For companies in the United States, there’s never been a better time to attract investors from China and expand market share in Asia. By gaining insight into the local culture, business practices, and government regulations, businesses from across almost every industry can uncover opportunities for exponential growth—domestically and abroad.
Inbound Opportunities
The US business outlook is positive for 2018, with many companies considering international expansion as a viable possibility. The most current data available shows China’s foreign direct investment in the United States soared to $45.6 billion in 2016, tripling the total from 2015. This significant increase in investment presents a unique opportunity to US-based companies seeking either foreign investment or greater market penetration.
With a population of 1.4 billion, China is the most populated country in the world and has the second largest economy at $11 trillion annually. The country also has a significant shortage of research and innovation, and it largely lacks a talent pool and skill set to commercialize new technology and products.
Limited product options and technological innovation in the country plays to the benefit of US companies. Products or services that may be viewed as common in the United States may be unique in China—and that’s exactly what Chinese investors are looking for.
Once a distinct product or service hits the Chinese market, adoption typically follows and quickly spreads throughout the entire country. For this reason, Chinese investors may be willing to pay above what a US company has been valued at—because they believe there will be an extremely high demand for that particular product or service in their country, which can easily offset the premiums they paid at the time of the transaction.
Attracting Investors and Expanding Market Share
Before a company can entertain the idea of having an international presence in China, it’s important to understand the risks that a foreign market can provide—and to gain knowledge of any potential barriers.
Economics
Over the past two decades, US companies who entered into the China market had goals aimed at lower labor costs, special low tax rates, and other subsidies granted by the Chinese government for incentivizing foreign investments. However, this situation has since changed because of China’s rising wages and rapidly growing economic success.
General labor costs are no longer considered substantially lower in China because of additional tax fees, capital resources, and new regulations. As more Chinese investments flow into the US market, the amounts of China–United States inbound and outbound investment may eventually equalize.
Cultural Considerations
Culture significantly impacts how the Chinese run their businesses, negotiate agreements, and communicate with foreigners. Understanding the reasoning behind Chinese thinking is key to building a flourishing brand and attracting investors there. This is often best achieved by partnering with someone intimately familiar with doing business in the country already.
Chinese investors are extremely strategic in their approach, so US companies need to be prepared to clearly demonstrate how their product or service will thrive in the Chinese marketplace or fulfill an underserved niche.
On the consumer side, brand names are incredibly important in China, and people are generally willing to pay more for luxury brands. Higher prices aren’t an issue, provided consumers perceive they’ve received a quality product at a good value. A significant mistrust of local products exists as well—especially for food and health-related items. This unease surrounding local brands has created additional opportunities for the western companies expanding into China’s market.
For all of these reasons and more, it’s important for US companies to understand how cultural differences could impact their marketing efforts to gain market share in the China.
Government Regulations
In evaluating new deals, Chinese investors must work within a tax structure and regulations that vastly differ from those found in the United States. Continually shifting regulatory barriers can also affect Chinese investors’ ability to access their capital.
For example, in 2016, the Chinese government imposed foreign exchange controls in an effort to tighten the capital market, which in turn affected all transactions involving currency outflows. The increased difficulty of transferring funds out of China deterred many investors; however, it’s expected that these restrictions will be loosened in late 2018. Being proactive and paying due diligence to prestructural planning is vital for US companies for this reason.
Intellectual Property
It’s important for US companies with significant R&D activities to plan on protecting their intellectual property (IP) and patents when entering China’s market, which is known for copying technologies and innovations that were developed abroad. Even though the Chinese government has increased its effort to protect IP, US companies should still assess the risks and set up a sufficient legal structure to shield their IP before entering China’s market.
Next Steps
Whether your organization is already doing business in China, looking to expand there, or seeking a bridge to China capital investment, locating a US partner who has extensive experience in the country’s culture, business practices, and government regulations is an important first step in expanding any business there.
In addition to using your own local chamber of commerce, consulting firms that have a working knowledge of China and a proven track record can assist your company by connecting it to the appropriate Chinese investors and helping you navigate the entire foreign investment process.
Annie Norviel has practiced public accounting since 2008 and is fluent in Mandarin. As part of the China Practice at Moss Adams, she provides assurance services to public and private clients in the technology, life sciences, and healthcare industries. She can be reached at (858) 627-1484 or annie.norviel@mossadams.com.
Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory services offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.
