doing business in china - university of denver

7/28/2019 Doing Business in China - University of Denver

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Doing Business inCh ina - A

Pract ioner 'sPerspect ive

University of DenverMichael T. Byrnes

January 22, 2009


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Agenda

China Overview

China Cultural Traits

China - Why Do Business in China China A Rapidly Developing Economy

China Elements of a Strategy

China How to do Business China Where to go for Help


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Overview

Geographyand

Demographics


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Geography

Roughly same latitude range as the US

Roughly the same size 3 m sq miles

High Percentage of mountains and deserts Arable Land 7 % or of US arable land

Bounded by 14 countries most have had

adversarial relations in the past.


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Demographics

Population - 1.3 billion people One Child policy to limit growth, but social impact Population will peak at 1.6 billion in 2030

70% of population located in south and east costalregions 70% of population lives on the land Population and Employment China must create

13 m new jobs each year Population Trends Aging population and declining

births Han make up 94% of population 55 different

minorities


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Cultural Traits


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Business Culture

General Principles

Relationships

Great Family hierarchy -

Ritual and protocol

Risk Taking acceptance of responsibility

Trial and Error

Initiative

Fear of negative reporting


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Reading List

The Immobile Empire Alain Peyrefitte

The Chinese Looking Glass Dennis Bloodworth

Village Life in China Arthur D. Smith

1 Billion Chinese Customers James McGregor Beijing Jeep Jim Mann

The Tyranny of History: The Roots of ChinasCrisis W.J.F. Jenner

1587: A Year of No Significance Ray Huang

The Call John Hersey


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Why China?


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Why China?

China a special market- A market of significant Size

- A market of significant Growth

- A market of significant Resiliency

- A market with increasingly Normal business environmentbut not without Risk

* Maturization of reforms and opening up

* Chinas entry into WTO

* Business friendly government policies

- A global market with virtually all major MNCs present

- A global low cost manufacturing base

- Large reservoir of high quality low cost engineering talent,skilled labor and a developing management pool


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China FIE Profitability

Profitability of US CompaniesAmerican Chamber of Commerce Survey in May 2008Over 800 companies from Beijing and Shanghai

74 percent of respondents report either profitable or

very profitable Over 37% report they have higher margins in Chinathan globally and another 31% report that theirmargins are comparable

There was a slight decline in profitability from the2006 - 2007 surveys.

Challenges Economic Slowdown EconomicNationalism - Local Competition Labor Cost andBattle for Talent IPR - Market Access


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Trends and Opportunities Infrastructure

* Water* Power Transmission/Distribution

* Mass Transport, Sea and Air Ports and Marine

* Commercial, Residential, Industrial, Public

Environmental and Energy Efficiency* Renewable Energy * Clean Coal *Waste Management

Manufacturing - Global manufacturing base development* Automotive

* Electronics/Telecoms

* OEM development

Safety/Securityfood, mining, industry, residential Services Logistics and Distribution

Health and Elder Care - demographics


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RDE and Mature Market

Rapid Developing Economy* Scarcity of resources

* Undeveloped infrastructure

* High operational intensity

* Mid-level leadership* High level of uncertainty

* Cultural barriers

* Underleveraged brand/reputation

* Distance

* Need modify BU and personnelmetrics

* Requires pre-emptive investment

* Core values more critical, butnormally weak

* Boston Consulting Group

Mature Market* Resource-opportunity balance

* Well established infrastructure

* More regular operational tempo

* Senior leadership* Predictability level high

* Cultural conformity

* Established brand and reputation

* Home turf

* Metrics well tested

* Investments in place not need

* Core values assimilated


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Challenges for Foreign Businesses

The need to understand the role of the government The constancy ofchange

Regulations and Standards

Authorities

Market conditions Corruption, IPR and rule of law

Increasing economic nationalism

Managing control and complianceacross the board

Need to deal with local competition and price pressure Pace and depth oflocalization

