Weblog with daily updates of the news on a frugal, fair and beautiful China, from the perspective of internet entrepreneur, new media advisor and president of the China Speakers Bureau Fons Tuinstra
Showing posts with label foreign companies. Show all posts
Showing posts with label foreign companies. Show all posts
China’s new government promised foreign companies a more open economy, but the recent raids on China offices of Bain and Capvision consultancies leave foreign investors confused, says political analyst Victor Shih at Hong Kong FP. “It’s very puzzling considering Beijing says that it will boost foreign investment and entrepreneurial spirit. It seems like the right hand doesn’t know what the left hand is doing.”
Hong Kong FP:
Victor Shih, associate professor at UC San Diego and an expert on Chinese politics, said that the US and China are involved in tit-for-tat moves. Washington slapped sanctions on Chinese companies in the internet, bio-technology and pharmaceutical industries, while Beijing barred US arms manufacturers from investing in China. However, taking action against global advisory firms “took things to the next level,” he added.
Shih said the due diligence and advisory services industries are essential for both foreign and domestic investment in the Chinese market: “You can’t give away your money when you don’t have enough information. And we all know you will come across scams like the case of Sino-Forest Corporation or Luckin Coffee,” he said in reference to recent corporate scandals. “It’s important to invest carefully.”
“Why are there all these consulting companies in China trying to do research on China’s economy and Chinese companies? It’s not like a plot, it is just because China is important.” Shih added. “It’s very puzzling considering Beijing says that it will boost foreign investment and entrepreneurial spirit. It seems like the right hand doesn’t know what the left hand is doing.”
China is taking a stricter line when it comes to national security and spying when it comes to foreign companies, including raids of the consultancies Bain and Capvision offices in China. Intercultural leadership coach Gabor Holch guides those foreign firms through the intercultural minefield, he tells in the South China Morning Post, in an article about the last warnings,
The South China Morning Post:
Gabor Holch, an intercultural leadership consultant in Shanghai, said steering round sensitive issues had been part of doing business in China since the early 2000s.
“I personally helped many corporate leaders navigate this minefield, from obvious political taboos to minute references such as country lists and images in brochures,” said Holch, who is also an author of a forthcoming book on foreign managers in China.
“In past decades, definitions of strictly off-limits topics became clearer and embedded in published laws, something that was missing in the early days.”
He said that nowadays executives had to be more “vigilant than before to avoid sensitive issues that can put their firms in jeopardy”…
Holch said: “Foreign firms must make sure to appoint politically able and well-informed, preferably Mandarin-speaking, executives to their [Chinese] businesses as opposed to technical problem-solvers typical a decade ago.
“Most importantly, China’s restrictive information environment demands that foreign and local managers at multinationals share information and keep their firms agile but legally compliant.”
Many foreigners and foreign companies are talking about exiting China, but as far as it comes to companies, very few do, says veteran China lawyer Mark Schaubat the China Chitchat. While doing business in China has never been easy, seldom firm fully pack their coffers, he says.
Mark Schaub:
In the last few years, we have had many foreign invested enterprises coming to us to discuss exiting China. However, only six liquidated at the end of the day. Most kept a toe or even a foot in the China market (some had lost an arm or a leg) or they sold their China business to someone else – sometimes paying to do so. For most international companies China is very much a hotel California experience – it starts with:
“This could be Heaven or this could be Hell”
And then after a while it becomes:
“You can check out any time you like, but you can never leave”.
To be fair over the years relatively few clients have wanted to fully exit China. Many decided to temper their ambitions or restructure how they did business (i.e. distribution model, OEM contracts etc.) rather than fully up sticks.
Foreign firms have been isolated more than ever from their China operations because of COVID-19 and the ongoing lockdowns. China lawyer Mark Schaub looks at the situation in 2022: “If you intend to continue with your subsidiaries in China then greater local decision-making power seems to be a likely pre-requisite to success,” he argues in his weekly newsletter. He looks at the good, the bad, and the ugly general managers.
Mark Schaub:
The Bad GMs often have the following traits:
Difficulty in seeking assistance – Often the manager feels it is a solitary responsibility to interpret China and deal with any difficulties which may arise. The problem is that such interpretation may not be objective (i.e. “fish cannot see the water”) or is more complicated and needs HQ support or is serious and HQ has a legitimate right to know what is happening.
Observe not Do – Observers are more comfortable in reporting difficulties to HQ rather than actually tackling the problems. Typically, these General Managers will blame anything other than themselves for a failure to get things done (e.g. the joint venture contract did not give them sufficient powers; the Chinese partner is being mean/difficult/unreasonable; the approvals have not been obtained, etc.).
