BJCG Article: The ‘Cheap’ China Venture

China has a reputation worldwide for being a low-cost destination for everything from pharmaceutical research to the manufacture of consumer goods. But is China a low-cost destination for all foreign businesses?

Cecilia Fan explores some of the hidden costs of doing business in China.

China – where beer flows cheaper than water – as low as RMB1.5 (less than A$0.40), you can have a long neck delivered to your couch, cheap labour is widely available and the annual salary for a public servant at deputy division chief level is around US$10,000 (or US$800/month), cleaners will work around the clock for as little as US$2/hour, new businesses can apply for five years of tax holiday packages, export rebates, and even lawyers in China don’t charge the frightening triple-figure hourly rates we are used to in the West.

With figures like that, no wonder China is seen as a low cost haven for foreign investors, with Australians too rushing in, relocating their factories, and setting up call centres, architecture firms and so on.

There was a time when China welcomed all visiting foreigners with a red carpet and police escorts, regardless of whether they were potential investors, traders, or simply those who had just jumped on the plane to see China without any idea of what they were doing. They arrived to a VIP-heaven: free transport, free – and good – food with sometimes regrettable “Gan Bei” drinking sessions (bottoms-up) and free interpreters often provided by local government authorities.

Once the deal is sealed, however, foreign investors often find that the VIP treatment dries up, and despite the cheap labour, it is difficult to find people with the skills the business needs, you have to train these people and, more importantly, retain them. You can’t always find an HR manager/accountant who can manage it all, speaks your language and is willing to live in your factory’s small remote location. You then find out the staff salaries are not as low as you thought once you add in all the social welfare and housing expenses, and the discounted tax rate only helps you once you start making profits and doesn’t help at all when you are struggling to survive in the early days.

Even those establishing a simple service operation may encounter the same level of frustration. Office rental in Beijing or Shanghai is no cheaper than Sydney or Melbourne; you can’t work from your comfortable (and affordable) apartment, you must rent a separate office which is pricy; you must (or at least are obliged to) pay all staff social benefits including maternity leave and various fees including contribution to the education and disability sectors. You may also find you have made your investment at one of the lowest points of the exchange rate which affects your whole financial forecast; and to obtain a small bank loan doesn’t get many (if any) Chinese banks excited. Obtaining a foreign currency loan needs another round of approval, with all of this costing time and money.

On top of that, you have your top-heavy expatriate costs – the hardship posting allowance, international school fees, plus a few bottles of champagne in the first class cabin and a few nights of 5-star executive suites for visiting senior staff.

Understand that these hidden costs in China are critical. After all, costs are only one side of the equation – any investment is made based on the positive figure in the end, which is never only determined by cost saving. Companies merely looking for cost savings may need to look further a field – Vietnam, Africa (or perhaps Santa’s little Elves!)

Despite the current economic crisis and its influence on the housing renovation market, one Brisbane-based manufacturer is doing well, while many of its competitors are suffering. “We didn’t relocate everything to China despite the temptation of a cheaper manufacturing cost base,” says Ramtaps CEO, Gary Stevens. “We kept part of our manufacturing capability in Brisbane which brings us close to the consumer market, we kept our own designers and continually improved our environmental standards and design to meet local consumers’ needs. We have also invested into China to build our own facilities where we have full quality control, when our competitors are sourcing cheaper goods from all over China and continue to struggle with quality issues.”

The smart companies like Ramtaps understand the China “matrix effect” – maintain low costs and grow their own competency. Low costs don’t merely come from cheap labour but also come from a smart global strategy and sustainable structure, as well as a solid China team and understanding from the international headquarters. Companies that go in and out of China may, in time, begin to look a little like circus clowns entertaining the Chinese and international audiences.

When “cheap” is no longer the primary drive for companies entering China, it reveals the true nature of some companies which constantly whine about China – they have got little to ensure their competitiveness in their overall business. And the way in which some companies enter China is hardly different from the way in which the Chinese rushed to San Francisco and Ballarat to make their “fortunes” on the gold fields in times past. For foreign companies falling all over themselves to cash in on China’s current economic gold rush – without any research and forward planning – they too are likely to fail. After all, entering China is not just about hitting bottom dollar.