Written by Lizzie Meng – Account Manager
Startup companies in China are facing tough challenges in the midst of an economic slowdown that has affected the entire world. There are some similarities between the Chinese markets and the international markets, as both need to expand their business model to cope with the competition from the global brands.
The Chinese markets, like other countries too, are seeing a lot of foreign companies invest in the country, but it is still a fairly new industry for most of the companies.
One thing that makes Chinese startup companies unique is their willingness to work with the existing market players. This means that while they are opening up a new market, they are also trying to work with the existing players in the market to get maximum profit and success.
In this article, we explore the current situation of the startup environment in China and how foreign companies can enter into this market with fewer costs and in a short time.
An Overview Of The Startup Business Environment In China
Startups in China are an interesting phenomenon in that it seems to be the biggest factor in the growth of the Chinese economy in the recent years. While no one can argue with the fact that China does have great economic potential, many are surprised by the growth rate of startup companies.
It is much more difficult to promote a new market than it is to promote an existing market due to the limited amount of capital required for operations in startup companies. But I believe that the startup business environment in China will see explosive growth, driven primarily by domestic sources due to the growing economy and tighter bank regulations.
What is driving this growth in China?
The primary driver is the fact that the government has been more open to capitalizing on the growth of startups in the past few years. In fact, in the last few years, there have been multiple rounds of financial grants being given out by the State Development Department (SID).
Additionally, there are numerous programs that allow foreign companies to open up startups in China and claim patent protection based on their technology. This is a relatively new policy in China and one that was not promoted heavily during the prior years.
There are a few reasons why the startup business environment in China is unique compared to that of the United States or other comparable countries. One is the level of competition that the Chinese startup businesses have faced from local and international companies.
Another factor is the size of the Chinese market. The Chinese startup businesses are also highly fragmented, creating a highly competitive environment for all but the most robust companies to operate in.
The key to understanding the growth of startups in China is to understand the dynamics at play in terms of funding.
There are some large Chinese companies that are comparable to the current American companies in terms of size and financial strength. However, most of the country’s companies are either locally based or have very limited local reach, especially in terms of product offerings.
Benefits Of Opening A Startup In China
There are numerous benefits of opening a startup in China. Many foreign companies are now interested in coming to China to start their own startups or investing in existing ones.
One of the main benefits of investing in a Chinese business is the incredible consumer market. Every day in China there are millions of new products being introduced to the public. The Chinese consumer is very accustomed to shopping online and from electronics to clothing to cosmetics, the products that are possible to find online are constantly increasing.
Because of this high demand for consumer products, the Chinese retail market is extremely high when compared to other markets around the world. When investing in a startup, this gives you an opportunity to tap into this large customer base in order to increase your profits while at the same time helping to bring new consumers to your business every day.
Another of the major benefits of opening a startup in China is the massive amount of capital that can be used to expand your business. In the past few years, China has exploded with growth both economically and socially. With this growth, there has been a tremendous amount of money that has become available to both Western companies and new entrepreneurs looking to capitalize on this emerging market.
The Chinese government has approved several large economic development programs that have massively increased funding for companies in the country. This has allowed many new entrepreneurs the ability to launch their own businesses and help develop the Chinese economy into the powerhouse it will someday need to be.
One of the biggest benefits of opening a startup in China is the excellent level of local support you will receive. Unlike many countries around the world, China is a very politically stable country.
This means that entrepreneurs are often given the support they need from the Chinese government in order to succeed. If your business does make it through the Chinese market, you stand a very good chance of being able to sell your product all across the country for very reasonable prices.
Another great benefit of opening a startup in China is getting first-hand access to the Chinese market. The great thing about investing in China is that you will have direct access to the largest consumer population in the world.
Millions of Chinese people use the Internet every day, and this translates into a huge potential for your business. With an investment in your startup, you may even find that you can tap into the incredible amount of leverage that the Chinese economy offers you – especially if you are able to hire professionals to handle the bulk of your business communications and marketing.
What Are The Challenges For A Startup In China?
Startups in China face unique operational issues because of the size and scale of the economy.
At the same time, many entrepreneurs have failed to successfully penetrate the existing markets because they lacked the know-how and expertise required to compete with multinational corporations on an equal footing.
To remedy these difficulties, international companies should conduct research and develop appropriate strategies to address issues like management issues, HR issues, and issues about their business culture and perception. These issues can impact negatively their ability to successfully compete against established businesses.
HR and payroll
It is not uncommon for startups to experience issues with employee turnover, especially when a company has just started operations. In a country with a tight labor market and labor shortages, there are limited avenues for improving worker retention. There are also limited systems for compensating employees when the enterprise becomes profitable.
Every country has great differences in human resource management and calculation of salary and tax. It is not easy to understand completely and thoroughly in a short period of time. This also makes it difficult for foreign enterprises to manage Chinese employees after they enter China.
Because of the unique environment in China, there is a unique need for startups to hire local partners with extensive local networks in the business community.
By partnering with these local firms, the startups are able to draw on expertise and resources that will prove invaluable to them as they grow and become successful.
Although many Chinese firms focus on international markets, there is still a strong dependence on domestic markets. To this end, it is important for a startup to secure credible local partners.
Laws and regulations
Before entering a country, the most important thing is to understand the local laws and regulations, which is the premise for a foreign-funded enterprise to have a long-term and stable development.
How to hire employees in China in compliance with the law and how to manage social welfare and tax declaration for employees is also a big challenge for a foreign-funded enterprise that is not familiar with China’s policies.
In addition, in the case of employment disputes, how to legally terminate employees is also a difficult problem.
Another key issue facing startup businesses in China is the overall environment. The Chinese government is well aware of the problems associated with the environment.
In fact, this became one of the reasons why the Chinese government started encouraging the development of a green economy. Green economies create jobs, generate revenue, and help reduce pollution and other environmental-related risks. Given this, the Chinese government is encouraging greater involvement by startups in the green economy and in finding solutions to solve these problems.
How A PEO Can Help Foreign Investors To Expand Into China
A PEO Service in China is a very effective solution that can help foreign enterprises to open the door of the Chinese market quickly and in an easier way.
It has the following advantages:
- Manage HR and payroll for your startup – A PEO takes charge of all the HR and payroll aspects. Because of the expertise in local laws and regulations, a PEO can assure that foreign companies operating in the country are compliant with the local regulations in terms of labor contracts, social security, taxes, and all employment-related issues.
- Reduced costs – A PEO can lower the costs of operating a company in China, administrative costs, and also the costs of employee turnover. In fact, a study has shown that PEOs can lower employee turnover by 10% to 14%.
- Easy process to hire employees – Hiring employees in China can take resources in terms of costs and time because you would need to manage an internal team to recruit, onboard, take care of payroll, social benefits, etc. A PEO can take care of all this and you can easily hire employees for your startup with or without a local legal entity.
- Test the market with fewer risks – Entering a complex market like China, can be very risky. Navigating among local laws, language barriers, regulations, are a costly and time-consuming tasks. One of the main benefits of using a PEO is the possibility to test the market with fewer risks because you can enter the country without a legal entity.