Is The “China Dream” Real? Or Did Western Businesses Get Suckered?

Sunday, January 24, 2010 8:16
Posted in category Uncategorized

A lot of conversation over the last few weeks about what China is for many firms. and what it is not.

It is a conversation that, while recently catalyzed by Google’s announcement that they were looking at pulling the plug, is a conversation that I would say is had on a basis that is more frequent than many would like to admit to at time. Typically preceded by an event of some sort, commercial or political, and can be defensive, self defeating, or well analysed depending on the person, and one of the more interesting analysis I have seen lately comes from James McGregor in his recent piece in Time, The China Fix, where he writes the following:

The foreign business community in China has deep respect and affection for the Chinese people and their hard-earned success. But more than a few foreign business leaders are asking themselves if they have been bamboozled by the system. Multinationals have been solid citizens in China, handing over heaps of capital, technology, training, source code, best practices and proprietary products to joint-venture partners they were forced into bed with. They have funded schools, orphanages, disaster reconstruction, overseas scholarships and all manner of poverty-alleviation programs. But now that the China market matters more to them, it appears that China couldn’t care less. Increasingly difficult China-market access is the immediate worry. But many are looking ahead and losing sleep over expectations that their onetime partners are morphing into predators — and that their own technology and know-how will be coming back at them globally in the form of cut-price products from subsidized state-owned behemoths.

Some would say that this paragraph sums it up nicely, and that what is described above amounts to a big China bamboozling.

For me, while I agree that there is a general negative vibe going on, what I am consistently surprised by (perhaps disappointed is a better term) is that people really will fool themselves into believing anything about China at any given time, and when you look at the recent case of Google.. it is really hard to sympathize on some levels as their executives came in believing they could change the structures of the market.

It is a belief that has lead many bad retail strategies, joint ventures, and investments, and it is a large reason why I typically advise an organic growth strategy.

But, that being said, has the situation changed?  Has a new day dawn upon China?  Have Westerners (firms and managers) outlived their useful shelf life?

Or is this another case of anecdotes clouding sound judgment?

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13 Responses to “Is The “China Dream” Real? Or Did Western Businesses Get Suckered?”

  1. ian channing says:

    January 24th, 2010 at 7:48 pm

    Surely the multinationals went into their deals and tieups with their eyes open, fully aware of these risks, and took the needed measures? Much the same thing happened in Japan in the 1970s and 1980s–when the tech had been absorbed and copied, partnerships were broken up, and shelf and showroom space become harder to get. To this day, western multinational penetration of Japan is minimal. The auto and consumer electronics sectors are nearly 100% owned by Japanese companies. I doubt that this will happen in China, but it should come as no surprise that they “couldn’t care less” about the interests of western multinationals.

  2. Alex says:

    January 24th, 2010 at 10:33 pm

    One of the main points of business is surely to evaluate and make decisions rationally. A lot of businesses don’t do that, and I’d imagine that sort of business are complaining a lot more now than those that did.

    For sleepless nights, when there was a lot of investment cash washing there was a focus on growth, now there’s a focus on actually making money, and material problems, like having a bad partner, appear in the headlights.

    I don’t think the system has changed other than evolved in a very natural way. Going back a step when for example Coca Cola were setting up in China, things are a lot better, but themes such as China not wanting to ‘sell out’ or be dominated by foreign companies remain true, always have been true, and probably will remain so for a long time.

    Expectations vs. reality. Sometimes when investment funds are plentiful there’s a lot more focus on expectation and much less on reality.

  3. Chris says:

    January 26th, 2010 at 1:03 am

    I couldn’t disagree with McGregor’s Time article more. China has changed, but it is not in the rather paranoid, anti-foreign conspiracy McGregor identifies.

    China is behaving more and more like the USA, Canada, the UK, EU and Australia. It is becoming more selective about who it lets in, who stays in and who can leave. It is becoming tough on tax / HR / legal compliance. It is expecting both local companies and MNCs to comply with local law. All of these issues are bread and butter for companies in the West. This is to be expected and perfectly natural as China develops into a mature and relatively stable market.

    It doesn’t appear that the recent Google issue is affecting foreign investment which continues to boom at unprecented levels. These days it is those companies seeking access to markets or investment return rather than those seeking a cheap production base.

    If anyone has been bamboozled, it was those who unrealistically expected that the ‘anything goes’ days would last. Or that Chinese enterprises would remain a cheap production base content to OEM without evolving up the enterprise food chain.

    The pressures that Western companies are experiencing on compliance are also being experienced by local firms, both private and State owned. The massive tax crackdown that began last year, designed to bolster sagging tax revenues, was initially and primarily aimed at large SOEs where evasion and illegal tax minimisation was rife. Foreign enterprises also felt the heat, though being generally more compliant, were less impacted.

