Cost of Doing Business in China Keeps Soaring

Times Staff Writer

Stephen E. W. Mulder recently found a way to save his company some money. He landed an apartment in Peking that rents for $72,000 a year.

In U.S. terms, this may not sound like much of a bargain. In fact, Mulder points out that, in the entire state of Indiana, where his company, Cummins Engine Co., has its headquarters, there probably isn't a single apartment as expensive as the one he has rented.

But as a foreign businessman in China, Mulder's standards are different. At the moment, he and his wife and three children are living in the Great Wall Sheraton Hotel, where the rent for his three-room suite is more than $125,000 a year, and where monthly laundry bills alone run up to $400.

"My personnel director back home asked me if I had thought of a laundromat," said Mulder, laughing at the incongruity of the idea. The laundromat has not yet become a feature of Chinese life.

Mulder's difficulties are typical of those encountered by foreign business executives here. Representatives of private companies stationed in Peking say that it has begun to join Tokyo and New York among the most expensive cities in the world.

Exorbitant Rents

Recently, the European Economic Community's Peking-based counselors issued a detailed report criticizing the living conditions for foreign business officials here. The report said problems encountered by businessmen "are now so serious as to act as a deterrent to some companies setting up offices here." The study complained mainly about exorbitant rents for offices and housing, but it also discussed other difficulties of life in China, such as finding adequate staff and arranging travel.

Actually, complaints about the costs of doing business in Peking arose five or six years ago when international companies first responded to China's open-door policy by stationing representatives here, and China welcomed them by hiking its rents and other prices.

Yet businessmen here say there is a marked difference now.

"Three years ago, Peking was expensive in comparison with what you got for your money. But in absolute terms, compared to Tokyo or Hong Kong, it was still cheap," said Herve Pauze, Peking representative for the giant French petrochemical firm Rhone-Poulenc.

"Now, it has become expensive in absolute terms," he said. "When I got here, we paid what seemed like a high price for a dirty little hotel room, but it was much less expensive than Tokyo. Today, the room is still small and dirty, but the price is the same as you would pay in Tokyo."

Pauze is living in a two-room suite at the Peking Hotel. When he first arrived in 1981, he was required to pay 3,600 yuan per month--about $1,300 at current exchange rates. Since then, the rent has been raised every three or four months. He now pays 8,400 yuan ($3,000).

"We still have the same good-looking cockroaches, the same rats in the corridor," Pauve said cheerfully. "It's still overheated in the winter and overcooled in the summer."

The Chinese rationalize the high prices as a means of avoiding what could otherwise be construed as exploitation by foreign businessmen of the country's low wage structure. Very few Chinese workers earn as much as $50 a month. The Chinese version of a millionaire--that is, someone considered remarkably wealthy--is an individual who amasses 10,000 yuan (about $3,600).

Some executives here view the high rents as a sort of indirect tax or license fee for the right to do business in China. In fact, the astronomical prices for housing and office space apply primarily to the foreign business community. The Chinese house diplomats, journalists and foreign teachers and advisers in special walled compounds set aside exclusively for them, where the rents are considerably lower.

The high rents also reflect the extreme scarcity of housing and office space for foreign companies in Peking. Until now, most businessmen operating here have been forced to live in hotel rooms simply because there was no apartment space available. This year, for the first time, some newly constructed apartment buildings for foreign business representatives are being completed.

$72,000 a Year

The Mulders are moving into a complex that will open within the next few months next to the Lido Hotel on the edge of town. Compared to his hotel room, it will seem like a palace. He will have three bedrooms, a kitchen, living room and washer and dryer.

The $72,000 a year that Mulder's company will pay for these amenities does not include utility charges and a $300-a-month management fee. Mulder and other renters are required to sign a three-year lease, to pay a full year's rent before moving in and to give a security deposit of three months' rent.

"They know we don't have any choice," Mulder said. "We've got to live someplace."

After paying huge sums for office space and housing, the business people stationed in China find they are also required to pay equally astonishing amounts to the Chinese customs bureau to import the equipment they need.

China has just announced that it is reducing import duties on certain high-technology items it needs, such as microchips. But for ordinary business items such as cars, typewriters or photocopying machines, the customs fees are often as high as 100% or more--and can be raised virtually on a moment's notice.

Last November, an American working in Peking ordered a new Toyota for his company. The Japanese trading firm informed him that he should expect a customs levy amounting to 80% of the cost of the car.

But, by the time the car arrived in February, the tariff had been raised from 80% to 120%. On a car that cost about $7,400, the duty came to more than $8,800.

To pay this duty and pick up the car, the American and two Chinese assistants were required to make a two-day trip from Peking to the port outside Tianjin. They had to make three visits to customs offices, three trips to banks and two sojourns to the police station--one of them to get the special license required to drive the car three miles inland from the port.

When they finally completed the procedures and found the new car in a warehouse, its battery was dead. In the back seat, they found cigarette ashes and two tickets to the local sports stadium for an event a week after the car had been unloaded.

Despite all these obstacles, foreign companies continue to flock to China, hoping to carve out a share of what may potentially be the world's biggest market.

This week, for example, Nabisco Brands Inc. entered into a joint venture with a Chinese firm to produce items such as Ritz and Premium crackers here.

"No organization today could claim to be worldwide without an association with China," Nabisco Chairman Robert M. Schaeberle told about 75 assembled guests at the Great Hall of the People. "Starting today, Nabisco can really say it is worldwide."

Some of the companies that have come to China hang on in the hope of making money in the future. Others are already in the black.

"You've got to realize we do make money in China," said Mulder of Cummins, a leading manufacturer of diesel engines. "We wouldn't be here if we weren't making money." Last year, he said, his firm had total revenue of about $15 million from its China operations.

Those who have done business in other Third World countries say they are willing to take their chances in China.

"We ship equipment to Iran and Nigeria," said Peter R. Alexander, president of Baker Perkins, whose company will supply some of the equipment for Nabisco's operations in China. "It's much less risky here."

For the present, at least, foreign companies are so eager for access to China's market that China's bargaining position is remarkably strong. Few foreign companies are willing to pull out of China entirely.

"They (Chinese officials) know that, when you take the world economy, there are very few countries with anything near the potential of China," Pauze of Rhone-Poulenc said. "There are 4 billion people in the world, and 1 billion of them are in China. You can't really say, 'I don't care.' "

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