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The China Challenge

During the thirty years since Deng Xiaoping opened China’s door to the outside world in 1979, China absorbed over US$ 500 billion in foreign direct investment, second only to the US. Yet, surveys of various sources had consistently indicated that while a quarter of foreign investments had exceeded initial expectations, over half had taken longer than forecast to
achieve profitability or performed worse than expected. There have been instances of success but most of them have been really lucky because they hit the right thing at the right time. A survey conducted by the Economist Intelligence Unit estimated that more than one fifth of all foreign invested companies had actually pulled out of at least one loss-making venture. Failed China ventures have been associated with big names, such as Peugeot, Foster, Revpower and Whirlpool, as well as many smaller companies.

The case of British brewery BASS

BASS established a beer joint venture in Jilin province in 1995 but had to withdraw from the US$ 40 million venture by selling its 55% stake to the local partner in April 2000 due to distribution difficulties and relationship problems. Refused licences to sell bottled beer in certain cities, the brewery had to focus on draft beer, despite the lack of on-tap facilities, but besides regular floods blocking road and rail, winters at -35°C froze the beer in the draught piping. Relationship between the two partners had reportedly deteriorated to such an extent that when Bass personnel visited the joint venture site in 2000, they had to be accompanied by bodyguards. Yet, when China-Britain Trade Review spoke to Bass at the time the joint venture was established in 1995, a company director said that great care had been taken to choose the right joint venture partner in a geographical area with excellent market potential!

A personal challenge

Developing and operating business ventures in China can also be an unprecedented personal challenge. “In a year in China, you can learn more about international business, about managing people and about managing yourself than in a decade anywhere else,” as reflected by many Western expatriates. According to some studies, the failure rate of expatriate senior executives in China is as high as 30 per cent, which is twice the world average. One human resource specialist says in Management Review magazine that 75-80 per cent of China expatriates become burnt out after a two or three-year stint. A high divorce rate also exists among expatriates. This is also why Ken Watson, chairman and country senior partner of PricewaterhouseCoopers China Limited, once famously concluded: “The most difficult job in the world is being the general manager of a joint venture in China.”

"The China Dream"?

 Arguably the most influential book that describes the dark side of investing in China is The China Dream, the author of which, Joe Studwell, contends that the China market, rather than being a goldmine, is an illusion, and that Western businesses are engaged in an act of mass folly by pursuing the market and that has been the case ever since Marco Polo. In a thoughtful and persuasive analysis, Studwell argues that Western businesses have always had inflated expectations of the market for business in China, based on erroneous assumptions about its size and its lure. Our assessment of the book is that although it is a welcome counterbalance to the often uncritical talking-up of this market that is implausible – even off-putting – for companies seeking realistic market entry guidance, the author paints a grim – almost cataclysmic – picture, where Western businesses are unlikely ever to succeed in China. And, instead of being a dream, investing in China is a challenge that can be met if we understand its whole nature.

Self test

 

Jack Welch, former CEO of General Electric Company (GE) with a staggering US$ 200 billion-plus market capitalisation, which has done billions of dollars worth of business in China, and anointed "the gold standard against which other CEOs are measured" by Business Week, once told Industry Week:

"We don't know China. Every time I leave China, I know how much I don't know.”

As such, whether your company is contemplating on investing in China or has already made investment in China that is struggling to perform, whether you are a CEO or managing director directly in charge of your China investment or a senior executive or director related in some way to the investment project, ask yourself the following fundamental question:

"What does it mean to invest in China?"

If you find this question awkward to answer, you are advised to immediately contact us before wasting your resources or making fatal mistakes. If, however,
you can produce an answer but are unsure about whether you can pass the test, we urge you to mark your answer yourself by moving on to answering the following set of more specific questions.

Twenty questions about investing in China

  1. “What, in nature, is the difference between Chinese society and my home country?"
  2. "How can I find my way around in China?”
  3. “What are the characteristics of the China market?"
  4. "How can I correctly read its dynamics?”
  5. “What form should my investment take?"
  6. "How can I find a suitable local partner?”
  7. “What are the differences between Chinese and my negotiating philosophy?"
  8. “How can I effectively negotiate with a local partner?”
  9. “What are the inevitable communication gaps associated with my China venture?"
  10. "How can I bridge these communication gaps?”
  11. “What are the professional weaknesses of local employees?”
  12. "How can I improve the professional quality of local employees?”
  13. “What is the Chinese criterion for human relationships?”
  14. "How can I lead Chinese people?”
  15. “What are the respective limitations of managing and leading?"
  16. “How can I balance managing and leading?”
  17. “What are the forces determining the success of a business in China?”
  18. “What strategic advantage can my China venture pursue?”
  19. “What are the differences between Western and Chinese civilisation?”
  20. "How do these differences influence the way I see my China investment?”
 

Unless you are totally confident of answering each of these twenty questions and thus can pass the test on investing in China, you are advised to get to know more about the services offered at 2W China by browsing the web pages on your right.