By Paul Gestro*
China is one of New Zealand’s top trading partners, yet it is ranked 96th in the world for overall ‘ease of doing business’, according to the World Bank Ease of Doing Business Report 2014.
Whilst the rewards can be high - the risks are real.
However, New Zealand companies pursuing commercial opportunities in China can take simple, yet important steps to manage the business risks unique to the region.
All cross-border trade comes with financial risks. Whether you are an exporter or an importer, you carry the risk of not receiving payment, not receiving your goods or losing money to exchange rate fluctuations. When it comes to China, these risks are heightened due to the volatility of the market, and difficulty in enforcing commercial contracts. But don’t be put off. A few simple measures can help smooth the process considerably.
Using documentary trade tools such as letters of credit can be a tactical way to address counter-party risk. Such measures work in favour of both the buyer and seller, and help to provide certainty that both parties will honour their side of the deal. The credit risk is essentially shifted from the buyer to the issuing bank, and can be a useful tool if you have not yet built a strong relationship with your Chinese customer or supplier.
If you are considering documentary trade as a way to mitigate risk for exporting, your New Zealand bank needs to have a risk appetite for the issuing bank, and will generally only agree to deal with well-established banks in China. With this in mind, understanding who your trade prospect is banking with in China should form a key part of the due-diligence process.
As a bank, we have seen the full scope of war stories - including an importer who sent a significant ‘deposit’ in cash to a Chinese supplier for its goods (rather than rely on documentary trade to facilitate the transaction). Once the deposit was received, the Chinese supplier said they could no longer manufacture the goods ordered, and refused to refund the deposit. The customer is still trying to get the money back.
If you are dealing with suppliers or customers in China, you will also be exposed to foreign exchange rate fluctuations. Movements in currency can have an impact on profit margins from one day to the next. It is good practice to learn how to manage the downside of risk associated with currency changes, and implement a hedging strategy that minimises the adverse (and maximises the positive) movements in rates.
In China, government regulations can change at the drop of a hat and without warning. You need to stay on top of any regulatory changes that could impact your industry, and be prepared to make changes at short notice. We saw this with the sudden changes to China’s import rules for infant formula in 2014. The rule change left many New Zealand companies rushing to comply with the strict new requirements – some even being shut out of the market for failure to comply on time.
Equally important is the need to have all of your documentary requirements in order. The Chinese authorities are strict when it comes to formalities, and if you don’t have your if you don’t have all your ducks in a row, the consequences can be significant. A key lesson should be taken from the Ministry of Primary Industries export issue in 2013, where New Zealand lamb and beef was held up at the Chinese border because of failure to properly effect a change of name formality on the export certificates.
Managing these sorts of risks can be as simple as staying informed and being vigilant.
Intellectual Property Risks
Many companies query whether doing business in China is really worth the risk to their intellectual property (IP) rights. As long as you prepare in advance and register your IP early on – the risks can be mitigated.
If you do nothing else, get your trademark registered. As China is a ‘first to file’ country (in other words, whoever registers the name first, gets it) - you need to do this before you speak to a potential business partner, or even attend a trade show. This will safeguard you against the risk of your brand being misappropriated by a bad-faith trademark squatter.
A positive note is that the Chinese government has taken steps towards improving the IP framework for foreign companies. In 2014 it amended the trademark law, and introduced specialist IP courts to crack down on copy-cat infringers. It is also boosting efforts to encourage innovation within its own people, a move to promote originality and counter the ‘copying’ culture.
To sum up, China is a rapidly changing economy, and local businesses are becoming more sophisticated in their practices. However, it still has a long way to go. If you are considering exploring opportunities in China, speak to professional advisors and people with previous experiences (good and bad). Get as much information as you can, because knowledge is king. As long as some of the common risks and challenges are taken into account and carefully managed, China can be a perfectly achievable market for New Zealand companies to succeed.
*Paul Gestro is Head of Asia Business for BNZ. This is part of our regular series focusing on understanding the challenges and opportunities for New Zealand in our trade with China.