The right organizational structure

Corporate Engagement


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Elements of a

Strategy


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Operational Requirements

Strategic vision from the top the need to thinkbroadly

- Aggressive Government Relations and Reputation Building- Cost, Product and Management Localization

- Pre-emptive investment andCorporate subsidization- Appropriate control structure to insure compliance- Right balance between sales and coordinated operations -Manufacturing, R&D, Sourcing and Logistics- Expanded presence and partnering

- Significant focus on HR training and development- Common processes and shared facilities and services


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Government Relations

Key Objectives

Reputation enhancement

Problem/Issue resolution Policy watch and regulatory shaping

Direct Commercial Support

Where possible align your goals withthose of the government


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Why Government Affairs?

PRC government plays a significant role inbusiness in China

THE PLAN China a command economy

The regulatory environment

Partners, customers, suppliers, competitors,

service providers, and media are controlledby the Party and the parallel governmentbureaucracy.


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GA Targets

Central Government Focus on the macro-level andpolicy

Provincial Government Focus on implementation Industry associations - playing a more and more

important role in developing standards and formulatingpolicy. NGOs - they are an emerging and new power in China.

They monitor government behavior and the actions ofenterprises

Think Tanks - universities, State Council ResearchCenters, Ministry Research Centers. State Media - the Chinese propaganda department

provides guidelines to the media


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GA Principle - Win-Win

Companies should implement programs seeking awin-win solution to promote a regulatoryenvironment favorable to business objectives

Full Compliance - labor, environment, tax, safety,customs

Provide goods and services that Chinaneeds/values

Long-term commitment

Corporate Social Responsibility

Never complain but constructive dialogue


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Issues List - PRC

Standards/Codes/Licenses

Labor Contract Law

IPR Protection

Market Access

Customs Procedures

Tax Unification Corruption

Economic Nationalism Anti-foreign sentiment


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GA - Helpful Hints

The Companies senior executive in China should take thelead on GA with strong support from a local team GA should be both focused (ISSUES) and general(REPUTATION)

GA is not based on Good guanxi front vs. back door Be a good citizen faithful compliance and communitysupport Remember that GA not only includes the PRCgovernment but also the USG

Leverage all resources available Be open to helping others even competitors in somecases Insure the understanding by Corporate executives of thekey importance of GA in the China market.


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Localization

Cost Structure* MNC cost structure = harder to compete* Threat is indigenous competition* Never get too indigenous - nor do you want to

Product - Need for a Development Center

* Develop a product that meets market cost and functionality fit* Develop product for China that serves as a benchmark forglobal cost* Develop and support product/services to meet needs of thelocal market

ManagementLocalization means local, with acontinuing need for selected expats


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West/Northeast Geo-Strategy

Focus on developing markets in Chinas interior

Leverages PRC Government drive to develop the interior

US$150 + billion to be spent on infrastructure 2006-2011

Power distribution

Environmental - WWW and pollution reduction Transportation - Light rails, subways, airports Natural Resources - Coal Mining, Oil & Gas, Pipelines

Local governments are highly receptive to foreigninvestment and presence

Ability to use government relations to develop businessopportunities

Relatively low level of competition

f G


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Positioning for Growth -

Partnerships

Partnering with local firms will in some casesbe necessary and now in many cases feasible* Local firms especially private firms - increasinglyunderstand the win-win logic of commerce

* Local firms have a significant home court advantagein cost, contacts and in understanding the market

Focus on:* Intellectual rather than physical capital* Engineering and Manufacturing* Firm that have licenses* Channel enlargement but never easy

* Private firms that demonstrate good management


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Support OpportunitiesChina Help Desk


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Where to Get Help

US Foreign Commercial Service Chambers of Commerce US, Beijing,

Shanghai Law firms International and local Quality Brands Protection Committee (QBPC) Industry Associations such

CCPIT China Council for the Promotion ofInternational Trade Consultants - TAX, Government and Media


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Contact Information

Michael T. Byrnes Senior Advisor - Yuan Associates (Beijing)

* Government Relations

* Business Start-up

Senior Advisor Amer-China Partners (Beijing)* Due Diligence

* Background checks, vendor vetting

* IP Investigations

* Dispute Resolution

TEL: 401 243 4511 E-mail: [email protected]


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Thank you.Questions?

