Doing Business in China - A Practioner's Perspective

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Doing Business in China - A Practioner's
Perspective

• University of Denver
• Michael T. Byrnes
• January 22, 2009

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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

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• Overview
• Geography
• and
• Demographics

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(No Transcript)
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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.

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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

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• Cultural Traits

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Business Culture

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

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

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• Why China?

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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
• Chinas 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

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China FIE Profitability

• Profitability of US Companies
• American 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

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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

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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

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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

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Elements of a Strategy
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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, RD, Sourcing and
  Logistics
• - Expanded presence and partnering
• - Significant focus on HR training and
  development
• - Common processes and shared facilities and
  services

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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

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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.

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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

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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

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Issues List - PRC

• Standards/Codes/Licenses
• Labor Contract Law
• IPR Protection
• Market Access
• Customs Procedures
• Tax Unification
• Corruption
• Economic Nationalism Anti-foreign sentiment

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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.

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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

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West/Northeast Geo-Strategy

• Focus on developing markets in Chinas interior
• Leverages PRC Government drive to develop the
  interior
• US150 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

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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

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Support Opportunities

• China Help Desk

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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

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Contact Information

• Michael 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 [phone] E-mail mtbyrnes_at_sprynet.co
  m

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Thank you.??

• Questions?

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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

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Chinese Government Structure
National Peoples Congress
State Council
Central Committee of the CPC
Peoples Political Consultative Conference
Central Military Commission
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A Functional Perspective
Sector Management
Macro Controls
Law Enforcement
Public Affairs
National Security
MoF
SAIC
NDRC
MoFA
MoLabor Social Sec
AQSIQ
MoC
MoD
MOFCOM
MoEd
PSB
MIII
PBC
MoCulture
Customs
General Adm. Sport
SDA
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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

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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

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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

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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.

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Negotiations China Style

• Anything is possibleeverything is difficult and
  remember - the negotiation is never done
• Know the Objective know the other side
• Understand and set limits dont be anxious
  dont get involved in a pure price discussion
• Explain your position be clear be direct - make
  concessions reluctantly stress shared
  responsibility/gain
• Dig in or flex - dont get emotional decide
  before hand where to give
• Always support your team no public disagreement
• Always have your own interpreter
• BE PREPARED TO WALK AND TO LOSE/WIN

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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

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Government Relations - Structure
REPUTATION/POLICY SHAPING The center merits the
most attention
State Council
Ministries
ISSUES The lower levels of government require
and merit the most attention, not the least
Regional/Provincial
Local Municipal