Nearly 3 million cars that do not comply with China’s State VI vehicle emissions standards, to take effect in July, are sitting on dealer lots across the country, according to the China Automobile Dealers Association (CADA), said Caixin.

That amounts to an estimated RMB 500 billion ($72 billion) in inventory value that dealerships must unload before the new standard takes effect and makes it illegal to sell them, according to a report the industry group released last week.

The unsold inventories of vehicles that only meet State V emissions standards are so large that as many as two-thirds of China’s dealerships believe they won’t be able to sell all of them before next month’s deadline, according to a survey published last week by China Auto Dealers Chamber of Commerce.

To make matters worse, many dealerships are locked in long-term contracts with automakers that force them to continue to buy vehicles that do not meet the updated standard.

China’s State VI standard will go into effect on July 1 in most of the country as part of the new rules to cut polluting emissions from new vehicles by about half of the current threshold. The State VI standard will be the sixth iteration of incremental emissions limits that China’s environmental protection ministry has instituted since the 1980s.

 

China is a country with an economy that is growing and developing quickly, and it’s viewed as one of the strongest economies in the world, second only to the United States in size. It’s become synonymous with manufacturing in all sectors, and the world’s biggest businesses like Apple, Google, and Facebook all have strong connections to China.

There are many positive aspects to setting up a business in China, and it’s becoming an increasingly popular option for entrepreneurs from many other countries. Whether it’s a possibility you’ve never considered, or it’s an idea you feel enthusiastic about, there are some facts you should know about China to get you started on the right path.

Economy

The second largest in the world, China’s economy is growing at a faster rate than any other country. It’s also the premier exporter and importer in the world. Benefits of having a business in China include:

• Cheaper manufacturing rates
• High-quality technology
• Productive workforce
• Lower staff costs
• Government investment in infrastructure
• Well-established trade routes

Industrial diversity

China’s strength economically is in part due to the diversity of industries operating within its borders. Leading sectors for small businesses include:

Manufacturing

China is well-known for its manufacturing prowess, and with companies like Apple and Microsoft having their products made here, the country has gained a reputation for being able to produce the highest quality technological products.

China doesn’t just make iPhones and laptops, however; there are plenty of opportunities to source your manufacturing in an extensive range of other sectors, from prams and pushchairs to electricals and homewares. Some of the most successful examples of small-scale manufacturing are in:

• Shoes
• Handbags
• Cases
• Electronics
• Gadgets
• Jewelry
• Mobile phone accessories

1.Healthcare

Healthcare products in a range of niches are all showing healthy growth and profitability. People are increasingly health conscious and are prepared to pay for anything that can help them lead a longer, healthier life, and look better at the same time. Three key sectors within healthcare are:

2. Herbal and dietary supplements

Chinese herbal medicine is a respected form of traditional healing that has become popular worldwide. Your easiest route into making money from health supplements is by coming to an agreement with existing manufacturers to sell their products, but if you have the knowledge and investment capability, then you could start a whole new brand.

3. Pharmaceuticals

Pharmaceuticals are profitable the world over, and even more so in China where raw materials and labor costs are lower. The complication with this lucrative trade is that it is more tightly regulated, so you would need to obtain a license in order to operate. You’d also need to be aware of the import and manufacturing requirements in other countries if you intended to sell your products abroad, as they can vary from country to country, and in some cases may be prohibited.

4. Beauty products

Health and beauty is another global sector that could be exploited from China. Skincare, for example, is a booming market, and the latest trend among Western women is the flawless, natural look originating in Asia, so China is the ideal location from which to establish a new business in this area.

5. Education

There’s a large and growing demand for English language lessons among Chinese business people and society, and this is a trend that looks set to continue. You could also offer online or small face-to-face classes in a variety of other subjects, providing you have the skills and qualifications to undertake such work.

6. Environment and ecology

Finding ways to reduce emissions and halt the progress of climate change is widely recognized as a global necessity. China is active in looking to reduce environmental pollution and use more renewable energy sources, but the challenges are substantial. If you have experience in engineering or construction, this could be a good fit for your new business.

7. Import/export

Importing and most particularly exporting are conventional business models in China that have afforded the smallest of enterprises an opportunity to create a successful company. The range of exportable products available means there’s no need to get involved in manufacturing unless you have a burning desire to make your own goods, so it’s a relatively simple process to source products and sell them via global retail outlets.