    I do agree with the comments on “bad retail ventures, joint ventures, and investments”. Those foreign companies that chose local partners on the basis of forced policy arrangements, “guanxi”, poor advice or tied themselves into exclusive distribution or supplier arrangements made poor business decisions based upon weak business practice. The same applies anywhere in the world.

    Those foreign investors that chose business partners on non-exclusive healthy commercial terms secured by enforcable contracts (ie good business practice) continue to have the flexibility to work with partners to improve continually and find ways to manage costs, or to change those partners if things don’t work out. Contract enforcement is relatively straightforward in local courts.

    China has had a long term clearly articulated strategy of creating national business champions across a wide range of sectors. These strategies have been articulated over many, many years and published quite widely. Any foreign company that expected a free ride with no domestic competition was blind and illiterate. Actually I can’t think of any genuine MNC foreign investors that were bamboozled or that stupid. The strong and successful foreign brands in China have responded to strong local competitors at every step. Not easy, but no surprises here.

    Any firm anywhere in the world that outsources core and key functions should only expect that those doing the outsourced work will develop capacity and emerge as competitors in overseas markets. Any enterprise will focus on improving margins. It was the ‘branding’ experts primarily in the USA whose obsession with the absolute minimisation of costs and headcount within organisations and meanness with outsourced suppliers undertaking OEM work that created these emerging competitors focused on capturing part of those healthy margins through developing their own brand and controlling distribution. No surprises there either.

    The success of foreign business in China is reliant on creating the same business fundamentals in this market that led to their success overseas. Creating great products, great teams, a strong local company culture, maintaining core global values, localising the cost base and responding to the needs of local customers. This hasn’t changed and will not change in the forseeable future.

    Broadly speaking, there are no greater restrictions on mainstream foreign investors access to local markets. No significant sectors have been restricted recently. Enforcement of investment restrictions on prohibited and restricted sectors is indeed tighter but foreign investment in these areas was always questionable, no matter how Private Equity their lawyers and accountants disguised ownership in the form of loans, contracts, offshore holding companies with local WFOEs, licensing fees etc. Mainstream business investors with a clear and reasonable investment proposal permitted within the investment framework are experiencing no great difficulty in getting investment projects approved. A few more documents might be required as local authorities try to sort through legitimate and opportunistic proposals, but overall investment approval continues to be quite fast and responsive.

    China is indeed becoming more bureaucratic and the cost of compliance for all legitimate businesses is rising significantly and rapidly. This applies to both domestic and foreign enterprises. The on-costs on staff (42-44% for social insurances and housing funds), stricter labour laws and employee protection, the need to license / register with an unreasonable number of Govt agencies, to operate within a restrictive business scope etc, will indeed impact the competitiveness of Chinese enterprises. China is no longer ‘cheap’ and the compliance cost will become greater as more staff at a senior level need to direct their attention to these issues rather than market opportunity. In compliance terms China costs are approaching those of the EU.

    The labour law changes in 2008 were tough to deal with, but requirements, while stricter than the USA, are less costly or restrictive than say Canada, the UK, the EU or Australia. The shock of some US executives at having to deal with unionized employees is amusing, but the union negotiation experience much more straightforward, civilised and professional than I have seen in the EU and UK. Foreign firms that value their people will find these processes quite straightforward.

    There are genuine concerns that the creeping State sector, with its endless access to cheap finance via endless bank loans at consumer-subsidised low interest rates, is impacting both the domestic private sector (especially SMEs) and foreign enterprises. As these State owned enterprises go private, or partially private, their preferential access to cheap credit will indeed give them a competitive advantage over those foreign and domestic enterprises with higher financing costs.

    Nonetheless, I believe the discipline imposed by a higher cost of capital for foreign enterprises and Chinese SMEs will result in fewer poor investment decisions, and more focus on core business and profitable extensions to those businesses. Overall, foreign and local private businesses will continue to do well in a highly competitive and fast moving market.

    The quasi-SOEs with the distraction of cheap capital will be able to monopolize a few sectors (telecoms, media, mining) but in open markets, their poor investment decisions, high overheads and low returns will diminish their ability to compete.

    Much has changed. This is the fastest moving marketplace I have ever experienced, with customer, staff and partner expectations moving at a pace I have never before seen. Govt expectations have changed and so have the pressures on senior expat managers on meeting complex regulatory and compliance frameworks. Mature MNCs need to implement the same robust frameworks they do in other mature markets and actually employ some strong local staff to manage these issues.

    None of this is a shock or suprise. Those foreign enterprises that used reputable accountancy and law firms have been well briefed as China has changed and made the necessary adjustments. All of this has occured more rapidly than expected and quite a few plans have been bought forward. However, it is not a conspiracy, not specifically anti-foreign and certainly not unexpected.

