"The Issues That Chinese and U.S. Directors Face are Very Similar"
from September/October 2008
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Be There
It’s imperative for any company interested in doing business internationally to send some of its senior management and directors to China. The opportunities are definitely there and will continue to be there for years to come, but only those who best understand the regulatory, economic, and cultural environment will be poised for long-term success.
Many [Chinese] domestic businesses are either partnering with or learning from their foreign counterparts, and vice versa. For example, if a large U.S. financial institution buys a stake in a Chinese bank, often the Chinese institution is working alongside the U.S. institution to understand its business practices and how to tailor them for the Chinese market. Similarly, the U.S. institution is learning how to best conduct its business in the Chinese market. So while foreign business continues to penetrate the Chinese market, Chinese companies are poised to benefit from this trend, which seems to be the goal of the Chinese government as it seeks to promote and develop its economy.
The major international banks are involved in China—maybe to a limited extent, but they are there. One thing I believe would be helpful in welcoming banks would be for China to focus on regulatory issues, making it easier for foreign banks to get involved in banking in China in conjunction with local businesses. It’s a good way to create capital and would help the Chinese continue to grow their economy.
Norlin Boyum, 60
Chairman, American Bancorp.
Minneapolis
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The snapshots of directors taken during their China trip include this one of Leonard Kujawa in the doorway of a yurt, a Mongolian nomad’s portable home. |
The Party Is the Boss
China’s economic success of the past decade is the easy story, whether you measure it by the number of cars, exports to the U.S., foreign currency reserves, or its economy’s double-digit compounded growth rate. A whole lot more mysterious is the process behind those successes. China is different.
The first difference is China’s decentralized organization. Western headlines tell of the decisions made by the State Council and the president and premier. The reality is the dominance of the local and provincial governments—and that is the organizational model that must be managed by those who invest in China. The central-government regulations must be accommodated, but the local authorities make the decisions that enable a foreign business to make a profit.
The other profound difference in China is the role of its Communist Party. We understand that the country’s one-party rule places restrictions on individual freedoms. Less easy to grasp is the party’s role in business. The party is everywhere, but not to be seen or understood by us as the outsiders. But make no mistake, the party is the boss. In the chain of authority, it comes first and the government organization is subordinate to it. This is most clear at the local level, where the party secretary is superior to the mayor. How they work together and make decisions is another mystery to outsiders, a black box.
Leonard J. Kujawa, 76
International Financial Consultant
Richmond, Virginia
Public board: James River Coal Co.
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Bob and Lily Huang visit a Buddhist temple west of Shanghai. |
Time to Invest
For U.S. companies, legality is the first rule of business; fairness comes second, followed by relationships. Our Chinese counterparts value relationships first, fairness second, and legality last. Understanding this difference can be very helpful in business negotiations—and very important in developing and managing people in China.
Synnex has been in China for more than two decades and has more than a thousand associates working in various cities. While we have seen the explosive growth of the country, I’ve been frustrated with the slow development of our local business due to potential FCPA [Foreign Corrupt Practices Act] compliance issues. During the trip, I was very delighted to learn not only that the Chinese government has been serious about attacking corruption, but that the Shanghai Stock Exchange has put together a set of metrics to assess the level of corporate governance of its listed companies. As the result, those companies show much better performance on growth and earnings. I believe this kind of initiative will accelerate the improvement of transparency, and it will be much easier for us to do business in China.
I was surprised that the U.S. accounts for only 7% of foreign investment in China. If we are going to capture the massive opportunities in China, both business executives and directors need to really understand the environment so they can invest more and put a proper strategy and governance in place.
Bob Huang, 63
CEO and Director, Synnex Corp.
Pleasanton, California
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Margot Lebenberg at the lama temple in beijing. A spin of the prayer wheel behind her invites good luck. |
Hire the Right Locals
If you were a global company, I believe it would be harmful to your business not to be doing business in China. However, directors planning a China strategy need to be mindful of a number of issues and risks, and significant government regulatory restrictions remain a prominent barrier. Hiring the right professionals—locals who understand the vagaries of Chinese business and government—can help you overcome the challenges and make China a phenomenal place to do business.
One of the highlights of my trip was a one-on-one session with several directors of Chinese companies. We sat around the table—three American directors and three Chinese directors—and spoke directly and openly about the issues we face. We found that while there are certainly cultural differences, the issues that Chinese and U.S. directors face are very similar. For example, U.S. companies have struggled through implementing Sarbanes-Oxley-type regulations over the past several years; now Chinese companies are self-imposing many of the same risk-management and internal controls, and coming up against the same challenges.
