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Doing Business In China Just Got Even Tougher

Posted in China Business

I have known Janet Carmosky for going on a decade now and I’d be willing to stack her China business knowledge up against anyone’s.  And not only does she know China business, but she is one of those people who just seems congenatillay incapable of pulling any punches.  I am a huge fan of hers, though we certainly do not see eye to eye on everything.

But when Janet says something I always have to listen and she just came out with an article that already has people talking. Janet’s article is in Forbes and it is titled, “Business in China: My Painkillers Aren’t Working Anymore.”  To say it starts out strong would be an understatement:

This just in – a Happy New Year note from a friend I’ll call “Hank”, who has lived and worked in Beijing, on and off, since 1983.  ”Things are hard. The Chinese are (expletive deleted) with American companies here in ways beyond anything I have ever seen.”

That is saying something, because 30 years of working in US-China business has taken Hank into some fairly ugly situations. There was a time when the business landscape in China was nothing but regulatory gray area, and when business plans went well into execution phase before it became clear that they were based on massive misunderstandings. Someone had to figure out what went wrong;  ask the questions no one asked before.  Fire people, carefully, who were holding hostage the operations; renegotiate deals that took two years to negotiate the first time; track down the holders of fraudulent paper.  Headquarters never wanted to know the details. I had to do some of those things.  Hank did it more – chasing down bad joint venture partners, bad deals, bad loans.  I got death threats once in a while, but I’m pretty sure Hank had bodyguards on speed dial.

Carmosky then goes on to argue that China does not play fair when it comes to foreign companies doing business in China and we should not expect it to play fair any time soon:

We’re stating the fact that, while the board is identical visually, the Chinese are playing chess and we are playing checkers. We need to accept that competition is not between firms (American firms and Chinese firms), but between our firms and China’s government.  If the objective is winning, we should teach more of our people the game as it really is being played. Don’t blame the people who do the dirty work for not being team players. The real issue is that head office doesn’t have a team. They have pain killers, denial, and the habit of indulging in the wishful thinking that the Chinese will start acting like us soon, or else…? We’ll get stronger pain kllers, right?

I pretty much have to agree.  I say that because I have already received two emails from two of the people I most respect on China’s front lines and both of them say essentially the same thing.  They both come from people who have been deeply involved with doing business in China for more than a decade and they both say that Carmosky has completely nailed it and that things have never been so bad for foreign companies in China as right now. They both assert that China is much more concerned about face and about nationalism and about keeping its citizens happy than it is about the few thousand jobs that any given foreign company can provide.

I also keep hearing the same sorts of thing from my firm’s own clients.  Just today, I spoke with a very savvy China veteran who contacted us to provide legal assistance to a company in which he is a part owner.  During our conversation, he told me that he would never have an American company own a China WFOE outright because that simply presents too easy a target for China.

What I can add to all of this is that we have seen a definite tightening in the enforcement of all sorts of laws against foreign companies. Almost without exception, the foreign companies and foreign individuals getting in trouble in China were skirting Chinese laws at least a little bit.  But at the same time, we are seeing foreign companies and foreign individuals taking hits for doing things that nobody much cared about as recently as one year ago.  Our lawyers’ response to all of this is to re-emphasize that if you can do business with China without having to do business in China, you should think long and hard about that path.

Are you seeing what we’re seeing?

  • http://www.inpraiseofchina.com/ Godfree Roberts

    Given our overt hostility–in thought, word, and deed–towards China, their pushback is hardly surprising.
    That we’re surprised suggests that we’re accustomed to saying and doing whatever, and threatening whomever we wish….without even being aware that we are doing so.
    Better manners would be a great start.

    • Dave Stewart

      “Our hostility?” Do you have a mouse in your pocket?

      If you read the linked Forbes article, you’ll see that this line of thinking is the point, and the problem. It’s guilt by association. By nationality, even.

      “Everyone thought that modeling the structure of western capitalism would cause commercial behavior in China to evolve. We expected that Chinese would focus economic growth around the logic of The Firm, rather than the logic of The Nation.

      Hank thinks that the current unpleasantness – that where the giant household name multinational he works for, which has invested billions into China over decades, which employs many thousands of Chinese in many many Chinese cities, pays lot of Chinese taxes and etc. is getting worked over by Chinese regulators and partners – is “payback for America’s handling of ZTE and Huawei.” In other words, Chinese enterprises felt they were treated poorly in America, and turnabout is fair play. ”

      Where you happen to come from, it seems, often matters more than what you do. This is a big risk for companies (or even your average expat!) that just want to compete fairly.

      Nationalism is just tribalism writ large, but it can’t be ignored.

      • qu.wen

        In fact in many so called important areas,foreign companies(especially US and European companies) are treated more poorly in China is a Industrial policy country

  • ChinaUnplugged

    I think Janet gets it right. Things are getting more difficult for foreign companies, even while many things have gotten easier. Janet builds on her great ability to explain what motivates the Chinese people, government and its companies as opposed to the same in the West. She also builds on the points that Ian Bremmer makes in “The End of The Free Market: Who Wins the War Between States and Corporations?”; that mostly Western, Corporate Capitalism is facing a stiff challenge from State Capitalism. The battles are between companies, like Apple and Samsung versus government companies like China Mobile, Exxon vs Sinopec, etc.

