Globalization in China and strategy a corporation should take to enter China market
(Mar. 20, 2005)
Globalization has put Chinese domestic companies in difficulty
(boxun.com)
Dispute is still going on about whether US companies should relocate their jobs to third countries such as China. Most people know that China is a great market – huge population of 1.3 billion, cheap labor and high growth rate. Companies and governments complain about poor intellectual property protection in China. One important fact that companies do not want to speak out as it may catch attention from those care China' s development: China government has been favorable to foreign companies in its policy by discriminating its own private companies.
In early 90s, as part of government research efforts, I visited dozens of joint ventures in China. The following is what I observed:
There are mainly three levels of favorable status for business operation in China:
- Foreign invested companies have the best status in tax, less government intervene, easy access to bank loan.
- Second is state-owned companies, they have easy access to bank loan; but the managers are responsible for government, they do not have strong decision power. State companies are characterized by low efficiency and corruption.
- The worst status is private companies in China. These companies have limited access to loans (USB bank estimated 50% of the loan needed by private companies can not be filled). The worst disadvantage is: they can not operate in many industries that allow foreign companies to do business. In the past 20 years, industries have been opened to foreign companies first. In the coming years, foreign companies will be allowed to enter banking, insurance, and communication industry; while up to now, there is no schedule when the government will allow Chinese domestic private companies to enter those industries.
It is a common knowledge that state-owned companies are impotent to compete with private companies or foreign companies. Why does China government have such a consistent discrimination against its own citizens? One reason is: 1) Dictators care more about " losing face" . In Mao’s time, China exported or gave away best products to foreign countries. 2) Foreign investment has been important to the economy of China, to compensate the disadvantage caused by less transparency and corruption, China has to give away some values. 3) Communist does not like capitalist, it has more power to play hard face against its own private companies. This government does not trust private companies and thus does not allow them to touch its “sensitive” industry, but it cannot resist foreign companies to enter as the pressure from foreign countries.
Chinese private companies do grow quickly, but it only shows that private companies are much more effective than state-owned companies, even under the discrimination under its own government. In the past decades, they have always entered the restricted industries in smart ways. Most of them incorporated under the name of “collective unit”. Some successful companies have legal problems in ownership later, such as one automobile company in northeast – its owner was N0. 2 richest person in China in 2002, and escaped China to the USA in 2003 and lost his ownership.
Under this practice of China government, China domestic companies in beverage, detergent, automobile etc have lost the markets to foreign brands. The once famous brands in China have almost gone, and are replaced by Coco Cola, Tides, Audi etc. (How to push a Chinese brand out of the market will be discussed below).
Impact on Culture, Environment and Political System in China
- Culture is more liberal
China is changing towards more liberal for sure; in fact, it has gone beyond western countries in many aspects. For example, porn movie studios can operate next door to elementary schools; striped dancing in public parks, etc. These activities are not legalized in China, but it does not matter in a country without rule of law. Many scholars are concerned with the problem of deteriorating morality in China. Three reasons make the situation not easy: 1) China has misleading people in its propaganda about western life style. Western life is prototyped as casual sex and night clubs everywhere. People think it as it supposed to be if we want to live a good life as western world. 2) Since communist took over the power in China, it has destroyed many traditional good values on purpose. The rule of thumb is: an evil power cannot live well with a good value system. For example, Confucian has been playing an important role in people’s daily life for 2000 years in China (also in Japan and Korea); but Confucian was condemned, Confucian palace was destroyed, which had never happened in past 2000 years, no matter who was in power. 3) Rule of law/corruption problem: illegal businesses have higher profit. For example, the most famous prostitute hotel in Beijing has been operating for more than 10 years. People joke “everyone knows but police”.
Beyond the bad aspect, more liberal is good as people can choose the way they want to live. Globalization has brought in the information and products that affect culture, such as food, drink, music, movies, etc. KFC and McDonald can be found in most cities in China. Foreign movies are very popular too.
- Impact on environment
Most foreign companies take responsibilities in environment. Both companies have stricter environment policy than local standards. But globalization worsens environment in China in two ways: 1) Recycling businesses with high pollution are relocated to China, such as dismantle ships and other machines. Some areas suffer badly because of these businesses. 2) High competition from foreign companies pushes local companies reduce the investment in environment. The key problem is not those companies polluting but the fact that polluting activities can get away without much punishment.
- Impact on political system is mixed
Many people think economy grows, then political change will follow. It may be true in most cases, but not in China. Although China has librated businesses and life style, it does not lessen its control in politics and media. In residence areas, people can not see Cable TV of CNN, etc. People cannot subscribe foreign newspapers. Hotels have CNN cable service, but it subjects to interrupt anytime when it shows issues about China. Foreign newspapers for expatriates may lose pages if those pages contain pictures or contents that China government does not like.
Many people think Internet has brought free information to its 90 million Internet users. It is only partially true. From day one when China planed to introduce Internet in early 1990s, it first asked the technology companies (CISCO was one of them) how to censor the information. Under the technology help, China can censor all websites and email messages on its advanced machines. That is why CNN.com, NY Times and most other news web services can not be accessed in China.
