By: Steve Dickinson
This post is Part Two in our two part series on how Chinese companies typically view investments and how this view impacts Western companies that invest in Chinese companies, and even how this can impact all companies doing business in China.
As I explained in Part One of this series, Chinese companies simply do not value investment to the same extent as Western companies. Chinese companies value work. I ascribe this, at least in part, to Communism, which values the worker over the investor.
China’s pervasive attitude towards investment explains many of the difficulties foreign investors have in joint ventures in China. The typical failed joint venture works as follows. A failing Chinese state owned company is desperate for working capital. However, the enterprise has been cut off from life support from the state and no bank loan is possible. Or a private enterprise finds itself on hard times and no bank loan is available.
The venture then sets out hat in hand and finds a foreign joint venture partner. The foreign partner contributes cash, technology and markets. The Chinese side contributes land, buildings, staff and management. The foreign side takes the position that the Chinese side ought to know what it is doing and so it becomes only minimally involved with the Chinese domestic operations. Through the hard work and dedication of the Chinese staff and management, the joint venture business succeeds. Often this success is won only after years of struggle and financial losses.
With financial success finally achieved, the foreign joint venture partner now thinks: finally, we can relax and earn a return on our investment. However, the Chinese side thinks exactly the opposite: finally, we can be rid of our foreign partner. The response to the success of the company is exactly the opposite. Why is that? The foreign side is of the view that without its investment, the company would have failed. The Chinese side is of the view that it has already paid the foreign joint venture back for its investment with a small profit. The foreign investor is doing no work and has done no work. Work is all that counts. The foreign joint venture investor is acting in bad faith by insisting on being paid when it has done little or no work. The Chinese side with then go to extraordinary lengths to get rid of its foreign partner, even if it damages the company in the short term. In doing this, the Chinese side thinks it is doing the right thing and the foreign partner that insists on staying around is the one acting in bad faith.
This attitude has been pervasive in China since I started working here in the 1980s. I have seen little or no change and I therefore expect little change in the immediate future. My discussions with Chinese businesspeople and Chinese lawyers only confirm this. The reason is obvious. China was and still is very much a communist country. Labor counts. Investment does not. This fundamental value assessment must be taken into account in designing your investment program in China.