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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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:

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.

 Schlesinger goes on to say that the downturn in media perceptions of China creates opportunities for smart companies that go to China and do things right:
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.
Ma sees China getting tougher mostly because it is getting more “normal”
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?
Dickinson notes how the old days of foreign companies getting away with ignoring Chinese law is over and that succeeding in China today requires abiding by Chinese law:

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?

Today’s Wall Street Journal has an article entitled, China Plans to Keep Tight Control Over Seven Crucial Sectors, reporting on those industry sectors over which “China plans to keep an absolute ability to control.”

CCTV reports that China’s State-Owned Assets Supervision and Administration Commission has said it plans to cut the number of state firms almost in half by 2010, but keep a “tight hold on critical areas: military industry, power and the power grid, petrochemicals and oil, telecommunications, coal, civil aviation and shipping.” The report did not detail the types of control Beijing will exercise over these sectors.

These seven industries (to which I would add media) are likely to be the most difficult for foreign business involvement, so if you are thinking of doing business in China (or even with China) in one of those industries, you had better do a lot of homework. In particular, you better make sure that your involvement is both legal and coincides with Beijing’s goals. Cause if you get on the wrong side of either of those, things will not go well for you.

What do you think?

 

Elizabeth Economy just did a Washington Post article on how and why China is blaming foreign companies for China’s own pollution problems. Entitled, A Blame Game China Needs to Stop, it discusses how China is seeking to diffuse international criticism of its environmental record by “launching a political campaign that lays much of the blame for the country’s mounting environmental problems squarely on the shoulders of foreigners.”

We told you so.

Ten months ago, in a post, entitled, Is China Going Green? — Part VII — Doesn’t Matter Because You Should No Matter What, we wrote how “people often get very emotional about the environment and I can see Chinese citizens getting very angry at a foreign company whose units in China are less environmentally sound than their units in the United States or elsewhere.”

That day is now.

The Washington Post article notes “growing international and popular discontent over the country’s environmental crisis,” has led China’s leaders to tap “into anti-foreign and nationalist sentiments to deflect attention from their own failures”:

In late October a top environmental official, Pan Yue, accused the developed countries of “environmental colonialism”: of transferring resource-intensive, polluting industries to China and bearing as little environmental responsibility as possible. At the same time, a leading member of China’s National People’s Congress claimed that foreign companies were not only exporting their waste but also underpaying Chinese workers. When a Chinese nongovernmental organization released a list of 2,700 companies cited for violations of China’s water regulations in late October, the ensuing media frenzy focused exclusively on the 33 multinationals, including 3M, Panasonic, PepsiCo and DuPont, and ignored the more than 2,600 Chinese companies similarly cited. Not surprisingly, Chinese bloggers have taken up the call, discussing the “eco-colonialist” policies of multinationals and calling for “eco-compensation.” Even environmental activists who have worked closely with multinationals have accused these corporations of not practicing what they preach.

As the article notes, “scapegoating foreigners can be an attractive policy option.”

It most certainly is.

As we have written previously, and as those doing business in China well know, forcing foreign businesses to abide by Chinese laws that either do not apply to domestic companies, or which domestic companies ignore, is going on across the board. Foreign companies are to unionize, while domestic companies are not generally required to do so. Foreign companies are to pay their taxes, while domestic companies often do not. Foreign companies must operate fully legally, while domestic companies typically need not.

When Westerners proclaim (as they fairly often do) to our China lawyers that China’s laws are essentially the same for foreign companies doing business in China and Chinese companies doing business in China, we typically respond with something like, “and that means what in real life?”

So what’s a foreign company doing business in China to do? You can get Beijing to change its policies and become even-handed — just kidding.

Or, you can come clean by following all rules. Register your company in China; the crackdown on this is already in full force. Pay your taxes in China. Do not pay bribes. Ever. Follow international environmental standards. In other words, forget about the so-called “Chinese way,” as that never really applied to you anyway, and it certainly does not apply to you now. Complain all you like, but the wise thing to do is to heed the advice of our own Steve Dickinson, and start recognizing there is a “new paradigm” in town and you as a foreign business must abide by it.

For more on the Chinese government’s distinguishing between foreign and domestic businesses, check out, China Policy — Let Mikey (Foreigners) Do It and China’s Corporate Tax System to Become Unified — Someday.

Larry Hotaling was the final first day speaker at the China Forum.  Mr. Hotaling (who I have heard described as an “operations genius”) spoke on “China/India: The Collaborative Future is Here.”  Mr. Hotaling heads up Global Diligence, a Hong Kong based market entry and operations consultancy whose tag-line is “Your Bridge to Asia.”

Mr. Hotaling began by talking about how much easier it is to start doing in China than in India. He also noted that India’s infrastructure is much worse than China’s and how if you have more than 100 employees in India, you will need government permission to fire anyone.

Hotaling said manufacturing companies must deal with both China and India. Though this is going to be a requirement, Chindia as he and others are starting to call it, is also “an opportunity.” A company’s tasks should be done where the company can secure the best resources at the best price:

  • Product definition will be in the United States or the European Union (EU).
  • Product design and tooling will be in India.
  • Tooling build will be in India or China.
  • Product manufacturing will be in China and/or another low cost country like Vietnam.

Hotaling then compared China and India using a whole slew of different factors. I generally agreed with Mr. Hotaling’s assessment of China and India, but I disagreed with his brief assessment on the state of the two country’s legal systems. Mr. Hotaling described China’s legal system as “poor” and India’s as “excellent (British Model).” I would describe China’s legal system (and this is for business only and only in those parts of China where most foreign business is conducted) as fair and improving. But that is just a quibble.

