Welcome back to the Ultimate Guide series, where we have you covered on all the common questions on expanding to China, from how to have dinner with your business partner to the organisations that can help get you started, so that you will be braced and ready to get it right the first time around.
To round off the series we’ll be looking at how theory is put into practice by talking to experts in the field. We’ve talked to Australian business owners and finance professionals to find out what they learnt from expanding their business into China.
Doing business in China: learnings from local business
As we found out, there’s never been a more exciting time to do business with APAC’s leading economy.
Australia and China’s bilateral trade relationship continues to provide mutual benefits for both parties and an increasing numbers of Australian businesses are entering the Chinese market with great success.
China provides an attractive option for local businesses seeking to minimise their production costs, and with a growing middle class and shift toward higher quality good and service exports, the opportunities for Australian business are set to broaden beyond the financial.
However – as with any global expansion – the rewards of setting up business in China are coupled with considerable risk. China remains a complex foreign market with an often uncertain regulatory environment, with local businesses often finding the market difficult to penetrate.
Doing business in China can be a big challenge for a small business, so we asked three Australian business leaders who have tried and tested the market to share their advice on making the move a success.
Elyse Daniels founded Exodus Wear in 2009, a business specialising in leavers wear for Year 12 students, tour jackets for dance schools and tracksuits for sporting groups. With a team spread across Australia and Asia, their garments have been worn by international musicians including Justin Bieber, Justice Crew, Kylie Sandilands and Stan Walker.
Edwina Walsh, founder of Bamboo Monkey, has created a range of modern essentials sourced in sustainable bamboo. Prior to starting her own business, Edwina spent years working as a product developer/buyer in Fast fashion, so when I decided to venture into her own business, it was an easy decision to make to source in China: home to the Bamboo Sea.
Daniel Brady started Heavenly Hammocks with goal of selling hammocks, hammock chairs, stands and accessories across Australia. While using Brisbane as a wholesale base, China is Daniel’s go-to source for manufacturing.
Investing time and resources into building the right networks is key to any successfully market entry strategy, and this is particularly true in China, where business is often built on personal relationships.
Although not always essential, Elyse Daniels believes meeting your Chinese business partners in person is important in the early stages, to establish relationships:
“I would advocate going there at least once to meet the supplier -whether at the initial stage, if you are deciding between a shortlist of players, or once you have made the decision. This will go a long way to building confidence and a solid foundation for the relationship to grow.”
Edwina Walsh found that as a small business, it’s often difficult to be taken seriously, and advised working with a third party operator to mitigate this:
“The biggest issue for any small business is finding a supply resource and building a relationship. Especially from the other side of the world. Being a small business, you are not meaningful - in that the size of your order is quite small in comparison to the customers Chinese factories deal with. My initial production orders were placed through third party operators, so I could leverage their buying power and existing relationships with primary producers.”
Although a local agent can be critical in building relationships on the ground, Elyse cautioned that the process can be more of a hindrance and advised practicing discretion:
“I started out by using an agent – but it's a difficult process and a situation that’s hard to get out of. The agent has complete control over the supply chain and can be really secretive.”
Daniel Brady found trade platforms such as Alibaba were the easiest way to source and initiate contact with suppliers who she could then get to know through Skype:
“When chatting, you start to get a good idea if they're legit, it they're a factory or reseller, if they're flexible with quantities or not, and so on. After making an initial order with them, we can then continue to chat with them about any questions or issues we have, or future orders.”
Supply chain management:
As important as it is to establish the right contacts; this is only the first step in a long journey to business success in China.
After sourcing a Chinese exporter, setting clear expectations – particularly in light of communication barriers – is critical to maintaining high quality standards, Edwina Walsh explained:
“Due to the communication barriers, you have to be incredibly clear and precise. Nothing can be taken for granted. It is very easy for small mistakes to slip through, so you need to clearly explain exactly what your expectations are.”
Although it is common practice in Australia to use fewer suppliers and benefit from economies of scale, this strategy doesn’t always translate to the Chinese market, Elyse Daniels added:
“Don’t put all your eggs in one basket. You may find a factory that’s great quality so you start to use them the whole time. Australians are loyal, and that's nice, but it can come back to bite you. When you put all your volume into one factory they won’t necessarily let you cost down. It’s important to do independent audits of your factory, using a company like Asia Inspection. Before you pay the balance on any orders, get them to come and do the audit on your order then you can pay.”
With many manufacturers expecting payment on orders in full – Daniel Brady warned that cash flow issues could arise:
“Some manufacturers let us pay a 30% deposit and some want 100% upfront. It's a little difficult on cash flow, but it's doable.”
Dealing with payments and foreign exchange:
Recent turbulence in global currency has made exchange-rate risk a greater threat for both importers and exporters who deal with China.
Elyse Daniels learned the hard way about the unpredictability of foreign exchange, and would recommend working with an expert to mitigate these risks:
“I would recommend finding someone who can give guidance regarding currency fluctuations. I learned this the hard way, when the AUD went from parity to not, I lost tens of thousands of dollars from inaction.”
Payment has been a particular pain point for Edwina Walsh, who relies on standard international bank transfers to pay suppliers:
“At this stage we just do standard International transfers via the bank, which is cumbersome and slow, especially when you are dealing with a new supplier. They will not release any goods - even samples until funds are received.”
Daniel Brady also initially relied on bank transfers, but eventually switched to an online foreign exchange service due to the more competitive exchange rates:
“Initially we used a local bank for the transfer, but their fees and exchange rates were not competitive, so we've since changed to an online FOREX provider for Australia whose costs are very reasonable. This method goes smoothly with all of our suppliers.”
Businesses are wising up to hidden fees and this is what prompted Airwallex to provide a one-stop solution for international payments; tapping into local payment gateways (such as WeChat Pay, AliPay and Union Pay) to offer businesses mid-market rates with complete transparency.
What we can learn
There’s no one-size-fits-all entry strategy for success in China, however learning from the failures and accomplishments of other transnational businesses will provide a clearer vision of the road ahead.