CFOs interviewed are now
investing in or planning to enter these markets, compared to only three out of
ten in 2011.
China comes out as the frontrunner. It tops our Global
Opportunity Index of most attractive investment destinations, and has done so
for three consecutive years. However there is a disconnect – according to the
World Bank’s latest ranking released last week, China is the 91st
easiest place in the world to do business, lagging behind the likes of Rwanda
So what are the main challenges of doing business in
China and how can businesses meet these head on?
The culture challenge: Multinationals
need to have a clear understanding of the country’s unique etiquette and
ceremonies. A nuanced understanding of Chinese business, culture and ethics is
of paramount importance for any organisation wanting to conduct business there.
It’s impossible, for example, to expect to carry out formal business
discussions with any Chinese company during the first meeting. Building trust
in each other is the first step of any business relationship in China.
You need a local, not a country, strategy: China is made up of 23 provinces and 56 ethnic populations, all of which have
very different sets of beliefs and values. Companies wanting to succeed in
China must therefore tackle the challenge at a city or provincial level when
developing their market entry strategies and ground operations.
Local target markets are also important. For instance, a major British
retailer has seen Western-style desserts fly off the shelves in Shanghai, but
it’s been harder to shift clothing despite giving it much more floor space. The
opposite would be true in Beijing if it was to open a store there.
Working within the regulatory environment: Chinese regulation is uniquely complicated and is often dictated at provincial
or municipal level. This means that it is essential for CFOs to recognise, understand
and address these issues at the planning stages of their China strategy.
A particular challenge is knowing the required general and industry specific
permits, licences and certificates in the region or municipality in which you
are operating. For example, a well known
advertising agency recently used the ‘wrong’ quality paint for their upmarket
office interiors. This resulted in a fine and the office had to be closed for
So on-the-ground knowledge is absolutely key when planning expansion in
China. A good understanding of culture, business etiquette and customer
behaviour can make all the difference.
Kim Hayward, BDO LLP’s International Liaison Partner,
and Jingru Liu, Head of BDO’s Europe-China Desk.
This post originally appeared on The Financial Times
Beyond Brics blog: http://blogs.ft.com/beyond-brics/2012/10/29/guest-post-cfos-put-eggs-in-brics-basket-but-china-is-not-easy-to-crack/