Doing Business in China

Five days ago, 22 Smith students entered China knowing very little Chinese, understanding very little about Chinese culture, and half-expecting the cuisine to be General Tso’s Chicken with fortune cookies for dessert. Duck tongue and tripe (a.k.a. beef stomach lining) soon proved us wrong – what a difference a week makes!

General Motors:

Our last day in Shanghai began with a factory tour of General Motors (GM) in Shanghai.
GM, the world’s largest automaker and one of the best known American brands, formed a 50-50 joint venture with Shanghai Automotive Industry Corporation Group to create Shanghai General Motors Co. Ltd (Shanghai GM) in 1997. Today, Shanghai GM has an annual production capacity of 200,000 vehicles and employs 6,000 of 13,000 GM employees in China. As noted here, Smith students enjoyed looking at the newest models.

While there were similarities among the GM plants in the US and China, there were some notable differences. One example is that Shanghai GM produces brands unique to the Chinese market that are not produced in the United States. In addition, the Shanghai plant has capabilities to produce multiple vehicle models on the same production line, while the US plants typically only produce one model per line. One of the primary reasons for this difference in production styles is because GM has a comparatively smaller niche target market and producing multiple models on the same line is more efficient for their needs there.

Shanghai Stock Exchange:

Founded on Nov. 26, 1990, the Shanghai Stock Exchange was the first stock exchange in China and remains one of the most topical institutions in the world today. The group met with Situ Danian, an economist at the Exchange, and received a briefing on many of the current events at the exchange.

The Shanghai Stock Exchange has 153 members, currently all domestic, and the majority primarily from securities firms. The Exchange estimates 39 million investors, and institutional investors hold approximately 22 percent of the equity in the Shanghai market. The market has seen significant gain since 2001 and is getting ready to list one of the most anticipated IPO’s of 2006 – the $10 billion Bank of China deal. The past 10 years have brought about historical highs and represent the emergence of China as a market economy. Most of the companies on the exchange are state-owned-entities, where generally over 2/3 of the shares are not tradeable. A major initiative of the Exchange is its effort to attract more blue-chip listings for the Shanghai Stock Exchange. The Exchange has had a moratorium on IPO’s. Hong Kong has taken advantage of this vulnerability and worked diligently to attract more Chinese companies to list in Hong Kong. Reforms are said to have “gone well” and the IPO’s just resumed yesterday. People are optimistic that these changes will bring Chinese IPO’s back to the Chinese stock exchange.

Situ Danian provided a candid assessment of the Shanghai Stock Exchange’s reform efforts and acknowledged that the Exchange has a long way to go to gain the confidence and respect necessary to be among the world’s leading capital markets. One initial step towards improvement is a recently created “corporate governance board,” which provides companies the opportunity to voluntarily adhere to better corporate governance practices. While this effort is a first step, the board is purely voluntary and will not have the authority or the political grit to create or enforce regulation.

GRACE

Smith students also met with Jim Healy from W.R. Grace and Co. (Grace)
www.grace.com

Grace is a US based specialty chemicals a materials company with a significant presence in China. The company has been in the PRC since 1965 and was among the first Wholly Foreign Owned Enterprises (WFOE) allowed in China – a significant achievement for a company based in Columbia, MD. Despite W.R. Grace and Co. being in Chapter 11 since 2001 as a result of the company’s previous involvement with asbestos, Grace’s operations in China boasts a healthy $70 million in sales turnover per year and growth in China remains a high priority in 2006 and beyond.

Stephen Green – China’s Financial Structure

The last session of our course in China did not disappoint. The class heard from Stephen Green, an economist at Standard Chartered Bank and the author of “China’s Stockmarkets – A Guide to its Progress, Players and Prospects,” a book reviewed by three students on this blog. Mr. Green’s education and professional experience make him one of the premier experts on the Chinese economy, thus hearing his perspective on China’s current financial structure was a great way to conclude our time in China.

Mr. Green spoke at length about China’s banking reform efforts, capital markets and issues related to the exchange rate and currency and offered his own insight about the successes and struggles to date. Green concluded that the general direction is right and the reforms are meaningful, but many obstacles still remain. After a week of various meetings with business leaders in China, Mr. Green’s conclusion seems to be consistent with what we are seeing. It will be interesting to see what the next few years will hold for China’s economy and its impact on the world.

