Doing Business in China - A Practioner's Perspective

Doing Business in China - A

Practioner's Perspective

University of Denver Michael

T. Byrnes January

22, 2009

Agenda

• China – Overview

• China – Cultural Traits

• China - Why Do Business in China

• China – A Rapidly Developing Economy

• China – Elements of a Strategy

• China – How to do Business

• China – Where to go for Help

Overview

Geography

and

Demographics

Geography

• Roughly same latitude range as the US

• Roughly the same size – 3 m sq miles

• High Percentage of mountains and deserts

• Arable Land – 7 % or ¼ of US arable land

• Bounded by 14 countries – most have had adversarial relations in the past.

Demographics

• Population - 1.3 billion people• “One Child” policy to limit growth, but social impact• Population will peak at 1.6 billion in 2030• 70% of population located in south and east costal

regions • 70% of population lives on the land • Population and Employment – China must create

13 m new jobs each year• Population Trends – Aging population and declining

births• Han make up 94% of population – 55 different

minorities

Cultural Traits

Business Culture

• General Principles• Relationships• Great Family – hierarchy - • Ritual and protocol• Risk Taking – acceptance of responsibility• Trial and Error • Initiative• Fear of negative reporting

Reading List

• The Immobile Empire – Alain Peyrefitte• The Chinese Looking Glass – Dennis Bloodworth• Village Life in China – Arthur D. Smith• 1 Billion Chinese Customers – James McGregor• Beijing Jeep – Jim Mann• The Tyranny of History: The Roots of China’s

Crisis – W.J.F. Jenner• 1587: A Year of No Significance – Ray Huang• The Call – John Hersey

Why China?

Why China?

China a special market - A market of significant Size - A market of significant Growth- A market of significant Resiliency- A market with increasingly Normal business environment but not without Risk

* Maturization of reforms and opening up* China’s entry into WTO* Business friendly government policies

- A global market with virtually all major MNCs present- A global low cost manufacturing base- Large reservoir of high quality low cost engineering talent, skilled labor and a developing management pool

China – FIE Profitability

Profitability of US CompaniesAmerican Chamber of Commerce Survey in May 2008

Over 800 companies from Beijing and Shanghai

• 74 percent of respondents report either profitable or very profitable

• Over 37% report they have higher margins in China than globally and another 31% report that their margins are comparable

• There was a slight decline in profitability from the 2006 - 2007 surveys.

• Challenges – Economic Slowdown – Economic Nationalism - Local Competition – Labor Cost and Battle for Talent – IPR - Market Access

Trends and Opportunities• Infrastructure

* Water* Power Transmission/Distribution* Mass Transport, Sea and Air Ports and Marine* Commercial, Residential, Industrial, Public

• Environmental and Energy Efficiency* Renewable Energy * Clean Coal *Waste Management

• Manufacturing - Global manufacturing base development

* Automotive* Electronics/Telecoms* OEM development

• Safety/Security – food, mining, industry, residential

• Services – Logistics and Distribution• Health and Elder Care - demographics

RDE and Mature Market

• Rapid Developing Economy* Scarcity of resources* Undeveloped infrastructure* High operational intensity* Mid-level leadership* High level of uncertainty* Cultural barriers* Underleveraged brand/reputation* Distance* Need modify BU and personnel metrics * Requires pre-emptive investment* Core values more critical, but normally weak

* Boston Consulting Group

• Mature Market * Resource-opportunity balance* Well established infrastructure* More regular operational tempo* Senior leadership * Predictability level high* Cultural conformity* Established brand and reputation* Home turf* Metrics well tested

* Investments in place – not need* Core values assimilated

Challenges for Foreign Businesses

• The need to understand the role of the government • The constancy of change

– Regulations and Standards– Authorities– Market conditions

• Corruption, IPR and rule of law• Increasing economic nationalism• Managing control and compliance across the board• Need to deal with local competition and price pressure• Pace and depth of localization• The right organizational structure• Corporate Engagement

Elements of a Strategy

Operational Requirements

Strategic vision from the top – the need to think broadly

- Aggressive Government Relations and Reputation Building- Cost, Product and Management Localization- Pre-emptive investment and Corporate subsidization- Appropriate “control structure” to insure compliance- Right balance between sales and coordinated operations - Manufacturing, R&D, Sourcing and Logistics- Expanded presence and partnering- Significant focus on HR training and development- Common processes and shared facilities and services

Government Relations

Key Objectives

• Reputation enhancement• Problem/Issue resolution• Policy watch and regulatory shaping• Direct Commercial Support• Where possible align your goals with

those of the government

Why Government Affairs?

