Doing business in a changing China

 

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By Alan Chu

As the fastest-growing major economy in the world, China continues to offer global companies attractive investment and business opportunities. However, doing business in China also means navigating the complexities that arise from China’s unique historical, political, and cultural contexts. Despite the challenges, leading US companies are succeeding in China by developing collaborative relationships with Chinese stakeholders and demonstrating the agility to continuously adapt their strategies to the country’s dynamic environment. These companies are positioning themselves for long-term success by embracing the Chinese proverb qiu tong cun yi, which means “seeking similarities while respecting differences.” In doing so, they are co-opting China’s long-term interest in stability and prosperity into their business strategies.

Despite the global recession, China has remained a bright spot for many Western multinational companies. According to the 2010 China business climate survey conducted by the American Chamber of Commerce in China (AmCham-China), 77 percent of respondents ranked China as one of their top three global investment priorities; almost all respondents indicated they were profitable or they broke even in China in 2009 despite the economic downturn; and 80 percent are accelerating their investments in the country this year.1 Charlie Denson, president of the Nike Brand, probably speaks for many when he says, “We’ve moved China off the emerging-markets list. They’re the fastest-growing market in the world. They have the capacity—and they’re building the capability—to become the biggest market in the world.”

The size of the prize justifies such optimism. Since the economic reforms started in 1978, China has enjoyed an average growth rate of 10 percent. During the recent global recession, China overtook the US as the world’s largest auto market and energy consumer. This year, China surpassed Japan to become the second-largest economy in the world, after only the US.2 In 1980, China was not among the top 10 global economies by size. By around 2025, PwC estimates China’s economy will be larger than America’s and will grow to approximately 130 percent the size of the US economy by 2050. (See Figure 1.) This is likely to be true regardless of whether gross domestic product (GDP) is measured in US dollar terms at market exchange rates or purchasing power parity, because gradual appreciation of China’s real exchange rate during this period will eliminate the difference.3 Yet, as Western companies continue to place big bets on China, they are confronting new challenges. Benefiting from China’s economic expansion will require more patience and tenacity than ever before.

Understanding the challenges

Global companies are struggling with China’s seemingly contradictory political and economic policies. In some ways, China is moving toward aligning its processes with those in developed countries. In other ways, it continues to carry the risks and challenges associated with doing business in developing countries. Many multinationals fear that a more assertive China is increasingly employing instruments of state capitalism to promote economic nationalism at their expense. Thirty-eight percent of US respondents to AmCham-China’s 2010 survey reported feeling “unwelcome” to compete in the Chinese market, the highest proportion to express this sentiment since the organization began polling its members. In a letter to the White House earlier this year, America’s Coalition of Service Industries decried the new rules of doing business in China as “an unprecedented use of domestic intellectual property as a market-access condition [that] makes it nearly impossible for the products of American companies to qualify unless they are prepared to establish Chinese brands and transfer their research and development of new products to China.”4

China’s rapid rise to the world’s largest economy

At the same time, China also seems to know—and appears willing to concede—that it cannot go it alone. At the World Economic Forum’s Annual Meeting of the New Champions, or the Summer Davos, held in China in September 2010, Premier Wen Jiabao said the Chinese government was committed to giving equal treatment to foreign and Chinese firms in its procurement decisions as well as to working with the international community on protecting intellectual property rights.5 Cheng Li, research director of the John L. Thornton China Center at the Brookings Institution, explains: “During the past three decades China traded its markets for capital and technology. That may be changing now, but China also cares about its relationship with the West, particularly with the United States. China still wants all kinds of things, including foreign markets, and the US remains the single-largest mature market in the world.”

So how are leading companies managing these contradictions and the resulting unpredictability? As Nike’s Denson points out, “It’s hard to say how China is going to evolve politically, economically, or socially when you get into the specifics of the various provinces, consumer segments, factions in the government, and so on. But what we do know is that they are going to continue to progress. Both the Chinese government and the Chinese consumer want more— that is, more access to the global marketplace and more prosperity from the global economy.”


1 American Chamber of Commerce in the People’s Republic of China, 2010 Business Climate Survey Report, April 2010.

2 Bloomberg News, “China Overtakes Japan as World’s Second-Biggest Economy,” August 16, 2010.

3 PwC, The World in 2050, 2008.

4 Coalition of Service Industries news release, January 26, 2010.

5 Chris Oliver, “China’s premier assures foreign companies of fair treatment,” MarketWatch, September 14, 2010.


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