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Simon Liu

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Title: Simon Liu


1
Pacific Region Forum
CHANGES CONSTANTS IN THE MIDDLE KINGDOM -- AND
THEIR IMPLICATIONS FOR CANADIAN INVESTORS
Simon Liu
2008/02/28
2
AGENDA
  • China 1997 2007, Overview and Highlights
  • Canada-China Economic Compatibilities
  • Canada Globalization Index
  • High failure rate in China
  • Unique to Canadian companies?
  • Entry strategies More options make choice more
    challenging
  • Government Relations China-Canada differences
    remain a constant
  • Role of Expatriates The more you localize, the
    more expatriates you have
  • Staffing Cant we find one IT manager out of
    1.3 billion?
  • Trade Union Commonality stops at the term
  • QA

3
CHINA 2008 BEYOND
  • Chinese New Year 2008
  • G8 state heads giving best wishes
  • 168 years, from the Opium War
  • 8 United Forces looting Peking
  • China became a semi-colonial, semi-feudalist
    country
  • 3rd largest economy in the world
  • After US and Japan Surpassing Germany, either in
    2007 or in 2008
  • 2008 Beijing Olympics Show time for China
  • To become 2nd largest economy
  • Surpassing Japan in 2011 or 2012
  • To overtake US in 2040 or in 2050?

4
CHINAS ROLE 1997 2007
  • 1997 Asian Financial Crisis
  • Chinese currency (RMB) stability helped avoiding
    world financial crisis
  • Deng Xiaopings death
  • Chinas take-over of Hong Kong
  • Fortune, The Death of Hong Kong, June 28, 1995
  • 2000 Dot bomb, High-tech melt-down
  • China internet users (2007) 200 million
  • China cell phone subscription (2007) 508 million
  • 20 of 90 US-listed Chinese companies are
    internet/e-commerce based
  • Baidu is the most actively traded internet stock
    on NASDAQ
  • 2001 9/11
  • USs attitude shift on China from not an enemy,
    not a strategic partner to strategic
    stakeholder
  • Chinas entry into WTO
  • China GDP growth (2001) 8.1
  • 2002-03 SARS
  • Testing governments crisis management capability
  • China GDP growth (2003) 10.0

5
CHINAS ROLE 1997 2007
  • 2007 Credit crunch
  • 2nd year of RMB appreciation
  • Buoyant stock market in Shanghai Shenzhen
  • 130 million stock trading accounts
  • China has the largest IPO market
  • PetroChina once became the most valuable company
    in the world
  • China GDP growth 11.4
  • 10th anniversary of Chinas Hong Kong takeover
  • Fortune Oops! Hong Kong is hardly dead,
    2007/06/28

6
CHINA BEHIND S HEADLINES
  • Socialist market economy of Chinese
    characteristics
  • Representation of the Communist Party
  • From representing the proletarian (the poor)
  • To representing the broadest peoples interest
  • Sustainable Growth specific (and aggressive)
    targets for
  • Energy efficiency
  • Environmental protection
  • Pollution control
  • Social stability as an issue of national interest
  • Protection of private property in constitution in
    2007
  • Go global
  • Business sector
  • Promoting Chinese culture as Soft Power
  • Peaceful uprising
  • Political reform
  • Slow, but steady

7
CHINA BEHIND S HEADLINES
  • Full WTO compliance and its effect
  • Leads to better and more liberal business
    environment
  • RMB appreciation
  • Slow but steady
  • 5 7, for next 10 years
  • Disparity of wealth
  • Between the poor and the rich
  • Across regions
  • Urbanization
  • Farmers moving to cities
  • Villages consolidating into communities
  • Aging population
  • 10 over age 60
  • China gets old before getting rich
  • 150 million seniors
  • The only-childs having families
  • 4-2-1 family structure

8
CANADA-CHINA COMPATIBILITY
  • Canadas energy-rich (energy dependent?) economy
  • Energy services and conservation technologies
  • Chinas insatiable appetite for energy and
    materials
  • E.g., PPP initiative in the paper industry
    Planting-Pulp-Paper

