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Should your global strategy include China?

Globalization has become a key strategy issue for many firms. Competition is no longer a local issue; it can come from anywhere in the world. As local resources are depleted, many firms need to look elsewhere to obtain them. High local costs drive some firms to less developed countries to take advantage of lower costs.

Companies are participating in markets around the world with international, multinational, and global strategies. Japan is slowly starting to open up, Europe is developing into a European Community, Russia is struggling to develop new economic and business models, East Germany and West Germany are uniting, and there exists the possibility of a North American trade block (the United States and Canada recently relaxed trade barriers; all that remains is an arrangement with Mexico).

Although many companies are attempting to develop worldwide strategies, the question arises as to whether there can be a viable long-term worldwide strategy that ignores China.

BACKGROUND

Historically, doing business with China has always been problematic for the West. In the late 1800s, the British were eager to trade with China because of the fabulous goods that the Chinese produced-tea, spices, silk. The Chinese refused to allow the British to trade for her goods, ultimately resulting in the Boxer rebellion and British control of Hong Kong. Today, few countries are eager for Chinese goods. Rather, the desire to do business with the People's Republic of China (PRC) is fueled by visions of selling products to a country with 1.2 billion potential consumers. However, the Chinese still make such a prospect fraught with difficulty.

In spite of problems associated with operating in the PRC, many business people are taking a long-range view based on the realization that the PRC will become a formidable economic and political power by the first third of the next century. Therefore, some companies are doing business with the Chinese now in order to position themselves to capitalize on future opportunities. Yet, we have all heard of the companies that have lost large amounts of money and been unsuccessful in their efforts. In light of the events Tiananmen Square on June 4, 1989, firms are questioning whether they should pursue a strategy of doing business with the PRC.

Any thought of doing business in China should carefully address several critical success factors:

* product fit;

* internal resources;

* situational intelligence;

* strategic objectives;

* realistic game plan; and

* implementation.

FACTORS CRITICAL TO SUCCESSFUL BUSINESS WITH THE PRC

The first step is to determine if the company's products fit with the new thrust of the PRC government to concentrate solely on high-technology ventures, on projects in critical industries such as petroleum exploration and aeronautics, or on projects to develop export goods. Since the suppression of the pro-Democracy movement, consumer products, agriculturally-based industrial projects, service projects, and low-technology ventures have been actively discouraged. Second, a business needs to take a hard look at itself. Does it have the capital, cultural, and mental resources to weather the frustrations, delays, and seemingly senseless obstacles it will inevitably face? Does it recognize that profitability is most probably a long-range prospect? Longrange in this case is not 4 or 5 years, but 10, 20 or 3O years. It must decide the level of investment it is willing to make.

Closely coupled with the issue of internal resources is that of situational intelligence. The firm needs to bring in some expertise to help understand the history and culture of the Chinese people, as well as the role and structure of the government and how it affects doing business in the PRC. The company should have employees fluent in the Chinese language and knowledgeable in Sinology to form a small cadre of business people who truly understand the motivations of the Chinese. Critical to understanding how the Chinese view the issue of technology transfer is to be aware of the history of Sino-Soviet relations in the 1950s.

After Mao Zedong and the Communists took control of China in 1949, the country closed its borders to all but other Communists nations. As the most developed and powerful of its Communist neighbors, the Soviets became intimately involved in the economic and political development of China. During this period, they assisted China by bringing in whole factories, complete with all equipment and entire production lines, technical and other documentation, and technical experts and management assistance. In effect, these were turnkey operations. This experience has formed the PRC's view of what technology transfer means and what is involved. Furthermore, this technology transfer was paid in large part by counter trade arrangements. This historical experience helps explain the expectations of China today when technology transfer ventures are contemplated.

In addition to understanding the Chinese, before making a decision to pursue the venture, the firm should do its homework. It would be helpful to gather as much information as possible on the successes and failures of other companies that have attempted or have accomplished the goal of doing business in the PRC. The finn should also try to gather as much information as possible on the market for its product, and on the areas of China it feels are suitable for locating its plants, including information on the infrastructure currently in place.

China has created Special Economic Zones (SEZs) both to control "contamination" from the West and to encourage and attract foreign investment and technology ventures. These special zones are literally separate areas, enclosed by walls with border crossings and guards. The SEZs provide low labor costs, a better investment climate, and a preferred tax structure, as well as an improved infrastructure. There are also 14 coastal cities that are more open to Western business.

