While the eyes of business executives in the West are focussed over the unification of the European Community and the prospects and threats that such unification portends, along with certain morbid fascination for the struggle of eastern European countries, many are overlooking the dynamic economy in the East, namely, that of The People's Republic of China. Although growth is unevenly spread across the country, China’s economy has been booming at a double digit rate. For the year just concluded, the nation’s economy grew by over 12%, far exceeding the anticipated 6% for the year. (Some official statistics recently released showed positive growth in virtually every sector, see table appended to this paper.) China's foreign currency reserve has reached over $50 billion and increasing and its current account balance is positive. Last summer, China attracted some attention when it plunked down $130 million to buy vehicles from Detroit.
This current economic movement is not driven by political ideology or theoretical concepts of economic reform and certainly not by “democratic reform” whatever that might mean for China. The movement is, pure and simple, fueled by the desire to get rich. The other side of the drive is the fear of being left out. Since August of last year, the central government has basically declared that centrally planned economy is out and "socialistic market driven economy" is in. To state owned enterprises this means that the iron rice bowl is no longer the secure safety net it once was. Internally, the prevailing view is that China will be admitted to GATT (Generally Agreed Tariffs and Trade) in 1993. That will require the removal of protective barriers against imports and the survival of inefficient enterprises will be in jeopardy.
State owned enterprises are already being asked to downsize from the typically bloated work force where a handful do the work while 3-4 times that many sit around,—but get paid all the same. Most of the time, the management of these enterprises are being asked to downsize without the authority to lay off or fire workers. The management of one Shanghai company making automotive components found a creative but only partial solution by opening shops and a restaurant across the Huangpu River in the Pudong Development Zone. Their less or non-productive workers are being asked to commute to Pudong and operate those new and small operations that are otherwise not related to their line of business. The choice for unproductive workers is either wait on tables or stay at home. While staying home still entitles them to their normal wages, everybody understands that they will be most vulnerable to being cut adrift, when and if that becomes an accepted practice. (Pudong has the national mandate to become the next magnet for foreign investment and has been publicly castigated by Deng Xiaoping for moving much too slowly. Now, an anything goes attitude seem to hang over the area, and the factory manager took advantage of this to set up the unrelated stores and restaurant.) Other more progressive managers find equally creative ways to downsize. Nevertheless, no one can be satisfied by half-way measures or half-hearted attempts.
The immediate solution is obvious to everyone in China from foreign visitors to cadres and managers down to the lowest menial worker. The solution is called free enterprise. One only has to compare the desultory service at a state-run store, restaurant or hotel to one that is privately owned or is jointly owned and operated by outside investors to see the difference. Privately owned establishments are clean with courteous and attentive service personnel; their entire demeanor encourages repeat business. State run establishments don’t care. The difference is striking, and exposure to the difference is now a common daily experience.
In China, the quickest way for a state run enterprise to break away from the iron rice bowl mentality is to form a joint venture with an outside partner. These joint ventures are allowed to hire selectively and fire non-performers, provide incentive awards and promote according to merit and performance, plan production according to market demand and for a profit, import needed raw materials if domestic prices are unreasonable, and avoid answering to many layers of bureaucracy. In the west, these “privileges” are taken for granted. In China, these conditions in a joint venture offer a heretofore unreachable opportunity for professionals, managers and entrepreneurs to fulfill and achieve their potential – and make more money.
Another reason for the drive to form joint ventures comes from the desire of local authorities to develop certain resources and enterprises which are not being funded by the national coffers due to the limited national budget. Thus, the climate and conditions for forming joint ventures have changed markedly since the late ’70s and early ’80s, when I first got involved with Sino-American joint ventures. Enthusiasm was probably as high in those early days, but now the Chinese are more knowledgeable about the process of forming a joint venture, more willing to be flexible and creative in finding arrangements that would be mutually satisfactory, and show a more openly cooperative attitude.
An important example of increased flexibility is the issue of balance of foreign exchange. In the old days, Beijing was driven by the fear of outward drain of foreign exchange and insisted that every joint venture show at least a net zero balance of foreign exchange at the end of the fiscal year. This meant that in order for the foreign partner to repatriate its share of the profit, it had to help the venture earn enough forex to at least offset the dividend it was taking out. Some form of compensation trade was usually tied to the deal. Needless to say, not every project or type of business lent itself to this kind of stipulation and many frustrated discussions and negotiations were stymied and never came to fruition.
On my recent trips, I found that many in responsible positions in China now recognize that not every joint venture has to be able to export to be viable. In cases where China does not have advanced technology or economies of scale to compete in the international market, the insistence on export makes little sense. The passenger car is one of the most obvious examples. The Volkswagen Santana is being built by a joint venture in Shanghai and sells for more than RMB 180,000 inside China, or more than $30,000 by the current official exchange rate, which is at least three times its market value on the international market. Inside China, the Santana with local content exceeding 80% couldn’t be made fast enough to satisfy domestic demand. The approximately 150,000 passenger cars being made annually in China under Santana and other brands (all with foreign partners), though inefficiently made compared to international standards, replace direct imports of an equivalent number of foreign-made cars and are obviously saving the nation in overall forex. This kind of macro view is beginning to find acceptance and should loosen the parameters in which a joint venture can be established.
Given China’s eagerness to form joint ventures with foreign participation, what’s in it for the American companies? In the early days of China trade, those active in the business used to sneer at those naively rushing into the market because of the potential of the proverbial 2 billion armpits. While still not a dream market for deodorants, China is now a significant market for many consumer products from hamburgers to soft drinks, cosmetics and jeans.
Ten years ago, I felt uncomfortable taking any of my Chinese relatives to the “Friendship Stores” specifically for visitors, because any souvenirs I could buy seemed ostentatious in light of their income. This time, my cousin had many opinions about the price and aesthetics of the souvenirs and gifts I was buying, and I no longer felt like such a big time spender. The point is that China is becoming more consumption-oriented thanks to dramatic economic development over the last decade.
Businesses from Japan, Hong Kong, Taiwan and Singapore have been actively building their bases in China to participate in the current and future market. By and large, U.S. companies have been missing out. Yet American companies have the technology, market presence and product know-how that China needs, and are in the position to strike attractive deals with favorable long term returns.
China is one of the few places in the world where anything American still carries a special cache, a feeling dating back to World War II. Too bad more American businesses are not taking advantage of this vast reservoir of built-in good will.
Of course, going to China to seek a joint venture partner or form some other strategic alliance is still not a piece of cake. For thousands of years, China considered itself the middle kingdom that waited for the outsider to come to it. In ancient days, the visitor brought tribute and was in turn handsomely rewarded. Now China still expects the outsider to be the proactive party and bring in their ideas. Those who take the trouble to formulate a project, carefully outlining the benefits and required contributions for both sides are more likely to claim the reward they seek.