Energy Materials
  • Canadas Clean Country image
  • Canadas long standing practice in environment
    protection
  • Chinas determination and dire necessity to
    develop green economy
  • E.g. Huihe River clean-up project RMB 50
    billion under Premier Zhu, additional 60 billion
    under Premier Wen

Environment
  • Canadas world renowned engineering
    infrastructure building capabilities
  • Canadas own massive update of infrastructure
  • China The largest construction site on earth

Infrastructure
9
CANADA-CHINA COMPATIBILITY
  • Taxation
  • Medical care
  • Social welfare system

Social Welfare
  • Canadas competitive advantage in large-scale
    agriculture
  • Chinas campaign To build socialist new
    countryside
  • Consolidating villages into city-style
    communities
  • Agricultural land will consolidate into bigger
    lots

Agriculture
10
GLOBALIZATION INDEX CANADA VS CHINA 2004
11
CANADAS CHINA/ASIA PACIFIC INITIATIVES
  • Federal Team Canada Mission/Canada Trade Mission
  • Started in 1994 under Chretien government
  • Last trip to China 2005, led by Minister
    Peterson
  • Cooling down by the Harper Administration
  • Provincial Asia Pacific Gateway Initiative
  • 14 billion investment to date
  • Recent trip to China in late 2007 led by Campbell

12
CHINA, A KILLING FIELD?
  • A few Canadian firms failures in China
  • Royal Bank of Canada, 1996
  • Sun-Rype, 1998, 6 million
  • Lassonde , 2003, 13 million
  • Seagram (apple cider)
  • Altachem (Quest) Pharma Tech, 2005, 6 million
  • How to lose your shirt in China MacLeans,
    2007/01/29
  • The economy beckons, but its business climate
    makes China a killing field for Canadian firms.
  • "I tell them China is going to eat you raw,
    because you are so green they won't have time to
    cook you. Canadians come to get screwed and the
    Chinese go, 'okay, we'll give you a run for your
    money.' -- Gervais Lavoie, Director, Beijing
    Chapter, Canada China Business Council
  • "If I had to define China now, it's appearance
    over substance. Things appear different but the
    substance isn't there. Anyone who says the people
    have changed -- that's bullshit. This is still
    the wild, wild West. Sam Goodman, Owner,
    Beijing Sammies Where East Eats West

13
CHINA, A KILLING FIELD?
  • A few companies China experience
  • Sun-Rype
  • Shen-Mei Coca-Cola (Shanghai)
  • Van Melle
  • CeDo
  • Vitasoy (2003/04), Vitasoy (2005/06)
  • High start-up failure rate in Canada
  • Higher business failure rate if going overseas
  • Change and adapt
  • Possible to be insulated from worlds 3rd
    (becoming 2nd) largest economy?
  • More economic weight from western provinces
  • Not a question of if, but when and how

14
CHINA ENTRY STRATEGIES
  • Strategies as your disposal
  • Trading
  • Licensing, Technology Transfer
  • Joint Venture
  • Wholly Owned Foreign Enterprise (WOFE)
  • Mergers Acquisitions
  • Key lesson to share The formula for failure
  • Load-lose-leave
  • Committing to loads of fixed assets (land, plant
    equipment)
  • High cost structure leading to high prices, no
    competitive advantage
  • No second chance
  • Practical formula
  • Start light-adjust-learn
  • Focus on intangible assets People/Team,
    Connections, Products, Distribution
  • Adjust and accumulate learning
  • Strive to positive cash flow, break-even

15
RECOMMENDATIONS FOR CANADIAN FIRMS
  • Buy before Build
  • Buy Procurement (passive, defensive strategy)
  • Spending money before making profit
  • Finding suppliers before finding customers
  • Running an office before operating a plant
  • Case-in-point Wal-Mart China strategy
  • Buy into Chinese companies
  • Attend board meetings before hosting management
    meetings
  • Invest in your suppliers
  • Invest in your customers
  • Buy up Chinese companies
  • 3rd Party before in-house
  • Abundant OEM capacity in China
  • From Made in China to Created in China
  • WOFE over Joint Venture
  • High cost of having a partner as the comfort
    factor
  • Unrealistic expectations on partner delivering
    mission critical functions

