Doing business in China: it's far from easy

USA Today (Society for the Advancement of Education), Jan, 1996 by S.R. Nair

China is a land of 1,000,000,000-plus potential consumers, a thought that increasingly is tantalizing the imagination of CEOs across America. Yet, there are many horror stories of people who have lost their shirts (and more) in China. A Dec. 10. 1993, article in The Wall Street Journal summarized the phenomenon succinctly:

"China's economic transformation, born in a shift to free markets in 1978, is rapidly coming of age - and it has mouths watering throughout the business world.

"It also has stomachs churning. For while some foreigners may be making hay in China, the roll call of dead and dying enterprises there is also tellingly long. China is no sure bet."

The question that is paramount in the minds of China-watchers today is whether it will become politically unstable after aging leader Deng Ziaoping's death. Historically, political volatility has been a rule, rather than an exception, in China. Indeed, today's uncertainty about the future probably is an improvement over the certainty that the future will be unstable. While there undoubtedly will be a power struggle upon Deng's demise it is highly unlikely that the new leadership can revert to the old ways of a totally communist society. The genie of economic freedom irreversibly is out of the bottle. Whether China can achieve the transition from a communist economy to a market one without going the Russian way is another cause of worry. However, the Chinese are extremely capable of handling their economy and. unlike the Russians, undoubtedly will deregulate one sector at a time, rather than try to do everything at once.

Unless something really drastic occurs (such as a total falling out between China and the Western nations, primarily the U.S.), the odds are that China will fulfill the prophecy attributed to Nostradamus - that this is the century of the yellow race. As the country began to implement quasi-capitalistic policies, many of the inefficiencies in the system were removed and the economy grew at a phenomenal rate. Although there still are many inefficiencies in the system and, by extension, room for growth as these are removed, the economy is expected to grow briskly. By some estimates, China has the world's third largest Gross National Product after adjustment for purchasing power parity. It is predicted to achieve the largest GNP within the next 10 years. According to World Bank projections, in the year 2002, China would have a gross domestic product of $9.8 trillion, compared to $9.7 trillion for the U.S. Obviously, China no longer can be ignored. Corporate America should - and must - take advantage by investing in China so that, on the one hand, it could export equipment, technology, and expertise and, on the other, penetrate the burgeoning domestic market. If they ignore China, American corporations will have let the opportunity of a lifetime pass and have missed the chance to participate in an event of historic proportions. China certainly is not an easy place to do business. There are differences in language, culture, and commerce that must be overcome. China also is an expensive place for foreigners. The cost of living in Beijing is roughly equal to that of New York. Rents of offices and expatriate accommodations are prohibitively high. All this often prompts smaller companies to ask themselves whether they can afford to be in China, rather than whether they can afford not to. With their limited resources - both financial and managerial - it is impractical for small and medium-size firms to set up offices in China. Should the smaller companies, therefore, leave China to the McDonalds, GMs, Motorolas, and AT&Ts? The success of scores of small Hong Kong, Taiwanese, Japanese, and American firms indicates that opportunities exist even for some small enterprises.

How does one go about setting up a business in China? There is no simple, straight answer or formula that can be bottled and sold. Each deal or project has to be studied and all elements researched carefully and thoroughly. The following are some generalizations based on personal experience.

The first and most important step is to find the right partner. This is a key element the world over, but absolutely critical in China. On the face of it, there is no dearth of potential partners in China since everyone is trying to make a quick buck and is on the lookout for rich partners and potential ventures. You need to be able to separate the wheat from the chaff and identify the correct person. Who is a "right" partner? The most important measure is broad-mindedness. An open-minded partner will learn as he goes along, and this will make life easier.

When we set up our first joint venture China to manufacture electronic components, our partner was a factory with facilities that best could be described as primitive. The managers had limited exposure and a mind-set that sought to have a dormitory for the workers to take a nap during the after noons. Nevertheless, we sensed that they had the willingness to learn. Convincing them was a difficult task. but achievable. Once convinced, they accepted and adapted. When the factory finally came on line, the workers - despite receiving training at factories in the U.S. - faced a huge learning curve. Because of this, one so-called expert assured us that we had made a mistake in putting up a hi-tech chemical plant; that we would have had a better return on investment if we had started a plant to make bricks. Today, the factory is one of the most profitable and successful plants in the industry in China.