The Hero – rather than complain about his situation, he revels in any difficult position he may find himself in. Very much like Hollywood movies the Hero cannot be a team player – having others to share the burden would distract too much from the star of the show. When the Hero does communicate with the head office, it is to (1) convince them that they do not understand; (2) cement a position as “our contact in China”. Heroes can normally only survive in General Manager positions if they have a patron in the head office. The reason being that they intend to infuriate everyone else by always replying “this is China”; “you do not understand”; “I have good guanxi” to any normal question one may pose. The good news is that once the patron falls, the hero will normally soon follow suit.
No matter how irritating bad General Managers are, there is a far worse category – the UGLY. The Ugly GMs come in many varieties but some of these include:
The “Partner” – this will typically impact a medium sized company’s WFOE/sourcing operations and flourishes when the General Manager is left to their own devices in China. This isolation has greatly increased since COVID. However, even in the past a visit by HQ personnel will be stage-managed like a Soviet state visit – no chance encounters with any other company personnel. HQ may feel uneasy as to their lack of knowledge of what is happening in their China outpost but are consoled that the venture is making a small profit unlike the JV horror stories. Responsible HQ personnel may resolve to do … something … to investigate its subsidiary in China as soon as there is more time available … but time never does become available … COVID … other fires to put out … other priorities … China is far away. While HQ procrastinates the General Manager will slowly evolve at some imperceptible stage from no longer seeing themselves as an employee but rather as a partner in the HQ’s China business. This is a problem.
The Thief – Unfortunately for some General Managers, the title “CEO” is more an acronym for “chief embezzlement officer” rather than “chief executive officer”. Experience is that since COVID there has been a spike in clients concerns in relation to procurement fraud, embezzlement, diverting funds, competing with the business etc. In my experience, such managers are a small minority but they can be local or expatriate. The most common characteristics are that they thrive in an environment that has little corporate culture, limited oversight, poor controls, no checks and balances and the GM has typically been in their position for a long time. Many people think that there is less such behaviour amongst expatriates. I do not think that is true – it is not that the expatriates are more virtuous they just have not been in their role long enough.
The Megalomaniac – my personal favorite Ugly GM is the Megalomaniac. He resembles the Hero but with two very important differences: 1) unlike the Hero, he does not have the company’s interests at heart – he sees everything as being solely for his benefit; and 2) he does not seek any praise from the head office as he believes they are all deluded fools. Megalomaniacs have either no successor (i.e. no deputy general managers) or an abundance of successors (i.e. five or more deputy general managers). The reason is clear. A potential successor would contradict the main tenant of the megalomaniac’s management philosophy – he is irreplaceable.
Foreign companies have been struggling how to manage their China investments for decades. Veteran China lawyer Mark Schaub, partner at KWM, looks at how the questions have remained, but the answers changed as China developed from a lucrative niche market into a major competitor for most industries, in his weekly Chit-Chat China.
Mark Schaub:
Thirty years ago, China was for most foreign companies a lucrative niche market with great potential but of limited sophistication. Today for many of these foreign companies China is a critical market that is increasingly complicated, regulated and above all, competitive. Thirty years ago, foreign business interaction with China was often simply sourcing or manufacturing for export or B2B (e.g. auto suppliers for VW, selling to China manufacturing etc.).
Back in those days there were many challenges – unclear regulations, IP protection, increasing labour costs, real estate issues etc. Today, I imagine for almost every business in China the number one challenge is COMPETITION – competition for market share, for talent, for opportunities.
While there will be risks, perhaps sourcing companies or B2B businesses can still be remotely managed to a large degree but this is far more difficult for consumer facing businesses or larger businesses.
Today’s China requires greater agility than in the 1990s – management needs to respond to competition, regulatory change and market trends – to be fair it has probably been sub-optimal for a decade to remotely micro-manage China operations from the USA or Europe. The impact of COVID could mean a business limping along sub-optimally may not survive.
In China, anything good will be snapped up quickly.
One client, a retailer of homeware, very successful internationally, attractive product range, homeware was a hot sector, product was competitively priced… what could go wrong? Well for one thing … real estate could go very wrong and they had a bricks and mortar model. Securing leases was crucial to the business but the European HQ was wary of perceived risks in doing business in China.
To combat this the European management came up with a very well thought out protocol to be followed when entering into a lease as illustrated below:
The HQ protocol was excellent at minimizing risk – in large part this was due to almost no leases being signed. Only the most desperate of landlords would have the patience to wait for the whole laborious and time-consuming process to unfold. Most leases were for basement space in non-performing malls. This killed the business in China.
