Business In China | The Do’s & Don’ts of Business in China

By: Sonja Cheung
Source: http://blogs.wsj.com
Category: Business
Posted By: Imagination Print

Banking on China’s economic growth and increasing consumer appetite, many overseas entrepreneurs are looking to establish businesses in the mainland, but fund managers and startup executives agree that the market is becoming harder to crack.

The Beijing skyline.
The ability to achieve a higher company valuation in Asia–in some cases 30% more than in a developed market after an initial public offering, according to Ernst & Young–is one of the key attractions for foreign startups setting up in the region, especially China. But, protecting intellectual property, establishing Chinese partnerships and adopting the right business strategy are some of the few obstacles that stand in the way.

“Companies need to avoid bringing Western business ideas straight into China. It’s not always transferable,” said Savio Kwan, who was previously the chief operating officer of one of China’s largest e-commerce companies, Alibaba Group, and is now a co-founder of A&K Consulting.

Overseas businesses need to tailor their products specifically to the Chinese user, and in particular consider the average GDP per person and adapt product pricing, said Amadeus Capital Partners co-founder Hermann Hauser, citing Chinese users’ preference to use cheaper smart phones such as those made by Qiming Venture Partners-backed Xiaomi rather than pricier handsets from the likes of Apple.

For cross-border funds, such as Infinity Group, expanding an Israeli portfolio company into China may include licensing or distributing Israeli technology to mainland companies, “but there’s the issue of intellectual-property protection, especially in an environment where there’s lots of copying,” Amir Gal-Or, founder and managing partner told Venture Capital Dispatch in a telephone interview.

Even though IP protection has improved over the last decade, there is still the question of whether a national patent is as secure as an international one, and if China’s legal system will enforce patent rights, which can be a “complex and torturous” process, “so you need the right relationships,” DLA Piper Partner Adam Cooke said at a Silicon Dragon conference in London, which also featured Kwan and Hauser.

That said, opportunities for overseas companies in China can be found in health care, food, education, entertainment and services that cater to the aging population, according to fund managers speaking in London.

Existing companies that operate in China include Cork, Ireland-based manufacturing company PCH International, which is backed by venture firms such as Cross Creek Capital, Focus Venture Partners, Fung Capital and Norwest Venture Partners, and operates in Shenzhen, and has been a supplier to Apple. As well as, U.K. fashion brand Jack Wills, backed by London private equity firm Inflexion, which has shops in Hong Kong.

Moving the other way round, from China to Europe, IDG Capital Partners’ portfolio company, Bosideng, a Chinese retailer, last year opened a shop in London, while China’s Dagong Global Credit Rating, in which cross-border European/Chinese fund Mandarin Capital Partners has a 40% stake, is becoming more active as overseas companies seek a mainland rating to help when tapping the capital markets.