Where I think Mr. Hotaling is wrong is his describing India’s legal system as excellent because it is based on the British model. The way to judge a legal system is not on its model, but on its reality. China has some of the most modern, most clearly written, and most thoughtful corporate, contract and IP laws in the world. China’s legal problems arise not from the system on which it is modeled, but from poor implementation. I think the same is true in India. I note also that India has yet to sign on to numerous international treaties relating to IP protection, including the Madrid Protocol on trademarks, which China signed more than ten years ago.

After Mr. Hotaling spoke, I talked with two forum attendees about their companies’ willingness to outsource design and engineering to India. My theory was that Midwest manufacturing companies (most of the attendees) would oppose sending such tasks overseas because they are considered the “heart of their business” and to do so would also mean laying off their friends. If a two person survey can be deemed conclusive, I was flat out wrong.

Both people with whom I talked (one was head of engineering and the other was a high level executive) told me they thought outsourcing such work would allow their companies to take on more work and would, if anything, increase company jobs.  One said that securing overseas engineering help would reduce turnaround time and allow his company to secure more projects. Another said his company was already maxed out on the engineering and design side and bringing in more engineers and designers from outside the company would allow it to expand.

Chindia’s coming.  Or, if we are to include Vietnam, should that be Chindiam?

By: Steve Dickinson

in “Amazing Lawyers And The Criminal Side of China Business,” we talked about the need to be careful regarding business activities the Chinese government considers criminal that are not typically seen as such in the United States or in Europe.  A reader posted a comment asking us to give some examples as it “would be monumentally inconvenient” were he to be charged with a crime in China.  I agree, so here goes.

In the U.S. and in Europe, it is quite uncommon for a dispute between two business people to become subject to criminal law enforcement. This is not true in China. In doing business in China, you need to be aware of two things: the scope of economic crime there is far broader than you probably expect and the Chinese party with whom you are conducting business is far more likely to pursue a criminal complaint than you would expect.

China has developed an elaborate set of laws concerning ‘economic crimes’ that parallels its civil law system. The area of economic crime is quite extensive. My Chinese textbook on economic crime is over 1500 pages long and it describes 105 separate crimes, divided into eight categories. Dealing with economic crimes has become an increasingly large portion of the workload of the average Chinese court. Many of these crimes are garden variety crimes, such as smuggling or passing bad checks, that would be considered a crime in any jurisdiction. However, a whole host of crimes applies to areas most Western business people would think would be dealt with by private litigation. For example, one general area of crime is “Disturbing the Market Order.” Another is called “Damaging the Management Order of a Company or Enterprise.” Crimes in these categories can be very broadly described and can often be applied in areas that are surprising to a Western business person. For example, criminal fraud is very hard to prove in the United States.  It is exactly the opposite in China.

Here are some examples of the ways Western business people can find themselves in China’s criminal system:

There is a sale of product. The Chinese party complains that the product is defective. The foreign seller insists the product meets standards and it is the buyer’s own processing that caused the problem. This normal business dispute may be transformed into the crime of sale of defective products.

A Chinese company pays a substantial deposit to a foreign service provider to develop a sophisticated market access program for the United States. There is a dispute over the quality of the service provided by the foreign provider. The foreign provider does not collect the remainder of his fee, but refuses to refund the deposit. This normal business dispute may be transformed into the crime of contract fraud.

A Chinese company insists on a guarantee of payment from a foreign seller through deposit of promissory notes issued by a foreign party. When the Chinese party attempts to collect on the notes it cannot do so due to banking regulation or some other technical matter. The foreign seller does not make alternative arrangements for payment. This normal business dispute may be transformed into the crime of financial fraud.

The offended Chinese business person is also much more likely to pursue a criminal complaint than his Western counterpart. This is particularly true outside of the major cities, where the private court system is less developed. There are a number of reasons for this. First, there is the longstanding tradition in China that law is basically a criminal matter. Many Chinese judges are more comfortable in handing out criminal sanctions than deciding the merits of private commercial activity.  Second, many Chine businesspeople are more comfortable beseeching the police, the prosecutors, and/or the courts for justice than pursuing justice on their own. Third, there is an economic incentive. If the state pursues the claim, the offended person or company saves on the expense of hiring a lawyer. Fourth, as part of the criminal action, the state will seek to force the defendant to pay redress to the offended party. In China, the state is more likely than a private party to be able to obtain assets from a defendant.

Bottom Line: If you are involved in a business dispute in China, you should immediately consider the risk it will be transformed into a criminal matter. If the other side in a business dispute threatens criminal sanctions against you, you should take this very seriously. You need to make sure you are completely prepared to deal with the issues. Moreover, you need to be completely sure that what you consider to be an entirely innocent commercial dispute is not in fact a potential crime under the wide application of economic crime applied in China.

China will be giving provincial and local governments greater authority to approve foreign direct investment (FDI).  China’s Ministry of Commerce just announced that, beginning March 1, 2006, local commerce departments and state-level economic development zones will be authorized to approve the establishment of foreign invested companies.

Despite this announcement, we find it hard to believe Beijing will not continue playing a decisive role regarding entry of certain kinds of foreign business.  At the same time, however, we view this announcement to be of major importance to foreign companies wishing to enter the China market.  It is always irritating to hear someone say “I told you so,” but, we did tell you so here, where we criticized an article for claiming a relationship with Beijing is critical for every foreign business, and here, where we talked about how Beijing’s power over business is devolving to the regions.

Foreign businesses wanting to go into China must do more than simply decide to “go to China” or to set up in Shanghai.  They should also consider the legal, tax, and business climate in various regions for their particular type of business.