Crackdown Poses a New Dilemma for the American Firms in China
When Jerome A. Cohen first tried to teach the ABCs of business law in Beijing a decade ago, the task left him, well, speechless.
“We weren’t even sure what words to use in Chinese,” recalled the attorney whose efforts helped pioneer modern U.S. business dealings in China. “There wasn’t even agreement on the word for ‘contract.’ How did you express ‘offer’ and ‘acceptance?’ ”
Despite the awkward start, American companies found the world’s most populous nation to be an increasingly valued--if perplexing--business partner. More than 650 deals worth at least $3.5 billion were signed by this year, covering a wide range of projects, according to the U.S.-China Business Council, a trade group.
Will the budding partnership survive the turmoil in Beijing? For foreign firms already invested in China, the basic stance is to watch--and avoid jumping to conclusions. China’s wish to modernize, many believe, will keep the door open for continued ventures.
“At this point, I wouldn’t bring any more funds into the country, but I wouldn’t withdraw any either,” said David K. Eiteman, a professor of international finance at UCLA. “I’d just batten down the hatches, sit and wait.”
Actually, some companies plan to push ahead. General Bearing Corp. of Rockland County, N.Y., still expects its jointly owned factory in Shanghai to start up this month, despite increased absenteeism among workers.
“Even with recent circumstances, we think we’re still standing on pretty solid ground,” said spokesman Paul Borsuk.
The current military crackdown is just the most spectacular in a long list of troubles faced by foreign companies that linked their fortunes to China in the 1980s.
Restrictions on converting Chinese currency to dollars continue to make it hard for U.S. ventures to take home their profits. Fees and taxes sometimes pop up unexpectedly. The legal code remains incomplete, leading to misunderstandings and conflicting views. Moreover, Americans sometimes are put off by a negotiating process that can take years.
Westinghouse Electric, for example, has considered 10 different joint ventures in China since the 1970s but has never gone ahead with any of them. “We’ve had the usual problems with the bureaucracy and with negotiations that are very, very extended,” said Elizabeth Kilkenny, a corporate spokeswoman.
By various accounts, the vast cultural gulf has narrowed greatly from the early days when Cohen and others helped establish the framework for U.S.-Chinese business deals.
As recently as 1980, the concept of free enterprise was new to the younger Chinese. The legal profession had not yet recovered from the Cultural Revolution, when it was abolished. Even the right to hire and fire Chinese workers was granted only belatedly to U.S. employers.
No Recourse
For Americans trying to unearth policies on such exotic matters as exchanging currency, the early experiences were other-worldly: “I remember sitting in the Bank of China,” recalled Cohen, a partner at the New York law firm of Paul, Weiss, Rifkind, Wharton & Garrison. “The guy kept a handwritten copy (of the regulations) in his lap under the table--peeking at it furtively like a good poker player.”
A few years later, UCLA’s Eiteman recalled, Chinese banking officials blocked a U.S. baby food manufacturer from withdrawing its own money because they were dissatisfied with its progress in building a factory.
“You don’t have any recourse,” said Eiteman, who follows the experience of U.S. joint ventures in China. “The bank manager for that part of the country is sort of a dictator unto himself.”
Early euphoria over China’s potentially gigantic consumer market led to what a McDonnell Douglas executive now calls “the toothbrush syndrome”--the naive view that a billion Chinese could mean sales of a billion toothbrushes, or more expensive consumer goods, for that matter.
The attitude overlooked simple reality: The U.S.-sized nation already had a low-tech industrial base to provide its people with washing machines and other household goods. By contrast, what China really wanted was Western equipment and technology in its quest to modernize.
“From the industrial side, China clearly needed a lot of equipment,” said Gareth Chang, vice president of McDonnell Douglas, which has a joint venture to assemble airplanes in Shanghai.
As business relations grew between the two countries, the Americans’ early ignorance of Chinese reality gave way to more modest expectations. One recent sign: The average size of investments has dropped, even as the number of deals has grown.
