Not only is China the world’s second-largest economy in regards to GDP, but it also holds the distinction of being the world’s largest economy by purchasing power. Up until 2015, China’s economic growth rate averaged about 10% over the last three decades. During that time, it was the fastest-growing major economy on the globe and, as a result, attracted the attention of virtually all industries and sectors, particularly those that were targeting new markets for rapid (and prosperous) global expansion.
Recently, however, things have taken a bit of a turn. A looming trade war with the United States—regardless of personal opinions—has caused many U.S.-based companies to consider abandoning operations in China. Expanding into new territories always brings with it its fair share of uncertainties, but in 2019 China, this is especially true. However, this isn’t to suggest that companies should avoid entering the Chinese market altogether. Instead, businesses need to both recognize these potential challenges and understand how an International Professional Employer Organization (PEO) can help mitigate these risks—and help establish a presence in the country.
Global Expansion Challenges: Entering a Complex Chinese Market
By far, the biggest challenge with entering the Chinese market is the aforementioned trade war. It’s something that has already seen both supply chains and industrial clusters shift significantly, mostly towards Southeast Asia. It’s also brought with it an increased sense of competition for U.S. companies from rivals in areas like Vietnam, Germany, and Japan.
This segues directly into another major challenge: the fact that customers are either slowing down orders or, in some cases, not placing them at all. Many speculate that customers are holding back on placing orders until times are more certain. Even still, once a company loses market share (even when the circumstances are beyond their control) it’s very difficult to gain that ground back.
Two additional current challenges of entering the Chinese market are also directly related: increased bureaucratic oversight, coupled with a slower-than-normal rate of customs clearance. Many analysts have even warned that these two issues are only going to get worse as China is unable to match U.S.-based measures on a dollar-for-dollar basis moving forward.
Business across numerous sectors are feeling the uncertainty; according to one recent survey, roughly 85% of companies based in the United States say that they’ve suffered from either U.S. or Chinese tariffs or, in many cases, both. And 70% of their Chinese counterparts said the same. Not only do the tariffs increase the cost of goods sold, but they also reduce profits as well. Nearly one out of every 10 manufacturers affected said that they’ve already reported losses in excess of $250 million or more—and there’s little to suggest that an end is in sight.
Other Considerations When Entering the Chinese Market with an Employer of Record
When expanding into China, businesses must also consider other essential factors, with Chinese employment contracts being chief among them. Chinese law not only requires a written contract for every employee but also has penalties for employers who don’t have one. Each contract must include items like a job description, salary, social insurance information, labor protection, and safety information, among additional items. Not only must the contract be written in country-specific language, but it is also essential for understanding how companies can and cannot terminate Chinese workers who are employed by their hiring company.
China’s employment contracts, coupled with the challenges of entering the market, help to act as a reminder of why an Employer of Record can be such an integral asset before, during, and after global expansion efforts. For businesses considering entering the Chinese market, an Employer of Record offers a flexible solution with speed, agility, and a quick, compliant exit plan should the market not meet the company’s needs. Not only can this solution help businesses understand cultural nuances and mitigate risks, but it can also bring with it the most important factor of all: remaining focused on running your businesses.
Take on the Chinese Market with an Experienced Expansion Partner
The current economic climate in China may present a number of challenges, but that doesn’t mean that China should fall off your global expansion radar. Expanding with the right partner can make all of the difference during expansion. Velocity Global’s Employer of Record solution offers businesses step-by-step assistance when establishing a presence in China—or any of the 185-plus countries in which we operate. Ready to establish your presence in one of the world’s largest economies? Let’s talk.