This evening, the class will be celebrating the conclusion of our time together in Shanghai by dining with out Smith counterparts at Barbarosa. As we bloggers plan to be an active part of these festivities, we will have to post the pictures from that event in the near future.

Public Chinese Firm with a Maryland Presence

Our second day in Hang Zhou started with Read the rest of this entry »

Today, the group met with Yingxi Fu-Tomlinson of the Kay Scholers Asia Practice. Yingxi is a member of the firm’s Shanghai office and concentrates on mergers and acquisitions (M&A).

Yingxi took time from her busy schedule to meet with us and discuss her M&A work in China despite traveling to Hong Kong and Beijing on the previous day.

Yingxi discussed the main differences between M&A and doing business in general in China from that of the United States. The three main distinctions she noted included the role of government, the role of government officials, and the laws and regulations around business.

In the US, the role of government is that of a regulator, referee, and facilitator; while in China the government’s role is more that of a parent overseeing its children (notions of national interest), although it is trying to move to a more US-based model.

The role of government officials in the US are that of public servants, while those in China “face south¨. That is, they sit back and listen to the problems brought before them. If they occupy a high enough position, they are referred to as a parent official.

The laws in the US are created to establish the integrity of political institutions (constitution, etc) and to regulate and balance economic and social interests. In China, there are a limited number of laws to establish political institutions. Rather, the system is based on civil law in which the interpretations of judges are not necessarily precedent setting. A judge in one jurisdiction may rule one way, while another jurisdiction may rule another way and there not nbe a tension between the two.

Yingxi also discussed some myths about doing business in China. Such myths include China as a lawless country, connections are everything, and contracts are useless. As a practitioner of M&A Yingxi rebuffed these myths by stating that China has many business laws (cited examples of advertising regulations during dinner time) and that while connections are important, China is now progressing to the point that any deal must have merit to be considered regardless of connections. She further stated that contracts are not useless but must be structured differently than in the US. She suggested that contracts have economic leverage for both parties so that both parties have an incentive to fulfill the obligations of the contract. She also reiterated the obvious that the contracts should be well understood by both parties and should be as fair as possible.

In the afternoon the MBA group visited the office of BearingPoint office in Shanghai, China. Mr. Afzal Tarar, Managing Director & Greater China Financial Services Leader led a discussion on opportunities for Bearing Point in China.

Mr. Tarar, a graduate from Case Western School of Business started his career as a consultant for Deloitte Consulting in New York, NY. After several years he moved to IBM Business Consulting and had his first assignment in China. Few years later he was finally recruited by Bearing Point and moved on a full-time basis to Shanghai, China.

After working with the big names in consulting, Bearing Point presented Mr. Tarar with a unique opportunity to help the revamp of Bearing Point. In China the firm is also known as the first enterprise risk management financial services consulting company, the second largest financial management and transformation company, and the third largest in business process animation. These strong client perceptions and a supportive senior management team gave Mr. Tarar the energy to take this challenge in China.

The first challenge faced by Tarar was the fact that all consulting companies in China produce negative operating income. His first goal objective was to change this situation for Bearing Point. His initiatives to achieve these goals are: 1. Focus on Strategic Clients, selecting engagements with higher potential of being profitable 2. Recruit, develop, and retain talent; and 3. Rationalize costs, from operational costs to higher consultant time utilization

While Mr. Tarar foresaw a 9 to 12 months for the turnaround the senior management only granted him 3 to 6 months for results. For this demanding timeframe Mr. Tarar focused his initiatives with a selected group of clients that included the China Construction Bank (the most important), the China Agricultural Bank, and the China Industrial Bank, among others.

To face this challenge, Mr. Tarar mentioned that having entered the Chinese market before India gave Bearing Point a first mover advantage, to the point that as of today, the firm is the only foreign consulting company allowed to quote major public consulting projects.

As for the future, Mr. Tarar added that the company will avoid areas that have been commoditized, such as integrating systems, and keep focusing on the Financial Services as the one area with higher potential for growth and profitability.

Our day ended with a journey to Hangzhou, where we checked into the Ramada Inn and had dinner at West Lake.

