Last month we looked at the trends that are making China a key player on the global business stage. In this issue, we examine the most pervasive risks and present some recommendations for companies that are seeking to increase their presence in this important market.

About 80 percent of Fortune 500 companies have already invested in China, and many smaller companies are now doing so. Both groups face a variety of regulatory, political, and business risks. For example, China has been known to impose licensing, technical, and packaging restrictions that don't violate World Trade Organization (WTO) tenets but still put foreign competitors at a disadvantage. These restrictions may prevent newcomers from using existing distribution channels while giving Chinese manufacturers more time to prepare for direct competition. And businesses that are new to China must be wary of local protections, which often include budget-busting employee-benefit packages.

Regulatory fragmentation is another problem. Logistics in China has been micro-regulated for years, with different service components treated as distinct subsectors by various government departments. In addition, companies still must acquire separate licenses from several governing bodies, and they often must obtain separate licenses for each province in which they operate. Although there have been some efforts to improve coordination, it's likely that shared jurisdiction over the logistics sector will remain a challenge in the near future.

China has one of the most dynamic markets in the world. This fact, combined with an abundance of development funds, has inspired many companies to build logistics capacity too rapidly. Most major cities in China now have some sort of distribution center or logistics "park." But according to the China Storage Association, 60 percent of them are empty.

If foreign companies are to surmount these challenges and thrive in China, they should consider the following:

Invest in the right place. High costs and lengthy timetables will prevent shippers from rushing to develop their own distribution channels or networks after China meets its WTO logistics commitments. Instead, savvy players will reinforce the capabilities of the domestic distributors with which they already have relationships. This might require providing incentives and performing audits to improve distribution efficiency. Supply chain masters also will pay attention to local and regional rules and relationships, as every investment zone has different policies designed to attract certain types of investments.

Focus on value. Global leaders excel at removing unnecessary layers of bureaucracy. Dell did it with direct-to-customer sales and by outsourcing logistics. And in selected Chinese cities, Nokia renounced the industry's traditional distribution model (manufacturer, general agent, regional distributor, second-tier distributor, retailer, consumer) and now supplies large, regional distributors and retail outlets directly.

Think "end-to-end." Because China is one of the world's most dynamic markets, demand-forecast errors are more frequent and severe than elsewhere. This underscores the importance of coordinating and streamlining internal and external supply chain resources. This "end-to-end" integration is particularly important in China because it helps align supply with demand. Companies that have superior supply-and-demand-matching capabilities are always more responsive to changing market conditions.

Emphasize partnerships and alliances. Accenture's research confirms that high-performance businesses collaborate frequently. In China, this means dedicating internal resources to strategic initiatives while relying on qualified third parties to develop and operate distribution networks. Key benefits are the ability to quickly identify and aggressively enter new markets, and to rapidly achieve the necessary scale.

Leverage technology. China's logistics sector has been slow to adopt new technologies. However, the astute application of technology is a must for any China-bound company. Maximizing data visibility, making global business decisions quickly and correctly, tracking demand in real time, leveraging the contributions of supply chain partners, and flexing the supply chain to meet changing objectives are just some of the reasons.

Manage risk. The ability to quantify risk and plan for its mitigation can separate success from failure. Foreign corporations that understand both their baseline cost structures and the drivers of excellence in integrated fulfillment—and can calculate their net landed costs—stand the best chance of thriving in China.

Tap talent. Value-added logistics services require more expertise than most Chinese providers possess. Some believe that up to 90 percent of distribution initiatives in China fail because of workforce errors. To surmount this obstacle, make training a priority, develop leadership capabilities at all levels, and set clear criteria for advancement.

Effective supply chain operations can help companies achieve market share and profitable growth in China. And an end-to-end approach that emphasizes collaboration, technology, and talent can make all the difference.