AT THE ONSET OF A NEW DECADE FIDUCIA’S MANAGING DIRECTOR JURGEN KRACHT LOOKS BACK AT AN EXCITING PERIOD FOR BUSINESS IN CHINA, THE CHANGES AND CONSTANTS IN A DYNAMIC ENVIRONMENT.
What a Decade
At the beginning of a new decade it is time for reflection: China has been a member of World Trade Organisation (WTO) since 2001 and we all expected that doing business in China would become easier. What has changed and what has not changed? The size of the market has increased, in some areas dramatically but the development across the country was rather uneven. At the same time the competition especially from local companies increased, and this was often unexpected. The pace of development of the local took many by surprise. In total, we have a more even playing field in China but the operating conditions have also become more challenging. To the outside world China looks like a market economy, but one should not be deceived, there continues to be a strong influence by regional and local government authorities and the respective party leaders.
An observation from the EU China summit in Nanjing in November 2009 confirms this: The greetings at the welcome dinner hosted by the Jiangsu Provincial Government were in the following order; Party secretary, Governor (the political leadership) followed by foreign guests. The topics were of interest, the meetings were well attended but the discussions were more monologues rather than dialogues.
The Macro Level
China continues to be governed from the centre, predominantly by technocrats. One has to admire the speed of decision and execution (of course made easier by having a small team of leaders who donât need to obtain parliamentâs approval). At the base of all decision making are two key priorities: maintaining domestic stability and growing economically. This in turn assures the continuation of the current political structure.
I firmly believe that China has a long term master plan and we are in the midst of its roll out. Getting foreign companies to invest in China and bringing what is needed for the countryâs development (such as capital and technology) was just the beginning. Securing natural resources overseas, investing in Africa (âChafricaâ), leapfrogging industrial developments (for example, in the car industry, alternative-fuel, hybrid or in energy generation, wind farming) are just mosaic pieces in the bigger picture. Who would have forecast in 2001 that China would export high speed trains, manufacture aircraft and become the biggest global car market?
The characteristics of Chinaâs economic situation result in positive impact (GDP growth, wealth creation) to negative (economic imbalances, uneven development, over-capacity, real estate bubble). It depends on your point of view â or the industry you operate in. Part of the China game is living in contradictory circumstances.
Business Republic of China…
…is the title of a recent book describing âtales from the front line of Chinaâs new revolutionâ. The title describes aptly what China really is: a multitude of business enterprises. As economic power has visibly shifted to China and as foreign companies continue to tap the market, China must have grown more confident that it could dictate the rules of engagement. Yet one should keep in mind that the country globally ranked only 89th in the World Bankâs 2010 study in terms of âease of doing businessâ.
Help is now at hand and one only has to follow some rules, which apparently have been proven in practice. â22 Rulesâ were reportedly found on the wall of a Zhejiang businessmanâs office in late 2009 and have since been widely circulated on the internet. Zhejiang business people have a reputation of being clever and successful, so this document provides interesting insights indeed.
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Rule number one says: âPersist in watching CCTV 1 Newsâ. This is certainly true as the government uses this program as a megaphone to announce the changes in economic politics and the new rules of the game. Only those who arrange their affairs accordingly shall have a chance to succeed.
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Of interest is the combination of rule two and three as they reflect exactly those contradictions that particularly enrage the newcomer in China business: Rule Two says, it is advantageous not to rely blindly on agreements and contracts whilst rule three says that it is valuable to keep ones word. This rule is however not applicable if one deals with people who are known for not keeping their word.
Challenges and Solutions
During the last ten years corporations have been faced with multiple challenges: quick changes in the market environment, competition, rising operational cost. And the response in 2009 has been to restructure the organisation by reducing the number of factories, offices and warehouses (which were created in the boom times), expense reduction, adopting products to the different market segments and creating new markets (for example, export to India).
What has not changed and should always be remembered are the traits for China engagement:
On the other hand, we have witnessed a âshift of gravityâ over the years: managing the China engagement from the head office (HO) poses challenges, because of the distance of some 10,000 kilometers. Thus, many decisions which were previously made by the HO have now shifted to the China manager whom is closer to the market. We believe that success in China is increasingly based on a dual strategy which is a mixture of independence from the HO and at the same time dependence on the HO.
The key goal remains to have a clear focus on the opportunities while steering clear of the many pitfalls.
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