McGregor, a journalist and businessman, has spent over 15 years in China. He lived in China during the transformation of its economy. In One Billion Customers, he outlines his insights and commonsense lessons about Chinese Business Practices. It is an entertaining and an easy read book that can be used as a handbook by the foreign businessmen seeking to harvest in this new economy. Read the rest of this entry »

Meeting with Sage Brennan, Managing Director of Pacific Epoch

Our first presenter Sage Brennan spoke to us today on a wide range of topics from technology and communications to starting a business in China. Pacific Epoch is a business intelligence firm focusing on media, telecommunications and investment opportunities in China. Filling the void of information in the technology sector with a boots on the ground strategy, Pacific Epoch provides customized information to clients, mainly hedge funds and VCs.

One of the challenges in providing independent research in China centers on a general suspicion of answering questions. Companies in China are not enthusiastic to provide market data or trends as would a typical US company selling its story. This requires Pacific Epoch to develop its own market research techniques through polling and surveys. Part of Sage’s job is to sort through which projects best add value to the company and can be used in follow on research. One off projects with no follow on application are not the best way to leverage the assets of their small office.

Sage touched on the business strategies for Pacific Epoch as they grow and expand their product offering. Training and hiring is another challenge of operating in China. Most hires are from local universities and have a passion for technology. Innovation and out of the box thinking was the attribute most difficult to find in China and part of the training challenge going forward. As a provider of information it was refreshing to hear that censorship has not had an impact on their operation except for some minor technical difficulties on their server. In a reversal of sorts, Pacific Epoch’s only problems with intellectual property rights violations occur in the US a result of unauthorized distribution of newsletters and reports.

Always a hit with the crowd was the experience as an ex-pat living and working in China. Sage was able to provide insight into the ways to start working in China through his unique experience. His outlook on tech in China was enthusiastic with many opportunities still available.

Meeting with Altcatel’s Kang Wuping, VP of Human Resources

Alcatel is a leading telecom company based in Paris, France with 57,000 employees across 120 countries. Today we met with Kan Wuping, the VP of Alcatel Shanghai Bell, a subsidiary of Alcatel. Alcatel has a 20-year history in Shanghai and has been in a great position to watch China’s recent the economic development and capitalize on it. In 2002 Alcatel China merged with the state-owned company Shanghai Bell to form Alcatel Shanghai Bell. Alcatel’s recent merger with Lucent has transformed the company from a telecom product company into a full telecom solution provider.

Alcatel Shanghai Bell’s shares are 50% +1 owned by ASB and 50% owned by the Chinese government. This means half of the board of directors are government officials, but it would seem as though the relationship with the government is productive and non-confrontational. ASB’s market is mostly in China but they are also a global hub for Alcatel R&D (earning the most patents of any Alcatel location globally in 2005) and also house one of Alcatel’s four manuracturing facilities (consolidated from 100+ just a few years ago).

Alcatel’s core values are 1) Customer Value, 2) Innovation, 3) Teamwork, and 4) Accountability. Fortunately, Shanghai Bell shared three of the four Alcatel core values when the merger took place, and as a result the merger went smoothly and efficiencies were realized quickly.

ASB takes pride in it’s responsibility to the local community. The company has given back large sums of money to the local community for school, SARS research, and to promote a Green Culture.

The key motivator for ASB employees is career management. For this reason, ASB has focused a tremendous amount of resources on developing rigorous career path programs designed to retain employees, accelerate high potential employees, and build broad experience within the relatively young employees of the company (the average age of an ASB employee is 30). Accreditation programs are a key piece of the career management program at ASB and help measure competencies and justify salary and responsibility increases. ASB’s program management system is one-of-a-kind within Alcatel and Alcatel’s Paris headquarters has realized the value and is considering replicating this kind of system across more of it’s regional offices.

After our discussion with Mr. Wuping, the students went on a tour of Alcatel’s Next Generation Network (NGN) showcase center where video conferencing, IP-based phone systems, and data-voice convergence technologies were demonstrated.

