Commentary: How to invest in China

By Lane Leskela, Louisa Liu and French Caldwell, Gartner Analysts

Companies that enter China's markets will do best to follow the examples of Chinese and foreign companies that have already achieved success there.

Western companies considering investments in China must address two challenges, one right after the other. First, they must make a strategic decision to enter China by weighing its increasing importance in the global economy against the political risks.

	See news story: Microsoft gets diplomatic in China

Once they've made the choice to set up operations there, companies face the difficulty of making money in a competitive landscape that differs significantly from what they're used to in the Western economies:

• Despite its potential for explosive growth, the domestic e-business economy in China remains small, especially for consumer e-commerce.

• The Chinese government heavily regulates the sectors that foreign companies can enter and the forms of investment they can make.

• China's infrastructure remains generally poor, with exceptions in designated cities, such as Shanghai, where it will soon be world-class.

• China's business culture differs from that of the West, and certain cultural attitudes make it difficult to replicate Western business practices and models in China.

Market forces
China's consumer market already ranks as one of the world's largest, with plenty of room to grow. However, the consumer e-commerce market has only begun to form. The footing can be treacherous, as many Chinese dot-coms have found. They went through a severe shakeout in 2001 much as U.S. dot-coms did in 2000. Before companies jump into this arena, they must understand the forces controlling the shape of the market. Knowing that will help them develop business models with a greater chance of success.

More particularly, companies should pay attention to the kinds of business models and tactics that have already succeeded or failed for Chinese companies. This approach requires weighing the range of products and services offered, the quality of the offerings, and whether business models target niche or horizontal markets.

Partnerships
Just as important as what the business will do in China is finding the right partner. The Chinese government wants to develop strong domestic vendors and prefers that Western companies form partnerships with Chinese companies to transfer specific business skills and approved technologies to them. This preference becomes a mandate for certain key markets, such as communications, although China's membership in the World Trade Organization (WTO) will loosen restrictions.

To take fullest advantage of the opportunities in an opening economy, companies can follow the example of leaders such as AOL Time Warner, which started a joint venture with Legend, China's largest PC vendor. People who buy Legend PCs and log onto the Internet receive AOL-type services. Thus, AOL can extend its brand to a huge new market without bearing the entire risk.

Companies can get lucky by going against the grain, as one small European manufacturer did, by setting up wholly owned operations in one niche market. Kobold Instruments, a German manufacturer of precision instrumentation for process measurement, sells the products it manufactures in Europe and the United States in Beijing, Hong Kong and Yeenon, among other places. Kobold sells via direct mail, advertising and distributors, and via participation in exhibitions and trade shows.

E-business opportunities
Another way to spot good opportunities is to consider what China will need as it builds up its infrastructure--for example, the wireless networking sector. However, mobile technologies represent just one aspect of a much larger movement to embrace e-business in all of its various aspects. Opportunities abound here. External service providers that carefully choose the areas in which to concentrate their skills and marketing efforts could overcome the customary reluctance of Chinese companies to outsource.

Intellectual property
Finally, Western companies must guard the rights to their intellectual property created or deployed in China. China's traditional understanding of knowledge as free of charge for the common benefit has led to widespread piracy of software. However, the Chinese government recognizes that it must do a better job of upholding Western standards of intellectual property protection. Whether these efforts will work remains unclear, but in concentrating on this threat, companies should not overlook the much larger threat to intellectual capital--the global economy.

The best advice for Western companies is not to treat China as an isolated case, but to view IT investments in China as a critical part of a worldwide strategy.

(For related commentary on how Microsoft should approach the Chinese market, see Gartner.com.)

Entire contents, Copyright © 2002 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.