I was interviewed last night by a reporter writing a story on foreign companies doing business in China. At one point, she asked me what I saw as the best business opportunities for foreign business in China. And I referred her to this post, China’s Five Best Business Opportunities, in which I list out education, healthcare, food, clean-tech/green-tech, and software. In that post, I noted that I have been pushing these same five industries for years.
Now I am just not so sure.
Let’s look at each of them.
- Education. Everyone knows China is big on education and everyone knows China is particularly big about its best and its brightest (well, its richest anyway) getting a foreign or a foreign-like education. So even though some aspects of China’s education business are shut off to foreigners, this does remain a prime area for foreign business. More anecdotally, our education clients, spanning a massive range of businesses, are almost universally thriving by doing business in China or with China.
- Healthcare. Everyone knows China is aging, getting wealthier, and seeking to improve its healthcare. All of this is almost a perfect storm for those in the healthcare field. But healthcare is a big field and much of it is a minefield of regulation, corruption and/or other assorted difficulties. Though no doubt this is overall a great field, it certainly has its issues.
- Food. Everyone knows China wants better and safer food and I am an unabashed optimist about the role of foreign food in China. Without exception, every one of our clients that has fought through the requirements to be able to get their food product (of all kinds) into China, be that on their own or through a distributer, is thriving in China.
- Clean-tech/green-tech. Everyone knows China has nearly limitless pollution problems and everyone knows that the Chinese government is concerned about that. But this is a tough field for foreigners because it is one in which government connections are too often critical. We have clients that have succeeded spectacularly and we also have clients with top tier products and management who just cannot (and will not) buy a break in China.
- Software. Everyone knows China (like everyone else) wants better software. The biggest hurdle I see for software companies in China is pricing. A number of our software clients have told me that Chinese consumers and businesses are “not accustomed” to paying high prices for software and their Chinese competitors are accustomed to selling software at rock bottom prices. On the other hand, our clients that sell highly specialized industrial/commercial software seem to be doing just fine.
I can tell you one business of which I would be wary of starting in China: Corporate sleuths on edge after China detains foreign consultants.
But what about China for foreign business overall?
To that I turn to a “ChinaFile Conversation” from just yesterday, entitled, Is Business in China Getting Riskier, Or Are Multinationals Taking More Risks? The conversation is between the following China luminaries:
- Arthur R. Kroeber, Managing Director of GaveKal Dragonomics, an independent global economic research firm.
- David Schlesinger, Founder of Tripod Advisors, a China business advisory company.
- Damien Ma, Fellow at The Paulson Institute, where he focuses on investment and policy programs and the Institute’s research and think tank activities.
- Steve Dickinson, co-blogger here at the China Law Blog and the lead China lawyer for our law firm, Harris Bricken.
Krober starts the discussion by essentially saying things are still quite good for foreign companies doing business in China or seeking to do business in China and the numbers bear this out:
But the headlines are deceiving. Data and company surveys both show that China continues to be a magnet for foreign firms. Greenfield foreign direct investment, according to the Ministry of Commerce, has held steady at US$105-115 billion a year since 2010, well above the pre-crisis level. Inflows in June exceeded $14 billion, the highest monthly total since 1997. Broader data from the central bank, which include reinvested earnings, show that foreign companies committed a quarter of a trillion dollars to China in 2012.
Member surveys by foreign chambers of commerce consistently reveal that despite their discontent, foreign companies in China are still quite profitable and generally want to increase their investments. A walk down any Chinese high street will quickly confirm these numbers: foreign brands occupy a far larger and more visible slice of the market in China than in most other Asian countries, including Japan, Korea and India. And big cities are filled with tens of thousands of young foreign entrepreneurs who find it easier to start a new business in China than in their home countries.
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On the whole, though, the evidence shows that foreign companies win quite a bit more than they lose.
Schlesinger says that despite recent headlines, China is still the place to be for foreign businesses and dalliances with countries like Myanmar will only reinforce that:
The current onslaught of bad news about China—much of it real, some of it the pendulum-swing of pundits piling on—certainly makes China business seem like risky business. A slowing economy, growing social pressures, looming crackdowns or public relations campaigns against foreign companies—none of these are good signs for companies hoping to swiftly reap the fruits of their labors.
Some executives are scurrying to look for the next best opportunity in Myanmar or the Philippines or Indonesia. But for those who stay, and for their boards, this may be a necessary reset in expectations that actually leads to healthier and more sustainable investments.
Now that China bears are having their day, smart companies will go back and ensure the basics are right. That’s hard, slow, unglamorous work. But it sure beats having your executives jailed, your reputation sullied or your cut-corners exposed.
But the terrain for MNCs in China has surely gotten more complex—and at times contentious—but those are relative terms. And most of the changes in the operating environment owe to what Arthur described as China becoming a more “normal” country in which to do business. Normal, of course, being filtered through the detritus of “Chinese characteristics”—uneven regulatory enforcement, opaque decision-making, relationships, and so on. It is worth reiterating the point that China has transformed rapidly from a capital-starved country to a capital-abundant one, and it has learned the rules of the game at the WTO and can play by them effectively. In combination, these developments make for an attitudinal shift in how China may be approaching foreign MNCs—if they no longer really need the capital, then what do they need now?
It is true that over the past 15 years, China has adopted a formal legal system that at least on its surface resembles that of a developed country and is, in that sense, “normal.” The paradox is, this normality has led to greater risk for foreign companies rather than reduced risk. The environment in China in general has not become more risky. However, the risk of violating Chinese law has increased substantially.
In the old days, foreign companies just ignored Chinese law and relied on connections and the rest to operate for maximum profit. These profits were high enough that the time and effort of working in the chaos of China was justified. Over the past 10 years, the system in China has changed dramatically. This is the Wild West to Chinese law and regulation no longer works for foreigners.
This puts foreign companies operating in China in a difficult situation. The fact is that Chinese companies routinely ignore Chinese law. So, foreign companies operating in China are faced with a major decision that carries big risk. They can follow the law and struggle or fail in the Chinese market or they can act like their Chinese competitors and violate the law in order to compete on a level field.
The risk is: as China becomes increasingly stressed by the declining growth of the economy, the government has shown that it will seek foreign scapegoats. Drugs are too expensive: it is the fault of the foreign drug companies. Food is not safe: if is the fault of the foreign fast food companies. Mobile phones are defective: it is the fault of the foreign phone manufacturers. The China Dream has not been realized: the foreigners are holding us back. As a result, taking action against foreign violators of Chinese law is an obvious way for the Chinese government to deflect attention away from the deeper problems in the Chinese economy and society.
Dickinson goes on to say that foreign companies doing business in China or seeking to do so must ask themselves whether they can both follow the laws and be profitable, or not.
China opportunities for foreign business, what do you think? Better now than ever? Worse? The same? Mixed, depending on the industry? And what are the best opportunities anyway?