Balancing risk and reward in China.

Seeking to enter the China market? Patience, long-term thinking, and a low profile are key.

When I was elected chairman and chief executive of Honeywell in 1993, I laid out the growth strategies the company needed to follow to reach an annual sales target of $10 billion by 2000. Since the plan called for 8 percent annual sales growth, the developing world would need to be included in our plans for expansion. China, in particular, was key.

* While North America and Europe are expanding at 2 percent or less per year, China's economy is expanding at an annual rate of more than 8 percent. Inflation rates have decreased from 25 percent in 1993 to about 10 percent currently, making the immense Chinese market even more attractive to investors.

* But while China's potential as a business opportunity is enormous, doing business there successfully requires a new mind-set for Westerners. Patience and long-term thinking - which often do not come easily to aggressive American businesses - are essential to dealing successfully with the Chinese. Any companies doing business in China must carefully and strategically balance risk with reward, while at the same time being sensitive to the social and political realities of the host nation. It's not an easy balancing act, but one that ultimately can be profitable.

* The modernization of China's infrastructure already has created multibillion-dollar markets. With per-capita income rising, consumer-oriented ventures also are getting a warm reception from Chinese authorities. Accordingly, the U.S. Commerce Department is slated to open a commercial center in Shanghai. In the United Nations' latest table of general development, Shanghai and Beijing now rank ahead of Seoul and Singapore, two of Asia's legendary growth tigers. With tax breaks attracting an inflow od capital investment second only to that of the U.S., and China's increased commitment to the market system, the country's economic boom no doubt will spread to other cities.

With a population of 1.2 billion, China in recent years has resembled the U.S. at the start of the 1950s, when the U.S. was rapidly building new cities, electric power systems, immense factories, an interstate highway network, and consumerism in an expansion fueled by democratic capitalism. Today, China is more like the U.S. of the 1960s, '70s, or even the '80s, having narrowed its gap with global competitors. In an interview with the Financial Times, Prime Minister Li Peng was quoted as saying that China has "shifted from an extensive growth economy to an intensive growth economy, or rather, changed from quantitative growth to more efficiency-oriented growth." High-tech companies have been indispensable partners in this growth, as China's leaders look outside for capital, venture partners, technology, up-to-date management systems, and creativity. On my twice-a-year (or more frequent) visits to China, it's apparent the investment in systems has produced optimal returns.

THE HONEYWELL EXPERIENCE

Honeywell's China business is profitable and growing significantly: We expect to double our annual revenues there by 2000, from $250 million currently to $500 million. These totals include both direct sales and OEM revenues from Honeywell components.

Honeywell is a global company with 53,000 employees in more than 95 countries. In 1995, our revenues were nearly $7 billion, with net earnings up 20 percent over 1994, to $336.6 million. More than 40 percent of our revenues are generated outside the U.S. Right now, Honeywell's strengths match China's needs. We are helping the country increase its industrial output, decrease its environmental problems, and increase the standard of living for a population that is seeking better quality of life. We also support China's fledgling aviation industry by improving flight safety.

Our experience in China, however, has not been particularly easy, and success wasn't immediate: We entered China in 1963 and established our first office there in 1974. In those days, China's technology was well behind what we were accustomed to, and Western-style marketing techniques were not applicable in a communist/socialist state. Rather than listen to private companies with China experience, we listened to government bureaucrats. We ended up with a less-than-ideal licensing agreement.

Ultimately, we realized our mistakes, retooled our thinking, and abandoned some of our "eager American, let's-do-it-now" impatience. Our unsatisfactory licensing relationship taught us that we needed partners with experience in comparable technologies and marketing in China and other emerging Asian nations. One such partner was Yamatake-Honeywell, a Tokyo-based joint venture that had given us a foothold in the Far East in the 1950s and later helped to facilitate our entry into the Chinese market.

We followed with a software joint venture in Beijing in 1992; two years later, we set up a building automation facility in Shanghai. At that point, with China's economic boom under way, we were in an excellent position to participate both through Yamatake-Honeywell and Honeywell itself.

In addition to these ventures, we have partnered with the bureaucratic city governments and large state-sponsored industries that are updating huge elements of China's economy. In China, we incorporate the same five criteria that drive all our domestic and international ventures. Such ventures must:

* Improve productivity;

* Save energy;

* Protect the environment;

* Increase safety; or

* Enhance comfort.

By the early 1990s, we were established in Beijing, Shanghai, Shenzhen, and Tianjin. China's building design, energy management, and oil refining executives had observed our projects in other nations, and had associated Honeywell with cutting-edge, high-technology solutions. Subsequently, we were not an "unknown" to them as we sat down to talk business.

