China 2001    January

A Good Old-fashioned Corruption Story?

 The former Deputy Minister of Power and Vice-General Manager of the State Power Corporation Cha Keming and other senior officials including Tan Aixing, head of the State Power Corporation’s International Co-operation Department, have been arrested for taking bribes.  Western companies are said to be involved, including some of the biggest names in the industry. No doubt some senior executives are thinking twice before they visit China!

Investigators have set up camp inside the company and are busy questioning senior officials.  China has had its share of financial scandals but what distinguishes this one is the connection with Li Peng, the Chairman of the National People’s Congress.  Mr Li was Minister of Power in the 1980s and it is reported that Mr Li and Mr Cha are close associates.  Although there is no suggestion that Mr Li is implicated in the scandal, the case may yet prove a problem for him.

 It appears that a political agenda is also being played out here.  Premier Zhu Rongji and Li Peng are known not to get on and this has all the appearances of a battle by proxy.  Chinese are famous for saving face and avoiding confrontation and this would be a typical, oblique approach where the protagonist, in this case Zhu Rongji, is reluctant to make a direct attack on Li Peng, preferring to attack a close associate through a third party.  It is difficult to predict the outcome, but Li Peng is a great survivor.  The future certainly looks bleak for Mr Cha but we will have to wait to see how the battle between Mr Zhu and Mr Li plays out.

WTO talks stall

Despite our confident prediction that China’s accession to the World Trade Organisation (WTO) would be completed by the end of March 2001, the latest round of talks has broken down over the issues of agriculture and market access for service industries.  It now seems that further delay is inevitable.  In addition to agriculture and services, compromises are also being sought in three other areas; technical barriers to trade, industrial policy and China’s trading rights.

China is insisting that its agricultural sector should be allowed the same level of domestic support given to developing countries, which is 10% of total output value.  However, the United States and the Cairns Group – Australia, Canada, Argentina, New Zealand, Thailand and Chile – all major exporters of agricultural produce, maintain that China should be treated as a developing country, which would permit it to offer subsidies of up to 5% only.    China currently pays subsidies of about 2% of output value but obviously fears the effect of a more open market for agricultural products and wants to have the scope to offer more protection to its farmers.

China feels aggrieved because it has made concessions on market access, including agreeing to cut tariffs on agricultural products and undertaking not to introduce trade-distorting subsidies.  The main dispute in the services sector concerns the operational freedom that will be permitted to foreign insurance companies. The Chinese are still very concerned that their insurance companies are not strong enough to compete with foreign companies, a fear that is well founded when you consider how rapidly AIG managed to win market share in Shanghai.  The question of operational freedom, together with technical barriers to trade and industrial policy, is extremely important.  We still believe that China will find administrative ways to blunt some of the effects of the rules of WTO in order to protect its weaker companies and industrial sectors and it will make inventive use of these areas to achieve this.  Do not be surprised if the Chinese find inventive means to get round some of the more irksome rules.

 Nevertheless, we are still confident that this will be only a short-term delay to China’s eventual accession to WTO.

Reduce your manufacturing costs in China

 Late last year we attended a briefing held by one of the major Chinese manufacturers of mobile phone handsets and their European partner, one of the world’s leading mobile phone brands. The two companies are global strategic partners selling products not just in China but worldwide and China is one of the European company’s key manufacturing hubs. Working with a Chinese partner is bringing huge cost savings as well as providing a springboard to attack Asian markets.  Production costs in China for mobile phone handsets are as low as 25% of the costs of the European partners other manufacturing bases in North America and Europe.

Now a cost reduction of 75% might only be attainable for mobile phone handsets and would not be applicable to your products. But imagine how even half this cost saving would transform the prospects for your company!  Or imagine the effect on your company if your competitors get there first!  Isn’t it time that you gave manufacturing in China a closer look?