Setting up your business

First, you need to register your trademark in China. Then you need to decide whether you want your entire business to be located in China, or whether you just want to base your manufacturing operations there. You should come to your decision after comparing the pros and cons of being in China as opposed to elsewhere, and the overall costs involved. You may find that although you’ll be adding transport costs, for instance, you’ll be reducing the cost of raw materials so significantly that it more than covers the extra shipping costs.

You’ll need to create a viable business plan and a budget with a long-term forecast. This forms the hub of your business proposition, and you’ll have to be able to find the investment required to finance your project. Your personal finances aren’t directly related to your business finances, but potential lenders and investors may well want to see evidence of your ability to manage money. If you have a poor credit rating, for instance, take action to improve your rating by using loans for bad credit, or judicious use of a credit card to rebuild your score.

You must be able to raise a proportion of the investment yourself, but many entrepreneurs are finding success with crowdfunding type schemes using multiple small investors to raise the money, so this may be a better option for you depending on your situation and your business idea.

Small businesses are just as important in China as anywhere else, forming the supportive framework that allows bigger corporations to operate successfully. Small companies provide opportunities for both entrepreneurs and local people, benefitting the local and national economy and further strengthening China’s position.

If you’ve only thought of China as a place for global sized companies, think again, because the country provides an ideal platform on which to develop a successful small business.

The China Securities Regulatory Commission (CSRC) has announced plans to give foreign individual investors access to the mainland’s A shares via local brokers, the South China Morning Post reports, marking a further step towards liberalisation of domestic markets.

Under the current system, only a select group of overseas individual investors may trade A-shares through local brokers, such as foreign employees of mainland-listed firms or those holding permanent residency permits. Foreign institutional investors can do so if they participate in the QFII programme.

Others must buy A-shares through the Hong Kong stock exchange which has a link with the mainland’s two bourses.

China’s $6.4 trillion stock market has been the focus of the government’s rhetoric relating to liberalisation and reform in recent months. Both of the country’s stock markets, in Shanghai and Shenzhen, however, are in bear markets following a string of economic headwinds for China.

We’re often told that mixing business and politics brings nothing but trouble. But in today’s China, business leaders ignore the ebbs and flows of Chinese political sentiment at their peril.

That is the core argument of The War for China’s Wallet, the latest work by leading China expert and Director of the China Market Research Group, Shaun Rein.

In this exclusive interview with China Economic Review, Rein explains why brands need to be more politically savvy than ever before to succeed in China, which economic trends we should watch out for in 2018, and why US President Donald Trump is actually handling the Chinese rather well.

Q: The overriding message of The War for China’s Wallet is that brands need to have a real understanding of Chinese politics to succeed in today’s China. Why is that?

A: China’s market has always been big for multinationals. But a lot of brands haven’t thought about the political risk implications of doing business in China, and that’s why I wrote the book. What we’ve seen in the last three to five years is that the Chinese government is using economic carrots and sticks to punish and rewards countries, and increasingly companies. For instance, in the last month you’ve seen how Marriott called Taiwan a separate country [on its website], and what did China’s government do? They handed out punishment, with a massive hammer. They blocked all of Marriot’s websites in China for one week. That’s a massive amount of loss of revenue.

So, the thrust of the book is: China is increasingly using economic punishments and rewards, and how do companies adjust to that? Do you kiss ass, like Cambodia has done? Do you go completely against China, like India has done? Or do you go somewhere in the middle, somewhere I like to call the ‘warm partner’ category? That’s countries like Canada, the UK and France. Those countries will be nice to China, but they’ll also stand up to it, and that’s probably where you want to be.

Q: How can companies avoid being caught up in a political furore in China?

A: It’s not easy, frankly. Your employees, from the top to the bottom, now have to become political, almost State Department-like analysts. You can’t just rely on PR people to deflect anger. You have to start at the very beginning, understanding that China wants to be a superpower—you have to listen to what it wants or be punished.

It’s not an easy thing, because if you take the example of Cambridge University Press from the UK, they bowed down to China and blocked a lot of articles and books on their websites at the government’s request. But then the backlash came in the West, with people saying that CUP was censoring its content. So, you kind of have to play that middle line. You have to weigh money vs. morality.

Some companies, like Apple, are shameless. Tim Cook stands up at the World Internet Conference in Wuzhen and says that China has a flowering internet ecosystem, and doesn’t even mention censorship. That’s mealy-mouthed and pathetic. But he does that because Apple makes so much money in China and they have their entire supply chain here.

