Entering the Chinese Market
Introduction
Acme, a US firm is currently focusing on investing in and penetrating markets in China. This decision can only be made if there is complete and diligent research conducted into various factors about China. Once a decision is made as to whether the venture will be profitable, the CEO still needs to weigh the outcome of conducting business in a climate that does not keep in standing with what the company’s views are.
Background
As the beginning of the 21st century, the People’s Republic of China is in the midst of a change. This transition affects the culture, economy and social structure of the country. “The old certainties, which epitomized the iron-tight grip of the Communist Party…have long since been replaced by the more liberal but unclear policies…of subsequent regimes” (Buckley et al, 2010). I the past, if a company or individual was in pursuit of a profit, they were considered “counter revolutionary” and considered enemies of the republic. This view has since changed, although the Communist party still holds power. This new reform has brought on very big questions. By what business rules will the country abide? How will the current business culture change or be reinvented, after all, commerce has been outlawed for nearly 40 years? From where will the country draw the rules that it will follow? It is reasonable to believe that faith based values would come into play, but China is an atheist state. So, they look to the past. One must remember that this is one of the oldest continuous cultures, with history being recorded as early as 4,000 b.c. “The answer is, of course, to fall back on traditional cultural drivers and in China that means a return to Confucian values” (Buckley et al, 2010). With this turning of one page and leaping into the 21st century, China will continue to face newly emerging problems and contradictions. This emergence of a rapidly growing middle class brings forth “a massive new internal consumer market and both local and international companies struggle with the best ways to capitalize on that new market” (Buckley et al, 2010). The contradiction is that this burgeoning middle class demands higher wages. This in turn, puts strain on the traditional cost advantage that China has had for so long. The Chinese government is feeling tremendous pressure, because of the ever expanding middle class, to effectively manage its economic growth. Currently the country has developed a list of strategic industries in which it wishes to concentrate. These industries are “alternative energy, biotechnology, new-generation information technology, high-end equipment manufacturing, alternative fuel cars, and eco-friendly technologies. That means these areas will receive state sponsored investments, upwards of $1.5 trillion USD (Buckley et al, 2010).
Risk
There is a plethora of business risk associated with China. Part of this stems from all of the reform that is taking place in the country. Currently, “the regulatory framework governing business is a work in progress: the accounting system is being revamped, the tax code simplified and uniformly enforced, while industrial regulations are being harmonized with China’s commitments to the World Trade Organization” (FTI Consulting, 2012). Another factor that affects business in this country is that what appears to be a centrally planned economy is in all reality decentralized. This allows for “increasingly assertive and independent-minded provincial and local authorities” greatly affect the market (FTI Consulting, 2012). With all of the change, the legal system is racing to catch up. The government is going through great lengths in an attempt to “align domestic regulations with international best practices, the rule of law is at best patchy and courts subject to extra-judicial and often political compulsions” (FTI Consulting, 2012). There is a big problem when it comes to contract enforcement and there is difficulty having the legal remedies enforced. The best way to avoid these pitfalls is typically through the reliance on a local business partner, who can navigate through these obstacles. These local business partners can often times be the biggest problem facing foreign investors. These partners often times over estimate potential profits and exaggerate the sizes of potential partners. This means due diligence is the key when dealing with middle men and other introductions. Other problems that often present themselves include, but are not limited to “being overcharged for raw materials (often supplied by companies run by staff), billing discrepancies, unauthorized disposal materials, fraudulent staff welfare claims and dummy employees, sweatshop labor, high transaction costs and other corrupt practices” (FTI Consulting,2012). There are many recent and often times public disclosures of Chinese corporate frauds. “Unexpected company failure and business malpractice and corruption continue to highlight the need for transparency and solid understanding of the off-balance sheet risk which can affect any investment” (FTI Consulting,2012).
