China's Business Environment and Its Risks

The complexity of running a business in China generally boils down to “sudden policy changes,” especially the frequent changes in customs inspection standards. When importing an engine into China, one must file monthly applications, even though the annual total number of engines is already established. Thus, a sudden change in policy may cause the number of permissible imports to be lower than the previously set annual total. Also, even though imports may have tariffs levied on them as finished goods, the tariff rate is often left to the whim of the customs officer. China also poses land use risks. For example, although a company may have a 50-year lease agreement to use a property, it may suddenly be asked to return the property. Preferential policies set by local governments are also subject to risk, which may be eliminated by central government policies. Hirota explains “I learned the importance of maintaining relationships through the many troubles we faced

Fig. 8.2 Structure of HCMC and its subsidiaries (Source: Interviews with Hitachi Construction machinery personnel)

and while confronting various risks.” To build relationships based on trust, Central government officials must be treated cordially on their visits. Compensation standards must be clarified to employees, with employee benefits made available to them according to Chinese practices (such as the distribution of moon cakes in midautumn). HCMC was one of only five companies recognized as an A-grade business by the Anhui Province Taxation Bureau for its efforts in maintaining good relationships with local government and employees. This made things convenient for the company in a number of ways. Hirota says, “We can solve most issues through our networking and legitimate activities.”

Aside from “sudden policy changes,” China presents risks in regard to debt collection. Construction machinery products in China are often sold in installments, and many customers do not pay even if they have the cash to do so. HCMC has fought exhaustively to obtain payment through litigation. The advent of GPS monitoring systems made possible through recent technological advances, allows HCMC to remotely monitor the location and operating information of its equipment. Therefore, in case of delayed customer payments, HCMC can have its equipment as inoperable. The company also set a down payment of 30 % in an effort to reduce non-payment.

Protecting intellectual property is an increasingly important issue for conducting business in China. The country as a whole has a low awareness of the necessity of protecting IP, which has become a constraint on the sale of new products. For example, because the number of quality local parts manufacturers is limited, a parts manufacturer may supply multiple customers. Sometimes price, design, or other information may leak from these suppliers to competitors. Preventing these technological leaks by former employees is also an important issue. Dealing with this problem is difficult; HCMC employees are rigorously trained and are required to sign non-disclosure and non-compete agreements.

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