Is it still worth it to do business in China? Part 4 -- Different earnings models, different bureaucratic challenges

by Andrew Hupert

Western negotiators in China are finally coming to accept that no matter what the deal on the table may be, their most significant counterparty is the Chinese government bureaucracy. The Chinese government has a much different attitude towards international businesses coming to China to buy or manufacture as opposed to those coming to China to sell and market. International managers are still coming to grips with this dichotomy, and it is causing problems and costing money.

Ask not what China can do for you – ask what China wants from you.

Most Westerners got to know China business during previous administrations when life was much simpler. The policy trend stretching from Deng Xiaoping to Jiang Zemin was pretty consistent – China wanted Westerner to come in and spend money, import sophisticated equipment, and train engineers and managers to modernize and rationalize the ailing Mainland production sector. MNCs sent managers, engineers, money, and know-how in, and many of them carted off huge profits and cost savings in return. As long as Westerners were spending, they could get away with pretty much anything. Child labor? Unsafe work conditions? Dangerous materials? Unsustainable business practices? No big problems. In fact, when Western companies like Nike or Apple took grief for their labor practices, the complaints usually originated overseas in their home markets. The Beijing bureaucracy was pretty friendly to manufacturers – at least compared to marketers. Why the difference?

China Inc. had a specific agenda from international business.

• Money & Investment
• Technology & Know how
• Overseas markets & export channels

Many of the Western decision-makers negotiating in China today formed their impressions and earned their experience in a China that was much poorer and more backwards than today’s PRC.

The New China doesn’t like Wall Street’s New China Business Model

Ever since the financial crash of 2007-8, Chinese policy-makers have had a much different view of Western business. First of all, China has become much more confident about its own abilities and place in the world. Before the Lehman bust, American business methods were held in high regard in Chinese business centers. The West’s reputation for business excellence crumbled quickly, and Chinese commentators ridiculed all those credit checks and expensive third party audits that couldn’t even protect Wall St from its own baser instincts?

The second issue was that Beijing felt its internal opening and free-market experiments had gone too far, and directed their own post-crash fiscal bailout program towards SOEs in the nation’s interior.

The biggest contributor to China’s new and decidedly less welcoming view towards foreign investment, however, was the success that Western brands were enjoying in China. At first it was just in B2B or industrial sales, but more and more in the fields of consumer products that competed directly with established Chinese players.

Western Brands Overstaying Their Welcome?

Marketing to local Chinese consumers may appear like the natural evolution of a successful business model in Western HQs, but it is a jarring and radical development to conservative policymakers. Not only are financial flows going in the wrong direction (from Chinese to foreigners!), but it was also starting to seem like the Westerners were settling in permanently. China always seemed to feel that Western manufacturers and sourcers would eventually go home and leave the OEM managers and localized factory managers to run things on the ground. That had always been the pattern, stretching back to the bad old days of the Qing. But the consumer branders and retailers were a very different breed from the engineers and financiers that Beijing had learned to handle so deftly.

Why is Marketing is a different story?

• Foreigners are taking Chinese money. Don’t underestimate the significance of this issue. China has deep & ugly memories of being swindled and exploited by unscrupulous foreign merchants. The Opium Wars are the most obvious example, but there are a slew of other events and stories that you may never have heard of but are as familiar to Chinese schoolchildren as the Boston Tea Party and “Taxation without Representation.”
• Marketing investment less apparent than industrial investment. The CCP is still run by engineers. They know what a factory is, what a port is, and what a supply chain looks like. Spending on services, marketing, and distribution is less visible and concentrated than investment in infrastructure and production facilities. It just doesn’t look like real business.
• Culture & values getting imported. You put a peasant to work for 14 hours a day in a soulless factory, and it doesn’t really matter what those extruded bits of plastic get used for – he’s still the same stalwart Worker Hero he always was. But once you start selling him Diet Cokes and iPhones, he’s going to get ideas in his head about what else those foreigners have that he deserves. It’s called “aspirational marketing” for a reason. The Chinese Dream has different aspirations.
• Here to stay. The biggest, scariest threat of the marketers was their permanence and long term impact. No one understands the power of a good slogan like the Chinese Communist Party, and “Have a Coke and a Smile” is a lot easier on modern ears than, “Learn from the Lessons of Lei Feng”. Not only are these marketers not going home after 2 years like the engineers did, but they were reshaping Chinese culture in unpredictable and potentially dangerous ways.

Western flexibility seems duplicitous and suspicious to Beijing.

10 years ago, it was still pretty common for hear senior managers at MNCs say they were going to source, manufacture, and possibly develop markets, though they weren’t quite sure how or when. It was a reactive strategy that was intended to exploit Chinese economic development trends opportunistically. As long as manufacturing was cheap, they would manufacture. As markets developed, they would explore those options. To Westerner Boards and Wall St Investors, it made sense. Companies like Nokia, Motorola, GE, and GM didn’t have any trouble – or see any danger – in adapting their China plans to developments on the ground. There was nothing wrong with referring to China as a moving target that required an evolving strategy. It seemed prudent and sensible.

To Chinese policy makers, however, the relationship and value of Western investment changed 180 degrees in the second half of the 2000s. China had money of its own, was much more specific and directed about the technology it wanted – and viewed Western inroads into its market as direct competition with Chinese policy goals. While Chinese companies were actively blocked from entering developed markets — or found the process of building strong brands beyond their abilities — Western companies didn’t seem to have much trouble entering and dominating Chinese markets. They weren’t just collecting money – they were forcing Chinese firms out and threatening the primacy of the CCP with brand implicit brand messages that competed with the official party line.

Is it Still Worth it to Do Business in China? (Part 1)

Realities of the New China Economy (Part 2)

Bustin’ 2 Type of China Myths (Part 3)

Andrew Hupert runs ChinaSolved.com, an online platform that helps the international business community achieve greater success when doing business in China. He also writes ChineseNegotiation.com. He can be reached at andrew@chinasolved.com.