This is China! blog

The China expat website eChinaCities recently interviewed me on how difficult it was for foreigners to set up and run a business legally in China. I’ve been doing it for years here in China, without having paid graft or taken kickbacks or making shady side deals with government officials. Part of the reason for that is I don’t have the time or patience to mess around with these kind of relationships: the times during which I’ve indulged someone through guanxi, I’ve regretted it. So I now rationalize even that very Chinese way of doing business. Also, though, it helps our business is based in the Suzhou Industrial Park, which has a very strong influence from the Singaporean government. The Singaporean government itself is based on the colonial British model of efficiency in government affairs.

Shanghai has improved greatly in the manner in which it treats foreign investors; however, the brand corporations with deep pockets of course receive much greater assistance in wending through the maze of policies, regulations and bureaus than do tiny companies. Outside the close orbit of Shanghai, though, and setting up and managing companies requires far greater due diligence of the area, its regulations, and the departments that affect the investment. Localities throughout China are notoriously parochial, so new enterprises need to spend extra attention on the relationships that will supposedly facilitate approvals and audits. The relationships can cut both ways, with locals’ expectations for the business way out of wack with the Westerners’. The further away from Shanghai foreign investors venture, the further back in time the enterprise travels, back to where the rule of man is far more important than the rule of law.

And always have an exit strategy. Local governments that believe themselves the only game in town for a foreign investor inevitably become sloppy and demanding. Companies need to be sure they know how they will extricate their project from a location with minimal damage to the image and bottom line of the mother company. Though China has become a more straight-forward environment in which to do business, the shifting tides of domestic interest in foreign adventures in China is on the wane, depending on the industry. Experienced local governments that support “pillar” industries like automotive, renewable and clean energy, and aerospace will facilitate approvals and business transactions for investors; whereas foreign invested companies that want to set up in discouraged industries like textiles and toys will find a gauntlet of unpleasant restrictions with which to deal; in which case, China may not even be the right place for the enterprise.

Read the article.

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Paul French recently interviewed me for a piece he was doing on the kick-back business culture in China. Paul is Chief Representative of Access Asia and author of several books on China, most recently Through the Looking Glass. He is also China Editor for the magazine Ethical Corporation, based in the UK. Ethical Corporation is “an independent company providing competitive intelligence for business sustainability.” They publish the leading Responsible business magazine. They also sponsor conferences on Corporate Social Responsibility. Paul saw my Eurobiz article titled “Kicking the Kick-back Habit”, in the April 2010 issue of the Magazine. Paul recorded our conversation and saved it as a podcast, which you can listen to or download at: Bribery and Corruption: Fighting kickbacks in China

Enjoy.

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When Journalism Made a Difference

A friend and one of the funniest guys I know in Suzhou, Turner Sparks, recently received a write-up in the New York Times about the franchise he runs in China, New York-based Mr Softee. Turner not only runs the ice cream truck, but he also hosts a Friday night stand-up comedy show in one of the bars in Suzhou, showcasing the talents of local expats and Chinese comedians alike. The article is an excellent case study for any Westerners who want to transplant their business models in China, when the Chinese are simply clueless what the business is on about – especially franchises. As the article mentions, Turner and his former college room mate, Alex Conway, President of Mr Softee China, had all kinds of hoops to jump through in China, the first of which was “selling products out of a truck. Mr. Soft Heart trucks were assigned specific routes and parking spots, with no deviating allowed.” Mr Soft Heart is the Chinese name for the company. The article goes on to explain how the company educated Chinese consumers about the product line and flavorings, and how some flavors simply did not fly.

The article is as light and fluffy as the ice cream itself, except more educational – and less fattening.

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I recently found myself talking a European businessman in the energy sector out of forming a company a joint venture in China. With so much activity in general in China and in the energy sector specifically, it’s no wonder that a business person in China after just a few short months wants to get in on the game. Of course, he had not done any due diligence on the JV partner, leave alone the sole-supplier from which they were supposed to draw product and sell it onto the international market.

Andrew Hupert in his monthly online negotiation column for the China Economic Review writes about just some of the pitfalls in doing business deals in China. As is his pithy way, Andrew cites five must-do’s, my favorite of which is under the heading, “There is a Chinese metric system – how do you measure a ‘win’?” Andrew writes, ” Amateurs demand that onerous penalty clauses get inserted into English-language contracts that don’t mean anything in local courts. Pros want the right to pick the financial controller who keeps the company chops in his office safe.”

Amen to that.