• PRC government plays a significant role in business in China

• THE PLAN – China a command economy

• The regulatory environment

• Partners, customers, suppliers, competitors, service providers, and media are controlled by the Party and the parallel government bureaucracy.

GA Targets

• Central Government – Focus on the macro-level and policy

• Provincial Government – Focus on implementation• Industry associations - playing a more and more

important role in developing standards and formulating policy. 

• NGOs - they are an emerging and new power in China. They monitor government behavior and the actions of enterprises

• Think Tanks - universities, State Council Research Centers, Ministry Research Centers.

• State Media - the Chinese propaganda department provides guidelines to the media

GA Principle - Win-Win

• Companies should implement programs seeking a win-win solution to promote a regulatory environment favorable to business objectives

• Full Compliance - labor, environment, tax, safety, customs

• Provide goods and services that China needs/values

• Long-term commitment

• Corporate Social Responsibility

• Never complain but constructive dialogue

Issues List - PRC

• Standards/Codes/Licenses

• Labor Contract Law

• IPR Protection

• Market Access

• Customs Procedures

• Tax Unification

• Corruption

• Economic Nationalism Anti-foreign sentiment

GA - Helpful Hints• The Companies senior executive in China should take the lead on GA with strong support from a local team• GA should be both focused (ISSUES) and general (REPUTATION)• GA is not based on “Good guanxi” – front vs. back door• Be a good citizen – faithful compliance and community support• Remember that GA not only includes the PRC government but also the USG• Leverage all resources available• Be open to helping others – even competitors in some cases• Insure the understanding by Corporate executives of the key importance of GA in the China market.

Localization

• Cost Structure – * MNC cost structure = harder to compete* Threat is indigenous competition* Never get too indigenous - nor do you want to

• Product - Need for a Development Center* Develop a product that meets market cost and functionality fit* Develop product for China that serves as a benchmark for global cost* Develop and support product/services to meet needs of the local market

• Management – Localization means local, with a continuing need for selected expats

West/Northeast Geo-StrategyFocus on developing markets in China’s interior• Leverages PRC Government drive to develop the interior• US$150 + billion to be spent on infrastructure 2006-2011

– Power distribution – – Environmental - WWW and pollution reduction– Transportation - Light rails, subways, airports – Natural Resources - Coal Mining, Oil & Gas, Pipelines

• Local governments are highly receptive to foreign investment and presence

• Ability to use government relations to develop business opportunities

• Relatively low level of competition

Positioning for Growth - Partnerships

• Partnering with local firms will in some cases be necessary and now in many cases feasible * Local firms – especially private firms - increasingly understand the win-win logic of commerce* Local firms have a significant home court advantage in cost, contacts and in understanding the market

• Focus on: * Intellectual rather than physical capital* Engineering and Manufacturing* Firm that have licenses* Channel enlargement – but never easy* Private firms that demonstrate good management

Support Opportunities

China Help Desk

Where to Get Help

• US Foreign Commercial Service• Chambers of Commerce – US, Beijing,

Shanghai• Law firms – International and local• Quality Brands Protection Committee (QBPC)• Industry Associations such • CCPIT – China Council for the Promotion of

International Trade• Consultants - TAX, Government and Media

Contact InformationMichael T. Byrnes

• Senior Advisor - Yuan Associates (Beijing)* Government Relations* Business Start-up

• Senior Advisor – Amer-China Partners (Beijing)* Due Diligence* Background checks, vendor vetting* IP Investigations* Dispute Resolution

TEL: 401 243 4511 E-mail: [email protected]

Thank you.谢谢

Questions?Questions?

