DON’T MISS THE BOAT!

despite challenges, the time is right for
rninvolvement in China

By Peter Bolton Peter Bolton Associates Burnley, U.K.

In the past, China was often referred to as a sleeping giant. Well, just in case you haven’t noticed, in industrial terms the dragon is wide awake and growing rapidly. In recent years its GDP has increased at a phenomenal pace, on occasions reaching a rate of almost 12% per annum. The Chinese government’s target for 1998 was to sustain that expansion at 8% and at this writing, the latest information available indicated they are falling just a couple tenths of one percent below that figure. When one considers the problems facing the rest of Asia, this is a remarkable achievement. Continued growth at this rate will see China surpass the GDP of the U.S. early in the next millennium. As a nation of 1.2 billion people, China constitutes 23% of the world’s population and that market is rapidly acquiring spending power.

To switch completely from a command economy to a demand economy is difficult and it will not happen overnight. However, it appears the Chinese government intends to make this change. The current five-year plan, which runs through the year 2000, incorporates a strategy to have 15% of industry in private ownership by the turn of the century and all indications are that they will expand this policy far into the future. Major publicly owned companies are also being reorganized and streamlined to make them more competitive. We in the West may feel that the pace of transformation is too slow, but if one considers what has happened in the former Soviet Union, one has a fairly clear indication of what occurs when rapid, unplanned change takes place. Change without control would result in chaos. The switch in China will occur in time, but it will be controlled and orderly. The Chinese people and their government have a totally different view of time than their Western contemporaries and they have the luxury of being able to plan ahead for 10, 20 or even 30 years.

The relative stability of the Chinese economy is vitally important for the well-being of the rest of Asia and beyond. The current Asian crisis has adversely affected Chinese exports and, so far, the government has resisted mounting pressure to devalue its currency. Unfortunately this may not continue. There are already indications that early in 1999, possibly after the Chinese New Year, the yuan will be devalued. If this happens, not only will it affect the economies of China’s neighbors, it will impact the cost of all exported goods, including nonwovens.

The significance of these cheaper prices will, in part, be negated because the nonwovens industry in China suffers from the same problems as many of the older established sectors of commerce. Inherent inefficiency due to over-manning and low productivity caused by lack of incentives, poorly trained management and inadequate and badly maintained machinery are commonplace. Many companies are handicapped by being equipped with inferior machinery sold and built to meet only one criterion: the lowest possible price. Until these problems are overcome, the advantage of low labor costs is somewhat nullified.

Entry Into The Market
rnAfter such a bleak picture, it may be surprising to hear that there are wonderful opportunities open to companies willing to invest in the Chinese nonwovens industry. The trick is to find the right vehicle and this requires planning, commitment and a willingness to study and appreciate Chinese culture and business procedures and ethics.

The usual methods of entry are through a wholly owned subsidiary or a joint venture with a Chinese entity, of which the latter is the most common. Before entering into either, you need to take several things into account, the first of which is the fact that haste is an anathema to a Chinese negotiator. To take one’s time over the discussions indicates that you are serious. To try to rush things through is considered bad manners. This is also the time when relationships develop between the opposing teams. These are vital to the negotiations and to the running of the business once it is underway. Remember, you are not just making a deal, you are making sure the deal works. The difference depends on how the negotiations are conducted and on how personal alliances evolve. The concept of guan-xi, beneficial friendship, should not be overlooked.

At this stage you must also settle on staffing levels, location, wages and benefits, methods of hiring and firing local staff, training, sales and marketing responsibilities, foreign exchange requirements, pricing policy for both the export and indigenous markets, expatriate staffing and a host of other details that need to be clarified before a final agreement is drawn up. During the negotiations there are several points at which government approval has to be gained; however, the procedure is well-defined and time limits are mandated so that bureaucratic delays are minimized.

Pick your negotiating team carefully. Don’t send a 26 year-old who has just emerged from your graduate training program. Advanced age denotes experience and gains respect. When it comes to choosing your team, and later your expatriate managers, a little gray hair can be a definite asset. It may be okay to be “aggressive” in Baltimore but the opposite is true in Beijing. Chinese business philosophy dictates that both parties should benefit equally from a deal and therefore you can expect a fair bargain. Always leave yourself room to give something in exchange for concessions granted by the other side. You will be expected to take a long-term view. If you go into a deal hoping to make a fast buck, you’ll certainly fail. Keep lawyers in the background and use their skills sparingly. Don’t give them a major role at the negotiating table. Remember, China is not an emerging nation; its culture extends back well over 4500 years. Respect that fact and you will be well along the road to success.

There are a number of nonwovens producers in China who would welcome the opportunity to cooperate with their Western counterparts and many would not be averse to forming joint venture companies if the conditions are favorable. Don’t be overly cautious. The climate is right for investment, providing you understand what is required and are prepared to be patient and flexible. These opportunities will not be available indefinitely and the first companies to take the plunge will reap the greatest benefits. The economic problems that currently afflict the Asian Pacific Rim will not last forever and as China takes over from Japan as the leading industrialized nation in that area, it would be foolish to ignore the ensuing opportunities. Ambitious companies with long-term strategies and global aspirations cannot ignore China as both a potential market and a base from which they can service the Pacific Rim and beyond.

About the author: Peter Bolton, based in Burnley, U.K., established Peter Bolton Associates in 1994 to advise and assist companies who wish to establish joint ventures with Chinese entities. He also serves as a technical consultant to the engraving industry with special emphasis on nonwovens production.