Wild Swans is a multi-generational romp through 20’th century Chinese history through the lives of 3 generations of women. For me, it helped solidify the effects of the tribulations that China experienced after the end of the emperor’s rule, giving theme human scope and context.
The book underscores how different the lives of these past 3 generations of women had been – going from an era of foot-binding and concubinage, to revolutionary ideals, and a sojourn to the west. However no matter how different the lives — the uniting thread is the women’s ability to deal with adversity: labor camps, secret tribunals, long marches under gunfire, forceful breakup of the family, re-education in the hinterlands.

A great deal of what this book instilled in me is the ability of the policies of one strongman to slowly submerge a nation into darkness. I can draw many parallels between the life and times of Mao to that of Stalin, Russia’s strongman. The rise from obscurity, the policies leading to famine, the personality cult, the purges and push into collectivization, and the thaw associated with each strongman’s demise. Unfortunately the experience of the generations of the Chang family are not unique within the context of China’s upheavals – and taking this idea further are similar to what was experienced under Stalin. Its no wonder the Sino-Soviet split was primarily a result of Mao being against the Soviet Union moving away from Stalin’s policies – the two had an affinity for one another. Just within my family the result of Stalinism was going from millionaire to gulag pauper after nationalization of assets, death from starvation in what is considered the bread basket of the Ukraine, the black car taking whisking loved ones away under cover of night. In a smiliar way the victims still held out an isolated hope that the great spider drawing them into the web perhaps was not responsible, translating in the belief in the power of the personal letter to “him”. But I digress …
When such experiences are common it changes the face of a nation, how generations perceive the world around them. The book does outline that on a positive note repression while bottling productivity, creativity and free thought cannot keep the genie in the bottle forever, as evidenced by the current rise of both nations.

The rich tapestry of the Chang family’s history is presented in a truly engrossing and realistic fashion. As you can see it made me relive some of the events in my own family’s history. The women are portrayed as sources of strength – a grandmother that treks through half of China with bound feet to see her daughter, the mother who while in a labor camp loses none of her spirit and resourcefulness, the daughter who deprived of a true education rises to a vocation of a doctor. Each is limited by what society lets them do, but rise above it. In fact the women seem stronger and more realistic than the men – faced with forced labor the father goes mad. The ordeal takes his mental and physical strength. “His old energy and sharpness had disappeared. Watching him shuffling along, stopping to rest every now and then, battling with his mind as well as his legs”(P 456) He is punished for “being a moral man living in a land that was a moral void”(p 457).

The frank descriptions of the family trials can be hard to stomach. “When he arrived at the office, he was immediately yanked into a small room, where half a dozen of large strangers set upon him. They punched and kicked the lower part of his body, especially his genitals. They forced water down his mouth and nose and then stamped on his stomach. Water, blood, and excreta were pressed out” (p 356). Not all travails are put upon them forcibly — you see the influence of society and the fact that the desire to conform, can be as strong as any strongman. Pre-communist China was not exactly a great place either. The first few pages talk about the practice of foot binding, which on description is the worst torture inflicted upon daughter by mother with the best intentions. “[Her mother] first wound a piece of white cloth about twenty feet long around her feet, bending all the toes except the big toe inward and under the sole. Then she placed a large stone on top to crush the arch. My grandmother screamed in agony and begged her to stop. My grandmother passed out repeatedly from the pain…Not only was the sight of women hobbling on tiny feet considered erotic; men would also get excited playing with bound feet… The binding could only be temporarily loosened at night in bed … Men rarely saw naked bound feet, which were usually covered in rotting flesh and stank when the bindings were removed.” (p 25)

Not to dwell on the foot binding, but it does underscore the one positive influence of communism – the equalization of women. While the grandmother is forced to become a warlord’s concubine and is held prisoner while her daughter is taken away, the Communist daughter marries for love, although she must put Mao before husband and family she enjoys significantly more freedom until she is put in a labor camp, the daughter fares better — she remains unmarried at 25 of her own choice and leaves to study abroad. In times of great change the difference in the lives between two generations are like night and day.

The book also gives one appreciation for the resilience of Chinese culture. The cultural revolution, was a concerted effort to wipe away the four olds, such things as family bonds, and even love. “Father is close, Mother is close, but Mao is closer”. Books are burnt, antiques smashed, families sent to remote parts of the country, yet you can see in the end the family bond survives. The tie to the homeland while painful to the author, is still one that binds.