16
GOVERNMENT RELATIONS (GR)
  • One-Party System vs. Government of Free Election
  • Stable government and consistent policy in China
    for 30 years
  • Peaceful transition of power
  • Deng-Jiang-Hu
  • Hu to Xi (or Li)?
  • Government and the Media
  • Two different types of watchdogs
  • Media the Partys tongue-and-throat
  • Monthly focal points from major media to central
    government
  • Strict restrictions on cultural industries and
    cultural products
  • Canada PR GR MR PR
  • China PR GR, then MR

17
TWO MEDIA FRENZIES ON PRODUCT QUALITY
  • Western Media vs. China Imports
  • 2007 (and on-going), in North America and Europe
  • Massive reports on China imported products
  • Toys, seafood, pet food, toufu, etc.
  • Negative, on China imports
  • Minimal on multinational companies supply chain
    management practices
  • Minimal on brand owners and retailers
    responsibilities on QC
  • Media reports triggered governments to take
    action
  • Canadas initiation of quality inspection at
    point of imports
  • Obama campaign teams clarification on ban China
    imports as media speculation
  • Mattel, early September, 2007
  • In US, Press release (Sept 04)
  • In China Product release improvement plan to
    Quality Bureau

18
TWO MEDIA FRENZIES ON PRODUCT QUALITY
  • Chinese Media vs. Foreign Invested Enterprises
  • 2005/04 06
  • Massive amount of reports on product quality
    problems
  • By central and regional media
  • Companies and issues exposed
  • Nestle iodine overdoze
  • Vitasoy raw material expiry date
  • Haagen-Dazs central kitchen sanitation
  • Bright Dairy (local, 3rd largest dairy in China)
    post-dating products
  • Johnson Johnson measurement system, imperial
    vs. metric
  • All companies based in Shanghai
  • All FIEs (except Bright)
  • Background With hindsight
  • Government reform Product quality responsibility
    shifting from MOH to General Quality Bureau
  • Media reports negative, on Shanghai-based
    companies

19
GR TO BRIBE OR NOT TO BRIBE
  • Canada
  • Among the top cleanest countries in the world ...
  • But, known as a safe heaven for some notorious
    bribery criminals
  • China
  • Corruption is a challenge the Party faces and is
    being seriously dealt with.
  • Less corruption in some regions than others
  • Probably will remain rampant as long as the
    one-party regime continues
  • The Vicious Cycle of Bribery
  • Infectious addictive, internal and external
  • Bad investment
  • Causing internal control problems
  • All these leading to bad reputation

20
GR THE GR RULE
  • A few gray cases
  • Come see my boss with cash case
  • Petty cash at casino case
  • Tour Germany seminar case
  • Education sponsorship case
  • My nephew likes your company case
  • Sub-contracting case
  • Hamsters case
  • The GR Rule in GR
  • Group (instead of individual)
  • Receipts (more than just costing paper trail)
  • In some cases, taking receipts
  • The Role of Consultants
  • Reputation and benefit of being a Clean Company
  • Get the word out
  • Were a listed company.
  • Its against our HQ accounting policy.
  • Do things of good will Respect is the universal
    currency.

21
EXPATRIATES
  • GMAC Findings for US Firms (2006)
  • More expats
  • More female expats 23 in 2005
  • Expats younger 50 between 20 39
  • Turnover twice as high as domestic counterparts
  • The more you localize, the more expats you have
    in China.
  • Key drivers for needs of expats
  • Rapid business growth
  • Regional head offices relocating to/set up in
    China
  • Functional centers, procurement, RD, logistics
  • More WOFEs established new or JV-converted
  • Why you need expats?
  • Leadership and strategic thinking
  • Corporate control governance
  • Home country headquarter culture
  • Functional expertise lacking in China
  • HR, Logistics, Finance, (Strategic) Marketing

