Promised land

Entrepreneur, Jan, 2004 by Joshua Kurlantzick

Robert Kushner, founder and managing director of Pacific China Industries Ltd., a 15-person company that develops and manufactures novelties in China, hardly seems like a typical American businessperson prospecting for gold in the Middle Kingdom. His Hong Kong office is crammed full of tchotchke products--dancing rock stars to mount on dashboards, collapsible corkscrews, sunglasses holders--that seem far from the high-tech exports increasingly flowing out of Chinese factories. He is not part of a massive corporation like GM or Wal-Mart, multinationals that claim to be best positioned to take advantage of China's size. He did not enter China with a bang, the type of show-stopping debut some corporations think necessary to impress Beijing officials. He does not possess a strategic vision of the People's Republic's future. No, all Kushner does is make money.

"We have been able to establish ourselves as consistently profitable," Kushner says. "I could have hardly imagined when I left my Los Angeles law job in 1994 and washed up in Hong Kong that, eight years later, I'd be making products sold at most major U.S. retailers."

Kushner is an example of a growing trend in U.S.-China business. Though huge multinationals grab the lion's share of attention with their enormous investments in China--GM, Volkswagen and other major auto manufacturers are drastically expanding their operations in China--smaller companies like Kushner's actually have proven among the most successful foreign operators. In fact, some entrepreneurs' businesses in China have become so profitable that large corporations have begun copying their strategies.

Rough Road

Over the past two decades, as China has liberalized its economy, several large companies have prospered by moving manufacturing into China or, more rarely, by producing goods for the Chinese consumer market. KFC, one of the first fast-food chains to peddle its wares in the Middle Kingdom, now has branches in every province and an outlet in Tiananmen Square, near a massive portrait of Mao Tse-tung. Carrefour, the French supermarket chain, has gained a loyal base of Chinese shoppers.

Yet more often than not, major multinationals have found making money in China considerably harder than they expected. "China tempts people because it has a billion potential consumers, but I can count on two hands the number of big companies that have proven profitable selling to China," says Joe Studwell, author of The China Dream: The Quest for the Last Great Untapped Market on Earth (Grove Press), a comprehensive book on companies' attempts to penetrate the Middle Kingdom.

Some big companies misjudged the market. British brewer Bass overestimated the number of Chinese people able to pay big money for its premium lagers and stupefied potential Chinese customers with promotions featuring dancing Scotsmen dressed in kilts. Other giants have had their ideas expropriated, with little recourse. Pepsi has sold its drinks in China for 20 years but admits it has yet to make a profit; now it's accusing its Chinese joint-venture partner of infringing on its intellectual property rights.

Smaller companies face difficulties in China, but they possess several advantages, says Ming-Jer Chen, an expert on Chinese business at the University of Virginia in Charlottesville. "Small companies operate below the radar of government officials--certainly below the radar of central officials in Beijing, and they less often go head-to-head with big Chinese companies favored by the state," Chen says. "So while a Disney or a Microsoft might have to spend huge amounts handing out favors, smaller companies do not have to do so much wining and dining."

Since entrepreneurs usually escape the government's notice, they are less obligated to locate offices and factories in areas favored by Beijing. When Honda decided to build a new auto plant in China in 2002, it allegedly came under intense pressure to erect the factory in Guangdong, a southern province that the government wanted to develop. The area is far from a port that could handle car shipments, automobile industry experts say, but Honda shouldered the increased cost and set up shop there.

Bruce Wang tells a different story. "There's always some element of dealing with the government in any country, but we have as much freedom to compete as we would in the U.S.," says the 48-year-old co-founder of NewTone Communications Corp., a $6 million software company with 140 employees, an office in Shanghai and a virtual office in Silicon Valley.

Derek Sulger, co-founder and CFO of Intrinsic Technology, a Shanghai mobile telecom service provider founded in 1999, agrees: "For a small private company, China is quite an open place."

Because smaller firms also have fewer resources and less ability to absorb losses, they tend to focus more on short-term profitability in China. "Companies like Anheuser-Busch or GM always talk about how they're losing money now because they want to be heavily invested in China for the long run, so when the market grows they will have established their brand," says Kathleen Ng, an expert on business practices in China who works in Hong Kong. "But that market could be 20 years from now, and by then, local companies might be more powerful, or the shape of the industry might be totally different."