DiligenceChina

or: “How I Stopped Worrying and Learned to Love the Protectionists”

Learn to love Chinese trade restrictions. They are great news for overseas investors. Or at least, they can be if you handle them correctly.

Chinese regulations and trade restrictions are the great equalizer. They turn the Chinese market from a chaotic mob-scene into an orderly footrace with a schedule, a clearly marked starting line and a referee with a whistle.

Trade restrictions are designed to foster local industries and domestic competitors – but traditionally such protectionist measures have a very spotty record. They frequently have unintended results – and wise foreign investors can benefit from Beijing’s regulatory maneuvering if they know how.

There are 3 classes of competition in China that international companies need to be concerned with:

1) SOEs (State Owned Enterprises)
2) Local startups (include JVs & hybrids)
3) Other MNCs (multinational corporations).

Here’s the good news. Chinese trade restrictions are almost always designed to support SOEs — who will probably never be serious competition for you. Yes, there are a few exceptions. But for the most part, your most dangerous competition in China comes from OTHER MNCs. Your second threat comes from those quick & nimble start-ups that exploit niches.

By blocking MNCs and regulating start-ups, the Chinese government is actually performing 3 important marketing services for your international company.

1) Government restrictions can function as market research.
Think of protectionist measures as a bouncer at a hot club – lining up the wannabe entrants outside. That queue may be frustrating if you are trying to get in to dance – but it also tells you what kind of bars are hot right now. If you are interested in setting up your own club, you have plenty of valuable information available. Just look to see who has the longest line!

2) Government restrictions give you time to get your house in order. Odds are that your biggest competitors are giant MNCs from the US, Europe and Japan. They tend to be big, rich and knowledgeable. They usually like to power into an attractive market early and grab “first mover advantage”. Protectionist measure help level the playing field by keeping giant competitors at bay for a while. This gives you time to study the market and build a plan for exploiting niches or developing new products.

3) Government restrictions neutralize potential threats. Lumbering SOEs with outdated technology and backwards management structures may win in the short term, but it is the innovative entrepreneurs – whether Chinese or foreign – who are effectively sidelined by protectionist measures. When the restrictions are finally lifted, outsiders are faced with a competitive environment that hasn’t really changed that much.

After decades of high-profile revamping and protectionist policies, China’s big state-run banks are in much better shape than they were in 1996 – but still no where near as powerful as marketing juggernauts like Citibank and HSBC. Those giant MNCs haven’t been cooling their heels on the sidelines, waiting for WTO market-opening measures to go into effect at the end of 2006. They have been preparing to develop the China market by negotiating tie-ups with smaller competitors, hiring and training local staff and preparing new products and services.

In the best of all possible worlds, your company would be able to invest freely in any market. But in the face of restrictions and protectionism you still have to execute on your company’s long term strategic goals. If China really is becoming more protectionist of its markets as some observers believe, then you are going to have to learn to turn the situation to your advantage. It’s possible. Overseas Chinese entrepreneurs have been doing it for years. Now the infrastructure is in place for your company to benefit as well.