Doing Business in China Is Profitable--and Frustrating : Patient Foreigners Can Succeed Despite Complex Bureaucracy
When Chinese officials meet with foreigners interested in doing business in China, they extol the success of a Beijing plant where Jeep Cherokees roll off the assembly line. That was not always the case.
Production came to an abrupt halt for two months in 1986 because American Motors’ Chinese partners refused to provide the money to buy imported components.
After Tony Fung, an Australian businessman, opened a $257-million Ramada Renaissance Hotel in Guilin last May, he encountered a myriad of problems, including squabbling with his Chinese partners, employee theft, and excessive charges for power, water and communication lines, according to the South China Morning Post, a Hong Kong newspaper. Upset, Fung complained to government officials in Beijing, and things finally began to run smoothly at the hotel in January.
The foreign investment trend in China has been moving away from large, capital-intensive projects such as oil exploration, hotels and real estate, which characterized the first wave, to smaller joint ventures in manufacturing such as American Motors Corp. Foreigners are teaming up with Chinese partners to produce items for export on a smaller, more manageable scale. China wants to export goods to earn badly needed foreign exchange, a goal at odds with companies attempting to tap China’s huge consumer market.
The dreams of golden opportunities that accompanied China’s opening in 1979 have yielded to hard, pragmatic views about doing business in a country short on foreign exchange and infrastructure but long on bureaucracy.
Beginning in 1986, foreign investment commitments in China began to decline. China initiated 22 new regulations at the end of 1986 to shore up foreign investment, but the downward trend in the dollar value of contracts continued through the first nine months of 1987--the latest period for which data is available.
“Many of the problems occur when you see China as a massive market,” David Fridley, head of China energy studies at East-West Center in Honolulu, explained. “China doesn’t operate quarter to quarter. It is usually in a framework of five years. They do not expect immediate results.
“It is a long-term investment . . . that has led to some disappointment, with the subsequent realization things are not as easy as they first thought,” Fridley said.
“There has been some retrenchment, some rethinking. We see companies go in with a different attitude. It is not a bright picture, but the most dismal part of the relationship is over.”
Foreign oil firms, for example, which saw a vast potential in preliminary surveys of China’s untapped oil reserves, have been disappointed. Fridley said drilling has not uncovered giant petroleum pools, and the yield of transport fuels such as gasoline, diesel and jet oil from China’s heavy crude is very small. Meanwhile, world oil prices plummeted in 1986.
Foundation for Future
“We have talked to Mobil, Shell, Esso and Japanese companies. Generally none of them is pleased with what’s gone on there. They’ve discovered the offshore basin of China is a lot more fractured and smaller than expected,” Fridley said, adding: “By 1986, the honeymoon kind of ended. . . . Given that atmosphere and the price collapse, this led to a massive slowdown.”
But China’s vast work force is attracting some basic labor-intensive industries, like apparel manufacturing, that require small investments to establish joint ventures, a vehicle popular with American firms. Although total U.S. investment in China declined in 1986, the number of U.S. joint ventures increased, doubling the 1985 commitment level, according to a report by the National Council for U.S.-China Trade.
By all accounts, joint ventures are tests of time and patience. U.S. companies, for example, typically de-emphasize conventional corporate measures of profit and return on investments.
Gillette and Hewlett-Packard, which were among the first to establish U.S. joint ventures, take a long-term approach to China and place great value on establishing a toehold in a country that represents a vast market potential. They have emphasized learning how to do business in China while working to establish a reputation and gaining the confidence of Chinese officials.
“The companies that have a lot of international experience have entered China with their eyes open, and they didn’t get overly ambitious. They have done quite well,” said Michael C. Hawley, vice president of operation services, worldwide, for Boston-based Gillette.
Profitable Ventures
“They are going along laying the foundation for the future of their company,” Hawley said recently. He headed Gillette’s Asia Pacific Group, which helped establish Shenmei Daily Use Products Co., which operates a blade-making factory at Shenyang.
“If you go in looking for a short-term gain, it is really disappointing. You’ll get frustrated,” says Chi-ning Liu, a U.S. citizen and business development manager for the intercontinental operations at Hewlett-Packard in Palo Alto. He was part of HP’s early relationship with China in 1979 that evolved into a joint venture, housed today on one floor of a watch factory in Beijing.
A survey of Chinese joint ventures by the Chicago consulting firm of A. T. Kearney and China’s International Trade Research Institute concluded that most foreign investors felt that their joint ventures were succeeding despite problems, which include a lack of suppliers and raw materials and a foreign exchange imbalance.
“The degree of difficulty was high because of the nature of the infrastructure in China,” explained Hawley. “They had a principle of self reliance. So if you had a factory that made door knobs, it would be vertically integrated. An independent small tool man didn’t exist.
“If you wanted to find someone to build a spare part, you just couldn’t look him up in the Yellow Pages. You had to find a factory with lots of machinery--and each is usually owned by a different ministry--then ask if they could help fix your part.
“In addition, workers’ compensation is tied to housing and other factors. The staffing levels and types of education are more a function of bureaucratic and political systems. It’s rather difficult to work your way through to get appropriate allocations.”
Electricity, water, and sanitation each were handled by separate government entities, Hawley said. “It did cause us to adjust our programs and learn a lot of things.”
Other mundane, day-to-day things such as finding apartments for U.S. dispatched staff and adequate transportation took a surprising amount of time, too, according to Liu, a 20-year veteran at Hewlett-Packard. “These kinds of things were a little more difficult than we originally thought. We spent lot of time on these.”
Another difficulty, he said, began in 1983 when China needed to conserve its foreign currency. “China has five-year planning cycles. Usually in the first couple of years things are very, very tight. Then the last two years, they catch up with the spending. Then they move into a second (five-year) plan and tighten things up.”
When China ran short on foreign exchange, it was unwilling to finance its share of production at the Jeep plant in Beijing. That, together with how the deal was structured, triggered a dispute that was resolved two months later after the U.S. company appealed to high-ranking Chinese authorities and went public in newspapers about its problems.
Today, “it is a bright spot here at Chrysler,” Michael N. Hammes, vice president of international operations at Chrysler in Detroit, said of the Chinese venture that Chrysler acquired when it bought AMC last August. “It is a profitable operation and a growing operation.”
Foreign currency problems continue to affect day-to-day business. To pay expatriates on staff, joint ventures have to earn hard currency, but they incur delays in capital exchanges. The Chinese government recently initiated changes to allow currency swaps among businesses. Hotels, for example, with excess foreign currency could trade with firms with shortages.
Gillette and Hewlett-Packard say their Chinese ventures are profitable and have met their expectations. Gillette now employs 100 people, more than double the original 45. Production is up to 40 million blades, which sell in China under the “Rhino” trademark. Gillette also produces razors.
Last year, Gillette added a small sub-assembly unit to make brushes and stems for its Liquid Paper correction fluids sold in Asia.
Hawley at Gillette says the China venture had limited expectations tailored to the unknowns of doing business in China. “Gillette is a company that operates 60 factories in 30 different countries around the world. We had the basic ability to mount an operation anywhere in the world, but no one had built any experience in China at all. It was rather hard to set expectations based on anyone else’s understanding or information,” he said.
Meanwhile, Hawley and Liu believe that changes have occurred in China, easing some of the early trauma of doing business there. “The biggest change is the state of awareness of doing business in China. We also recognize the realities that China is basically a poor country with limited hard currencies. So people tend to be more realistic now.”
