Doing Business in China 2010
April 28 2010 by Robert Lawrence Kuhn
In ancient history, in other words prior to the financial crisis, I wrote an article in Chief Executive offering a series of Do’s and Don’ts for doing business in China (“Mastering the Art of Doing Business in China,”).How the world has changed! It’s not that my prescriptions are out of date. All are still reasonably valid, yet the article seems, well, rather quaint.
I write from Shanghai, where the most elaborate Expo (World’s Fair) in history opens on May 1. The pavilions are stunning; the exhibits cutting edge. Participating are almost 200 countries, virtually every country on earth, and about 50 international organizations. Cities are featured for the first time, and there are many multinational and Chinese corporations. The designs are breathtaking and the ideas dazzling. Many pioneering technologies, particularly green technologies, reflect Expo 2010 Shanghai’s theme of “Better City, Better Life.”
Yet recently, seemingly contradictory in spirit, there has been a very public deterioration in Sino-U.S. relations and a fear that the business climate in China for foreign companies is growing colder. Some reasons are chronic, some acute. Chronic reasons include trade imbalances and accusations that China is manipulating its currency so that artificially low exchange rates can promote a policy of shifting jobs from other countries, particularly from America, to China. Other chronic issues include human rights and arms sales to Taiwan. Acute issues include Google’s decision to stop self-censoring its search results (triggered by a hacker attack traced to China), disagreements over what to do about Iran’s putative nuclear weapons program and the arrest of four employees of Rio Tinto, the giant Australian mining company, for bribery and fraudulently obtaining commercial secrets.
For foreigners, the Rio Tinto case was especially troublesome. In March, the employees, one of whom was an Australian citizen of Chinese origin, were sentenced to prison for up to 14 years. The case sent a chill through foreign executives and managers in China, who saw it, at least initially, as signaling a harsher environment for foreign companies. Some saw the arrests as payback for Rio Tinto’s nixing a market-related deal in which Chinalco, the Chinese state-owned aluminum company, would purchase a major stake. The facts of the case seemed to confirm that the convicted felons had perpetrated crimes, but surveys of foreign companies doing business in China expressed concern that China is favoring domestic companies through rules and process.
Into this cauldron of conflicting interests, Expo 2010 is being held in Shanghai. Typifying the world’s coming to Shanghai, Denmark’s national symbol, the Little Mermaid, was transported to China. It was the first time in history that it had left the country. (I am in Shanghai now because leaders asked me to produce, write and present/host the official China Central Television International series on Expo Shanghai – and have given me [almost] complete editorial control to tell the story).
Expo 2010’s overarching vision is that the world is coming to China and China is going to the world, and that all humanity must come together in a broad international partnership in order to optimize the future. Expo 2010 displays – idealizes perhaps – how people can live in harmony with the environment, in harmony with one another, and in harmony with the city. It should not go unnoticed that China has surpassed America in the raw amount of investment in green technologies.
China today is an economic superpower competing in every arena of human endeavor. From trade, business and finance to diplomacy, defense and security; from science, technology and innovation to culture, media and sports – China’s growing strengths have global implications.
Although economic improvement – a higher standard of living, financial success, luxuries of life – are goals in every country, there is extra energy to achieve these goals in China. The motivation goes beyond material benefits: The Chinese want to show the world that they are in every way a modern nation and in every sense a great power. If this pride requires material wealth, technological prowess, military strength, a world-class aerospace program, then these are what they must and will achieve. In every sphere of human endeavor, from business to culture, Olympic athletes to space taikonauts, music and art to modern science and ancient philosophy, China seeks its fair share of world leaders.
For example, China’s leaders expect its corporations in every industry of importance to become among the largest and most successful in the world. When Zhang Ruimin, CEO of household electronics giant Haier, said in the middle 1990s that Haier’s goal was to become a leading global company, foreign analysts yawned or smirked. Today, Haier is the world’s second-largest manufacturer of refrigerators (after Whirlpool), among the top 1,000 manufacturers in the world, and its brand name has joined the prestigious list of the World’s 100 Most Recognizable Brands. China is proud that the stock market capitalization of its companies in energy, telecommunications and banking are among the largest in the world.
To foreigners, it may seem economically inefficient for China to invest in wide-body commercial airliners, competing with Boeing and Airbus. Or to fund a manned space program, when two-thirds of the country is still rural and poor. But China is driven by pride and patriotism as well as by wealth and social fairness, and there is little complaint in China about these kinds of investments.
What Should Foreign Companies Do?
China’s leaders have said consistently that their country welcomes foreign investors as always and that there have been no changes in this approach. The former is correct; the latter not entirely so. There have been changes in China’s policy that affect foreign companies, as China’s leaders consider what is needed to enhance the relative position of Chinese companies in world competition.
The bottom line is that foreign companies can no longer build strategies around exploiting the Chinese market alone. If that is a company’s plan, it will fail.
New thinking is required. Consider the following brief case studies (disguised):
A world-class technology company was seeking a joint venture in China that could dominate a vast new market that policy is creating. But in today’s post-financial-crisis world, with China determined to enter the upper levels of all such industries of the future, it would approve this kind of JV only provided that:
- the foreign company’s most advanced technology would be transferred to China (in stages is fine);
- the JV would further develop the technology on a proprietary basis in China;
- the JV would be permitted to sell the products in the world market, essentially competing with the parent company.
This is not the old story of a Chinese company copying its JV’s partner’s technology surreptitiously. Now it’s an overt condition precedent to the venture. The flip side, though, is the huge opportunity – not just the business itself but also the stock market valuation. The Chinese market is so large and growth is so high (whereas in developed countries the market is mature) that the ~49 percent of the JV that the foreign company would own could well be worth more in market value than the entire parent company.
In another case, a joint venture of a global leader in the building materials industry with a state-owned quasi-monopoly, there was unrelenting friction, even over small matters, because the foreign managers, who were stationed abroad and flew into Beijing for meetings, didn’t understand China (and frankly didn’t like China). Obviously, China was good business, but the foreign managers hadn’t created the JV and inherently (if subconsciously) still imagined China as if a colony of European powers. The foreign management would announce the time they could meet their Chinese partners, fly in just before and leave just after. To make matters worse, local management included an older, foreign-born Chinese, who felt superior to his less worldly, younger colleagues in Beijing. This was never going to work. It was not until local management was replaced by a politically savvy local Chinese manager that energies could be focused on building the business, not internecine bickering.
This is not the old story of a Chinese company copying its JV’s partner’s technology surreptitiously. Now it’s an overt condition precedent to the venture.
In another situation, a world-class company with a reputation for insisting on “our way or the highway” recognized that, although China wanted what it could supply and the company sought a long-term relationship with China, a new approach was required to create a robust partnership. Strategies were devised to be consistent with the agenda of China’s leaders (within the sector of the company’s interest) – provided, of course, that such new strategies were consistent with company values and shareholder interests. This new way of thinking led to a series of supportive efforts that reinforced the core interests of the company (e.g., contributing modestly to the rebalancing of social disparities between urban and rural areas – a high priority for China’s leaders).
The best way to know China – the best way to do business with China – is to know what motivates China’s leaders and what drives their policies.
Robert Lawrence Kuhn’s new book is How China’s Leaders Think: The Inside Story of 30 Years Reform and What This Means for the Future. Dr. Kuhn, an international investment banker and corporate strategist, is a long-time advisor to the Chinese government and senior advisor to Citigroup. His television series – Closer To Truth: Cosmos, Consciousness, God – is broadcast on PBS and noncommercial stations.