At the moment, rising U.S. exports are working in Honeywell's favor. For example, over the next five years, we will receive substantial revenues from the sale to China of more than 300 large passenger aircraft, which will contain Honeywell avionics and integrated cockpit systems. We also are supplying China's airports with air-safety control systems, and its commercial buildings, factories, hospitals, and hotels with state-of-the-art automation. Our first Chinese manufacturing operation (home and building heating controls) opened a year ago in Tianjin, and in October 1996, we added an assembly plant to our complex there. We are working to supply the Beijing District Heating Co. with monitoring and control systems that will cut energy costs by 25 percent a year and improve temperature control for buildings in 20 percent of the city.

In January 1993, we established a joint venture with Sinopec (China National Petrochemical Corp.), the world's third largest oil refiner; Honeywell owns 55 percent of the venture, and Sinopec owns 45 percent. Founded to improve China's petroleum industry through more efficient operation of refineries and petrochemical plants, Sinopec dominates the country's oil, gas, and chemical processing. China's oil refineries process more than 2.5 million barrels of crude oil a day. Sinopec refines 87 percent of that, producing gasoline, kerosene, diesel fuel, and lubricating oil.

Based on the results of our earlier joint venture with Sinopec, in August 1995 we entered into a strategic alliance with Sinopec, making Honeywell the preferred provider of advanced refinery control systems in the world's largest nation. This should mean at least $150 million in Honeywell sales to Sinopec's 38 refineries or petrochemical complexes in the next five years.

In the consumer market, we are seeking an increased presence in Chinese residences through the production and distribution of our brand-name products, such as thermostats, lighting controls, and air cleaners. Our retail market portfolio increased in early 1996 with the acquisition of Duracraft Corp. This Massachusetts-based company, which has a plant in China's Guangdong Province, manufactures home humidifiers, heaters, and fans.

An international viewpoint is also apparent in China's air transport industry. Currently, its carriers haul 50 million passengers annually. But by 2000, according to Beijing estimates, 100 million Chinese a year will be traveling by air. Boeing, one of Honeywell's principal customers, estimates that China will need nearly 1,000 new aircraft in the next 15 years. Faced with the need to grow its commercial aviation at an annual rate of 30 percent, China needed to make major adjustments. A centrally controlled air transportation network was spun off into nine large airlines, and numerous small ones, each owned by the state, provincial, or city government.

China's Civil Aviation Administration, which controls aircraft imports, established new safety guidelines, following those of the U.S. Federal Aviation Administration almost line for line. Overseas aircraft maintenance companies established operation in China. Flight crews are being schooled in China by foreign aircraft manufacturers or airlines.

LESSONS LEARNED

How have we gotten as far as we have in China? We had to adapt: A typically American short-term strategy won't work. Indeed, short-term talk makes Chinese leaders suspicious. The rule of thumb: Walk, don't run. Patience is required to accomplish goals.

I also believe our dealings in China have been made a bit easier by the fact that we steadfastly maintain a low-profile there. We rarely deal with central government, and as a result, avoid the spotlight. On the other hand, we have had day-to-day contact with local officials and observed early on that China's technical and business leaders do painstakingly thorough research before they sit down at the table. Western companies that want to do business with the Chinese must do the same.

I'm often asked how Honeywell deals with the volatile political and social issues - human rights issues, in particular - that are points of concern between China and the U.S. I believe that sanctions over human rights or other social and political issues should be decoupled from business and trade. Why? History demonstrates that when developing economies have more license, political freedoms follow.

But political issues shouldn't be ignored for the sake of trade relations: Westerners in influential positions must make it clear that respect for human rights within its borders is imperative. Honeywell worked closely with the Clinton administration to develop model business principles that include political, social, and individual standards of human rights. While these principles are global, they were developed largely because of concerns about China. The voluntary code recognizes the positive role of American business in upholding and promoting adherence to universal standards of human rights.

When any company enters China, it must proceed cautiously and learn both the business and political environments, Chinese expectations about technology transfer can be sky-high. For example, while wanting the latest technology from Honeywell, China also wanted us to take the risk of setting up local manufacturing without the necessary logistics networks. We simply said no.

By the same token, intellectual property rights are vital. We faced this challenge in China long before it hit the front pages in the U.S., making it clear to the Chinese that we would not tolerate any impropriety or breach of ethics. We demanded - and received - assurances that there would be no misuse of Honeywell technology and that we would be able to protect our intellectual property.

Our relationships with Chinese associates have been built on a foundation of honesty and trust, as well as on our unwillingness to compromise corporate integrity or well-established practices. We cannot have different ethical standards in each country in which we conduct business.

China's transformation to a market-driven economy will take time, but so did those of its many now-flourishing neighbors in the Asia/Pacific region. If we are willing to balance risk with reward, plan for the long term, deal pragmatically, and be sensitive to the social and political realities of our host nation while we work to improve our mutual understanding, I am convinced that American industry will profit from its patience and assume a prominent place in the overall economic development of China.

Michael R. Bonsignore is chairman and chief executive of Minneapolis-based Honeywell, a $7 billion manufacturer of electronic, industrial, and aerospace equipment.