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Tom Doctoroff

Tom Doctoroff

Posted: July 17, 2007 11:43 AM

Opportunity and Challenge in the China Market

China's cityscape and business environment have improved dramatically over the past 10 years, but its commercial topography is not yet familiar terrain.

The country still has few if any institutions designed to guarantee--even protect--the basic interests of individuals and shareholders, directly affecting both macro and micro commercial environments. The state has no internal checks and balances and, as has been the case throughout its history, exists on a plane quite above daily life. In an effort to safeguard the Chinese Communist Party's authority, statutes are intentionally ambiguous so that they can be interpreted according to circumstance. (After living here, one realizes it is hazardous to judge this state of affairs, given the unique task of sustaining rapid growth and maintaining order among 1.3 billion people. Many believe that if the government's power wanes, chaos will erupt.)

For Western companies operating in the People's Republic, there are both challenges and opportunities. What they need to know:

The central government still has only indirect control over provincial and local decision-making. Everything from operating licenses and safety standards to tax rates is subject to arbitrary parochial intervention. On the bright side, the more that multinational companies penetrate the hinterland, the more they will be in a position to push for bottom-up change. The process, however, will be laborious.

There will be no liberalization of media ownership or censorship policies. Rupert Murdoch will not successfully extend his media empire into the Middle Kingdom--at least until China's political structure undergoes a fundamental transformation, which is unlikely to happen within the next 10 years. The Party is exceedingly concerned about availability of information in any area deemed to influence "social stability." The government fears forfeiting its ability to shape the debate, and the propaganda bureau will continue to rigorously enforce the dissemination of information

The courts are still unreliable, so contracts must be air-tight. While statues governing intellectual property and consumer and property rights are being drafted in accordance with international standards, a fair trial remains a hit-or-miss proposition at best, one that must be facilitated by maneuvering within an old-style political network. Judges are poorly trained, beholden to local interests and screened for legal "correctness." However, meticulously drafted contracts are respected, precisely because they offer an antidote to the murky ambiguity of the judiciary.

"International quality" still signals "attention to detail."
The quality standards of most multinational brands will remain a competitive advantage for decades. China's state-owned companies churn out products that are "good enough for the masses," but they rarely offer added value. Precision and craftsmanship remain beside the point, luxuries in a vast emerging market obsessed with projection of "face" and striving to modernize at lightning speed.

"Real" Chinese global brands are a phantom threat. They will first bare their teeth in emerging regions such as India, Latin America and Africa, where PRC products boast a formidable price/value advantage and a rapidly expanding sales network. But in Europe and the U.S., the menace of the Chinese juggernaut is illusory. Nike, Budweiser and Toyota can breathe easily for at least five years. Even more optimistically, the yin-yang synergy between China's low-cost manufacturing scale and Western innovation will underpin global growth for decades, assuming enlightened leadership on both sides of the Pacific.

Trust, rather than rational argument, will remain the key to forming business alliances. In an environment where the rights of the Everyman have taken a back seat to those in power, the Chinese have been raised to believe the unknown is dangerous. Alleviating the anxiety of the unfamiliar requires many dinners at round tables and drinking games to lubricate "wine and meat" friendships. Contract negotiation begins only when the battlefield has been cleared of landmines.

Policy decision-making will remain opaque but pragmatic. The top echelons of government are under no pressure to open their deliberations to the public. Further, top politicians have developed razor-sharp defensive instincts and are prepared to ruthlessly protect their hold on power. Fortunately, authoritarianism is not tantamount to totalitarianism. Most leaders areincreasingly pragmatic, even technocratic. All realize that maintaining the steady pace of reform is instrumental to ensuring future stability, the lynchpin of unrivaled Communist rule. Any foreign enterprise must come to terms with the Party's penchant for "abstruse incrementalism."

The government will open the service sector to foreign enterprises--but only to a narrow product range that primarily targets the upper levels of the new middle class. The CCP will zealously shelter existing service industry players from outside competition. However, as its needs become more expansive, the surging, economically empowered middle class will demand international (that is, personalized) standards of health care and financial planning. (Think HSBC Premier banking accounts.) Heavily regulated, centrally planned local companies will be unable to harness the entrepreneurial energy to compete--but they will always leverage their formidable distribution capabilities, an advantage that foreign players will never have. A division of spoils will be tacitly, then formally sealed within the next few years.

Well-funded, medium-size foreign enterprises should boast increasing competitive advantage over the next decade. Most private domestic companies--that is, those without equal access to capital--start small and stay small, competing largely on price. And given recent improvements in infrastructure and distribution, China's operational landscape has become friendlier to overseas firms. Of course, to achieve both scale and profitability, non-native companies must enter the market with a sustainable quality or service advantage, lest they get sucked into a vortex of vicious commoditization.

While China is making progress toward building institutions that protect individual interests, gains have been incremental rather than qualitative. How long will it take for the leadership to inextricably tie sustainable, rational economic growth to the economic and social welfare of its citizens? It may never happen, given China's Confucian cultural imperatives and, more specifically, its hierarchically rigid, ultra-competitive social structure. What is certain is that the Middle Kingdom's capitalistic blueprint will evolve only gradually, even imperceptibly, in a manner that suits Chinese long-term interests and stability.