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

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Gerald Deyell, a partner at Blake Cassels & Gradon LLP in Calgary, acknowledges that intellectual-property violation is a big problem in China.

Companies need to make sure they are dealing with "reliable people," says Mr. Deyell, who is responsible for his firm's China initiative. "Enforcement of rights is more difficult."

Problems in finding the right partner has led more foreigners to set up wholly owned subsidiaries. That means a company has no partner with whom to share costs, and startups in China can be financially daunting for smaller firms.

The Canadian International Development Agency's industrial co-operation program, however, offers grants to fund feasibility studies and reduce other costs under certain conditions. For example, Conspec received a $90,000 grant in 1999 to do a feasibility study on whether to start a China subsidiary, plus $450,000 to help defray start-up costs.

Other issues to watch for include:

Foreigners in China often import expensive modern equipment instead of buying cheaper machinery and taking advantage of the low-cost labour to do the job, says Alfred Lau, head of the China desk at accounting firm KPMG. "You could lose money for a number of years before you recover the cost of that plant and machinery."

Canadian exporters face credit risk dealing with more "quasi-private or private companies" in China as opposed to firms that usually had the backing of the state, says Mark Bolger, regional manager for Asia and the Pacific at Export Development Canada.

"Some of them [Chinese companies] have very good credit transparency," says Mr. Bolger of the federal agency, which provides credit insurance to exporters. "Others, it's a question of, 'What financial statements do you want to see?' "

Canadian firms that want to source goods from China because of cheap labour costs should consider potential hostile reaction by rival domestic manufacturers in this country, warns Greg Somers, an international-rade specialist with Ogilvy Renault.

"There are various trade remedies that a Canadian company . . . can take against those imports," and that is a financial risk to be reckoned with, Mr. Somers says. "You risk having your imports into Canada . . . being priced out of the market."

Last August, Ottawa slapped tariffs of about 50 per cent on Chinese-made barbecues selling for $100 to $500, and the duties could become permanent if the Canadian International Trade Tribunal rules the domestic industry was hurt by the imports.

A China strategy needs to go beyond the political and economic environment, and incorporate sensitivity to quirks of Chinese culture, adds Mr. Chan of Deloitte.

"When [Chinese] people say 'yes,' it doesn't mean that they agree," he says. "It's just acknowledging what you have to say. . . . If you walk away thinking that you just cut a deal, and that the guy agreed to all your terms, you are going to be shocked the next morning to find people at your door wanting to negotiate.

Says Mr. Chan: "We do see many mistakes being made in the exuberance of the rush to China."

THE FIRST STEPS

Check out competitors

Study your target market, or hire a consultant to do so.

Visit China and attend major trade fairs. It's a diverse country and doing business in downtown Shanghai differs from working in western China.

Make contacts with potential customers, local government officials, suppliers, Chinese competitors and Western firms to understand the competitive drivers of your target market.

Hire professionals

China's fast-changing laws and regulations can affect your market. Hire Canadian legal and accounting firms doing business in China, or China-based firms, to help navigate the bureaucratic maze.

You may need advice, for example, on the trade law that came into effect July 1 and now permits companies to engage in foreign trade after registering with certain government departments. Previously, foreigners had to meet specific criteria and apply for government licences.

Accounting firms can also advise on the tax implications of different business structures, and available tax incentives.

Have a sound strategy

Draw up a business plan and figure out how the China venture fits in your overall strategy.

Determine the strengths and weaknesses of your major Chinese and foreign competitors. If you are an exporter, you want to be in a region with good transportation. If you want to sell in China, you want to be close to customers.

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