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Common Errors

Irrational Exuberance

Trust but no verification

Failure to take proper legal and financial precautions

Acceptance of this is the way we do it in China

Worry about offending Chinese hosts

Believing in Friendship

Not getting the home office on board

Failure to recognize the cultural/systemic differences

between China and the home market Not establishing company culture and values

Not knowing when to say NO


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Chinese Government Structure

National Peoples

Congress

State Council Central Committeeof the CPC

Central Military

Commission

Peoples Political

Consultative Conference


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Government Affairs The

Environment Time-consuming to find the right officials in a PRC agency,

association, or think tank and ensure those officials haverelevant information.

Government officials have little incentive to share

information across departments. Government affairsexecutive must have several meetings on the same topicwithin one agency.

Meeting senior-level government officials is much moredifficult than in the past, and companies should not expect

to make courtesy calls with senior government officials. Successful government affairs programs must ensure that

the company delivers a uniform message to governmentofficials about who represents the "face" of the company


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Government Affairs The

Environment - II In the past, the Chinese government only heard a small

number of voices. But now they hear more and morevoices - trade associations, domestic business, mediaand NGOs.

The question is whether you want to have growth byrelationships or growth by policies. Relations areimportant but they are not enough. You must work withthe Chinese government to stimulate the growthenvironment

Corporate reputation versus issues management. Everycompany has issues, but it is better to proactively buildcorporate reputation than be seen to be responding toissues. Corporate reputation is your insurance policy


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Government Affairs Crucial

for Business Development

For MNCs government relations operate on thenational, provincial and municipal levels

Critical purchasing influences Focus on provincial and municipal levels Enlightenment of government officials at all levels

Administrative and organizational function Navigate the branches of government influential to industrial growth Improve the overall conduct of business through education of Rockwell

Automation management and employees

Monitor and influence changes in policy and regulatory environment Focus at national level Especially crucial in tax, customs, and WTO implementation Business opportunity watch Standards, electro-mechanical - networks - safety


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The How To

The Role of Guanxi - particularly the beliefthat a company must rely on someone with

connections to achieve its goals--make it

difficult for companies to conduct governmentaffairs effectively.

The successful government affairs professionalin China places greater emphasis on

interpersonal, communication, analytical, andcritical thinking skills than on personalrelationships or contacts.


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Negotiations China Style

Anything is possibleeverything is difficult andremember - the negotiation is never done

Know the Objective know the other side

Understand and set limitsdont be anxious dont

get involved in a pure price discussion Explain your position be clear be direct - make

concessions reluctantly stress shared

responsibility/gain

Dig in or flex - dont get emotional decide beforehand where to give

Always support your team no public disagreement

Always have your own interpreter

BE PREPARED TO WALK AND TO LOSE/WIN


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Cultural Traits General vs. Specific

Man vs. LawGuangxi and relationships Group vs. Individual core group is the family Family vs. Common Good Intuitive vs. Scientific -

Hierarchy vs. Matrixclean chain of command Form vs. Substance - issue of FACE Face vs. Results Shame vs. Guilt Order vs. Chaos Hustle vs. Planning Concrete vs. Abstract impact on services Indirect vs. Direct Backward looking/conservative vs. Forward looking


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Government Relations - Structure

ISSUES: The lower levelsof government require andmerit the most attention,not the least

StateCouncil

Ministries

Regional/Provincial

Local & Municipal

REPUTATION/POLICYSHAPING: The centermerits the most attention

doing business in china - university of denver

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