Over the last decade, numerous Chinese state-owned and private companies have invested in Africa. But there are also opportunities for African businesses to expand to China.
Lawrence Morgan, COO of Hong Kong-based start-up accelerator Nest Investments, recently spoke to a group of entrepreneurs in Nairobi about the business opportunities in Asia. China is one of the countries Morgan talked about, offering pointers on how to set up cost-effectively and engage with Chinese consumers.
Morgan noted African businesses can expand to China to tap into the country’s strong consumer market or to leverage its production expertise.
Although China’s economy is slowing down, it is still a major engine for global consumption and production. China has a population of over 1.3 billion people, and is home to the world’s biggest middle class. More than two decades of fast-paced economic growth has spurred wealth creation, thereby attracting luxury brands from the west.
According to a report by UBS and PwC, a new billionaire was created almost every week in China in the first quarter of this year. By 2030, some economists predict the total middle class population in China’s urban areas will reach 800 million.
So how can African companies reach these consumers?
Leverage the ‘Amazons of China’
“I think there are easy ways to get your product, especially if it is a physical product, into China without actually opening a company or establishing your own website,” said Morgan.
China has multiple e-commerce platforms that offer companies access to millions of customers. Last year the country recorded $458bn in online sales according to consulting firm Kantar Retail. And a report by market research company Forrester predicts online spending in China will exceed the $1tr mark by 2019.
Some online platforms, Morgan noted, allow minimum orders of as little as 10,000 units of product.
“It’s a far cheaper and far superior way to get access to a lot of customers,” said Morgan. “I think you have only got to worry, frankly, when the orders come in that you can satisfy them because [with] the scale of China, once you reach mass, [your market] can grow very quickly.”
Be careful how you establish yourself
African businesses expanding to China could also set up local entities, but Morgan cautions those who take this route seek professional advice. Where, and how, they set up could affect their operations and how they are taxed.
“From a tax perspective, definitely get advice. You can make some pitfalls now that will cost you dear in the future in terms of your tax structure,” he explained. “It’s everyone’s corporate right to minimise their taxable allowances – but think about if it is going to constrain you in terms of operating.”
In China, he noted, most foreign companies register as a Wholly Foreign-Owned Enterprise and are required to put some amount of capital into that company during registration.
“When you get your certificate of incorporation it prints on it what was the first amount of capital that you put into the business. It appears obvious that you should put in the minimum amount, but that is not the right way.
“When you then go to do business you will be asked for that certificate – and if you have incorporated with a minimum of $5,000 that will be a sign you are not committed and that you are not well capitalised in order to do business,” warned Morgan.
Understand the consumer culture
While China offers a large consumer market, he notes Chinese shoppers have cultural habits that companies ought to understand to thrive in the market. Morgan narrated his experience with a business in neighbouring Hong Kong and Singapore that dealt in luxury products like jets, yachts, villas and chateaus.
“We went into China and didn’t get any phone calls, because in China unless you have a toll free call back number, nobody will call you. These are multi-billionaire people but unless there is a toll free number they won’t phone. It’s just the culture there.”
Manufacturing and IP protection
For African companies looking to manufacture in China, intellectual property (IP) protection is likely to be a concern.
“[People] are worried about manufacturing in China [because] they have heard horror stories about what we call ‘the third run’,” said Morgan.
This ‘third run’ refers to a case in which a factory will run a morning session and afternoon session as per the owner’s request, then they will have an illegal run overnight and all those products go out through the back door.
“Chinese authorities won’t mark you at all unless you are producing over 50,000 units. It is not as defined. It is a moveable line on what is legal and what is not,” he added.
“[But] there are so many strategies for protecting IP. Often what we advise is if you have a very strong technical product, you should manufacture in several different factories where you split the IP, so no single factory has all that knowledge – then you assemble elsewhere.”