22
EXPATRIATES
  • Who are they?
  • Home country nationals
  • Returnees (Sea Turtles, or repatriates)
  • Ethnic Chinese (from Hong Kong, Singapore,
    Taiwan)
  • Role of returning overseas educated Chinese
  • Generations of state leaders
  • Dr. Sun Yatsung, Chiang Kaishek, Zhou Enlai, Deng
    Xiaopeng, Jiang Zemin, Li Peng
  • Half of finance executives in Hong Kong
  • A new generation of returnees the only-childs
  • Halfpats less than 5 years experience, no clear
    career path
  • Localization
  • Substituting home country expats with returnees,
    ethnic Chinese and high calibre locals
  • Emphasis on local knowledge, language (instead of
    cost)
  • One additional reason for Canadian companies
    needing expats
  • High trust on people (less dependent on
    check-and-balance mechanism)

23
RECOMMENDATION ON MANAGING EXPATRIATES
  • High cost of having the wrong leadership
  • High direct cost
  • Higher indirect cost
  • Top cause for business failure
  • Send/hire the most qualified
  • China is no dumping ground for mediocre people
  • Culturally sensitive
  • Diplomatic
  • No cowboys
  • To retain your capable expats
  • Supportive family
  • Compensation benefits at par with international
    standards
  • Career prospect at home (For home country
    nationals)

24
STAFFING
  • Cant we find one IT manager out of 1.3
    billion?
  • No. 1 operational challenge by AmCham Member
    Survey 2007
  • Middle management placement issues
  • High turnover, 2.5 average years of service
  • Longer at major MNCs
  • High total cost, benefits around 25 of salary
  • Low job satisfaction rate (lowest in Asia)
  • Low (young) ages 31 average age
  • Only-child generation into late-20, early 30 age
    bracket
  • One positive Properly motivated, they work hard!
  • Do you train develop your people (for the
    next employer, or competitor)?
  • Cradle for managers -- to be raided
  • High potential list becomes hit-list

25
RECOMMENDATIONS ON STAFFING-- FMCG INDUSTRY
BIASED
  • (FMCG Fast Moving Consumer Goods)
  • Top management very hands-on on team building
  • Hire the best. Fire the rest
  • Motivate with responsibilities
  • Perform, Pay and Promote
  • Turn managers into trainers
  • Couch your key managers

26
TRADE UNION COMMONALITY STOPS AT THE TERM
  • Trade union in western industrialized economies
  • Collective bargaining
  • Labour actions
  • Trade union in China
  • Duty To coordinate labour relations and to
    protect members rights and benefits through
    equal consultation and collective contracts
  • Working principles
  • Harmonious and constructive
  • Under the Partys leadership
  • Union mandatory with 25 employees

27
TRADE UNION COMMONALITY STOPS AT THE TERM
  • Need for stability
  • Definition of socialism
  • State-owned (collectively owned) enterprises
  • Private businesses
  • Foreign invested enterprises

28
TRADE UNION COMMONALITY STOPS AT THE TERM
  • Wal-Mart vs. Trade Union in China
  • Wal-Mart into China in 1996
  • Objecting union to be consistent with global
    practice
  • Shanghai rejected Wal-Mart stores due to its
    anti-union stance
  • Carrefour and Metro opened their stores in
    Shanghai in 1994
  • Wal-Mart is still behind competition in Shanghai
    to this day
  • All-China Federation of Trade Unions (ACFTU)
    brought open in 2004
  • 1st union in Guangdong on June 29, 2006
  • Election meeting in middle of the night
  • ACFTU officials and media on-site
  • Widely reported as a historical breakthrough in
    Chinese Workers Movement history Wal-Mart
    perceived as arrogant and ignorant
  • Union formed at all Wal-Mart stores end of
    September 2006
  • Unions reported to be hardly functional ever
    since
  • Wal-Mart still criticized for its hostility
    against union
  • Worth all this?

29
SUMMARY
  • China, a difficult place to do business for
    Canadian firms
  • China is changing and adapting to the world
  • Loss is not a total failure if lessons learned
  • More entry strategy options available
  • Be red, go clean.
  • Get the dragons head (government), the tail
    (media) will follow.
  • If expats are costly, try weak leadership.
  • Staffing is very challenging. But where isnt?
  • Trade union The danger of taking things at face
    value

30
Thanks, 1.3 billion!
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