The discussion with my Chinese counterparts underscored another critical point: the value of developing strong personal relationships and business alliances in China. An understanding of the people and their culture provides a strong foundation for success.
Margot Lebenberg, 40
President, Living Mountain Capital LLC
New York City
Futuremedia PLC
Palpable Energy
Since China began opening its economy to Western influence 20 years ago, the ferocity of economic and physical development has been beyond incredible. Amazingly, the Communist government has, in the main, proved able to manage this growth and its attendant strains. In 2008, as a result of currency imbalances [Chinese exchange rates are fixed by the government], dramatic worldwide price increases in essential commodities (including food, steel, other metals, and energy), and rapidly rising internal labor costs, inflation is a key problem.
The energy in China is palpable. Construction is 24/7 in all directions. Preparing for the Olympics intensified activity, but development must have been 24/7 for many years to create all the new buildings throughout urban China, a country whose size is hard to conceptualize. One example: The U.S. has nine cities of over one million; China has 240. China’s rapidly rising middle class is heavily urban. Others—some 650 million who live in remote rural areas—have largely been left behind (so far).
Just about everyone in China, nationals and expats, refers to acute environmental problems and endemic corruption among public officials. The Sichuan earthquake underlined the effects of the latter, namely the shoddy construction of schools for the rural poor. But it also highlighted the ability of central, provincial, and local governments to move quickly and single-mindedly in tackling the crisis.
Many non-Chinese companies, largely Western, have been successful in building businesses in China, either as stand-alone enterprises, as joint ventures, or through minority stakes. All structural forms pose problems, including difficulties in getting approvals from relevant government authorities (determining the real decision-makers is a key challenge), tailoring businesses to Chinese tastes and cultural habits, managing intellectual-property rights, ensuring adequate supply chains, and ensuring product quality. Chinese legal codes are evolving, but many basic legal issues are unresolved or subject to the idiosyncratic decision-making of local politicians.
No multinational company can afford to ignore the large and rapidly changing China market, but finding its best path to doing business there is neither easy nor obvious. Many businesses have invested enormous time and energy to make little progress, but real success stories exist and proliferate. Fortunately, there are an increasing number of consultants and other specialists who can help and who have built both expertise and connections.
Rosalie J. Wolf, 67
Managing Partner, Botanica Capital Partners LLC
New York City and Litchfield County, Connecticut
North European Oil Royalty Trust
A Need for House Rules
One of the things that I hoped to gain from the trip was an understanding of how corporate governance would work in a country that still has a Communist government. And while they’re making strides there, the Chinese are obviously living in a world that is complicated by the presence of a central controlling government. However, as China becomes a major player in the global economy, a participant in an inextricably linked global market, they will need to learn to play the game by house rules.
If you want to do business with people globally, if you want to own companies globally, you have to put in place forms of corporate governance that make people comfortable doing business with you. And that is what I think will drive the Chinese. They want to list on the New York Stock Exchange; they want to get access to capital; they want to own foreign companies; they want to do business in places; they want to get our customers. If you want to start selling Chinese products to IBM, Microsoft, and General Motors, you have to start having in place corporate guidelines that work. Nobody, if left to their own devices, is going to do something they consider onerous unless they’re forced to do it.
David J. P. Meachin, 67
Chairman and CEO, Cross Border Enterprises LLC
New York City
What a Difference 10 Years Makes
Returning to China after visiting in the late ’90s, I was struck by the difference that 10 years and an economic boom can make. I was impressed with the improvement in the standard of living, with many high-end consumer products being offered to Chinese consumers and foreign visitors. You certainly see the impact of the U.S. there, whether it’s the Nike store in Shanghai or the Starbucks stores on virtually every other corner. However, one of the most striking signs of the rising Chinese prosperity was right outside my hotel in Beijing: four automobile stores—Rolls-Royce, Ferrari, Lamborghini, and Maserati—side by side. That is not something that I would have imagined a decade ago, 15 minutes from Tiananmen Square. Ten years ago there were a lot more bicycles filling the streets of Beijing. Today cars are beginning to dominate the roads.
So China, and most notably Beijing and Shanghai, have become a great deal more international and perhaps less Chinese than I remembered them from a decade ago. I would not have imagined KFC and Pizza Hut could be such a visible part of the Chinese culinary landscape.
