Key risks to consider when doing business in China

Organizations doing business with China know that the operating environment is complex and very different from the Western world. However, the market opportunity remains promising, despite recent challenges from the coronavirus pandemic.

Success depends on identifying and managing a number of China-specific risks, including the following:

Current organizational leadership capabilities, structure and culture may not effectively support business performance.

Many multinational organizations have a dominant Western mindset and a lack of cultural intelligence. Others have corporate functional and regional silos that hinder business performance. It is vital that multinationals understand how China works.

They need to be aware of the many invisible and subtle differences between Chinese and Western culture, mindsets, behaviors and ways of working. Leaders require an informed understanding of the current business environment in China.

Companies working in China must increase the ability of their leaders to manage cross-cultural teams, and they should develop a supporting organizational structure that matches the specific challenges of the Chinese business context.

Organizations may not foresee and adjust to significant changes in the business environment in China.

The Chinese government’s austerity drive and the war on corruption have become permanent fixtures since 2012. Multinational companies are under increased government and public scrutiny, with stronger regulatory oversight, so businesses need tighter corporate governance and a focus on improving government relations.

This is not just about gaining market access (getting approvals, licenses, land, etc.), but it extends into managing risk. Risk management should focus on understanding regulatory threats, closing control gaps, and having an effective crisis-response team in case a regulatory investigation is launched.

As companies improve their understanding of the implications of new laws and regulations, and seek to adjust and adapt their operations, the importance of building a pristine business reputation will be more critical.

Failure to manage relationships with partners, clients, suppliers and other stakeholders may lead to litigation.

China’s legal framework is different from many Western countries. If disputes occur, lack of familiarity with China’s legal framework or how the legal system works can cause problems. Local arbitrators can deliver unexpected outcomes, despite legal opinions, facts and contractual terms that would suggest otherwise.

Organizations should therefore seek to minimize the risk of litigation, with a strong culture of relationship management, clear communications, and proactively identifying and addressing issues that might give rise to conflict.

China is different. Organizations doing business with China must have a deep understanding of how China works. They need to improve their organizational capability, governance and culture if they are to succeed in China. While the Chinese government remains committed to opening up and reform, the attitude towards multinationals is undergoing a subtle change.

Only those organizations whose investment can bring meaningful impact to the country will be welcome. The challenge for organizations wishing to do business is China is to ensure that they are on the preferred list, that they operate in a compliant manner, and that they make positive contributions to the local community, economy and stability of the country.