Mme. Mao on love. “When a Vietnamese army song and dance troupe came to China, those few who were lucky enough to see it were told by the announcer that a song which mentioned love “is about the comradely affection between two comrades” “(p 488).
One result of repression of free speech is the immergence of irony. Russian culture is tinged in this, when what you thought could not be said it produced this jaded form of humor to cope with the grimness of reality. “Deep fry the persecutors of premier Zhou…Your monthly ration of cooking oil is only 3.2 ounces. What would you use to fry these persecutors with?”(p 491)

The book ends on a positive yet not entirely upbeat note with a bright yet ominously uncertain future. The author describes how the China of today is vastly distant from its shadowy red past. Yet the red sparks are still bound to ignite events like Tiannamen Square. Wherein lies the dichotomy that is China. “the course of liberalization is irreversible. Yet Mao’s face still stares down on Tiannamen square” ( 508)

Understanding the modern day China cannot be done without understanding the importance of Deng Xiaoping. Although Joe Studwell’s book: The China Dream contains great detail regarding the development of china as the world’s largest market, I would like to concentrate in what I thought was the most valuable part of the book; Deng Xiaoping, the reformer. Read the rest of this entry »

A book review by Jorge A. Maceyras

The enormous potential of China’s stock market is well publicized. According to some estimates, China’s GDP is expected to approach $5 trillion by 2020, assuming 8-10% annual growth, which would bring the stock market to $2.5 trillion. China’s stock market, though booming, still has several hurdles to overcome to effectively compete with the established stock markets of today.

In “China’s Stock Market: A Guide to its Progress, Players and Prospects”, Stephen Green provides an insightful overview of the issues affecting the stock market and other capital markets in China as of the year 2002. Read the rest of this entry »

CHINA: The Balance Sheet
What the World Needs to Know Now About the Emerging Superpower
By C. Fred Bergsten, Bates Gill, Nicholas R. Lardy and Derek Mitchell

CHINA: The Balance Sheet is a collaborative effort by both the Center for Strategic and International Studies and the Institute for International Economics, both American, nonpartisan organizations providing strategic insight and practical policy solutions primarily for American decision makers. This book represents the first phase of the China Balance Sheet project, (www.chinabalancesheet.com) a three-year endeavor to bring thorough and objective information about China to light and guide a national discussion. The project plans follow-up activities including conferences both in DC and elsewhere in the United Stats to discuss the findings of the book and further develop policy implications of their analyses. Read the rest of this entry »

Book Review:

China INC.

How the rise of the next superpower challenges America and the World.

Ted C. Fishman

Edward Raymond

The author, Ted C. Fishman, describes how China is intertwined with the world and how China is applying economic pressure to countries around the world, especially America. Fishman provides a candid, provocative perspective accounting China’s rise to dominance and how it affects every American at all levels.

In the Introduction: The World Shrinks as China Grows, the author provides extraordinary statistics not readily available in the media in the United States. China’s enormous population is allowing the natives amass an arsenal of high skilled, superior work ethic and low cost labor pool has made China the world’s largest maker of consumer electronics. China is also poised to be leaders of the biotech and computer manufacturing industries.

Fishman describes some interesting facts about China that includes a relative analysis of the shear size of China. The population of China is consolidated in the 100 to 160 cities with more than one million or more people. In a stark contrast, America has nine cites with populations greater than one million, while Eastern Europe combined has 36 such cities.

China’s rapid rate of industrialization can be credited to the leapfrogs in infrastructure development and advances in technology. China is an laying fiber optic a rapid rate. The leaders of China are buying oil fields internationally and negotiating exclusive deals with Saudi and Russian companies.

The author describes several real world stories depicting the direct affects China is having on the average American. One example that was interesting was the expatriate of the US who now teaches English in Shanghai and was able to receive laser eye surgery for $600 US performed at an ultramodern Chinese clinic for a tenth of the price the procedure would cost at home.