China veteran and lawyer Mark Schaub dives into the issue of the upcoming exodus of ex-pats from Shanghai, triggered off by the stringent COVID-19 lockdowns. More foreigners than ever will be leaving, while fewer are coming to replace them unless their companies reinvent themselves. But to a large degree, this is a long overdue cleanup in a dynamically changing climate, he argues in his second weekly column China chit-chat.
Mark Schaub:
COVID is deadly to the vulnerable – this applies to businesses as well as people. In the West some businesses were hit hard but bounced back quickly. In the West COVID sped up the demise of old-fashioned retail, chain restaurants past their prime and often small businesses. At lot of these businesses had already lost their way and COVID just sped up the inevitable. For a long time, I have wondered whether foreign invested enterprises in China needed a shakeup. Many have been shielded by being in a growth market (but now being squeezed by competitors), having a profitable niche (but these niches are now also becoming battlegrounds), headquarters knowing China is too important to ignore but also a tough market on which they are not willing/able to spend their time on but also unwilling to fully empower the local management.
For many Western businesses the question going forward will be is can you continue to succeed in a dynamic market like China if management on the ground cannot take decisions dynamically? Can you survive against more agile competitors? Does it make sense to still be in the Chinese market.
China's decision to ease market access for foreign companies and expand imports will not only provide a boost to foreign businesses but also benefit domestic companies through competitive pressure, according to a senior US researcher of the Chinese economy.
Arthur Kroeber, founder of the China-focused Gavekal Dragonomics research service, said in an interview that foreign businesses had already felt the benefits from China's new round of measures to expand opening-up by gaining greater market access.
He gave the example of Exxon-Mobil and BASF establishing wholly owned petrochemical ventures in southern China's Guangdong province, and the relaxation of equity caps in the automotive sector.
"In the financial sector, where there are going to be quite substantial market openings, companies from the United States, Europe and elsewhere will benefit."
Kroeber, who is also a senior nonresident fellow of the Brookings-Tsinghua Center in Beijing and the author of China's Economy: What Everyone Needs to Know, contended that individual Chinese companies will also be able to improve themselves through competitive pressure.
"Particularly in the financial sector, I think the increased competition will be beneficial for the Chinese economy as a whole," he said...
As China tries to become a more innovative economy, there is a need for increased competition and stronger IPR protection, he said.
Kroeber also hailed the measures to cut corporate taxes and fees by 2 trillion yuan ($300 billion) which were unveiled by the Chinese leadership in March.
"The tax cuts will be beneficial in a longer term time horizon, regardless of the impact that the tax cuts have in this particular economic cycle.
"I think the signaling by the government is that, in the future, they will rely more on tax policy as a mechanism for macro economic adjustment."
He said that this would be "very beneficial" as the tendency in the past had been to rely on infrastructure and property stimulus to support the economy when times were tough, "and that just is not an appropriate tool anymore".
Kroeber also highlighted the role of innovation in driving future economic growth.
"If China wants to maintain high-speed economic growth, it needs to shift away from a capital intensive form of growth to one that is more focused on productivity growth and innovation."
American and European companies in China are complaining they are less welcome than in the past. That might be a correct feeling, says business analysts Shaun Rein to Bloomberg, for example when it comes to a higher living standard for their workers in China.
Bloomberg:
The push to improve the living standards of employees comes as Western firms are still clamoring for greater market access. In a January survey of 462 U.S. companies by the American Chamber of Commerce in China, 81 percent said they felt less welcome in China, while more than 60 percent have little or no confidence the country will further open its markets in the next three years.
Chinese officials, meanwhile, counter such complaints by pointing to the years of tax breaks and other special treatment afforded to large foreign companies to encourage them to invest in China, according to Shaun Rein, managing director of Shanghai-based China Market Research Group.
“There’s a feeling among the government that foreign companies have made a lot of money on the back of poor Chinese,” said Rein. “Now the government feels foreign companies need to give back.”
Many foreign companies fail when they try to enter the China market. According to William Bao Bean, a partner at Shanghai venture capital firm SOSV, dealing with over 120 startups per year, that is because they follow too often the instincts they take along from their home market. Wrong, he tells in the South China Morning Post.
The South China Morning Post:
Why is it so hard for overseas companies to succeed in China?
The biggest challenge for overseas companies in China is not the Chinese government, regulations or laws. When you’re a company coming into China from the United States, Europe or Southeast Asia, you’re entering a completely different market.
Think about it like this – when you learn how to do something, you might spend 10,000 hours and become an expert. You develop a gut instinct. But once you go into a market that’s different, like China, your gut instincts are wrong.
One of the reasons major US internet companies have failed in China is because people making the decisions often have their instincts tell them what to do, as opposed to the data they have.
