CHINA 2000  October

Job creation brings benefits

 Many Chinese still have misgivings about the level of foreign investment in their country, but there is ambivalence about these misgivings. On the one hand, some joint venture partners look upon a foreign investor as someone making a large financial gift for little or no return, whereas, on the other hand many Chinese fear that foreign investment will destroy their domestic industry.

 It is therefore important that current and potential investors in China work hard to persuade both government and customers that their presence in China brings “mutual benefit”, a concept frequently promoted by the Chinese during the course of negotiations.  Most western companies want to be considered responsible corporate citizens who are making a valuable contribution to the domestic economy.  A key means of illustrating this is to highlight the company’s contribution to employment.  As the Chinese government tries to modernise state owned enterprises, it faces rising unemployment and emphasising the creation of jobs is a sure way to get the attention of Chinese officials.  It is also a persuasive argument for foreign participation in all sectors of the Chinese economy, including those currently subject to restriction.

 Companies should not only count the jobs they create directly, they should also calculate the number of jobs that are created elsewhere through the “economic multiplier effect” of their investment and on-going operations in industries such as construction, machine building and the supply chain to the production facility.  Any company negotiating a project in China should emphasise the total number of jobs a project will create; it will smooth the negotiating and approval process.

 Can companies make money in China?

 The attraction of China’s immense 1.2 billion strong markets remains strong despite the fact that over the last decade there have been many tales of broken contracts, corruption and over-zealous bureaucrats to set alongside the success stories.

 Whilst the Chinese market undoubtedly has huge potential, don’t forget that there are many competitors, both foreign and domestic, who want to win and  maintain their market share. And despite its size, China’s market is often fragmented and subject to very fierce regional protectionism, as several well-known companies have found out to their cost.  Success becomes particularly difficult to achieve if a company relies on obsolete technology and equipment and entrusts its investment to second-rate managers.

So, is it possible to make money in China?  Recent studies at the Chinese Academy of International Trade and Economic Co-operation show that about one third of China’s 354,000 foreign invested enterprises actually make a profit.  The proportion rises markedly if the sample is restricted to multi-national companies, which have been wise enough and rich enough to spend time and money on researching the market, structuring the venture correctly and building their political contacts at all levels of government.  We suspect that the figures would rise even more if due allowance is made for creative accounting and imaginative transfer pricing policies.

The answer is clearly yes; companies can make good profits in China provided that they prepare thoroughly, research the market, conduct due diligence on potential partners, use the latest technology and, perhaps most important of all, ensure that talented managers are put in charge of their China operations

 China will “play by WTO rules”?

 China has sought to dispel fears that it will not play by the rules after it enters the World Trade Organisation.  A Foreign Ministry spokesman said “The Chinese government will adopt a serious and responsible attitude to honour its commitments so as to implement all the agreements it has pledged with various members of WTO”.

 We suspect that the United States government is not entirely convinced by the Chinese statement.  Washington will be put on stand-by to undertake substantial enforcement actions if China does not comply.  The US monitoring and enforcement plan – the largest for any trade deal – calls for “accelerated investigation” of future trade complaints against China and for the creation of a “rapid response team” to monitor compliance.

We, too, are sceptical of Beijing’s ability to comply totally with the rules.  There will be stout resistance from local governments trying to protect their domestic companies, which even now are protected from internal Chinese competition, and we see this situation improving only gradually.

 We are certain that the Chinese authorities will come up with some creative solutions to delay total compliance.  Are we conspiracy theorists if we suspect that Vodafone’s very recent purchase of 2% of China Mobile (Hong Kong) may make it very difficult for the company to play a major role in the Chinese telecommunications industry?  Our information is that the Chinese are delighted to have effectively sidelined a potential predator and to have received a very large sum of money at the same time; thus effectively delaying the opening of at least part of the telecommunications market.