Manufacturing in China? Key facts for getting started.

• Author: Pan, Alexander
• Position: PRIVATEcompanies

Encouraged by China's explosive economic growth and news of favorable changes in laws and regulations, increasing numbers of smaller American companies are considering setting up operations in the People's Republic of China (PRC). Such a move can yield good results, but, it's essential to understand some key issues before making irreversible commitments.

* The business environment. First, the obvious: it's a big country. Business conditions, customs and resources vary from one place to another. In one region, business practices may seem reasonably close to those in the U.S.; in another, they may differ markedly. And some regions may offer a more favorable environment for manufacturers than others.

This vast regional variability makes it imperative for interested U.S. companies to get informed advice--from official sources in the PRC and from others with direct experience on the ground.

* Local resources. Yes, there is inexpensive labor in the PRC, especially in areas like the interior provinces of Sichuan, Anhui and Heilongjiang, where manufacturing companies are especially welcome. But in more developed, "wired" coastal areas, such as Guangdong, Jiangsu and Shanghai, workers with the requisite technological and industrial skills are significantly more expensive, and competition for skilled labor among foreign companies can raise those costs even higher. Also, when hiring skilled workers, competition doesn't end, as other companies still try to lure employees away with better offers. While "cheaper," inland labor costs are often offset by training and transportation costs to get export-bound goods to the coast.

The energy supply, too, is largely dependent on location. Resources are more abundant in the central and western regions, such as in the provinces of Shichuan, Liaoning and Inner Mongolia. The PRC government is working to bring this situation into greater balance.

* Local connectivity. It's critical to understand local culture and customs, and the respect government officials feel is owed them. Face-to-face meetings help build this understanding and form the kind of personal relationships that can ease the entry process. Given the complexities of getting started in the PRC, this point can't be stressed strongly enough.

* Organizational structure. When China first began opening up to foreign business, many U.S. companies thought joint ventures with indigenous firms were a smart choice. Over time, however, it has become clear that the...