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Changing China

China's globalization has been advancing at a considerable pace, as the country's businesses develop more alliances with foreign companies and investment increases. Yet doing business in China is as high risk and competitive as it is promising. Click2Asia CEO Gareth Chang, a speaker at the upcoming China Compass Conference whose track record in Asian business includes serving as the former head of McDonnell Douglas’s Asian operations and Executive Chairman of Star TV, discusses the history and challenges of China's shifting economic landscape.

Interview edited by Wendy Hall , Larta Staff Writer

January 13, 2003February 2003 China Compass Conference Navigating US - China Business Opportunities

What are the main factors that are shaping the future direction of China's economy, particularly in the context of U.S. investment?

You have to look at several elements--China didn't really open up until 1979, and when it opened up, the economy and politics was not conducive to any foreign business. In 1979, China was, mainly out of necessity, watching the rest of the world moving very fast and in general saw that they were almost 50 years behind the rest of the world's economy. This sparked a tremendous amount of thirst and desire to become a player in the world's affairs. With this interest to become more involved, there was still a problem in trying to find the right system to move China forward. Another primary issue at the time was that there was very little foreign reserve, which caused a severe economic challenge for China. There was also a cultural learning curve, as the population was beginning to understand how to live in a capitalist society--pay bills, taxes, conduct business and so forth. So as far as those stages from 1979 to about 1989, those ten years, China was going through an almost like a child-like curiosity about the rest of the world, while worrying about its own path. And during that period investment was quite modest, mainly because foreign investment laws were rather incomplete, as was venture laws.

Then to look at the 1989 Tienamen Square situation, there was a whole series of pressures internally between the government policies and the movement towards free enterprise. Between 1989 until 1996, there was a tremendous amount of trade opening up in China as large U.S. and Japanese corporations began to invest there. Until 1989 you couldn't really travel to different cities without permits, and when that began to open up, there was a lot more debate and new possibility about China's future. It was also at this time that a tremendous amount of investment started, and subsequently laws became more complete to enable that investment and fuel trade. It was after 1996 that China began to make progress in its infrastructure, and it is still pouring a tremendous amount of money into the creation of it. More infrastructure always attracts foreign investment, while also raising the standards and allowing the economy to progress.

Where do you think there's most interest from the U.S. to invest--what sectors, what industries?

Well right now, there's a period of heavy investment and competition in the telecommunications field, particularly with companies like Motorola, Lucent, and AT&T. There's also a little bit of a history with those companies. Most of the American telecom companies are very generous in the ways they're working with China. Many companies like AT&T will train hundreds and hundreds of technical and management people for 20 or more years. And those people are now highly skilled workers today in top positions. That's why China has grown so fast in the telecom sector. I think that is also why it has gotten to be the number one priority for American investment right now.

What about the auto industry, which saw an increase in sales of over 50 percent in China in 2002?

Cars will come later. General Motors, other ventures, all those have had sad stories, or at least bad beginnings, and I think now U.S. investments, especially General Motors, may be poised to see very good returns. The two largest auto companies in China started up are good examples; one is Volkswagen, which was started in 1979 in China. They suffered a great deal for nearly 15 years in getting an infrastructure built, the components built, and now they have the largest marketshare in China. The second one is General Motors. What is surprising to a lot of people is really consumer products. When I say consumer I mean Coca Cola and Kodak, what the average citizen in China has money to spend on. So Americans that are heavily engaged in the consumer, and consumer products, rather than the auto industry, tend to be more likely to profit from their investments.

What do you think are some of the possible economic risks for companies and entrepreneurs investing in China right now?

Well the investment risks are much lower than before. Like I said, the laws were incomplete, and it was subsequently very difficult to deal with various foreign enterprises because they were not versed in how to conduct business. When you start to look at the investments in China often one word comes up--how do you handle corruption? And the way I see it is that, in Asia, and also other parts of the world, there are various types of corruption. And this is largely due to the incompleteness of law, or a falseness of law, and that has gotten gradually worse in China probably since the early '90s. In the last ten years, China has begun to prosecute, because corruption doesn't allow a healthy growth of enterprises, or attract good, healthy investments. So that is being cracked down on, but it still exists. And finally, it's going to come down to the fundamentals of business, is you have to pick out the right people to do business for you. And those are the key elements in managing the risks of investing and doing business in China.

What are some of the common misconceptions about trying to do business in China?

One of the most common misconceptions is what I call the 'Toothbrush Syndrome.' The logic is that if there are a billion people in China, and each person buys a toothbrush, there will be a billion toothbrushes and then, wow, what a market. Wrong concept. If it's a toothbrush, the Chinese can make it themselves. When you look through the blunders the American corporate world makes, it is really the same blunder made international business-wise everywhere. Those lessons are being learned well today. Most American companies today have gone through that learning curve. Another thing is that if you're going to send employees to China, you need to make sure that you're sending the top person to compete in the toughest market. China is the toughest market to compete in, because you have international competition, plus the Chinese themselves.

What are your thoughts about China's economic future in general as the global economy struggles through a downturn?

When we look at the future of China, I think everything will go extremely well. I think the big cities will continue to grow 8-10 percent every year, which is still relatively low compared to the rest of the world, but the part you worry about is the differences between the 100 million and the rest of China. That is something I think that each generation will have to face up to and manage. How well they manage that will determine the true future of China.