Posted on: 02/11/2017
Ever since the Brexit vote, Philip Hammond and other top UK trade officials have been busy in talks with the world’s fastest growing economies from Asia to the Middle East for trade ties and deals. One country stands out of course: China. In the last decade, UK has become China’s number one investment destination in Europe. The investment total reached £2.5bn in 2015 alone, and there is little sign of a slowdown any time soon. So how can UK SMEs get a slice of the Chinese investment, or what should they look out for when trying to get into the Chinese market?
Here are some of my top tips based on our interactions with Chinese investors and businesses over the years. Hopefully, these will give you a basic idea of what you could expect from the investors and what to watch out for when exploring business opportunities.
On Chinese Investors:
1. Unsecured loans without the price tag
Unsecured loans are typically expensive because of the high interest rates, which can become a real burden if we’re talking about financing for longer periods. However, not all types of unsecured loans come with the price tag. For example, the government-backed investment program linked to the Tier 1 Entrepreneur (T1E) visa is a great way for companies to raise fund. Under this scheme, each Chinese investor will invest £200,000 into a company, with a long repayment schedule of 5 years and a fixed interest rate of as low as 3%.
2. No fund, no fee
While some platforms specifically targeting Chinese investors boast of low interest rates, it’s always worth checking the small print for any “hidden” costs. Are there any fees for processing, admin, documentation, promotion, sign-up, cancellation, etc.? These little bits may sound small on their own but, once added up, they can become significant, which means in the end you’re paying in effect at a higher interest rate than advertised. There are platforms out there that could even offer a “no fund no fee” promise, so it’s definitely worth shopping around for the best deal.
3. Get the missing skills
It may not be the first thing that springs to mind when you’re looking for funding, but did you know that getting a Chinese investor on board could also solve your hiring problem? If your business is having difficulties recruiting certain highly skilled positions, chances are they could be filled by Chinese investors, who could (and most want to) actually work in the UK at the companies they invest in under the Tier 1 Entrepreneur (T1E) visa program. Highly motivated, 90% of the Chinese investors that we work with have a degree, with 60% at least a Master degree. They offer diverse industry experiences that range from nanotechnology to accountancy to fashion design.
4. Keep control over your business
Most of the Chinese investors we work with aren’t so much interested in owning a stake in the companies they invest in. Rather, what they really value is the opportunity of working with good UK companies in industry sectors that they already had extensive experiences in back home. If retaining full control of business is a top priority for you, then the T1E program may be a particularly attractive option to consider. Also, as a bonus, those companies with a China focus or looking to explore that market, whether it’s for export or production, can readily tap into the experiences and networks the Chinese investors bring with them.
5. Beware of the cowboys
If you do decide that the T1E program is right for you, make sure you check the set up and qualifications of the platforms that claim to have a pool of Chinese investors. How do they find the Chinese investors? Do they have their own offices in China to directly source, assess and then deal with the local investors throughout the entire process? Do they have an in-house legal team that is certified at the highest level by OISC (Office of the Immigration Services Commissioner) and licensed by the Bar Standards Board? What kind of in-house team structure do they have in place to match investors with investees? What’s their success rate over the past 3 years? You’ll find that most platforms in fact lack full capabilities and have to outsource, which inevitably means higher costs, longer lead time and, most importantly, a disjointed process for both you and the investors.
On Chinese Businesses:
1. Find a local business partner
Major UK brands have realised at great cost that China is not a market that you can simply set up shop, whatever your budget. Get a local partner to assist you in establishing in the market. They will know the best way that your product can be introduced into China and use existing sales channels. They understand the regulatory conditions of the market, importation and distribution. They also understand the banking system, usually providing a ready-made infrastructure. Simply put, a partner can provide a quick, low cost, trouble-free route to market and significantly reduce the risks with new market entry.
Since they will have a residential ID card, they can access basic services, which will be needed to create an online marketplace, for instance. Expats may find that setting up an online shop with some of the leading Chinese portals will be very difficult and when negotiating there may be language issues as well.
2. Saving face
Known as ‘face culture’ in China (or ‘saving face’ in English), this can be a complicated area for an expat new to the country to understand. A person’s reputation and their good standing is vital to a Chinese businessman or woman, so if an expat makes even a mild criticism of them in public, it would mean them losing face. On the other hand, Chinese clients will elect to work with the expat if they trust in them and believe they can deliver a good business opportunity. This is why there’s a lot of importance attached to networking and investing time in cultivating business relationships.
Chinese co-worker or business partner will not refuse a request or disagree with what the expat says, but they will express themselves subtly rather than engaging in direct confrontation. An expat needs to learn what the signals are and not press for an answer when the timing is not right.
3.Take time and be wary of copycats
Businesses and expats moving to China will appreciate fairly early on that competition is stiff and that competitors can bring out rival products very quickly, so the expat’s business needs to deliver quality above all else. They need to take the time to establish themselves and develop their ideas and products. Despite the size of the Chinese consumer market, they should not rush into delivering something without fully trialing it first.
They should also carefully monitor the marketplace for rival products, especially those that are simply copycats, since this will create a legal issue that will need resolving – and this is where a local business partner should really come to the fore with their knowledge.
4. Get a local tax expert
Currently, there is a single 25% tax rate charged on the income of foreign and local companies, though some business areas offer tax incentives to reduce this amount. For instance, many areas want to develop a high-tech sector and are offering tax rates of just 15% to firms that meet the tech criteria. Other cities, usually megacities such as Shanghai, also offer expats other enticements to create a new business or simply relocate from other parts of China. For instance, in Shanghai, expats in some business sectors are exempt from contributing to the country’s social security system. Foreign employers also need to note that the rate of income tax varies in most areas and the rate also depends on the nationality of the employee.With rules and tax rates changing on a regular basis, the foreign business will probably find it easier to employ a local who understands them and can explain them effectively.
5. Hire Chinese staff
Teaming up with a local business partner is a sound first step but, at some point, businesses will need to hire Chinese staff that they can rely on and trust.
Besides recruitment firms, a good starting point for expats recruiting Chinese staff is LinkedIn. It launched a Chinese language version in 2014 and attracts a very large number of professionals looking for opportunities. Alongside this is Red Rabbit, a LinkedIn platform, which is aimed at attracting young professional Chinese workers. There are other social media platforms, many of which are Chinese creations and unheard of outside of the country but which are very popular and can help find quality staff.
About the author
James has 30 years’ international experience working in fast-moving environments within major multinationals and governmental organisations on key strategic cross-border initiatives in China, Northern Europe and the US. He currently heads the Business Development team at the Ying De Group, whose award-winning investment platform has already facilitated more than £20m of investment from Chinese investors to UK SMEs via the government-backed initiative called the Tier 1 Entrepreneur (T1E) investor scheme.
Prior to joining Ying De, James held a number of senior management positions, including Interim Managing Director in the German automotive components industry and Senior Vice President responsible for global revenue in a leading global IT company. He is also the owner and director of 14 businesses across various sectors in the UK.Go back to Top Ten Tips