China’s market – sensible people acting insensibly
The recent US-China 100-day action plan – under which Beijing mostly agreed to do things it was already supposed to do but wasn’t, while the US kept its market wide open – once again shows the Chinese market’s hypnotic effect on foreigners.
The allure of a China where one sells one of something to every person in the country can make otherwise sensible people act insensibly.
Doing business in the People’s Republic of China requires willingness to overlook dangers that in any other country would unnerve foreign investors and businessmen.
For starters, take the absence of a reliable legal system – or even being able to count on enforcing a contract. Secure property rights are similarly elusive.
Massive capital outflows and the quest for overseas bolt-holes by China’s most affluent citizens are a futures market of sorts, suggesting the locals know something about the business environment that foreign investors don’t.
Technology and intellectual property are strong-armed via required “transfer” from foreign companies and the rest is at risk of being stolen; all part of a longstanding government strategy to build up Chinese companies and eventually displace foreign ones.
And taking on a local partner is risky. From the early 1980’s when the China market opened until today, stories abound of local joint venture partners milking the business for know-how, and funding, and then going into business as competitors.
Even doing due diligence in China is dangerous, with researchers being arrested, or worse. If North Carolina had a similar business environment nobody would invest there, not even the Chinese.
Foreign companies in China are subject to capricious government pressure and punishment.
The recent detention of six Japanese surveying for hot springs on behalf of Chinese clients is a reminder that authorities will take hostages to teach foreign companies — or countries — a lesson, or to achieve some other objective.
In 2009, the Australian mining giant, Rio Tinto, ran afoul of the government in the iron ore trade and its country manager (an Australian citizen) and several other employees were arrested.
Rio Tinto eventually kow-towed and brought in Henry Kissinger to spring its employees – in exchange for a reported US$5 million consulting fee.
Japanese and South Korean companies are prime targets.
Riots targeting Japanese-owned (and even Japanese-looking) businesses in China “spontaneously” break out whenever Beijing feels it necessary to make an issue of the Senkaku islands.
More recently, South Korea’s deployment of the THAAD anti-missile defense system on land sold by the Lotte Group resulted in most of Lotte’s outlets in China being shut down on trumped up excuses — and the company’s e-commerce sites subjected to cyber attacks.
Size doesn’t matter
Being big and successful elsewhere means little for a company entering the China market.
I had first-hand experience with Motorola in the 1990s and watched one of America’s most respected companies fail in China.
The company went all out in China, building factories, handing over technology, employing thousands of locals, and demonstrating its commitment to the market.
All was good for a while, but Motorola was really just building up its competition. Today, China electronics company Lenovo owns a good chunk of what was once Motorola.
Google and Nokia have also learned the hard way about the Chinese market.
Even Apple has felt some government pressure and must know it will someday face rival with Chinese characteristics – and no little bit of Apple technology.
Despite grumbling in recent years by the American Chamber of Commerce in China, the allure still exists.
The evidence is in Boeing’s plan to build a plant near Shanghai by 2018, despite the government’s avowed goal of developing a commercial aviation industry that rivals Boeing and Airbus.
However, not to worry since it’s only a “finishing” facility to build older 737s – and it is the price of admission to the market.
Boeing – or its shareholders – might recall the president of a once-prominent US aviation electronics firm who commented in the early 1990’s that he didn’t mind handing over technology to the Chinese in exchange for market access.
His rationale was the US will always be ahead of China. Not unusual thinking then or now.
Part of the difficulty of keeping one’s wits about the realities of the China market is that foreign companies do sometimes make money – sometimes lots of it.
But more often than not success is anecdotal and temporary.
Assessing commercial success in China requires a long-term look at performance (and as importantly, competitive position) over at least 10 years. Even better, 20 years. This is seldom done.
Also, there’s a belief among the foreigners that with just a little more time and effort the riches will come.
Indeed, China success stories resemble casino advertisements showing happy people at the craps table.
Perhaps true enough as a snapshot. But a more accurate ad would show people walking out of the casino at the end of the night. There might be a few smiles, but far more glum faces.
Today’s China is a far cry from 1980 when it perhaps needed some special treatment. The Trump administration (like its predecessors) is wasting its time unless its objective is full and immediate reciprocity.
A coercive element is needed, such as punishing Chinese IP theft, unfair trade practices, and strong-arming of American and foreign companies. Until China is pressured to change, it won’t – even if it makes token gestures to temporarily quiet the Americans.
It’s perhaps wishful thinking, but someday one hopes to hear a CEO – maybe one without an MBA – declare that until the market isn’t rigged against foreign companies, his company cannot afford to be in China.
Grant Newsham is a Senior Research Fellow at the Japan Forum for Strategic Studies. Among other positions held, he served with the US Foreign Commercial Service in Tokyo.