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That Rio Tinto Taint

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An American friend and I recently discussed how much easier it is to start a multinational company than it was even five years ago. With support from Chinese and American financing the company he and his partners are launching has as many as 175 new products, product combinations and kits within two years from seed investment. With a factory and suppliers based in the Yangtze River Delta, the company has commitments for sales from retailers in the United States, Europe and Russia. My friend believes the combination of Chinese investment (unaffected during the global economic downturn), the relatively low cost of manufacture in China as well as information technology that allows American headquarters in China can effectively communicate with designers in the States and distributors around the world. “The barriers to entry to be a multinational have never been lower,” my friend mused.

Proctor and Gamble watch out!

The confession of Rio Tinto’s man in China, Stern Hu, accepting bribes did not surprise me. Hu was originally from Tianjin, and acquired an Australian passport. Rio fired Hu soon after the Beijing court’s verdict at the end of March 2010, claiming it did not know what its man in China was up to during his negotiations with Chinese steel producers over iron ore pricing.

The reason I’m not surprised is that it is all too common in China for overseas Chinese to return to China as prodigal sons who quickly take to Chinese ways of doing business. I thought over the years that I would hear fewer stories of Overseas Chinese (OCs) who are General Manager’s following the Chinese Way of doing business: opaque, backroom dealings; mis-information or no information relayed back to HQ; commanding subordinates to help them siphon funds from purchasing contracts. What does surprise me is the increasing frequency with which I am hearing these stories, mostly from expats who have to work under the OCs. Perhaps the reason for the increase in cases is that when the global economic downturn struck in late 2007, headquarters of companies from around the world began pulling their expat GMs out of China, because of the “hardship” of it all. In many instances, Chinese junior staff were not yet ready to take the tiller of managing large, complex, rationalized organizations that had to meet international standards – especially around transparency.

The other point that surprised me about the Hu story is that there are not more of them in the news. One American businessman that’s worked in China more than eight years expects to see Western companies putting expats back in place after they’d pulled them out in a financial panic come the Great World Recession. “The companies are just figuring out that they’d passed the reigns on to Chinese staff too quickly, and that Headquarters actually doesn’t know what’s happening in their Chinese operations,” my friend said. When I commented on the dearth of news of multinational mis-organizations in China he commented sagely, “What multinational wants the world to know their man in China screwed the pooch?’

Find an excellent in-depth analysis of the Rio Tinto case:  FT

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A recently talked with the plant manager of an American Fortune 500 company that has a facility in Shenzhen. It’s been a couple years since I’ve been down to Shenzhen. I asked her if the environment had become any more livable since the economic downturn and the talk of Guangdong trying to upgrade its manufacturing sector to higher-value production, and to services. She flatly answered “No.” In fact, she told me, she lives in Hong Kong. Though the downtown area might be all bright lights, big city, the manufacturing districts were unsafe, especially at night. She worked a long four-day work week in Shenzhen, then retired to HK on Fridays for a bit of civilization.

The characters of places are as devilishly difficult to change as people themselves.

Pretty much every expat GM I’ve talked with this year in China agrees they’ve felt a sea change in Chinese government policy toward Foreign Direct Investment(FDI): “They’ll allow us to stay here until they’ve got everything they want, then it’s bye bye!” one Danish GM told me. Everything they want now is technology to copy, manufacturing processes to ape.

Now, Chinese policy is reflecting a sophomoric sensibility it’s got it all figured out and doesn’t need to remain unctuous to foreigners any longer. American companies, of course, are not impressed with the business climate change. “I don’t think the Chinese government can count on the American business community to be able to push back and block action [on Capitol Hill],” Myron Brilliant told the Financial Times recently. Brilliant issenior vice-president for international affairs. He used to shield Beijing from the Capitol Hill gang that wanted to extract its pound of flesh from Chinese protectionist measures, especially the currency revalutation issue.

Beijing has seen it’s pushed US business and government interests as far as it can since the global economic downturn, and is trying to make nice to policy makers who are pushing for tariffs on Chinese goods to signal American displeasure with China’s currency controls and other export subsidies. The powers that be just might find that adolescent muscle flexing is only winning them the world’s annoyance.

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Google’s decision to pull back to Hong Kong to stage Chinese queries on its search engine has highlighted an unsettling sentiment: American companies are finding China a frostier place in which to do business. The American Chamber of Commerce in Guangzhou recently released the results of its latest investor survey to reveal American enterprises have found that having investment opportunities restricted in various industries, a business environment still thick with intellectual property theft, domestic

Further reading: FT

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Companies exist to make money for their shareholders. After 1971 that became the corporate mantra. Companies are able to exist at all, however, because of their stakeholders: employees, supply chains, communities and shareholders. The shift in focus from stakeholders to shareholders has justified many corporations forgoing doing what is right for what is expedient.

Google is an exception. It’s the reason, too, why Google will remain one of the most innovative companies of the 21st-century. It dared to do differently.

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Cyber-kerfuffle