Cn Reviews does a nice job covering an interesting discussion on doing technology business in China. Though the discussion seemed to focus on the tech industry, what was said pretty much applies to all businesses.

I will note what was said (in bold) and then comment.

1. Cheap Labor is not to be found in Beijing and Shanghai. I always get irritated with statements like this, mostly because I only hear statements like this from company executives trying to convince the public that they are in China for reasons other than cheap labor. I completely buy into the idea that companies go to China for way more than cheap labor. In fact, I would estimate that well over half of the companies my firm has helped take into China in the last year had reasons for going there that had absolutely nothing to do with Cheap labor; most were going there to better sell into Asia. But, the reality is that even though labor in China is way more expensive than it was five years ago, and even though when you add in the required employee taxes, benefits and pensions, salaries in China are no longer woefully cheap, and even though top tier executives are now earning six figures (in dollars), the reality is that labor costs are still considerably less in China than in the United States or Western Europe. And this is true for just about every job. I have seen what our clients pay their employees in China (ranging from factory workers, to engineers, to top tier computer programmers to executives and those rates are less than what comparable employees make in the United States.

2. Foreigners and outsiders often fail to see the diverse and fragmented character of China today. This has been so often stated that I wonder how it can even still be true. I am sure there are companies that go into China not knowing that Chengdu is very different from Shanghai, which is very different from Qingdao, which is different from Dalian, but I also think those companies either learn quickly or fail. The fact that so few “foreigners and outsiders” locate their businesses in the more remote regions of China indicates at least minimal understanding that there are differences between the regions.

3. “The mistake most outsiders make re China is that while most outsiders look at China as a single economic entity …. As economic growth around the world slows, it is fair to say that different regions within China will break out into winners and losers. Those regions with better universities will do better in research and innovation, while those areas with a large number of poor will do less well. Also, those regions which do not depend on exports orders and are more self-sufficient will fare better.” I disagree again with setting up the straw man of the incredibly ignorant foreigner who does not realize China is not one economically unified country. I have to say that no client of mine who has actually gone into China really believed that moving goods throughout China would be a piece of cake and that business in Kunming would be no different from business in Shanghai. Yet I do completely agree that some regions in China are going to thrive in the next ten years way more than others and that the traditionally high flying regions like Guangdong are not necessarily going to be the high growth regions in the next decade. I am often touting Dalian and Qingdao as cities/regions on the move due to their quality of life, their quality of local governance, and their quality of educational institutions.

4. This fragmented nature also means that provincial and local governments are in competition with each other for jobs, investment, knowledge transfer and economic development. This is very true and this is indeed under-appreciated by foreign companies coming into China. I see this every time we compare the minimum required capital for starting a Wholly Foreign Owned Entity (WFOE). We just did that and the numbers were ~$140,000 for Beijing and ~$13,500 for Qingdao. Same business, different location. And this is absolutely typical.

5. You should consider how your business can be seen as supportive of the government’s own objectives. Very true. If the government (intentionally undefined) sees your business as good for China, your path will be smooth and likely cheap as well. But if you are planning to come into China with a low margin, low skill, high polluting business, things will be completely different. It is important from day one (i.e, company registration) that you let the government know that you are there to help (yes, that is an intentional spin on the old adage about government….).

6. A VC shared how his mistake was hiring “top executives from Hong Kong and Taiwan” who were “never accepted ‘into the inner circle’ by Chinese. This then became a handicap for his portfolio companies.” Very true. I attended a seminar in Shanghai a few months ago where a really good HR person talked about the pros and cons of hiring Westerners, Taiwanese, Hong Kongers, and Sea Turtles (returning Chinese) as your executives. My sense is that the only executives who make it into the “inner circle” in China are the mainland Chinese who have been in China the whole time.

7. If nobody but mainlaind Chinese are allowed into the “inner circle,” doesn’t that mean that China is an unattractive place for foreigners to be? No, it just means that you will not be in the inner circle and if that is critical to your business, you had better hire people who are.

8. What does it take to be successful in China in 2010?  “Bring your A-Game….Success in China requires your most talented people, and your most respected players. It also requires your best products and technology. If your fear of intellectual property theft causes you to bring dated technology, then you will not likely be successful in a competitive market. If you think China is a developing country and doesn’t require your best products, then you will not not be successful. On this latter point, my own opinion is that this may be true in some markets and less true in others. Jack Perkowski of Managing the Dragon talks about the different cost perspective of different segments of the market: the foreign, the foreign-local, and the wholly domestic part of the market. No matter what, you need the best people. But the best people need access to the right technology and products to serve that market.” I agree with both positions; it depends on the industry.

9. Have a long-term commitment. Sure. How can one disagree with this?

10. “China doesn’t need foreign direct investment anymore. It needs expertise. Be conscious of what you are bringing to the table and why it is good for your partners and the country. As a corollary to the point about having to work with the government, several panelists emphasized the need to have a value proposition for China’s government and people. This goes far beyond just producing the right products for your target market. The tone of the discussion seemed to imply that a high-profile foreign company must make a case to the government and other business elites that they *deserve* to make money in China because of the value that they are bringing to the country.” I agree it is important to show you are bringing value to China, but bringing in 200 jobs IS value to China, expertise or not.

11. Expect constant change. So true….

12. Lip-Bu Tan shared one of the best kept secrets from the Western media and public – that there are extremely well-educated, far-sighted people in the Chinese government that understand the global environment, operate in full awareness of the learnings from the rest of the world, and carefully navigating all the constraints they are faced with in solving for continued and stable development of China. Come on. How many people out there really think that there are no such people among China’s 1.3 billion? Are we really to believe that it is only those people at this one conference and a few other elites who knew this?

