Companies working in China list competition as a key challenge, writes Clifford Coonan in Beijing.

Driving in from Qingdao airport in eastern China through the suburbs, you see a showroom proudly emblazoned with the logo of the property company Century 21. Next store, in an equally flash shop-front, is Century 22. Further along the street, smiling Chinese versions of the Colonel Sanders logo beam out from fast-food restaurants indistinguishable from KFC.

The Colonel may just have been voted one of the 50 most influential foreigners in China ever, but a Chinese version is giving him a run for his money.

China presents lots of opportunities for Irish companies but no country in the world is quicker to learn from foreign technology than the Chinese market. The pace at which ideas are swallowed up is simply unprecedented and companies working in China list competition as a key challenge.

China's pirated CD and DVD industry, and its market in fake watches and branded goods, has become the stuff of legend, although the pirates are coming under more and more pressure.

On one side of the Three Gorges Dam, the world's largest hydroelectric project which was completed earlier this year, the turbines on one side of the dam are all built by the world's biggest engineers, like GE and Siemens. On the other side of the dam, which was more recently built, the turbines are largely domestic copies. "We have absorbed the Western technology in their construction," a leading engineer says proudly.

In sector after sector Chinese companies enter the market very quickly and drive all the value out before earning significant market share. The mobile handset market is a classic case, where Chinese manufacturers undercut everyone and earned huge market share, forcing rivals from Korea to come back with new products, technology and distribution.

Consultants regularly recommend their clients should be aware of ethical issues. For example, some foreign firms have realised that people in their company have excessively close relations to suppliers or clients, which goes against the company's standard business practice. In some cases, what is standard in a Chinese company will not work in a foreign company.

"Choose your market segment very carefully. If you're going to compete in China, don't try to compete with companies with the same products as you. Compete on technology, on product and brand but don't try to match the Chinese with similar products as they will have cheaper products. Foreign companies pay higher taxes, come with higher standards and have other costs which means they cannot compete," says Dr Paul Clifford, a director of Mercer Management Consultants.

Be ready to compete, says Slí Siar consultancy chief Nicole Bernard. Work closely with your local partners but don't give too much away.

One story tells of a company with no local presence in China which relied on resellers to market and distribute their products. The CEO of the company went to China to meet customers and asked how they felt about the company, its products, and its services. The customers said they were happy with the products but thought the employees in China gave poor service. The CEO soon discovered that the resellers had mocked up business cards with his company logo, telling people they were the the firm's representatives in China.

"If you have a great business idea, the probability that someone else has already thought of it too is pretty high. If you have a great technology, keep in mind that someone will try to make a local version of it - I don't mean piracy, I mean locally produced, cost-effective applications. If you think your end user doesn't have alternative options or substitutes to your offering, you are probably kidding yourself," says Bernard.

Intellectual property rights enforcement is a key concern too, although increasingly firms are saying the government is taking steps to combat piracy.

Some firms have left important decisions relating to the protection of key technology to the last minute, leaving them exposed to infringement of their rights by local competitors.

One Australian mining equipment company discovered one of their top local engineers sneaking out the back door with the plans for their products, while their warehouseman admitted he was being paid backhanders for keeping the packaging intact when unwrapping the products on arrival to sell the boxes to the competing, Chinese firm down the road which had simply copied their brand exactly. It got so bad that the pirates approached the Western firm asking for paint to touch up the machinery, as they couldn't get the tone right.

"I have come across many foreign companies who have come to China, and after an initial successful dalliance with the market over a number of years, have fallen victim to the fact that they never signed an adequate formal agreement with their local distributors or suppliers, or made adequate provisions for the protection of their intellectual property rights," says Ray Moroney, an Irish lawyer working at Rouse & Co International, an intellectual property specialist consultancy.

Getting specific legal advice before you enter the market is vital, says Moroney, an alumnus of the EU-China Managers Training Programme, an EU Commission sponsored language and commercial programme located in Beijing.

"If you do not register your rights, or have suitably drafted localised contracts, your company runs the risk of exposing its entire investment and may have no means to enforce their rights against would be infringers and competitors," says Moroney.