Currency
The official Chinese currency is the Chinese Yuan/Renimbi (CYN). The word Yuan is translated literally and means round coin or round objects. The mainland China uses the renminbi as its legal tender and is issued by the Peoples Bank of China. The Peoples Bank of China is the monetary authority of China. Previously, Chinas currency was linked to the USD at 8.28 renmimbi to one USD. This all changed on July 21, 2005, when China “ended its decade long old peg to the dollar to let the yuan fluctuate versus a basket of currencies” (Go Currency, 2012). Due to growing bond between Beijing and Washington, foreign exchange markets are convinced “China unshackled the yuan from its dollar peg and allow it to appreciate against other global currencies, two years after it was fixed at a rate many economists regarded as undervalued, and which many Western policymakers gave Chinese firms an unfair advantage which worsened global imbalances” (World Business Culture, 2012). This drawing together of two global forces caused the U.S. Treasury Secretary to post pone a report that could have labeled China as a manipulator of currency. This report surely would have caused “an embarrassing spat during President Hu Jintao’s visit to Washington for a nuclear summit”(World Business Culture, 2012).
Cultural Differences When building lasting relationships abroad, knowing someone’s culture is a must. China has a very rich and long culture that permeates into everyday life as well as their business dealing. The business environment, that is culture based, is considerably different than that in the U.S. and needs to be understood and taken into consideration. One glaring difference is their relationship-based market in comparison to our transaction-based market. In their culture a relationship will trump economics. The Chinese would rather do business with those people they know and trust. Whenever a business meeting occurs, it is paramount to sit with your potential partner and get to know them before jumping into a conversation about business. If trust has been built, “Chinese business people will gladly share their thoughts with you and will give you honest feedback” (Leverage China, 2012). A good way to speed up this rapport is by spending time with the partner outside of the office and business hours, perhaps for lunch, dinner, or drinks. Another marked difference is that entertaining is considered part of business. It is very common to host partners for dinner and is considered an informal meeting. This will only help to deepen the trust and rapport. This is a great tool for following up on informal deals that have previously been agreed upon.
This leads into another difference, their face to face interaction as opposed to completing business without meeting in person. There will be no way to successfully launch in China without going there and building relationships with partners through frequent face to face interactions. This is often done by opening a firm or office in this country or partnering with those already there. The Chinese people will haggle. It is their belief that there is some room for negotiations during every deal. It is important that a company make padded but fair proposals and expect multiple rounds of negotiations. The next difference is the communication style. “Chinese people tend to be quiet and reserved in business settings while Americans tend to be outspoken and eloquent” (Leverage China, 2012). This difference often leads to the challenge of getting certain information, outright refusals, and feedback that a company may seek.
Ethical Choice Throughout the course of this research it has been found that some practices and policies are in direct opposition of what our CEO believes. This information would be included into the report. It is the CEO’s responsibility to best manage the practices of the company while finding a balance to ensure profits are maximized. The only way a CEO can do this is if they are armed with all the information needed to make the hard choices. Either way by adding or excluding the information you are steering the process. If you have loyalty to the firm and management above you, you will provide them with not only the information they requested but anything that would help them to the right decision, whatever that may be.
Conclusion
As was seen through the progress of this report, China can be cornucopia of new business or a lost venture that puts a company on the ropes. The only way to succeed in China is through due diligence when selecting partners and a good level of rapport with that agent.

References
Buckley, C., Rabinovich, S., and Bi, B. (2010). Key political risks to watch in China. International Business Times. Retrieved from http://www.ibtimes.com/articles/21867/20100503/key-political-risks-to-watch-in-china.htm on April 13, 2012.
World Business Culture. Background to Business in China. Retrieved from http://www.worldbusinessculture.com/Chinese-Business-Style.html on April 13, 2012.
Go Currency. What is the Chinese Yuan/Renimbi (CYN)? Retrieved from http://www.gocurrency.com/countries/china.htm on April 13, 2012.
FTI Consulting. Mitigating Business Risk in China. Retrieved from http://www.fticonsulting-asia.com/en/pdf/fti_whitepaper_GRIP_mitigating_business_risk_in_China.pdf on April 14, 2012.
Leverage China. Seven Major Differences between American and Chinese Culture. Retrieved from http://leveragechina.com/archives/473 on April 14, 2012.