10 lessons for Canadian firms trying to crack the Chinese market

Empire Industries CEO Guy Nelson has been running a joint venture with a Chinese partner for five years. Here’s what he learned the hard way

An audience on one of Dynamic Structures’ attractions, the Flying Theatre at Wanda Movie Park in Wuhan, China

An audience on one of Dynamic Attractions’ rides, the Flying Theatre at Wanda Movie Park in Wuhan, China. (Empire Industries)

Prime Minister Justin Trudeau was on hand in Shanghai in September for the signing of a deal between Winnipeg-based Empire Industries and Chinese partner Altair (Shanghai) Space Technology to develop a $600-million amusement park on the theme of space travel. Not only is Empire subsidiary Dynamic Attractions slated to design and build the rides, but it has an option to become a 20% partner in the development, located in the city of Hongzhou. Not bad for a small Canadian manufacturer with a market capitalization of just $25 million.

But as with many a business venture announced in China with much fanfare, it’s hardly a done deal—more of a memorandum of understanding. Altair doesn’t even own the land yet—it must be rezoned and purchased in a public tender process. “Somebody could outbid our partner,” Empire’s CEO and executive chairman, Guy Nelson, allows. Still, Empire has operated a joint venture with a Chinese partner to manufacture ride components since 2011—and Nelson has come to know a thing or two about doing business in the Middle Kingdom.

In a recent speech, he offered the following 10 hard-won lessons for other firms trying to crack the Chinese market:

  1. Pick your partners carefully. Understand that most private Chinese companies are family businesses, and “family trumps partners,” Nelson says.
  2. Control your intellectual property. If you are exporting complex machines, do the hard stuff yourself, and have a long-term service offering. “You want to stay needed,” Nelson says.
  3. Only export proprietary products. These tend to be priced in U.S. dollars, which will limit your currency exposure over contracts that may last many years.
  4. Avoid exporting products that can be copied. They will be—and at lower cost than you can produce them.
  5. Go with the flow of central planning. China’s five-year plans are real, and they can dictate the direction of the economy. “Don’t buck the trend,” Nelson advises. Today’s structural reforms target moving from infrastructure investment to the consumer economy. It’s a good time to be selling theme park rides, in other words; not so good to be selling trains.
  6. Be prepared to set up shop in China. The combination of 12% import taxes and 17% value-added taxes on foreign manufactures continue to frustrate exporters, so do your high-volume, low-tech production in China.
  7. Use Chinese equity markets to raise capital for investments in China. There is an abundance of domestic savings available to companies at lower cost than in North America. And unlike foreigners, Chinese investors don’t discount Asian ventures for their supposed political risk. “I haven’t put down a dollar in China,” Nelson says. “I always use their money.”
  8. Manage your skilled workforce effectively. Tradespeople’s wages may be only a fifth of what they are in Canada, but their productivity is lower too. If you don’t pay special attention to that labour component, you may not reap the full benefit of lower production costs.
  9. Take advantage of China’s lower plant costs, typically just 40% (in land, buildings and machinery) of what a comparable facility would cost in Canada.
  10. Hire bilingual employees in key roles. “I don’t speak Mandarin, but I have top people on my team who do,” Nelson says. Good communication with Chinese partners, employees and government entities is essential.

Soundslike a lot of trouble? It’s well worth it, Nelson says, when you consider the market opportunity. “You’re getting on a rocket ship,” he says. “If they need what you’ve got, strap in, because it’s tough to keep up.”