If multinationals are going to hedge, you can’t invest too much in China. You can’t have your entire growth strategy in China only. You can’t have your sales and your production in China. And this is bad, this is killing me because I’m a China consultant who doesn’t have operations elsewhere, but that’s what you need to do.

Q: And if the Chinese government does decide to punish a company, what would be your advice for them? How can they deal with that situation?

A: Well, in the recent hubbub with Marriott, the CEO Arne Sorenson said, “We’re so sorry, we didn’t mean to upset the Chinese people.” He went out there and kissed ass, and he looked weak. I didn’t like that.

But look at a company like Zara, which also got caught up in [the same controversy over Taiwan references]. They apologised immediately and said, “We like China, we were wrong and are going to fix the situation.” But this was done through their China team. The global CEO didn’t apologise, and I think that’s the way to do it. Because once the global CEO apologises it becomes a bigger issue, the Western media starts to cover it. Did you know that Zara was hit? Probably not, but everyone knows that Marriott was hit. So, apologize, and then go slowly, wait a little bit, and see if everyday consumers are really angry at you. You always want to keep a low profile here.

Now, if you start to get a lot of anger from the Chinese consumer base, then you might need the global CEO to come in, but as much as you can you want to localise, and not go too far. I think Craig Smith from Marriott also went too far. He called it the “worst, most egregious mistake of his career.” I mean, come on! In my mind, the Chinese government knows that whatever it wants, Marriott will now do. And that’s a very dangerous situation. The Chinese government respects you if you’re respectful, but strong.

Now, this might sound kind of crazy, but Donald Trump, I think, has played China extremely well. I think on China-US relations, he has played that relationship better than any of the last three or four presidents. He comes in, has his goddaughter sing Chinese and tells Xi Jinping that he’s great. But then he also criticises at the same time, and says, “It’s unfair that you’re extracting so many business deals from us due to protectionism, and this needs to change.” Strong, but respectful.

Q: Do you think that Trump’s stance will actually help US companies do business in China?

A: Absolutely. I also think that he’s going to get a lot stricter this year, tensions are going to rise. I think his first priority was the tax cuts. Now that he’s gotten those down, he’s going to focus on trade. What’s smart is that he doesn’t attack human rights, he doesn’t attack democracy… Those are things that piss off Chinese leaders and also piss off a lot of the Chinese population, because they’re going to say: “What, you think we’re evil?”

Because when you say that you have human rights abuses, you’re basically saying to Xi Jinping that you’re an evil person. But he’s not an evil person. He’s just acting in a way that he thinks is good for himself, like all political leaders, and good for the country.

So, Trump is going to go after the economic issues, and he’s going to bang hard against protectionism, bang hard about opening up the auto market, financial services. This is what he should be doing, and its going to benefit the US business community.

Q: Do you think we will see significant action from China to open up its market more to foreign businesses this year?

A: I think there will be more. I think that China’s government will be willing to give up more market access to the US and Europe, but especially to the US, because they won’t feel like they’re being pressured into it, and being called a bad person. They’re going to feel that it’s a partnership, and they’ll be looking for ways to improve. And for them, opening up auto is not a big issue. Opening up financial services? That might actually benefit China, not just for increased competition but it might reduce some systemic risk here, because the domestic banks have been handing out too much and have too many non-performing loans.

So, I think the Chinese government will cede. They’ll say, ‘Let’s give Trump these things.” Trump will then be able to tout his success in the US press, saying that he’s “opening up China.” And Trump, wisely, will not criticise China on sovereignty issues, human rights, and the things that China’s government really holds dear.

Q: What do you think about the recent rise in tensions over trade between the US and China, with both countries imposing new tariffs on imports?

A: They’re fencing, pairing off against each other. The US recently put up new tariffs on solar panels and washing machines, but it was actually a lot less than what insiders expected. You could see that washing machine companies like Haier were thinking, this isn’t actually that bad, this is only going to impact us a little bit. It was a strong thrust that Trump could put in the US press, but it was sort of toothless.

Q: You recently said that you are no longer one of the “big bulls” on China. What did you mean by that?

A: I think for the last 20 years, I’ve called China better than pretty much any other analyst. When I came here in the mid-1990s and put my whole career here, everybody said I was crazy. Literally everyone. I don’t think anyone supported me coming here except maybe my father. But my father is a ballet dancer, so he didn’t care what I did as long as I was happy.

