Motivations for starting-up in China

Human Resource

One of the greatest motivations for establishing R&D in China is the huge human resource potential that the region has to offer. In 2010, 4 million students graduated from the country’s 3000 universities and colleges including 14,000 PhDs, and more than 100,000 masters students. Aside from domestic graduates, more than 580,000 Chinese students were dispersed among 100 countries and regions worldwide for studying purposes between 1978 and 2002, with 150,000 of them returning to China. The majority of students chose to immigrate into other countries after graduating. Hence, China has suffered from an outflow of talents (brain drain) to a great extent. In recent years, Chinese governments, at both national and local level, have introduced policies to induce highly skilled overseas Chinese to return to China. Increasing numbers of scientists and graduates have returned from abroad thanks to the enduring economic growth and improved opportunities in China. These key people represent an additional pool of uniquely qualified human resources, and bring experience and knowledge from around the globe.

Cost Reduction

Another well-known motivation for establishing operations in China is the cost reduction factor. Facilities in China costs about only one tenth of what it would in the West. Although the wages of highly qualified Chinese R&D staff is high compared to Chinese domestic level, it is still 1/4 or 1/ 5 of that of R&D staff salary in industrialized western regions.

In China, business success is still dependent on strong informal networks and relationships called “GuanXi”. Through the use of GuanXi, foreign companies can establish informal relationships with local universities and local scientific centers, which in turn might yield strategic partnerships and human resources for the long term. In addition, China’s industrial development is at an emerging level and the economy is undergoing a fast transition from a planned to a market based system. Hence changes in industrial regulations, legislation and policies are all the more dynamic. Through their on-site R&D activities and proximity to the government, foreign companies can keep pace with changes in the dynamic Chinese environment, while also achieving critical competitive advantages.

Since Chinese policy makers seek to raise the level of China’s industrial production and increase competitiveness to an international level, special economic and other investment zones have been established and have become the main engine for growth in the Chinese economy. These centers-of-innovation attract investors by providing space, advanced infrastructure, and high-tech facilities that they need along with financial incentives. As an example, the Chinese State Council and Beijing municipality both offer start-up firms located in Zhongguancun area tax-free operation for three years following their establishment, followed by a 50% discount for the next three years, and a 15% discount from the seventh year onwards, along with other tax incentives. Due to the substantial governmental support and geographical uniqueness, it is not surprising that several experts believe that these industrial and science parks will become centers of excellence in the future.

Barriers for foreign companies in China

Despite the mentioned advantages and rewards for setting up activities in China, there are still high managerial barriers that could neutralize the potential advantages. These barriers include difficulty in management due to Chinese language and the cultural gap, diversity of staff, low individual initiative and innovative mindset of Chinese employees, high employee turnover rates and lack of loyalty and remaining governmental influence within the company. Identifying, understanding and overcoming these barriers is an issue of out-most importance for the success and competitiveness of start-up companies looking to set-up activities in the region.

Language and Cultural Barrier

Given the still lack of experienced local managers in China, the majority of the upper management are still staffed by foreign expatriates. Unfortunately, most of them do not have adequate or non-management experience in the Chinese environment. The Chinese language is an initial barrier in management. Although some of the top Chinese research staff have a good command of English, most of the local engineers only have limited English capabilities.

On the other hand, a Western manager may have done everything correctly according to his understanding of good management style. However, lack of experience and sensitivity to Chinese mentality and culture will usually translate to managerial inefficiency, wrong decisions and inadequate leadership.

Lack of Initiative

Another potential pitfall may lie directly within the composition of the staff. Most teams of foreign companies in China are typically composed of three groups of people: local graduates make up the majority of the R&D staff. Western expatriates and global Chinese comprise the other two groups. Although diversity in R&D teams can increase creativity and innovation, it can also be a source of potential conflict.

The Chinese education system is characterized by a narrow curriculum design and very little development of individual initiative. Although Chinese graduates have a solid education and are highly skilled in solving certain well-defined tasks, they often present little individual initiative, which is decisive for creativity and innovation. Developing a more innovative mindset among Chinese staff is a primary concern of foreign R&D managers at this stage.

High Turnovers

Many foreign enterprises in China suffer from high staff turnover rates, particularly those located in large cities, where sufficient new opportunities are available. Foreign companies are often used as a career springboard. References from these jobs will help them get jobs with better pay and possibilities. The worst case scenario is that they can use this experience to get hired by competitors.

Government Policy and Local Cadres

It is worth mentioning the governmental influence within a company is a further management barrier in China. Even if the intervention on foreign enterprises’ activities by the Communist Party of China (CPC) has decreased in recent years, there are still numerous possibilities for the Chinese government to make everything difficult. Some of the major problems that may arise while dealing with local government officials are bureaucracy, uncertainty in legal changes and lack of commitment in the protection of Intellectual Property Rights.

According to the experiences of some foreign managers, receiving promised preferential conditions such as tax relief and other incentives can be a stressful and prolonged procedure, due to multiple bureaucratic hurdles and very specific rules. Therefore, a good relationship (GuanXi) network with the government is crucial to business efficiency and success.

Due to lack of transparency in Chinese policy making, China’s industrial, political, legal, technological policies and strategies are difficult to discern. This provides more uncertainty for foreign activities in China and should be carefully taken into account when planning the business strategy.

When it comes to establishing cooperation with locals in China, one of the key issues is the uncertainties concerning the fairness of R&D cooperation due to insufficient legislation (especially intellectual property rights) and a strong protectionism of regional governments. Most of the potential cooperation partners are actually state owned enterprises and derivations of former state owned enterprises. This obscure network makes it easier for the Chinese side to carry out dishonest or non-transparent technology transfer without the knowledge of the outsider. In most cases even if the foreign partner were to obtain clear evidence of this kind of activity, the means of counteracting it would be limited. Local governments are in most instances important stakeholders and legal proceedings against them could even hinder the foreign company´s future operations in China.

Now that we have taken a look at the advantages and disadvantages of setting up a technology business in China, let us shed some light in the current automotive clusters available in the country today. In the third article of this series, we will go ahead and try to identify the ideal cluster to invest in and try to come up with a possible market strategy for companies trying to tap into the Chinese automotive market. I’ll see you in the next post!