Blowing It With China

American relations with China may be seen from both a political perspective and in regard to how U.S. firms are seeking to enter the Chinese market. We begin here with the political perspective and then examine strategies for U.S. firms seeking to enter Chinese markets.

It can be hard for many people outside the U.S. to understand U.S. foreign and economic policies, particularly when it comes to China. There is a perception in Asia that not since U.S. General Douglas MacArthur stumbled headlong into war with China on the Korean peninsula in 1950 has U.S. policy towards East Asia been so ill informed. Lessons from that period appear lost on Americans now.

The first lesson was that the Chinese know us, or even what our best interests are, much better than we know them. The second is that our initial responses to China are often inappropriate.

Mutual Benefits Ignored

Let’s look at the attempted sale of Unocal to the China National Offshore Oil Corporation (CNOOC). Instead of reacting with fear, Americans should examine how the proposed sale could serve the interests of both countries.

If the Unocal sale can be made contingent on China further opening its domestic market to U.S. firms — for example to retail gas station chains or franchises — then gains for U.S. firms would be substantial. With more integrated economies, we will improve our understanding of China and reduce the fear factor that currently pervades our approach to that country.

U.S. firms are often good at operating large scale retail and distribution networks and in supporting franchise operations. American companies enjoy competitive advantages in those fields, advantages that can be employed to outscale and outperform Chinese firms in their own backyard.

To gain competitive advantages in China requires a better understanding of China, an understanding that cannot be restricted to the private sector.

China a Better Partner Than Adversary

China has the world’s oldest continuous civilization, whose recorded history spans 4,000 years. However, its civilization is so different from our own that we often find it difficult to understand Chinese subtleties and meanings. It is analogous to the many Eskimo words for snow and ice (49 in the West Greenlandic language), which whentranslated into English lose their subtly and meaning.

Before the U.S. bumbled into war with China, the Chinese government was clearly warning us, in plain terms, not to cross the Yalu River. However, we failed to grasp these warnings, failed to understand. At that time there were only two universities in the U.S. with full-fledged Chinese studies programs. Graduates from those programs were often seen as ideologically tainted in official U.S. government circles and their advice widely ignored.

It is in the interests of U.S. firms and the U.S. economy to gain new understandings of China and to adopt new approaches. This has to include a reduction in hysteria regarding the inevitable and long-overdue modernization of the Chinese military.

U.S. rhetoric regarding “democracy” is often seen in China as an attempt to destabilize that country and promote the sort of turmoil seen during the Cultural Revolution. This rhetoric should be downscaled in favor of efforts to encourage intellectual property rights and to strengthen Chinese courts and the rule of law.

U.S. limits on technology exports to China are not stopping the Chinese from buying whatever commercial technologies they need from U.S. allies. The effect of export controls has largely been to hurt U.S. firms, particularly in the manufacturing and high tech sectors. Those controls need to be revamped and streamlined.

Security Partner, Not Opponent

We should be looking towards China as a security partner, not as an adversary. China can complement the U.S. We share interests, but until we stop reacting to China with ignorance, fear and hostility, those interests will be difficult to realize.

Many prominent Chinese have been educated abroad, something that is encouraged in China and that provides instant credibility back in China. To be educated in the West is referred to as gold plating, whereas education in Japan is known as silver plating. How many U.S. leaders have been educated in China?

If U.S. companies are to be able to take advantage of the domestic Chinese market, we will need a much larger pool of Chinese managers. The best managers in China are often those who grew up there but who have been educated in the U.S. By restricting visas and making it difficult for Chinese to attend American universities, the U.S. is depriving itself of a vital economic resource.

Market Entry Basics

U.S. firms seeking to enter the Chinese market frequently attempt to do too much too fast. Failure is the inevitable result.

U.S. firms that are making money in China are largely those that started investing there in the early 1980s. They frequently endured five years or more of unprofitability, just like new market entrants there will need to be prepared to do in order to survive.

Having a long-term time horizon is the first rule of Chinese business. If your firm is not ready to lose money for a long period of time while starting up in China, then it would be best to avoid China entirely.

The second rule of Chinese business is to never enter into a partnership with a government-owned enterprise. In the event of a dispute, government-owned firms always win.

The third rule is to start in just one or two initial market locations. Many American firms become preoccupied with the total size of China’s population and fail to focus on areas of wealth concentration. The two best business locations in China for retail and light manufacturing are that country’s two major metropolitan areas.

Favorable Market Locations

The biggest population and wealth concentration in China is in the Yangtze River delta region. The Yangtze is the longest river in Asia and the third longest river in the world. Anchored by Shanghai, this region boasts 12 major cities within a two-hour drive of Shanghai. There are 80 million people in this compact area that serves as China’s main commercial center.

The second biggest population and wealth concentration in China is in the Pearl River delta region, anchored by Guangzhou (formerly Canton). In this region, there are a dozen cities and 50 million people within two hours drive of Hong Kong.

Infrastructure in those two regions is superior to many areas of the U.S. in terms of roads, airports and public transportation. In terms of numbers such as the number of cell phones per hundred people and the number of land lines per hundred, both those regions are on par with a developed country.

A third region is the Northeast industrial region, just across the border from Korea. This location is best suited for large industrial facilities. Formerly known as Manchuria, this region was jump started during the Japanese occupation in the late 1930s and early 1940s.

A fourth region is in Fujian province, adjacent to Taiwan. This area has benefited heavily from investment from Taiwan.

These four regions offer tremendous opportunities and lower risks than elsewhere in China. You can take advantage of these opportunities, directly and indirectly. Just don’t blow it.