How tech companies can crack China

Shanghai’s dazzling skyline is a powerful symbol of China’s burgeoning economic potency

As China last month officially overtook Japan to become the world’s second-largest economy behind the US, according to government figures, the race is on for technology companies to tap into a burgeoning market worth billions.

Just last week, the Financial Times reported that Japanese electronics company NEC was setting up a joint venture with Neusoft, China’s largest IT outsourcing provider, to offer cloud computing services to manufacturers with global export businesses and the Chinese SME market.

NEC’s move reflects the aspirations of outsourcing specialists and the technology community at large that China will become a huge source of revenue expansion for them.

After three decades of double-digit growth, the long-anticipated and meteoric rise to success of China’s economy has become a reality. China’s manufacturing capability is well documented but perhaps less well known is the scale of the country’s massive IT market.

The IT services market boasted revenue of $10.6bn (£6.9bn) last year and was forecast to grow to $20.6bn in 2014, according to analyst IDC, and rival analyst Gartner predicted that spending on IT in China would hit £150bn this year. In light of this, it’s no wonder that the technology sector is now asking if China could be the answer to its expansion ambitions.

Given the opportunities presented by China’s burgeoning technology sector combined with the weight of China’s economy, being a global leader increasingly means having a strong position in China. However, there are significant challenges facing UK technology sector companies.

Michael Rehkopf, partner and director of advisory firm TPI’s North Asia business, warns that understanding the rules and regulations of doing business in China, navigating the subsidies minefield and tackling recruitment are all major challenges for any company looking to tap into the opportunities China has to offer.

Although Rehkopf says financial services and healthcare represent two major opportunities for technology vendors, his enthusiasm is muted. “A lot of firms are getting prematurely excited about the opportunities presented by China but it represents about a quarter of the rate of GDP of the UK technology market – about 0.5 per cent – and everyone else wants a slice of the pie.”

Nigel Chadwick is managing director of Stream Communications, a machine-to-machine virtual mobile network operator whose products and services are designed to enable monitoring and management of remote computers via the 3G mobile network. Chadwick attended a recent UK trade mission to China, organised by UK Trade & Investment, the body tasked with encouraging investment into the UK and providing opportunities for UK companies to export.

“Building relationships is so important and it takes time. Good luck to anyone who thinks they can do business in China without investing in this. There’s a legal requirement for overseas companies to work through a local representative but culturally it’s very important to have those relationships, too.”

However, Rehkopf thinks the relationships element can be overstated. “In any country, business is easier when you have a relationship. And in China, if you don’t have the right products or services, the relationship won’t compensate for that.”

Masaaki Moribayashi is managing director of managed hosting and network provider NTT Europe. Its Japanese parent company provides services across 150 countries, including China. “Setting up in China is hard, and there’s always a danger that the regulations for foreign firms to set up will change. But if you have a good relationship with government officials, you can negotiate.”

He too stresses the importance of relationships to successful expansion. “It may take some time to build a relationship but it’s very important to have a drink with contacts after business hours,” Moribayashi says.

John Davies, a specialist on China at UK Trade & Investment, says the strategy of setting up a platform of large, successful brands – companies such as Vodafone and BT – to showcase the capabilities of the UK technology sector has been a real success and paved the way for smaller, innovative companies to make their mark.

“But setting up in China is challenging and risky. It takes a couple of years to get traction unless you’re really lucky. You can’t just turn up, expect them to like your product and assume you’ll be a success,” Davies says. “The Chinese need and want to learn how to innovate as opposed to replicate – they want to become not just ‘made in China’ but ‘created in China.’”