It can take up to 2½ years to register your trademark, but less than 60-80 days if you wish to record the copyright in your software, with the proper documentation and legal advice. Litigation is still relatively inexpensive in China but there is no substitute for doing due diligence on a potential partner, distributor, agent or investment.

"Beware of would be agents and intermediaries who claim to have great local connections or "guangxi". You wouldn't rely on them at home, so why take it seriously when it comes to China if you have not undertaken proper background checks," says Moroney.

Irish companies who fall foul of the pirates should seek advice from Enterprise Ireland as well as legal firms.

In order to accede to the WTO in November 2001, the Chinese government was required to implement many international legal conventions in order to comply with its obligations in joining the global trade organisation, particularly in the area of IPR protection, and since then there has been a range of laws and rules introduced to meet these requirements, with varying degrees of success.

While the legal system in China is becoming better grounded, choosing the right lawyer to advise on the legal pitfalls and local regulations and licensing requirements is crucial.

"While the legal issues you usually come across in China are not insurmountable and China is certainly not the most difficult of places in the world to do business, you do need to be sure of your local advisers and that they will do what is needed on the ground to get the deal done," says Richard Curran, a partner at LK Shields solicitors in Dublin.

Transparency of information about the costs and opportunities is an issue that many firms say is getting worse in China, with persistent problems with inadequate public comment periods on proposed rules that have been implemented but never published.

Understanding your business and how your business is viewed from a Chinese legal and regulatory point of view is essential. Business processes that are accepted practice in Europe and the US sometimes simply do not work here, says Paul O'Driscoll, a partner in the property company Investors in Asia.

The Chinese government recently took everyone by surprise when it introduced rules restricting foreigners from speculating on the Chinese property market - a sudden move aimed at cooling an overheating market. Investors in Asia are not currently processing sales in China for customers other than Chinese passport holders and long-term residents. "Clearly it is time to sit and wait for clarity on taxation and other issues before we proceed," says O'Driscoll.

The company was originally set up with an Asia-wide focus and has recently opened offices in Hong Kong and Singapore.

Being on site and having good contracts with the largest local law firms and government departments has been key in finding solutions and bringing solutions to the market," says O'Driscoll.

There is money to be made.According to the US-China Business Council's annual membership survey, 81 per cent of companies said their China operations are profitable, while over half said that profitability rates for their China operations meet or exceed their company's global profit margins.

Most US companies are invested in wholly foreign-owned enterprises, not joint ventures with Chinese partners and the companies invest in China primarily to serve the Chinese domestic market, not export back to the United States.

Ninety-seven per cent of respondents are optimistic or somewhat optimistic about the prospects of their China business over the next five years.

DCC unit SerCom Solutions, which provides supply chain management services, employs 500 people and has a current annual spend of €80 million, and has been doing business in China for the last six years. It recently opened China offices in Shenzhen.

Kevin Vaughan, SerCom's head of business development, says pitfalls to building trading links include future competitors, different culture, lack of track record, poorly developed relationships, and question-marks surrounding the reliability and quality of supply.

"However, now that people are learning more about business in China the phrase has moved to 'China an opportunity' and there is no doubt that there has been a sea-change in attitude," he says.

"We would encourage Irish- based manufacturers to see China, not as a threat but as an opportunity. This no doubt, will take a change of mindset and may involve significant change for existing operations. But developing our links with China can only bode well and it is by finding out what is going on there and opening our minds to the potential opportunities to trade and collaborate, that we can transform doom into boom," says Vaughan.

While not every business is suited to China, the advice is not to become disillusioned if it doesn't work out first time, or if deals don't close as quickly as hoped.

"Whatever your assessment, follow through on your decisions - pursue opportunities persistently and with adequate local presence, consider changing your business model if it's not working, and be aware of the implications of exiting China or passing up the market altogether," says Bernard.

Ray Moroney believes China is open for business, but common sense and avoiding risk should prevail. "In my experience companies should avoid viewing this market as a place to earn a quick buck, you should be prepared to be in it for the long haul if you expect to reap the rewards."