Most recently, the Chinese have announced plans to build a giant industrial free-trade zone called Pudong in East Shanghai.. Beijing has a high-technology corridor in the Zhongguancun area of the Haidian district. Other cities are trying to encourage foreign investment. Therefore, firms need to carefully examine these location alternatives in light of their business objectives.

A commitment of substantial resources for conducting business in China must be made in light of the firm's strategic objectives. A firm needs to determine what it intends to gain from this effort. Based on the information it has gathered, a company should plan a strategy for doing business with the PRC. This strategy should do the following:

* complement the firm's overall strategy,

* be compatible with its resources and capabilities,

* take into account the firm's strengths and weaknesses,

* recognize the limitations on the Chinese side,

* have a specific set of goals and objectives,

* be given the active support of top management, and

* integrate the firm's resources in a coordinated effort.

Armed with a better understanding of China, knowing what kind of effort is entailed in doing business there, and knowing exactly what it wishes to accomplish with this venture, a firm is then ready for the next step: deciding how it wants to structure the venture and determining where it can be flexible. This will give the company a framework from which to negotiate.

There are various types of business structures in China:

* processing trade,

* compensation trade,

* contractual joint ventures,

* equity joint ventures, and

* wholly foreign-owned enterprises.

Processing trade is an arrangement where a factory in China processes or assembles parts and/or components that are supplied by the foreign firm. In some cases everything, including packaging, is sent to China, and the final product is sent back to the foreign firm which then sells it. In other cases some materials or supplies are sourced locally.

Under a compensation trade arrangement, the Chinese provide the plant and labor while the foreign firm provides the technology, equipment, technical expertise, and management. The foreign firm often has to take payment in the form of a combination of products and cash because China usually does not have sufficient foreign exchange capacities to pay all cash.

In a contractual joint venture, the foreign partner provides technology, capital, specialized equipment, and materials. The Chinese partner provides land, labor, plant and equipment, natural resources, and services. The contract governs the relationship and determines the profit split.

An equity joint venture is an arrangement in which the foreign firm must own at least 25 percent of the venture. The Chinese and foreign firms operate the business jointly. In some cases the foreign firm may have majority control.

A wholly foreign-owned enterprise is the most controversial form of business in China. Typically it is used when unique, proprietary technology is involved. Often the products must be entirely for export, although this restriction has been relaxed in some cases.

In most instances, the Chinese government requires the use of the most modern equipment and technology. The technology must meet China's needs and be advanced and practical. It must be a technology that China can absorb and master. The completeness, effectiveness, and faultlessness of the technology must be guaranteed. The Chinese usually drive hard bargains that may substantially reduce the profit potential for foreign firms.

An important aspect to a company's strategy is developing personal relationships with the Chinese. Guanxi (or personal relations) is the key to making something happen in China. Although the structure of the government and the vagaries of politics introduce some uncertainty into the process, personal relationships are critical. This is where training in the language and culture are especially important. That background will prove invaluable in the lengthy process of relationship building and the later stage of negotiation, as well as in the overall development of the game plan.

Once the venture has been accepted by the Chinese and finalized, the foreign firm faces the further challenge of implementing its plan and getting the venture up and running. Chinese managers often have to be trained in Western management practices. The ability to make decisions and take risks must be cultivated. Also, workers need technical training.

Although this latter requirement may seem straight forward, the Chinese government has other objectives that need to be understood. For instance, they want to train as many people as possible, so there is a tendency to cycle as many people as possible through training. If the firm has done its homework, it will have negotiated to protect its interests in situations like these.

There may be problems with the infrastructure that affect the ability of the firm to operate with the type of efficiency to which Western managers are accustomed. Supplies may not arrive in a timely fashion, or public services such as utilities may operate sporadically. A host of other problems may also be encountered. This means that implementation must be based on the concept of flexibility. Contingency planning may help, but not all contingencies can be anticipated.

FUTURE PROSPECTS

Although attention to the above factors cannot guarantee that a firm doing business in China will be successful, careful attention to these areas is critical if there is to be a chance of success. The decision to do business in China is a strategic one. Its feasibility needs to be painstakingly assessed. The obstacles to success must be clearly recognized and management needs to develop plans to deal effectively with them.

A number of business people believe that China will eventually dominate the global market. They feel it is to their strategic advantage to begin to develop relationships with the Chinese now in order for their firms to remain competitive in the future. That is a decision that each business needs to make for itself.
COPYRIGHT 1990 University of Memphis
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:Global Business
Author:Ogilvie, D.T.; Fitzsimmons, James
Publication:Business Perspectives
Date:Sep 22, 1990
Words:1900
Previous Article:Group orientation and Japanese business.
Next Article:Communications networks for managing global operations.
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