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Don't rush your plan - an effective China strategy takes time

Insurance giants Manulife Financial Corp. and Sun Life Financial Corp. are carving their niche in China with an eye to a market of 1.3-billion people. Furniture maker Shermag Inc. is importing cheaper, traditionally styled home furnishings from there. And Conspec Controls Ltd., a gas-monitoring equipment maker, operates a subsidiary in that country to sell technology to Chinese coal mines.

Whether it's the lure of China's vast market or access to cheap labour, experts agree that doing business with the economic giant isn't easy and companies need to do their homework before embarking on a China strategy.

"The road to China is not paved with gold," warns Alex Taylor, director of planning at Ottawa-based firm Dai Group, an international business-consulting firm. "It is higher risk than investing in North America -- but the payoffs can also be greater."

China's entry into the World Trade Organization nearly three years ago has meant a seismic shift from a central-planning to market economy, including a gradual reduction in tariffs and other barriers in doing business there.

But China is still a developing country and people forget that, Mr. Taylor says. "They go to Shanghai, to Nanjing Road, where they see the skyscrapers. . . . That's not representative of China . . . and is not where the factories are going up."

Margaret Cornish, executive director of the Canada China Business Council, agrees that investing in the Middle Kingdom is tough, and a "China strategy" should have support from the top brass. "You can expect to lose money, possibly for three years."

While graft and corruption were a problem in parts of China in the early 1990s, the upside now is that "the business environment has evolved substantially . . . and those issues are much less problematic," Ms. Cornish adds.

Despite the challenges, some Canadian firms that are part of a global supply chain need to go to China because their key customers have shifted most of their production to that cheap-labour country, and now want cost savings from their old suppliers, says Randall Chan, director of the China services group at accounting firm Deloitte. "Many of these companies are going to China for life-and-death reasons."

More companies are investing in China by setting up a wholly owned foreign enterprise or subsidiary these days, but some are still opting for the traditional joint-venture partnership. It was once the only way to do business there, and still is for certain "sensitive sectors," such as publishing, telecommunications and banking.

Toronto-based Lingo Media Inc., a supplier of English texts to China's primary schools with a Chinese partner, prefers to pursue the joint-venture route again to enter the wholesale-distribution business that has historically been closed to foreigners.

With an eye to more relaxed rules for that industry expected in December, Lingo-Media chief executive officer Michael Kraft says he is negotiating to buy a majority stake in two Chinese media distributors to "get us to the mark that much quicker."

Joint ventures can speed up entry into the China market and ease the financial burden, but experts advise doing due diligence. Canadian firms may think they are negotiating with a "mom-and-pop" operation when the potential partner could be owned by a Chinese competitor, Ms. Cornish cautions. "It's difficult to see corporate linkages in China."

Mr. Taylor says it is complicated to negotiate a good joint venture, noting it requires a lot of time managing that relationship, or guanxi. "It's your network of personal relationships," he says. "People in China like to be friends with who they do business with."

Burlington, Ont.-based Conspec Controls negotiated joint ventures for its gas-detection business with two state-owned Chinese companies in the 1980s, but ended up dissolving them in 1998 to create a wholly owned Beijing subsidiary in 2001.

"It was not working out for us," recalls Conspec president Enzo Ucci. "The business practices of our partners were not on the up and up. . . . We had one guy who started a restaurant, for example, with the company's funds, and was purchasing cars."

Mr. Ucci says that Conspec also faced competition from former employees who had blueprints for its "older" technology, but the company is now taking steps to protect its newest generation of products. "Our engineers here are doing things, and making it extremely difficult to duplicate in electronics."

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