How to Combat Rising Business Costs in China

Cost increases are one of the more challenging business management issues cited among foreign entities in China in 2022, according to recent business confidence surveys conducted by chambers of commerce in China. Among the many factors exacerbating this for manufacturers and SMEs include disrupted international supply chains, and the recent unprecedented fluctuations from localized pandemic control measures in the country. 

In our recent webinar, Guilherme Campos, Manager of International Business Advisory, introduced some practical cost control solutions covering IT, HR, corporate sustainability, and other management strategies while maintaining and improving the quality of your operation. 

Here we have selected some typical questions asked by companies with brief answers. To watch the webinar, please click here.

What are the advantages of Cost Control?

Cost control is necessary for a business because profit making capacity of a business is guided by the efficiency with which various costs are controlled.

Cost control leads to increase of efficiency in use of material, machinery, and labor. It also provides a basis for cost reduction: while Cost control is a process which focuses on reducing the total cost of production, cost reduction aims at reducing the per unit cost of a product. Cost control is a quick process by nature, while cost reduction is a more long-term process and is a permanent solution most foreign companies in China pursue.

What are some of the best ways to achieve cost control and reduction?

Optimize your China Accounting System and create an Enterprise Resource Planning (ERP) to improve the efficiency of your company system. A big advantage of ERP is making sure the business process being standardized and optimized, which provides better internal control and reduce potential mistakes or loss caused by a faulty operation inside the organization. Moreover, the system itself makes the whole business process being “visible” (transparent) to HQ outside of China. This reduces the need for a lot of staff in HR and cash management and improves efficiency.

Digitalize everything as much as possible. Digitalization is the direction many companies are aiming for now as it does not only improve the efficiency but also provide more transparency, especially for expense management.

Improve your human resources and payroll management. This is a necessary consequence of a better ERP and digitalization. By digitizing these processes in the ERP system, the whole picture of the company in terms of profit / loss is available to you. This is especially useful if you are a CFO and need to have an immediate picture of the company regarding financial sustainability. This is also a great help to those senior management personnel who must manage the business from abroad due to pandemic controls.

Lastly, implementing corporate sustainability, which is an efficient strategy that focuses on the ethical, social, environmental, cultural, and economic dimensions of doing business, is also going to foster longevity, transparency, and proper employee development within business organizations.

Is relocating business to a more cost-effective area a good way of saving cost?

Given that China and particularly its first- and second-tier cities are super dynamic and changing, this means that the cost of land increases and the cost of salaries for your staff increase too. Relocating your business to a cheaper area and where the average salary expectation is lower is one of the solutions. This is a proven way of reducing business costs in a long-sustained manner, and it is especially important for manufacturing companies.

So where to relocate your business?

Free trade zones (FTZs) - because they are a specific type of economic zone where authorities can experiment with pro-business regulations and they benefit from several incentives, such as tax reductions, etc.

Industrial parks and high-tech zones - it’s basically the same deal as FTZ. However, these parks and zones are focusing on specific industries. Authorities are willing to provide incentives and customized services. These policies are normally case by case and are not searchable on the internet.

Industrial clusters - which is an interconnected system of similar businesses, which benefits collective growth.

Can I get a rough estimation on how much I would need to spend on digitalizing my entire HR and payment system from a traditional paperwork loaded system, as well as expected savings after the system is implemented?

It really depends on the size of the company and multiple conditions. But one thing we see from many client cases is that if you go from non-digital to digital, you will save a big cost. Even if the initial investment is high, but from our experience you will get higher return than what you paid in one year or two years at most.