But make no mistake: International as China is becoming, they don’t want to be like Europe and they don’t want to be like the U.S. They want to be a very successful China. While Chinese business is in tune with what I’d call modern world economics, there is no question that there continues to be a substantial government bureaucracy to deal with there.
That being said, there is a real focus in China on the needs and expectations of their people and the domestic economy, as well as the opportunities that they have globally. What I think would make China a more attractive business partner is having a consistent and rigorous enforcement of laws and regulations affecting business and commerce, particularly intellectual-property rights and contract law. Also, facilitating the orderly repatriation of earnings for foreign investors would be a very positive step. The free flow of capital into and out of markets would, I believe, create a more positive environment for foreign investment.
Chuck Noski, 55
Former Vice Chairman, AT&T Corp.
Air Products & Chemicals, Automatic Data Processing, Microsoft, Morgan Stanley
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Delano Lewis with English-language students he met in Shanghai. |
Diversified Ownership
I was struck and fascinated by China’s reforms and its government’s embrace of private enterprise. Contrary to what most Americans think about Communist Party-controlled countries, China is taking a very practical approach to development rather than an ideological one—witness its move from a planned economy to a market economy. Thirty years ago state-owned enterprises (SOEs) accounted for 80% of China’s gross domestic product; now they contribute just 17%. There are still SOEs centrally controlled for security and economic reasons, but there is a move to privatization, or as one Chinese official put it, “diversified ownership.” There are opportunities in tourism, retail, and financial services, with markets opening to a growing Chinese middle class.
Some 77% of investment from overseas is through wholly foreign-owned enterprises known as WFOEs, mostly in manufacturing. Newspapers and telecom remain off-limits for foreigners, and investing in China’s tobacco companies is restricted. Everything else is open.
In Shanghai, we met students who had studied English in school. They wanted to learn about America. One student also spoke Spanish and German. If these students reflect what is happening in the Chinese educational system, I would expect to find China in an even more competitive position in the world.
Given this scenario, there are great business opportunities in China. The time is now, the energy level is high, and the Chinese government is opening up, so I close with a question: Why not do business in China?
Delano E. Lewis Sr., 69
Former Ambassador to South Africa; Senior Fellow, New Mexico State University
Las Cruces, New Mexico
Colgate-Palmolive, Eastman Kodak
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Mary Richie at beijing’s Olympic Stadium |
No Better Place to Be
The business opportunities in China are unparalleled, but there are many barriers. One of the biggest is the influence relationships have in doing business. If you don’t take the time to develop those ties, you are highly unlikely to succeed. You have to take the time to get to know people and allow them to get to know you.
Foreigners need to adapt to this, because in many ways we need the Chinese for new market opportunities more than they need us. We can’t go in thinking the way we do business is the way they should do business. They simply won’t. They don’t need to. While China is a market that we would all like to enter, the Chinese could focus solely on their domestic businesses and be very successful.
Communism does remain an unyielding force, a monolith, in the lives of the people, but I was surprised by the strong presence of capitalism. Capitalism and Communism are not two concepts that one might think could coexist, much less speak in the same breath. But business and capitalism are alive and well, with an economy that’s progressing at an incredible rate and now perhaps surpassing what is happening in the West. So now is the time to be in China. It has potential to be a fantastically interesting place, with vast opportunities for those who are willing to take the chance and go there. For people who are starting out in their business careers, there’s no better place to be.
Mary C. Ritchie, 51
CEO, Richford Holdings Ltd.
Edmonton, Alberta, Canada
Isotechnika Inc.
A Need for Health Care
All is not champagne and roses. For example, China’s health-care reform has failed to improve the cost, accessibility, and equality of its health-care system. As a director of a pharmaceutical company that sees a huge need and opportunity to bring drugs, technologies, and services to China, my visit was most helpful in learning how critical it is to have effective centralized planning for all this. And it isn’t happening. In fact, nowhere is there a more obvious failure than in health care. The government has yet to make fundamental decisions and execute plans to create a health-care infrastructure.
In addition to drugs, technologies, and services, China needs qualified people to deliver them. It must produce more doctors, surgeons, and other health-care professionals, and do so with the same zeal it applied to producing engineers for the manufacturing sector—and with the same effect.
Additionally, who will pay and how will they pay for health-care products and services? Frankly, I came away from this visit with low expectations about our ability to meet the health-care needs of this huge market and reap the economic rewards until such time as the government does its job.
Thomas G. Plaskett, 64
Chairman, Principal, and Managing Director,
Fox Run Capital Associates
Irving, Texas
Alcon Inc., Novell Inc., RadioShack Corp.