  4. ian channing says:

    January 26th, 2010 at 9:25 pm

    Thanks for taking the trouble with this comprehensive post, Chris. I found it really interesting.

  5. Edward Eng says:

    January 27th, 2010 at 8:50 pm

    Yes, the ‘China Dream’ is real. And Western businesses DID NOT get suckered. It’s more about Western businesses not knowing how to deal with China. Many businesses have the ‘we’re going to change China’ mindset. That doesn’t work. Think about if China or any other country wanted to do that to the U.S. It just doesn’t work like that. Businesses sucker themselves out of China. In order to realize the ‘dream’, businesses need to understand what the consumers of the market want rather than try to change them.

  6. Rich says:

    January 27th, 2010 at 8:59 pm

    @Chris – thanks for the comment, which I think has more words than JM’s original article!

    In reading your comment, one thing becomes quickly apparent. He works for a firm that specializes in government relations, and that perhaps has skewed him from the ultra upbeat book he wrote… to this recent article

    R

  7. Rich says:

    January 27th, 2010 at 9:01 pm

    @Edward

    I would largely agree with you on your comment, and gave a lecture yesterday on how business make bad risk decisions all the time in China. Comes down to bad planning, lacking data/ context, and thinking that what is today will be tomorrow.

    Until the next post.

    R

  8. Edward Eng says:

    January 27th, 2010 at 10:21 pm

    @Rich

    Agreed. Granted local knowledge is valuable to business planning and deployment, a lot of businesses tend to rely too much on the ‘I know this area very well’ approach. Data is definitely a key factor in the success of expanding and optimizing in China or any other emerging market. However, quality data for these particular markets can be tougher to acquire owing to poor standardization practices and how fast the markets are changing/developing every day.

    -Eddie from getchee

  9. David Smith says:

    January 29th, 2010 at 9:46 pm

    There’s 10x more value in Chris’ comment than in the disappointing JM article that provoked it.

    Some of my business interactions in China of late have had bigger problems than ones 20 years ago, but rather than blame it all on China I observe three things: (1) Now it’s for bigger stakes. (2) The passage of time lends those earlier interactions a warm sepia glow of nostalgia. (3) It’s more important than ever to stay informed and pay attention to changing conditions.

  10. lark says:

    January 31st, 2010 at 11:55 am

    Such silly comments.

    I couldn’t count the amount of inane boosterism of China that was spread through the media in the last 10 years (western idjits talking their book, of course). And it was, at bottom, ideology: the free market would triumph, globalization was our future, nation state a thing of the past. And most especially: MNC’s were global actors, not beholden to any nation, whose self interest would lead them to hither and yon according to their version of survival of the fittest, profit. And if they discarded western workers, get used to it.

    This was the triumphal moment of western financial capitalism, and it is over. Now the ‘nation state’ part of China is roused and all the ‘post nation state’ free agents and MNC’s of globalization are feeling the chill.

    Were they suckers? Of course.

    Ha, ha, ha.

  11. Dan F says:

    February 3rd, 2010 at 6:29 am

    Just wanted to also add that Chris’ comment is really great.

    I think McGregor’s piece was just highlighting that the present climate is increasingly negative. However, the forces that he notes (purposefully inconsistent and nontransparent enforcement of regulations, rampant intellectual-property theft, state penetration of multinationals through union and Communist Party organizations, blatant market impediments through rigged product standards and testing, politicized courts and agencies that almost always favor local companies, creative and selective enforcement of WTO requirements…) — hasn’t this always been the case? I would have thought that things were actually getting better (albeit slowly) in this regard.

  12. Peter says:

    February 4th, 2010 at 9:10 pm

    The Western dream is real, but the fact is to effectively collaborate with the Chinese, you have to observe their business culture and “be Chinese”. China’s amazing entrepreneurs have earned their success through hard work and amazing talent, Westerners have a lot to learn about how things are done in China. But differences in business strategy and practices are a two-way street, meaning Westerners also have a lot of value to offer to the Chinese. The trick is always to create a win-win situation.

  13. Derek says:

    February 5th, 2010 at 10:47 am

    Chinese government does not play by fixed rules and the ability to modify market conditions is astonishing and very worrying. I’m in tech and have seen it time and time again… if local Chinese companies are getting beat out of the market the government steps in and basically repatriates the market into local hands. For my business it did not make sense to stay in China. In my 5 years in Beijing the only foreigners/companies I saw make money was the expats on the overseas packages… but most of their companies failed to make money. If you did make money the locals would take it away illegally through their government connections. Maybe fortune 500 companies have a long term chance but for the little entrepreneurs I would seriously consider against entering the Chinese market.