from January/February 2008
by Venessa Wong
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Turned on in the Great Hall of the People: representatives from Westinghouse Electric and U.S. officials join their Chinese counterparts in celebratation of a joint venture to build four nuclear power plants.
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To further pump up China sales revenues that hit a hefty $5.4 billion last year, General Electric has, like the frog in the old Burl Ives tune, gone a-courtin’. The object of its affection has the unromantic name of the National Development and Reform Commission, but the marriage is proving very sweet indeed. By working with the Chinese government to help improve China’s environment and develop its domestic companies, GE is taking today’s smartest shortcut to success in the country. “The reason the Chinese government loves GE is because China needs to know how to globalize its state-owned enterprises and how to develop global leaders,” says Geoff Li, director of communications at GE China. “We understand China’s needs and align our capabilities with its needs.”
Like GE, ambitious companies throughout the world continue to seek a stake in China’s economic explosion. In 2006 foreign investment totaled $69.5 billion, making China the third-biggest destination after the U.K. and the U.S. Another year of double-digit GDP growth is predicted for 2007. Some analysts expect China to surpass the U.S. as the largest economy by 2050. Plainly, companies should recognize this as a crucial time to prepare for a new economic order.
Opportunities remain abundant—for the prepared, the persistent, and those who can adapt to changing winds. To help their companies develop successful China strategies, boards must keep in mind several key factors that are changing the business landscape there. First, the China market is becoming increasingly competitive. The low-hanging fruit is harder to find. It is vital that companies identify in detail the reasons they are setting up or expanding in China, and generate solid business strategies to meet those goals. Protection against faulty supply chains and disastrous product recalls is obviously one of them (for more, see the following story).
According to Steve Ganster, managing director of Technomic Asia, a consulting firm in Shanghai that helps foreign companies develop China strategies, many businesses fail to come up with a solid plan in their rush to get into the market. “They underestimate what it takes and the staying power you need to play,” he says. Ganster, an American who set up his China office in 1985, saw his business grow most rapidly in the 1990s, when “we were riding the wave like a surfer.” Today newcomers can get a lot of help. “There are many resources available now,” he says. “There’s no excuse to be naïve.” The course set by GE points to a particularly strong future. As Vincent Lo, a Hong Kong real estate mogul whose investments in mainland China and Hong Kong have helped him turn a $16,400 loan from his father into a $2.1 billion fortune, puts it, “Develop your business strategy in line with the government’s.”
Aligning your company’s plans with national policy can help ensure smoother, more sustained growth. The Chinese government remains a controlling force, and President Hu Jintao is pushing new initiatives to enhance research and development. His ultimate aim is to make China the world leader in science and technology by 2050. The state is offering preferential treatment, such as tax incentives, to companies engaged in innovative projects that will promote this development. Lo’s company, Shui On Group, is capitalizing on the government’s objectives by creating the 208-acre Knowledge and Innovation Community in Shanghai—a place that will foster technical innovation and entrepreneurship, he says, not unlike the early Silicon Valley.
Enhanced health-care research is also a government goal. Pharmaceutical powerhouse Eli Lilly & Co. is among the companies taking advantage of state incentives in this area, which include looser approval requirements for new medicines developed by R&D centers for use in China. And while more companies are now able to set up businesses without Chinese partners, Lilly is conducting its research in cooperation with local partner ChemExplorer Co. The American company has announced plans to pour $100 million into China over the next five years to expand drug R&D capacity. It hopes to boost China from its 13th-largest market today to one of its top 10 by 2010.
The government wants to increase the role of service industries in China’s economy from the current 40% of GDP. Investment in the service sector—including finance, insurance, high tech, and health care—is encouraged by various state policies like relaxed minimum-registered-capital requirements, preferential tax rates, and assistance in such things as interpreting local law. The change has paved the way for some major players to enter or grow in the market. Full deregulation of the banking sector in December 2006, for example, allowed giants like Citibank and HSBC to increase retail services. China’s Ministry of Commerce expects the service sector to grow at a 20% annual rate through 2010.
The new goals open the door to more small to medium-size enterprises, which generally operate in the service industries rather than manufacturing. China’s own similar-size businesses have already played an important role in driving economic growth and innovation; they contributed 65% of China’s patents in 2005, more than 75% of its technological innovations, and over 80% of its new products, according to state sources. The Ministry of Finance and the National Development and Reform Commission set up funds in 2006 that offer smaller companies free financial aid and loan-repayment subsidies of up to $250,000 per project. Some of these enterprises will make sound joint-venture partners for foreign counterparts looking for opportunities. “You don’t have to be a huge company to be in China anymore,” says Laurie Underwood, co-author of China CEO: Voices of Experience From 20 International Business Leaders . “And almost all sectors are open to foreign participation, so everyone can invest now.” Her 2006 book sold widely around the world, but even though it was translated into a number of Asian languages, including Chinese, it was never officially marketed in China.
Underwood too emphasizes that a foreign company needs to align its strategy with the central government’s. “Sometimes companies run into protectionism,” she observes. “Chinese laws can be vague, but try to follow them. It’s your best defense.” For example, in 2005 News Corp., already the biggest Western broadcaster in China, came under intense government scrutiny after its Star TV subsidiary set up a joint venture with a local partner that would have offered programming way beyond the market areas for which it had approval. Authorities put a quick end to the project, and News Corp. chairman and CEO Rupert Murdoch, who has tried for years to expand the company’s presence in China, declared that the plan had “hit a brick wall.”
