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Treading with care in China.

Treading With Care In China

WHEN ROMANIA'S DES-potic Nicolae Ceausescu was executed in December, to Chinese leaders monitoring the barometers of discontent in their own country, the shots sounded frighteningly close. Chinese security forces were ordered on a high state of alert by officials who feared a resurgence of the pro-democracy movement might follow the Romanian example.

Although no new uprising materialized, this development suggests a serious case of nerves in Beijing, which is still experiencing condemnation for its brutal handling of the Tiananmen Square demonstrations a year ago. In Alaska, a number of businesses trading or wanting to trade with China get nervous when the Chinese government gets nervous.

Alaska's top timber exporter, Klukwan Inc. of Juneau, has a lot at stake in the fate of the giant slumbering tiger that is China's economic potential. Late last year, the Native village corporation announced the first two-way trade agreement with the Chinese by an American company since last summer's turbulence.

Says Ralph Strong, chairman and president of Klukwan, "Every time we hear of shakeups in the government and the politics, those cause us considerable concern. Their politics get in the way sometimes. But everybody's politics get in the way sometimes. We're trying to be very up front in our business relationship. We tell them of our concern about capital investment."

This tolerant attitude toward the Chinese government despite the crack-down typifeis other Alaskan businesses. One argument, held also by the Bush administration, is that more business would be good for Chinese democracy as well as for American profits. A divergent view point advocated by Congressional leaders is that restricting trade relationships should be a ploy to hold the Chinese government to social and political standards.

John Daly, chairman of Alaska World Trade Corp., has had dealings with the Chinese and keeps a watchful eye on events in Beijing. He says the Tiananmen Square crackdown "scared the hell out of the businessmen."

Explains Daly, "All the Americans that we dealt with just pulled back. People aren't particularly interested in investing their money in a place that doesn't recognize profits.

He feels the situation is temporary The Chinese drive for modernization is an experiment withou an instruction manual, a loosening of socialist control in which fear and mistrust of new ways play a big role.

Adds Daly, "It just got out of control. The students didn't know when to quit. And the government didn't know how to handle it. So here we are. I'd say it's been an overreaction all the way around."

Charles Becker, Alaska director of the International Trade Administration of the U.S. Department of Commerce, cautions against attributing too much significance to the events in Tiananmen Square in assessing the outlook for prospective business with China. He notes that a slowdown in trade and other economic developments actually began in the year before the student protests amid fear that the modernization was outpacing the government's ability to manage it effectively.

"Everything was going hucklety-buck. It was overheated. In 1988 they put the brakes on, they put them on with a vigor. As a result, trade and investment has slowed down, although it still remains remarkably active between the two countries," Becker explains.

China is Alaska's fourth largest trading partner, with half the volume of third-ranked Taiwan. In 1989, exports to China were valued at $52.4 million, compared with nearly $100 million in trade with Taiwan. By contrast, Alaska's exports to Japan reached $1.8 billion last year, nearly four-fifths of the state's export volume.

Tricks of the Trade. Despite the complexity of doing business with China, the recent political turmoil, and the lingering aura of mystery surrounding the country, a number of Alaskan businesses have been investigating what the Chinese need or want that the state has to offer.

Becker calls Kluckwan's recent agreement with the Chinese "an excellent example of the patience required to develop the business and social contacts needed to do business in in China." He explains progress has been and will continue to be slow. "We can't quantify today what the return is going to be, but it's a win-win situation," Becker adds.

In Becker's view. China is "a good place to do business, but it's a very challenging place to do business. Negotiations are very protracted, very methodical."

Klukwan is the state's largest timber company, and the third largest of all Native village and regional corporations in sales and employment. Klukwan employs 862 people, 99 percent of whom are shareholders, and has paid $22.3 million in shareholder dividends since 1981. The corporation was named exporter of the year for 1989, in part for its $71.4 million in export sales, a 22 percent increase over 1988.

According to Strong, Klukwan has formed a $3 million joint venture with the China State Investment Corp. of Forestry, a branch of the government responsible for meeting the nation's wood and construction product needs. The joint venture - Klukwan-Sino Inc. - is expected to conduct logging operations, timber exporting and possibly build a sawmill in the Ketchikan area.

The Chinese interest in Alaskan resources does not strictly parallel that of its Asian neighbors. The Chinese are self-sufficient in oil and coal; they export grain and are not noted consumers of fish products. They are badly in need of timber, but also are badly in need of foreign currency to buy timber. The joint venture with Klukwan represents an opportunity to kill two birds with one stone, says Strong.

"They have a shortness of currency to import a lot of products, but they husband it very well. And they're using some of their money to invest in areas that will produce additional hard currency for them. They will receive returns on those investments superior to what they would receive in their own country."

The Klukwan agreement differs from a joint venture launched in 1987 by the Chinese and Koncor Forest Products, another Native-owned timber company. Under that arrangement - a one-time, seven-year deal to share ownership, capital investment and profits - timber from Afognak Island is sold to the highest bidder. Because the Japanese market has been strong for Alaskan timber the Chinese have been making money, but not getting any logs. A shipload was sent to China last year, but none is expected in 1990, according to John Sturgeon, president of Koncor.

Strong says his corporation's joint venture is a flexible, long-range framework to do all kinds of business. For example, if Klukwan is successful in securing a reliable timber supply on the open market (trees owned by Klukwan won't last more than a couple of years), there is a strong possibility the Chinese, through direct investment and purchase contracts will capitalize a new mill in the Ketchikan area to harvest timber for Chinese and other markets. Another possibility is for Klukwan to purchase manufactured goods in China for import to the United States or sale elsewhere in the world.