Over the past 20 years, I’ve been very vocal that there is booming business, that it’s a place all companies need to be, or at least think about coming to, because this is the real market. Now, I still think there is going to be strong growth, there are going to be very good opportunities for some companies, and some sectors. Honeywell and General Electric, for example, will benefit from the Belt and Road Initiative. They’re going to make billions of dollars from this. Some other companies like Yum!, Starbucks and Nike will continue to do well here.

But the reality is that the economy is slowing, so it’s not going to be as easy to make money. The cost of doing business is also a lot higher than everyone except Shaun predicted. Real estate costs are very high; salaries are extremely high. We’ve thought about opening up an office in NYC to save costs, because a good Chinese person with many years of experience has to get paid a lot of money.

You also have the political system. It’s a rough time, politically, with the Chinese government more focused on rejuvenating the Communist Party ideologically than pushing the economy. So, a lot of foreign companies are going to ask, ‘Is it worth it?’ If you’re going to invest $5 billion dollars, like Mercedes might have done 5 years ago, is China still the place you want to invest?  If I was 20 years old and single, I wouldn’t come to China as a foreigner. I would go to Africa. I don’t know where, but I would look around.

And besides that, Chinese businesses are strong. These companies are well-capitalised, well-run, aggressive and they’re taking market share like crazy. Companies like Bright Food or Mengniu are kicking the ass of Nestle, kicking the ass of Unilever. It’s a tough place. Nestle might be better off investing in Indonesia or India, where you don’t have the same homegrown talent.

Q: So, it’s more the case that you’re no longer bullish on foreign brands investing in China, rather than the Chinese economy itself?

A: The economy is okay, but it’s slow growth. We’re not seeing the 8-10% that we had before. I’m a little different than other people, in that when the economy was growing 8-10%, I actually felt like it was growing 12-13%.

Twenty years ago especially, so much of the economy was underground. A lot of economists said that China’s economy was maybe 30% underground, and that was similar to Russia in the 90s before its economy collapsed. I always pegged it at 50%.

But it’s getting harder to cheat because of WeChat Pay, Alipay; it’s not as much of a cash business anymore. And that’s actually one of the reasons I think that the economy is slowing down. Because if you think about it, going from 10% to 6.5% GDP growth – it’s not that big, right? Over 6% is still amazing, but it feels cold, because before it felt like 15%. That’s a huge difference.

Q: What do you expect to happen with the Chinese economy this year? Do you expect the financial and environmental tightening to impact on growth?

A: No. The environmental tightening won’t have a major impact, because that’s already been tight since 2014. Q4 2013 is when the pollution went out of control, and anger went out of control. The reason for that is that in that quarter Chinese smartphone makers started coming out with affordable handsets that everyday Chinese could buy, with pollution apps.

So, it was really in 2014 when the government started cracking down on pollution. It’s much better now. It’s not great, but its not something I talk about every day like I used to.

I’m actually somewhat bullish this year. The main reason for this is that no business could be done last year because of the jockeying for power [in the run-up to the 19^th Party Congress]. Once you have that leadership switch, its going to be a hell of a lot easier.

The only way the economy is going to slow down is if they cut back on the credit, which might happen. But generally, I think that it’s going to be a more pleasant business environment this year, that’s how I would word it. Even if growth is not great it’s going to be a nicer lifestyle. It was very frustrating last year.

Chinese investors are vying to entice China-born tech executives and scientists back to the mainland to set up startups in their home market, the Financial Times reports.

A slew of venture capital funds backed by both private and state investors have been set up, which target Chinese executives and senior researchers working abroad at top companies like Google, Apple, Airbnb and Facebook. The funds are betting that the rapid development of China’s tech sector will produce high returns on their investments.

The Communist Party is also pushing a similar campaign with its program to lure Chinese graduates and academics back to China from foreign universities. “They recognize that the economy needs to shift to higher-quality production,” Shan Guangcun, a machine-learning specialist who received state funding to return to China from Germany, told the FT. “So they need talent to come back from overseas, and they are willing to pay for it.”

For a long time, landing a job at a well-known US company was the number one goal for Chinese students studying overseas. But the rapid development of markets for internet technology, e-commerce and mobile payments in China has made the mainland much more attractive to Chinese talent.

“We still believe the top talent is there [at US companies and universities] so we are still trying to bring them back,” said Cheng Yuyuan, an investment manager at K2VC, a fund targeting Chinese talent.