3030

Common Errors

• Irrational Exuberance• Trust but no verification• Failure to take proper legal and financial precautions• Acceptance of “this is the way we do it in China”• Worry about offending Chinese hosts• Believing in “Friendship”• Not getting the home office on board• Failure to recognize the cultural/systemic differences

between China and the home market• Not establishing company culture and values• Not knowing when to say NO

Chinese Government Structure

National People’s Congress

State CouncilCentral Committee

of the CPC

Central Military Commission

People’s PoliticalConsultative Conference

A Functional Perspective Sector

ManagementMacro

ControlsLaw

EnforcementPublic Affairs

National Security

NDRC MoFA

AQSIQMoC MoDMOFCOM

MIIIPBC

SDA

Customs

PSB

MoF SAICMoLabor&Social Sec

MoEd

MoCulture

General Adm. Sport

Government Affairs – The Environment

• Time-consuming to find the right officials in a PRC agency, association, or think tank and ensure those officials have relevant information.

• Government officials have little incentive to share information across departments. Government affairs executive must have several meetings on the same topic within one agency.

• Meeting senior-level government officials is much more difficult than in the past, and companies should not expect to make courtesy calls with senior government officials.

• Successful government affairs programs must ensure that the company delivers a uniform message to government officials about who represents the "face" of the company

Government Affairs – The Environment - II

• In the past, the Chinese government only heard a small number of voices. But now they hear more and more voices - trade associations, domestic business, media and NGOs.

• The question is whether you want to have growth by relationships or growth by policies. Relations are important but they are not enough. You must work with the Chinese government to stimulate the growth environment

• Corporate reputation versus issues management. Every company has issues, but it is better to proactively build corporate reputation than be seen to be responding to issues. Corporate reputation is your insurance policy

Government Affairs – Crucial for Business Development

For MNCs government relations operate on the national, provincial and municipal levels

• Critical purchasing influences– Focus on provincial and municipal levels– Enlightenment of government officials at all levels

• Administrative and organizational function– Navigate the branches of government influential to industrial growth– Improve the overall conduct of business through education of Rockwell

Automation management and employees

• Monitor and influence changes in policy and regulatory environment– Focus at national level– Especially crucial in tax, customs, and WTO implementation– Business opportunity watch– Standards, electro-mechanical - networks - safety

The How To

• The Role of Guanxi - particularly the belief that a company must rely on someone with connections to achieve its goals--make it difficult for companies to conduct government affairs effectively.

• The successful government affairs professional in China places greater emphasis on interpersonal, communication, analytical, and critical thinking skills than on personal relationships or contacts.

Negotiations China Style• Anything is possible…everything is difficult and Anything is possible…everything is difficult and

remember - the negotiation is never doneremember - the negotiation is never done• Know the Objective – know the other sideKnow the Objective – know the other side• Understand and set limits – don’t be anxious – don’t Understand and set limits – don’t be anxious – don’t

get involved in a pure price discussionget involved in a pure price discussion• Explain your position – be clear be direct - make Explain your position – be clear be direct - make

concessions reluctantly – stress shared concessions reluctantly – stress shared responsibility/gainresponsibility/gain

• Dig in or flex - don’t get emotional – decide before Dig in or flex - don’t get emotional – decide before hand where to givehand where to give

• Always support your team – no public disagreementAlways support your team – no public disagreement• Always have your own interpreter Always have your own interpreter • BE PREPARED TO WALK AND TO LOSE/WIN

Cultural Traits• General vs. Specific• Man vs. Law – Guangxi and relationships• Group vs. Individual – core group is the family• Family vs. Common Good• Intuitive vs. Scientific - • Hierarchy vs. Matrix – clean chain of command• Form vs. Substance - issue of FACE• Face vs. Results• Shame vs. Guilt• Order vs. Chaos • Hustle vs. Planning• Concrete vs. Abstract – impact on services• Indirect vs. Direct• Backward looking/conservative vs. Forward looking

Government Relations - Structure

ISSUES: The lower levels of government require and merit the most attention, not the least…

State Counci

l

Ministries

Regional/Provincial

Local & Municipal

REPUTATION/POLICY SHAPING: The center merits the most attention