“They (U.S. companies) are setting up beachheads,” explained Kelly Shea, manager of high-technology programs at the U.S.-China Business Council.
Last year alone, American businesses agreed to 269 manufacturing ventures in China, more than double the number for the previous year, the trade group reported. The Chinese typically keep control of the joint enterprises, while foreigners provide needed technology and financing.
The foreigners also benefit, however, from China’s low costs and growing industrial base: “Even if the old guard remains in control, there’s no reason to suggest that China won’t be a good place to do business,” argued Peter Green, president of James Capel Inc., a London-based investment firm with dealings in China and Hong Kong.
Already, the United States ranks as China’s third-largest trading partner, behind Hong Kong and Japan. The $5 billion in U.S. exports to China last year included shipments of equipment, chemicals and other products last year. In turn, America bought $9.2 billion worth of Chinese clothing, toys and other goods, according to Commerce Department figures.
Currency Restrictions Tough
Chinese officials, meanwhile, are credited with easing some of the hassles cited by foreign firms in the past.
For instance, the recent $10-million deal between General Bearing Corp. and Shanghai Roller Bearing Factory took just 70 days to work out, once the U.S. company signaled its intent, spokesman Borsuk said.
Moreover, determined companies have found ways to maneuver around the nettlesome currency restrictions.
Food Engineering Service, an Irwindale company, has invested $3.5 million through a Hong Kong subsidiary to build a factory in Hunan province that will produce egg powder. Under the joint venture, the private U.S. firm plans to use cash from sales inside China to buy the half million eggs that its factory will consume daily.
To bring home profits, Food Engineering has mapped out an indirect route: Exports to such countries as Japan, Hong Kong, Singapore and South Korea will earn hard currency that can be converted to dollars--without bureaucratic headaches.
“I think they (the Chinese) accept foreign business people less readily than some other countries do,” said Richard M. Smith, president of the U.S. concern that has investments in Mexico, Canada, France, Egypt, Czechoslovakia and other countries.
But, he added, after several years of dealing with the Chinese, “We’re old friends.”
At the same time, the volatile events of recent days have injected great uncertainty into such relationships. The spectacle of such powerful corporations as IBM, Chrysler, McDonnell Douglas and Westinghouse pulling American employees out of the country last week underscored the hazards of conducting business in China these days.
Indeed, foreign investors may be starting to pay a price for the political tumult. Until just a few days ago, Smith had looked forward to closing a $13-million equipment sale in China next month. Now, however, it looks as though the deal will be slowed by skittish bankers. “If the foreign banks say, ‘We aren’t going to lend money’, then things are going to slow down,” he said.
Joint Ventures Appealing
But some of those who already have poured money into China don’t expect that to happen, assuming unrest doesn’t persist for years. Perhaps the most compelling part of their argument is simple self-interest. China’s ambitions of economic development remain linked to continued infusions of foreign capital and technology.
“We’re completely confident that every element in Chinese society supports the success of ventures like ours,” Borsuk said.
Even as chaos and bloodshed have rattled Beijing, business went on as usual in many places. Mattel Inc., with two toy factories located 1,500 miles from Beijing in Guangdong province, sounded bullish even as troops massed in the capital. John W. Amerman, the company’s chairman, said in a statement that its factories were running normally and that Mattel planned “to continue operating in this region of China which has been unaffected by the political events.”
Do such upbeat appraisals amount to wishful thinking at a time of great upheaval? Not at all, maintain some of the same business executives who took refuge in Hong Kong last week.
Richard C. Gaskins, Westinghouse’s top executive in China, composed a proverb of his own to illustrate his long-term confidence: “Behold the dragon, fearsome when he is writhing, beautiful when he is content. He will be content again.”
U.S.-CHINA JOINT VENTURES
1979-81: 61.4
‘82: 9.5
‘83: 75.1
‘84: 154.6
‘85: 850.9
‘86: 443.8
‘87: 341.2
‘88: 325. 0
