Tough for foreign firms to succeed in China

Weak intellectual property protection and preference for Chinese companies leave foreign companies trying to break local market on shaky ground, say analysts, who add bribes common in tier 2 and below cities.
Written by Tyler Thia, Contributor

China's grip on major industrial verticals and a lack of strong regulation to ensure the protection of intellectual property (IP) are just some of the factors why foreign IT companies are struggling to establish a foothold in the world's most populous country, say industry observers.

Ovum's IT services analyst, Hansa Krishnamurthy Iyengar, explained that government policies in China dictate that local vendors be given top preference in any contracts and in any vertical market. Also, large Chinese players, as well as Japanese vendors that have a long standing presence in the country, and that are considered 'local', are often favored as partners over American or European companies, Iyengar said in an e-mail interview.

She added that the lack of policies and regulations to protect IP rights can affect the livelihood of foreign companies operating in China.

While it is common for these businesses to enter into partnerships with local companies to enter the Chinese market, foreign organizations often face the risk of local partners gaining access of their IP and breaking away from the partnership to serve the market alone, the Ovum analyst said.

Her observation was confirmed by Cheam Gim Chng, spokesperson of Singapore Infocomm Technology Federation (SITF). In an e-mail interview with ZDNet Asia, Cheam explained that intense price competition with local players and language issues, including the need for product localization in Chinese characters, are also some difficulties faced by foreign companies.

Differences in business dealings
The need to cultivate "relationships" is also crucial, Cheam said.

"During some of my conversations with vendors in China, I have been told that bribes are common and often companies that refuse to toe the line are subjected to things like disconnection of power or Internet connections, and other such underhanded means to coerce them into making the payoff," Iyengar said. She added that these situations are particularly common in tier 2 and below cities.

Such differences in business dealings can unnerve some foreign organizations.

Iyengar observed that what may be considered typical "gifts" in China may be regarded as bribes in western companies and deemed a breach of business conduct.

Google China's first head of government relations, for instance, was fired because she handed out Apple iPods to Chinese officials and charged the expense to the U.S. company, according to a CNN report. She and the executive who approved the expense were fired because the act was an "explicit violation" of the U.S. Foreign Corrupt Practices Act. She was reportedly "dumbfounded" when told of the dismissal.

Alan Eustace, the Google executive in charge of China operations then, recalled the incident as "the worst moment in our company" and blamed himself for not conveying the company's views and the severity of such acts, CNN noted.

Foreign companies that want to enter the country which has a population of 1.3 billion sometimes lack a real understanding of the market and also do not realize that the approach needed to address different parts of China is unique, Cheam noted.

"Communications is a potential problem due to a lack of fluency in business Chinese and understanding of the local business culture, or the 'hidden rules', she explained.

Iyengar, though, noted that foreign companies can still do well if they are able to tap the right opportunities. While big players such as Microsoft and RSA have successfully carved out a name in China, she said midsize players such as IT management and consulting company, Atos, have also been able to build "a decent base" there.

The Bezons, France-based company entered the market after securing a contract for the 2008 Beijing Olympics and have since gone on to acquire a few small and midsize businesses in China, noted the Ovum analyst.

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