China is able to leverage its enormous labor population due to the relative stability of the region. The Chinese workforce is described as a reliable, docile, and capable industrial workforce, groomed by government-enforced discipline. China’s workforce is dubbed the greatest natural resource on the planet by the author. The numbers tell us that China’s population is 1.3 billion people and China’s GDP was $1.4 trillion in 2003. The author describes how these figures could be unduly low, since some provinces in China’s central planning awards funding to provinces designated as poverty zones and this leads to misreporting. Another reason these numbers may be inaccurate is the existence of an underground economy, which is not included in the official numbers. Lastly, the author believes that the China pegs its currency to the US Dollar. A country like China should be able to see its currency value appreciate against the dollar as the dollar moves up and down. Accounting for these disparities, the U.S. Central Intelligence Agency speculates that the size of China’s economy is in fact closer to $1.4 trillion with a GDP more close to $6.6 trillion.

In subsequent chapters, the author describes the history of China to provide insight into how China has attained its ranking and unprecedented economic growth. These timeline of change is most visible in the city of Shanghai, China. In the twentieth century-until China and the world unraveled in the 1930’s-Shanghai was considered one of the world’s most important commercial centers along side with London, New York, Paris and Tokyo. Shanghai has also historically been the world’s second busiest port. The city’s history of foreign domination is one of China’s enduring national wounds. The government uses the darker history of the colonial history and humiliation of Shanghai, once painted “The Whore of Asia,” as the fuel that drives the Chinese people to strive to be the best.

The author accounts the revolution of the farmer Chinese and their migration into more suburban areas to seek a better life for their families. With the government giving land to its people and then immediately turning around and reclaiming these plots for government collective control, this has led to the great rural migration. The author describes the hukou system was described to prevent rural-to-urban migration. Families were required to at request show an internal passport describing the family’s origin, class affiliation, personal identity, birth date and occupation. Those found to be out of their rural areas would be detained and/or returned home. The revolutions and uprising and eventual liberation of China’s farmers set the stage for China’s emerging market economy.

Economic opportunity in China, largely driven by geography, has grown so lopsided that China now ranks among the most unequal of nations. On average, rural incomes are only a third of those seen the sprawling cities. An interesting fact the author offers is that farmers make a fraction of their urban counterparts, but the government requires them to shoulder disproportionately higher taxes than urban dwellers. Also interesting is the fact that those farmers making the most income receive it by family members who have left the home and sends money to support them. The author describes how Zhejiang Province and the Wenzhou district has grown at astonishing rate because those that left to attain educations outside of the rural nations return to make even more money.

The author transitions from stories in China to parallel stories in the US. Merrill Weingrod, the principle of China Strategies in Providence, Rhode Island, closed his leather belt manufacturing plant and partnered with Chinese manufacturer its product to lower their costs. He closed his plants to become an intermediary to American businesses wanting to do business in China. Zhenjiang is an extraordinary example of a phenomenon that is repeated in varying degrees elsewhere in China.

Competition within China is fierce and most closely touted as a blood sport. China’s free market is unique in size and characteristics. For example, the Chinese citizens have the highest rate of savings in the world, saving on average forty percent of their income. This allows the better-off of them to take advantage of the growing housing market, despite the 20% down payment requirement to obtain a government back and issued mortgage. To gain the dollars of Chinese requires understanding the culture of the people. In the red-hot Shanghai housing market of 2004, the most aggressively built properties were high-end high-rise apartment buildings that were sold off as condominiums. Apartments could be $120,000 and in the same year rise to $300,000 for the same space. This growth accounts for the risk of speculators. The author refers to these Shaghainese as the Wenzhou mafia, not because they are criminals, but for the characteristic Zhenjiang bravado and a penchant for touring Shanghai’s construction sites inseparably attached to their mobile phones and roller bags full of cash.
Most of China’s factory jobs are made up of women. They can have pay of 17 Yuan per month and a dormitory that provides room and board. The capitalistic nature of the Chinese people are finding these jobs are not as profitable as other more personal and private ventures. Many young women are leaving the factory for high paying prostitution jobs. Their worksite is the karaoke bars and can have 1,000 women on premises. They can earn up to three times that of a factory worker.

The book goes on to describe the great energy debacle, environmental concerns/pollution, Beijing’s race to out-skyline Shanghai in the near future, Wal-Mart’s success, global consumer market wars, the China Price, the automotive industry, the pirate nation and the interdependency of the economies of China and the US. The author closes with a story of Aaron Shershow, an American living in Shanghai.