News Corp.’s mistake, China experts agree, was expanding too aggressively in a sector that the government still keeps largely off-limits to private and foreign investment. Also, a change of leadership in the State Administration of Radio, Film, and Television around the same time reportedly led to a tightening of rules on foreign media companies. News Corp. had underestimated the state’s determination to maintain strict control over the media. While the government continues to liberalize the market and allow foreign investors to seize opportunities, its main goal is to improve the domestic economy, which may mean building and strengthening Chinese brands or limiting foreign involvement.
“Companies need to be aware of the government agencies responsible for areas where they do business—there are many, and often their roles can overlap or be in conflict,” says Robert Poole, vice president of China operations at the U.S.-China Business Council. To maneuver through these minefields, large companies commonly have a government-relations staff in China. In addition, the U.S. Department of Commerce, the U.S. embassy and consulates, and an increasing number of consulting or specialty service outfits offer a broad range of business information and other assistance to help companies set up and expand. For example, the U.S. Commercial Service, a government group, is helping U.S. companies find local partners and promises access throughout China. And the American Chamber of Commerce in Shanghai works with the U.S. consulate to expedite visas for member companies that want to send Chinese staff to the U.S. to conduct business.
Many municipal governments, aiming to attract investment, have also set up bureaus with English-speaking associates who offer support to foreign companies. In Shanghai, for instance, the Foreign Investment Development Board is easing the way for non-Chinese companies by holding seminars and conferences on investment in the country. These organizations can “help you understand government needs,” says GE’s Geoff Li.
Foreign companies can be hurt by overly exuberant HQ expectations. U.S. managements need to maintain realistic goals for their China ventures. There must be clear communication with the on-the-ground manager about circumstances that can affect targets. Rushing to beat the competition may not serve a company’s interests well in the long term. “Successful companies take a gradual approach,” says Laurie Underwood. Technomic Asia’s Steve Ganster says a study by his firm shows that one of the biggest problems faced by foreign managers in China is lack of support from their corporate overseers back home. Impatience ranks high among the complaints. That impatience, says Ganster, who has written a book called The China Ready Company (2005), comes from not realizing that “there are lots of people after the same piece of pie.” Jorg Ostertag, Eli Lilly’s China president, says that the reality of development in China is that “success is not a straight line. There will be dips every now and then, so there must be a long-term goal or commitment.”
Gradually shifting power to their China offices can help companies make more efficient, better-informed decisions. According to Underwood, many managers complain that the people at headquarters have expectations of strong growth but only a general understanding of China. “What I hear over and over is that you can’t know China until you come,” she says. “Keep an open mind and you can learn a lot. It is essential that corporations give those on the ground in China strategic capability, not only operational capability.”
The person appointed to manage the China operation should already have international management experience, the experts say. China’s tough business environment and cultural particularities can baffle inexperienced managers. “It doesn’t make sense for China to be a manager’s first overseas experience,” says Underwood. A seasoned manager can help find the right local partner for a venture or make the right moves in setting up a wholly owned foreign enterprise. And a manager with experience in China is probably best able to address human-resources issues, now the No. 1 challenge for U.S. companies in China, according to a survey by the American Chamber of Commerce in Shanghai. Across China, the task of recruiting and retaining local talent remains severe. The average employee-turnover rate in China jumped from 9% in 2001 to about 14% in 2006. “In markets such as India and China that are seeing rapid growth, globalization, and expansion, attraction and retention pressures have become scary,” says Lindsay Oliver, a compensation specialist with the China practice at consulting company Hewitt Associates.
Many companies have been increasing salaries to keep employees. According to 2006 figures from Hewitt, average salary rates rose by 7% to 9% in first-tier cities like Beijing, Shanghai, and Guangzhou, and by 7.5% to 10.6% in developing cities. Management-level employees enjoyed an average salary hike of 9%, while professional-level staff saw salaries rise by 7.9%. However, Oliver says, this isn’t a sustainable method of holding on to personnel. New practices, such as benefits packages, are being adopted. Many companies are investing in staff-development efforts. “At Lilly, we have good career-development programs for employees to further develop their skills,” says the drug company’s vice president of corporate affairs and government relations in China, Yu Ping Betty He. Those include both in-house and outsourced training programs.
In choosing managers for China, Underwood says, companies must also keep in mind the most common reason expatriates decide not to stay in the country very long: Their families do not adapt. In those cases they usually leave within six months. While the environment in developed Chinese cities such as Shanghai and Beijing now offers more resources to expatriates—from international schools and language programs to a wide variety of dining and entertainment options—the adjustment can still be difficult, what with the crowds, the language barrier, and a general lack of freedom to move around at will. It is particularly tough if a company is considering moving to less-developed inland areas. A significant number of multinationals are expanding into China’s second- and third-tier cities, which provide significant cost advantages and untapped market opportunities. Among them, Intel Corp. has 1,300 employees at its facility in Chengdu, the capital of Sichuan Province, while high-tech multinationals like Alcatel, IBM, Microsoft, Motorola, and Nokia have warehouses in Chengdu’s industrial-development zone. China’s “Go west” campaign, meanwhile, launched in 2000 to balance growth across the country, reduces industry barriers and provides incentives such as lower tax rates to encourage foreign companies to set up business in some of China’s poorest regions.
Companies looking to enter the market now “have a latecomer disadvantage,” says Underwood, but “you can also learn from others’ mistakes.” Ganster agrees: “We now have a document of the sins of the past. Make new mistakes, not old ones.” Like, for example, failing to recognize the power of government officials to throttle or further your interests depending on your respect for theirs—a lesson probably not lost on Rupert Murdoch.