    I don’t think the push-back is sustainable for China though. A country that needs new ideas, innovation, and a sharp movement up the “U curve” toward consumption and services can ill-afford to push so hard that foreign companies and governments no longer can/want/will do business in and with China.

  • Tim

    I agree with you here. I found Janet’s piece short on specifics but packed with metaphor and broad strokes that leave you with little actionable advice – except to hire a consultant. Doing business in a specific industry in China is not an overwhelming task that has gradually gotten more difficult. If anything, the pool of knowledge has grown, with the Chinese becoming more international.

    I work with foreign investors entering the market and I have not seen any substantive change in the last 6 months on a macro level. You still have to be willing to manage risk not just avoid or minimize it; the State and Local government is not interested in your money or the few jobs you are bringing to the market unless they consider it substantial; and it’s still not a level playing field for foreigners.

    Nothing new here.

  • http://www.inpraiseofchina.com/ Godfree Roberts

    Both candidates in our recent Presidential elections promised to “bring down China”. We employ salaried (NED) ‘dissident’ Chinese who publicly disparage and advocate the destruction of the Chinese State (Liu Xiabo, the Dalai Lama and Ai Weiwei, among many). We regularly, publicly vilify and criticize the Chinese for ‘human rights’ offences (of our own design) when we are the leading destroyers of human rights – domestically and abroad.
    We have bombed Chinese territory, publicly humiliated it on the high seas by stopping its vessels and by sailing war vessels and flying military aircraft into its space. We’ve excluded it from international bodies like the ISS. We’ve invited all of China’s asian-Pacific trading partners to join a new trading bloc that excludes China.
    We’ve supported a renegade Chinese warlord and armed him and his successors for 70 years. We’ve ringed the country with military installations whose only plausible reason for existence is to attack China. We’ve stimulated our Japanese and South Korean puppets to threaten and (very deliberately) insult China and goad it.
    What’s fascinating about all of this dog-in-the-manger activity is that it’s not working and we’re losing. Comprehensively and quickly.

  • http://www.inpraiseofchina.com/ Godfree Roberts

    You’ve got a point about ‘business as usual’. That MO is familiar to any dispassionate observer. I remember the Bic Corporation’s attempt to take over Schick (and put some serious mass-marketing muscle into it) and how Congress intervened and blocked the deal. That was before the convenient days of ‘terrorism’ as an all-purpose label.
    Janet’s explanation is undeniable in its logic. Yours is undeniable because you’re pointing out a familiar mechanism in action. Mine is the most emotionally satisfying. Chinese are far from being emotionless automatons. We all know how much real, deep emotion is contained in the collective Chinese breast bursting to show the world what Chinese civilization can do and be. We may have forgotten, but they certainly have not, that until recently we commonly treated them with contempt, publicly, simply for being Chinese and that we are still actively threatening them and thwarting their efforts to recover. Let’s not bullshit ourselves about what we’re up to.

    • Other Mark

      I’m uncertain who you categorize as “we” in your final two sentences. I certainly do know many wonderful, intelligent, well-intentioned Chinese people who wish to show the world how great China is and will become. The western view of China is often inaccurate, and this extends to generalizations of morality and business. As Dan points out, these are often misguided. However, to say that “we” (non-Chinese) have been collectively focused on keeping China down. That is no more accurate than the common viewpoints held by Chinese who associate “你们老外” with a particular view, behavior or attribute. Reality is bigger than that.

      At day’s end, China has to take some measure of responsibility for the reputation it holds, rather than pointing to some external boogeyman who has been holding things here back. I believe we could all point to a number of individuals and organizations that stand in the way of Chinese progress, and only a fraction fall outside of China.

  • qu.wen

    As a Chinese,I have to say,the key point in your industry is that are at a huge disadvantage compared to local firms.So local firms don’t need ask government for help.But in most industries,such as movie ,vedio games and so on.Foreign companies are not welcomed by China government because they have competition with local firms having government relationship

  • http://www.facebook.com/kenny.miller.754 Kenny Miller

    Just remember, doing good business in China is mostly about good guanxi. To be successful now, you must have a good established relationship with everyone, whether it is your suppliers, shipping company, government, or whatever. Without this you will always have problems.

    Over the last 10-20 years many factory owners have become very rich. Many care more about face now than they do about more profits. Of course they care about profits, but i feel it is not as important as face now. For example, i have been doing business with a furniture factory for many years. i used to go there and mostly discuss business with the owner, have dinner and leave. Now when i go there all he wants to talk about is how he has a nice room for me at the hotel and what time we will go to dinner and ktv after. He actually goes to ktv almost every night. Now, if i go to ktv with him every couple of weeks he just approves any orders i give him.

    This has also happened with the government. One of my factories was trying to get the tax rebate from the government. If you do business here, you will know that sometimes it is very difficult to get this. So, a couple of the tax guys come over, we take them to a nice dinner, then out to ktv and treat them like kings. The next day the factory got the rebate.

    Now, this is just my personal experience here in China. but by spending a lot of time working on guanxi over the years has paid off tremendously. Do not expect to come to china and start kicking ass the first year you are here. sometimes it takes months and even years to build enough guanxi to get what you are after. my advice, never ever turn down invites and work on those relations.