So what do you think?

  • There must be just as many extremely well-educated and far-sighted individuals in the Chinese government; but I have a feeling their political system affords them a greater ability to focus on the longer term (10, 20 years – ‘China’s peaceful rise’) than their US/UK counterparts.

  • A lot of the things that you say are obvious to people outside of Chinese business, but they aren’t obvious to people inside.
    Also I would characterize the issue with HK/Taiwan differently. Chinese politics works with different inner circles, and there are different ways of forming relationships. For example, if your business depends crucially on good relationships with suppliers and officials in Guangdong or Fuijian, a fluent Cantonese/Min-nan speaker is *very* useful (keeping in mind that not all Chinese from HK speak fluent Cantonese and not all Chinese from Taiwan speak fluent Min-Nan). Someone from Beijing is less useful. By the same token, someone in the Shenzhen local government is most certainly not in the “inner circle” of the Chinese central government. On the other hand if you do have a friend in the “inner circle” in a Beijing central ministry, they may be able to do nothing for you in Shenzhen.
    Also, there are more than a few Taiwanese and Hong Kong people that view mainland Chinese with contempt. They probably aren’t going to be that effective at business management.
    Since Chinese business (like everything else) works on relationships, you have to see what those relationships are. There are some relationships that are unavailable/uncommon to non-mainland Chinese (membership in the Communist Party and going to the elite schools). But there some which are (i.e. going to school at Harvard and working at Goldman-Sachs). Alumni and work relationships are extremely important, and someone from HK and Taiwan that went to the same school or worked in the same investment bank as someone from the PRC is very, very useful.
    What I’m seeing here is someone got burned by one “stereotype” (all Chinese are alike), and then is taking in another stereotype (all Mainland Chinese are alike) which is also going to burn him.

  • The other question that you really have to ask is do you want your executives to be in the inner circle of Chinese decision making.
    In order to really get your executives in the inner circle of PRC decision making, they basically have to be Party members or own favors to people who are. If push comes to shove, who are they going to take orders from, you or the Politburo?
    Maybe you are in a business where having friends in the Politburo is a good thing, but you have to look at the costs. You might be able to get into the inner circle, but it’s not going to be for free.
    Also in some areas (banking is a bit one), foreign companies are especially welcomed because they *aren’t* part of the inner circle of decision making and so can provide insights and advice that is unbiased by internal Party politics.
    One thing about China is that sometimes it’s a bad idea to “go native” if you just aren’t. Think of it this way. If you are a Chinese in the United States, are you better off trying to open a great Chinese restaurant or a poor Cajun restaurant? Similarly, an American company in China has to seriously ask, whether they are better off trying to be a great American company doing business in China, or a mediocre Chinese one?
    This sort of applies to my one branding. I’m not mainland Chinese. I’m an American-born Chinese. In a lot of situations, I’m better off in Chinese society emphasizing my “foreignness.” For example, I’m very blunt, which falls into the Chinese stereotypes that people have about Americans. But sometimes you need someone that is blunt, in which you bring in the “American.”

  • One other thing, if you do manage to get one of your executives into the “inner circle of power”, good luck firing them.
    One reason that a lot of companies use HK, Taiwan, and overseas Chinese as managers is that while they have good language/culture skills, they *aren’t* very connected with the inner circles of power whether they are local or national. The problem is that if you have someone that is extremely connected, then you have much less control over them.

  • About cheap labor….
    Dan: The reality is that labor costs are still considerably less in China than in the United States or Western Europe
    This is true but irrelevant. If you are thinking about thinking about China in terms of labor costs, your alternatives are not the US or Western Europe, you are likely looking at Mexico, India, Vietnam, Costa Rica, or the Chinese interior.
    Dan: I always get irritated with statements like this, mostly because I only hear statements like this from company executives trying to convince the public that they are in China for reasons other than cheap labor.
    One big factor here is that for an emerging market, Chinese labor isn’t particularly cheap. You can get a lot cheaper labor in Angola or Uganda than you can in China. China’s advantages are relatively cheap labor combined with about thirty other things.
    Third world labor costs with near first world port facilities, freeways, and literacy rates. That’s something that is very, very difficult to reproduce.

  • EchoThreeWhiskey

    So if I set up an RO or WFOE in say, Hangzhou, which I would imagine could theoretically slash the overhead and required capital by 50+%, would it be relatively easy to expand to Shanghai or would that just be a whole other ball of wax to contend with?

  • That really depends on what you are trying to do. If you are trying to set up an office to manage a product to be marketed at middle class Chinese, then you don’t lose much by being in Hangzhou.
    If you want to do something that requires large amounts of face to face interaction (finance and real estate). Then not being in the center of the action is going to hurt you a lot.

  • Chip Wood

    China has some very bright internationals that can plan in the very long range. Consider: will there be one world win-win MULTI-lateral government in 3000 with a global population that is in agreement and enthusiastic re its laws, are productive, happy, clever, creative, and bear problem free children? Ok, 4000? 5000? Get real. That’s what Confucius was talking about re “The Way”. Does anyone in the West get elected on such a platform? (No!) How many in Western history have thought openly about where we carbon-based humans are headed in the next thousand-plus years? (Yes, many.) My take is: “One World, One Dream” is not just a marketing quip. It’s a JV plan. It’s older than the English Language. The question is, in order to realize this plan, must we first kill, as Shakespeare wrote, all the lawyers?