This is the first in a series of Dispatches from China through the eyes of a Milwaukee expatriate for SMEs who are thinking about China.
If you are a student of human nature, you can do well in China. My Chinese friends tell me they do not fully understand China because China is not one thing but many and its parts are as diverse as 1.3 billion people and 5,000 years can make it. On the other hand I have noted that the instincts and elements which make up human nature good, bad and indifferent are universal.
The question you have to answer is; what are your business reasons for going to China? Are you curious, just following the crowd or do you see foreign markets such as China as vital to your businesses survival? If the answer is not the last one, take a tour or a class. The time, energy, resources and difficulty of getting involved in a new market should not be taken lightly, especially when your not familiar with the languages, customs, laws, taxes, accounting, politics or people.
If your answer is number three, you need to understand what China means to your business, what are the opportunities, how do you get involved, how do you protect yourself and how do you make and keep your money. This first dispatch will address the issues broadly; later installments will attempt to deal with each in more detail.
You need to understand first what China is.
China is physically about the same size as the United States with four times as many people. Its GDP is about half of that of the U.S., but it exports more than we do and imports less. In 2007, China’s manufacturing sector grew at 12.9 percent, while ours grew at 0.5 percent. (Update: In 2010, China grew by almost 10 percent, while we grew by less than .5 percent). Two-thirds of China’s exports are still controlled by large multi-national corporations, of which U.S.-based corporations have the largest share. China is still going through a rapid agriculture-to-manufacturing/service transformation which is moving vast numbers of people from rural to urban areas. In 2005, China and India represented 2.5 out of every six people on earth. (Update: In 2010, India has overtaken China as the population leader and together they represent over 36 percent of the world’s population).
It still holds true that, if you believe a consumer economy depends on consumers, then they represent the future of the world’s consumer economy. You should also keep in mind that China is also a fast-rising political power which is competing for the world’s resources to drive its economy. (Since 2007 China has taken numerous steps to ensure its supply lines of natural resources.)
What are the opportunities?
Initially, corporations went to China for the cheap skilled labor, lax environmental standards and tax advantages afforded to foreign operations but the tune is changing as businesses see the existing and potential market opportunities within China. What does China need today? Capital, technology and process knowledge. The question for you is: How do your business interests fit into China’s needs in a way which is profitable for both?
Some needed history
In 1978, under the guidance of Deng Xiaoping, China started developing a two-systems approach which accepted the development of a capitalist economy under communist control. Shanghai’s 4,000 high-rises, twice as many as New York has, were built in the last 30 years. The accomplishments are more amazing given that for a 10-year period during the Cultural Revolution, 1966-76, almost all higher education beyond grade school stopped. Keep this in mind if you find yourself sitting across the table from a 45- to 60-year-old Chinese business person. Also keep in mind that 30 years ago there were no banks in China and no insurers, lawyers or accountants. All the Chinese real estate belonged to the state.
Out of this chaos, China has developed its economy. In many ways, it represents an economic miracle but in others it falls woefully short of what we would expect in a modern economic system, so be prepared.
Many of those who succeeded during his time of turmoil were those who did not understand or care about the risks they were taking.
So, if you are thinking about what the opportunities are, think in terms of what you have to offer which will be of value in such an economy, an economy which is about as constant as the sea but whose depths hold opportunities for those who know how to find them.
How do you get involved?
Carefully remember dragons look happy but they have a lot of sharp teeth. The idea is you want to make a deal, not be the meal. Think of it as kissing a crocodile and be very careful. Check out who you are dealing with and what they bring to the table, what do you need and what do they need. Do not rely on Ganxi (friendship). The hospitality in Asia is often overwhelming, but think it through. Why would someone in China want to help a foreigner instead of their friends and family? Get it – all of it – in writing. Follow the laws. You may see locals playing a little fast and loose, but be assured there will be no sympathy for foreigners who break the laws, and the U.S. Embassy will not come riding to your rescue.
Lastly, but most importantly, verify everything; trust has nothing to do with business when you’re crossing borders and legal systems.
How do you make money?
Have a competitive advantage that you can protect, have a plan, get good help, integrate quickly, put little or no money up front, be legal, be ethical and use your common sense. Do not toss out your moral compass and practical approach to your business interest just because you’re 6,500 miles from home. And most importantly, read the next Dispatch From China.