"We are targeting initially some textile goods, some table wine and sporting goods equipment, fishing poles," says Strong. He adds an experienced delegation sent by Klukwan rated the products high in quality.

Klukwan is also considering buying some plywood from the Chinese (not necessarily made from Alaskan timber) to sell through a plywood plant the corporation just purchased in Port Angeles. The advantage, Strong says, would be the potential for a larger volume of sales through the plant without investing in expansion of the plant's capacity.

"We're currently exploring developing markets in the Near East for products out of China," adds Strong. He explains the objective is "to be able to do whatever might represent the highest return and then stay flexible to change as the markets change."

Even if Beijing is low on spending money, Klukwan's new agreement positions the corporation to profit from an important Chinese asset. Says John Daly, "They have one very great strength and that is their labor cost can be about as low as they want it to be. They can manufacture goods just about cheaper than anybody. Politics aside, commerce is commerce. If a product is cheaper, you're going to be interested."

But Daly warns against oversimplification. He echoes the common refrain that patience is a key ingredient in dealing with the Chinese.

"They're extremely competitive as individuals. They are really tough businessmen," Daily explains. "But their political system doesn't acknowledge profit, so it gets hard to tell how much he's a die-hard communist and how much he just wants to beat your price down. It doesn't automatically follow that they're going to buy what you have for the price you want.

"If you turn the Chinese loose economically, they understand the difference between a profit and loss. They work like beavers to make money for themselves; they have a real work ethic. If they're allowed to produce for themselves, they will."

Wants & Needs. The Chinese dilemma, Daly says, is how to increase the country's standard of living - which the communists have done on a universal, if modest, level - and stimulate growth with a cumbersome, restrictive political and economic infrastructure ... and no money.

"China's main goal right now is getting foreign exchange, and you can't do that by buying products from somebody else. If you're to sell to them, that's tough because they don't have the money or the sophistication for the things they want. Things just don't work over there," Daly says.

For example, the Chinese want, and have, IBM computer systems to modernize production and distribution, but can't maintain them. The same is true of the telephone system and other basic infrastructure, things taken for granted in the West.

Department of Commerce's Becker notes, "Despite their difficulties over '88 and '89, they ended up with significant foreign reserve surplus." China had a $7 billion trade deficit for 1989, he adds.

Suggesting that Alaskans might even be able to capitalize on some of China's woes, Becker is optimistic about future trade relations between Alaska and China. He notes, "They've made enormous investments in state-of-the-art computers, which has cost them dearly." With inadequate training and little or no interface between their new computer systems, the situation is ripe for innovative Alaskan hardware and software companies to market solutions.

Becker also identifies opportunities in exporting, fish processing equipment, environmental restoration technology, and industrial and infrastructure components. "They need the oil industry and it's support group, the technology that Alaskans have to offer in developing those resources. We've got some advanced technology here, not just in oil and gas," he points out.

David Rowland, a partner with his wife in Shaman Equipment of Anchorage, is betting the Chinese are interested in his line of business. Started in 1985 with $500 of capital, the company sells work clothes and firefighting and safety equipment, as well as selling and repairing fire engines.

Rowland says he is looking to business with China as a means of diversification. He adds, "For a small business to stay in one area is suicide." He hopes to translate Shaman's success in outfitting Alaska's rural fire departments into international market success.

Rowland met with a Chinese trade delegation to Alaska in 1988. He says, "It was good exposure for us. It was a learning experience, meeting the officials. They were interested and invited me over. I expect in the next year, we'll be looking at some kind of exploratory trip over there."

Rowland notes that previously keeping up with Alaska market demand had made that kind of exploration prohibitive; time has been at a premium. But he now feels Shaman has the financial strength and stability to permit a prospecting trip to China.

Like other Alaskans eager to talk to the Chinese, Rowland feels that politics - Chinese or American - should not preclude the development of economic connections. "We're not over there to sell social justice," he says.

"But by furthering our business relationships, we can further social goals. I think that's one thing that's going to save the world, the intermingling of all these connection," he says.

Though most observers seem to agree that the slowing of China's economic experiment and it's resulting impact on trade is temporary phenomenon, the fallout from Tiananmen Square continues to be detrimental to business. Tourism is suffering badly; foreign banks are moving slowly on new loans to China; and export credits are harder to come by. The Chinese government is desperately trying to increase exports to meet debt-repayment schedules.

Alaskan businesses continue to plan new China initiatives, undaunted by the complexities and the uncertainties, drawn both by mystique and some intuitive sense of the economic adventure of trading in a marketplace with one billion customers. Says Rowland, "We're definitely curious. I just have a gut feeling - and usually my gut feeling is right - that it would be a good market."

Strong says Klukwan's joint-venture agreement with the Chinese is just a beginning. "It's long-term project to get where you're doing a substantial amount of business. We see the Chinese market in the long term being a very huge opportunity for us. It takes great patience. Don't push too fast, so everybody stays comfortable - that's probably the key ingredient," he notes.

Table : Alaska's Exports to China,
 in thousands of dollars
Exports 1986 1987 1988 1989
Fish 1,427 759 0 0
Timber 9,183 24,659 24,929 23,380
Petrol products 8,419 31,369 41,428 27,856
Other 20,487 15,233 726 1,169
Total 39,516 72,020 67,083 52,405

Source: U.S. Department of Commerce. Compiled by Alaska Center for International Business. Totals may vary due to rounding.

PHOTO : Ralph Strong, chairman and president of Klukwan Inc., strolls with his wife, Carol, on China's Great Wall.
COPYRIGHT 1990 Alaska Business Publishing Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Title Annotation:International Trade
Author:Richardson, Jeffrey
Publication:Alaska Business Monthly
Date:Jun 1, 1990
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