Recognizing Business Types

China’s business environment is complex, including domestic firms, joint ventures, and wholly foreign-owned enterprises. The various types of domestic Chinese firms interact very differently with foreign business people. Determine what type of Chinese business you are dealing with before trying to form a business relationship.

State-owned enterprises

State-owned “policy firms” or SOEs, such as railroads, China’s TV network, universities, development banks, aircraft manufacture industries, and airports, exist primarily to implement important social programs and to support major government policies—although they also want to make money. In 2003, it was estimated that just over half of China’s SOEs were loss-making, but recent reforms have been vigorously aimed at improving efficiency and profitability.

Former SOEs

Formerly state-owned enterprises that now operate autonomously for profit may be listed on Chinese and foreign stock exchanges. The state is usually a major shareholder. Mostly market-oriented, they have rapidly adopted many of the best practices of foreign competitors. While needing to achieve profitability, they often retain some of their previous social agenda, and will usually respond to specific policy requests from the government.

Collectives

Township and village collective enterprises (TVEs) were originally designed to provide employment opportunities for local—usually rural—citizens. Agriculture is a major area of operation, although they also manufacture consumer goods. Collectives are generally very market-oriented and flexible, and some are emerging as global competitors. This type of firm is relatively very productive.

Private enterprises

Completely private enterprises owned by Chinese individuals have little policy agenda beyond a desire to exhibit good citizenship. They include many manufacturing firms, especially trade-related ones. The best are often led by returning Chinese with advanced degrees from top foreign universities and experience of working within leading Western companies.

Joint ventures

In Chinese–foreign joint ventures, the Chinese partner is usually a state-owned firm. While foreign technology, management skills, and financing combine with inside knowledge of China to create a major market force, the partners’ goals and methods may conflict.

Non-Chinese firms

Wholly foreign-owned firms—subsidiaries or divisions of global firms—are currently the favored investment model, creating 85 percent of China’s electronics exports, 70 percent of its plastics exports, and 60 percent of its equipment exports. Foreign “contract firms” source components and finished goods in China, specifying designs and often equipment and operating procedures to suppliers. Foreign “transactional firms” buy Chinese raw materials, components, or finished goods for export and sale abroad, without specifying design or participating in the manufacturing process.