The risks and opportunities of doing business with China

Few doubt the enormous opportunity that exists in doing business with China, particularly as the country’s external business and foreign policy, namely the Belt and Road Initiative (BRI), continues to drive economic development around the globe.

However, this opportunity also brings with it very real challenges. And whether an opportunity blossoms into a round of applause at the AGM or a slating in the media is not just a matter of how any investment develops, but a matter of how it is handled.

At the end of the day, reputation is the most valuable asset at stake for any investor.

In the UK there is an annual report (the Reputation Dividend Report) that assesses the percentage of a business’s market capitalisation that can be attributed to reputation. Looking at the conclusion of the 2018 report, the combined corporate reputations of the 350 largest companies in the UK stood at £986bn – 39 per cent of shareholder value. And among the key drivers of this are quality of leadership, financial probity, community and environmental responsibility. All things that are vulnerable when considering business with China.

What enables a business to manage these issues is how it communicates – its messages, its tone, who it communicates with, how it prepares for success, failure, and somewhere in-between.

Let’s consider the simple fact of just engaging with the BRI. It is not hard to imagine a western investor being portrayed as aiding and abetting Chinese world domination. So unfair yet potentially so damaging, what is actually happening is constructive collaboration arising from an acceptance and understanding of how to succeed in a changing world.

However, headlines get greater traction when they focus on the threat. And this is often the default position with China because of the very nature of the opportunities. Foreign policy blended with business expansion, perceived security implications of various projects, and the less than stable political and legal systems in many of the BRI partner countries.

So, the starting point when embarking upon a joint venture with the Chinese powerhouse is to ensure the right narrative. This requires involvement of all aspects of the business as reputation damage can emanate from anywhere – the investors, the staff, customers, regulators to name a few.

Crucially, this narrative, the reason for the enterprise, has to be communicated to all important stakeholders. This is the opportunity to communicate that this about collaboration and is a natural part of adapting to the changing world order. If a business appears to be secretive about its Chinese dealings then that is an open invitation to those who wish to misrepresent the activity.

Secondly, the nature of the project needs to be fully understood and the potential risks of it identified. This requires comprehensive scenario planning. Looking at every potential risk and then how that might play out with each stakeholder group. The establishment of a regularly reviewed threat management strategy is an essential part of the on-going business relationship. This clearly involves ensuring the right messages and communications are prepared so that if something goes wrong the impact can be reduced.

And it may all go wrong. China-based lawyers predict BRI initiatives will inevitably lead to more disputes, sometimes between Chinese contractors and international sub-contractors. In fact, China’s top 30 law firms handled 1,640 contract disputes for corporate clients last year.

However, if a positive narrative about the project has been put out and communicated clearly, then if things go wrong, they are going wrong from a position of strength. The platform to communicate your way through the problem has been established. And if you have already taken the high ground, by being open and transparent, you are likely to benefit from that good will. In the case of business with China, the issue of face is important and if you are pursuing a determined international expansion programme it is vital that you are seen by prospective partners to be reliable and fair.

In some circumstances, this might mean hard-hitting communications to stakeholders, should the formerly positive relationship turn into a nasty divorce. And harnessing all the opportunities available to keep it in the public domain. Go big. Go loud. And engage all influencers.

To summarise, risk analysis, risk management, behaving appropriately, and investing or collaborating for good reasons are all important parts of engaging with Chinese business development.

But the key is communicating all of this. Communicating to your investors, your regulators, your staff, your partners, the governments in the regions, and your Chinese partner.