China government requires all Internet companies have 24 hours of censorship otherwise may incur serious consequences if “sensitive information” appears on the company server. Many people are arrested because of publishing articles through Internet.
The impact on political system has been lessened greatly as most companies and executives understand the situation. The least thing they want to involve is politics. In addition, many companies help the government to control the media and free speech in China (Yahoo, Google are on the list).
After all, people’s thoughts are benefited from the globalization. Even under the tight control, they do have access to more information than before. People learn what is correct by observing in China and outside China. Still, prepared mind needs to pass the threshold of discussing the issues publicly, which is not allowed in China.
Strategy a Company Enters China Market
- Need leaders understanding both politics and economics in China
It is more important for business leaders in China to have good understanding in both politics and economics than in other countries. As discussed above, business leaders should know what can be touched and what cannot be touched in China. In recent years, a few companies have caught tension among customers because of Taiwan issue. Some of them call Taiwan as a country; most recently, MacDonald marked Taiwan as a country on its website.
Foreign investment itself is a political strategy of China government. To demonstrate to the world a good business environment, China government will make sure big companies make money. Business leaders should know the advantage and may leverage it. For example, American company did not apply the trademark for Viagara in China; while Chinese have been calling the type of medicine as “WeiGe” for many years. Coincidently, it has close pronunciation to Viagara. One Chinese medicine company filed the trademark after Viagara launched in the USA, that trademark was priced in billions of Yuan as it is so popular, easy to pronounce and has the right meaning. The American company claimed the Chinese trademark successfully, Chinese medicine company was fined. It is not a legal decision but political one.
- Who in the government should work with?
It depends on what scale of investment. All levels of investment need cooperation with government. Larger companies have more advantages over small ones as central government cares big companies very much. Most CEOs/Chairmen of top companies had chance to meet Chinese president or other top leaders. It means more than the meeting itself, the companies have many conveniences after the exposure of meeting. Small companies should just treat low rank officials well; I do not mean bribery if you can survive without doing it, the company should show respect one way or another.
In a system without transparent decision process, it is hard to name who should be the target of approaching. The rule is: do not ignore anybody in the power circle. For many companies, they work more directly with police (fire alarm system approval) and tax department. It will be naïve if an executive thinks it is all right if you do businesses by following the laws. To find out the truth, an executive does need to employ someone knowing the system very well. After all, it is not important for a company to lobby a law when there is no rule of law.
Businesses are affected by companies’ home country’s foreign policy because China government controls the power to place big orders. Whether Boeing or Airbus can get the order of billions dollars, it largely depends on whether US or Europe has a favorable policy in human rights or Taiwan issue. A lot of lobbying job should be done in their home country – as it is now.
Companies have started to employ the sons or daughters of Chinese leaders as their executives in China. I think it is effective, but not necessarily smart. It is a gamble. In communist history in China, many high rank leaders have lost power even life sometime in their career, including one Chairman, two former general secretaries (there are four general secretaries in total, Hu is the latest one).
- How to push Chinese brands out of the market?
The best example on this aspect should be Coco Cola and Pepsi Cola. Before the two brands presented in China, China had dozens of brands in soft drink industry – which is my graduation thesis focused on. Both companies used the same strategy to enter the market – set up joint ventures with local best brands. Then the company will shift the commercials and volume from local brands to their worldwide brands. In a few years, local brands are finished. In early 90s, China has an annual quota on foreign brand beverage (300,000 tons/year). That quota did not take effect as the official in charge of the quota was the chairman of Coco Cola factory that I visited and interviewed.
In this aspect, some companies have a more generous policy, such as Unilever, they tried to capitalize the local brands after acquisition/merge. Most companies just get ride of the local brands quickly. As a policy, one of the goals of introducing foreign investment in China is to learn advanced management and develop domestic brands. The result contradicts its stated willing.
In late 90s, there were two Chinese companies in soft drink and detergent that operated without foreign investment, as restricted by the government. Under the competition pressure and advantages given to joint ventures (tax and others), the two companies plead to the government and were finally allowed to form joint ventures with foreign companies.
- Globalization in China: a true spirit of globalization of losing domestic identity
Globalization has encountered least resistance in China than any other countries, such as India and Latin America, considering the scale of losing domestic brands and industry. The impact is still unknown, as more key industries will be opened in the next few years. People may not care of losing domestic brands with over 100 year history. It will be hard to imagine if a country lose its control in banking, insurance and communication industry. If China does not reform its corrupted political system and its state-owned banks, China will lose these industries after foreign companies start to enter.
The impact will not be as big as 100 years ago, because the world is more unified; the economic division is becoming less divided by borders than before.
One significant meaning to the world: China will be more and more important to the global economy; without reforming its political system, the conflict between the politics and economy will affect the world more and more significantly. Finally, the world has to care and intervene China’s political reform. The form and degree of the conflict can be anything.
(boxun.com)
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