Looking Back on China

These past two weeks in China were extremely interesting and they went by so fast! We have learned so much from this experience and we were right when we said that there is no better way to learn a culture than to be fully immersed into it. China has an incredible historical patrimony, an old gastronomic history, a high-level of hospitality service, and much more to offer. China is working on environmental issues by implementing waste facilities, like at the company Wheelabrator, but also recycling facilities, double-button flush toilettes and light saving systems. We believe that China would be ready to make the big step and become the new #1 economic world power if it wasn’t for its governmental situation and some other underlying issues that we will discuss below.

As we have heard in many company visits, there is a common belief that China’s economy is growing and that it has become one of the biggest economic powers. According to our marketing professor, Dr. Eroglu, a “market” can be described by a very simple function: Market = f (wants/needs + buying power +number population) – now, China reflects very well all of the three parts of the function. In fact, China’s consumers have many needs/wants, have an increasing purchasing power and the consumer base and middle class are growing by the day. During the visit at the US Commercial Service they provided us with data showing the growth of the Chinese territory and how fertile this area is for new business ventures.  Entrepreneurs like David Yu, free-lancers like the creator of Yuanfen Flow, or multinational companies like UPS, Citigroup, and YRC logistics, are aware of this potential and have decided to invest their time and money in the Chinese market. Obviously, they are aware of the cultural differences they have to face by doing business in China, like dealing with a government-controlled business environment and hierarchical society. For instance, they had to learn how to develop the Guanxi, how to maintain long-term relationships, how to negotiate, and how to “play” with the government in order to maintain their business. Nevertheless, besides all of these barriers, all of them are still doing business in China and nobody seems ready to move out of the country.

In terms of the business sector, most of the companies are very optimistic about their businesses’ growth in China. They understand that building up the relationship with the government is very important, and they still see opportunities and potentials for growth. Although China is a communist country, the business market is pretty much capitalist and the government strives to become #1 in terms of commerce.  In fact, the government is trying its best to promote a capitalistic economy to keep the GDP growth above 8%.  A few foreign companies showed frustration about the business regulations, like UPS being unable to compete domestically with the Chinese competitors.  That more or less slows down those foreign companies’ growth, but not China’s economy as a whole.  Harmonization and stabilization are the main concepts that government is trying to carry out.  As long as the government can keep its people under control, the economic situation will be stable.  If there is a move to reform, then China’s economy could crash.

Perceptions are reality.  The outside world’s perception of China will determine whether or not it can become the #1 economic superpower. Trust is a major aspect; therefore, the lack of enforcement of IP rights and product quality will hurt China’s perception as a trustworthy business player if the government doesn’t move to reform these issues.  A major problem with IPR in China is that enforcement is decentralized and up to the discretion of the local officer.  Furthermore, the counterfeit market in China is widespread and very lucrative.  If this industry were to shut down, the economy would take a huge hit.  Lastly, there has been the perception for many decades that goods manufactured in China are of a lesser quality than in developed countries, which would hinder China’s ability to maintain a high status in the business community.  However, as China’s economy improves, the wages are increasing andmanufacturing is moving to other Southeast Asian countries, thus helping China’s quality perception.  Certain companies such as Hisense are also trying to reverse the perception by marketing high-quality products with Chinese-oriented advertising, so that the world will begin to associate better quality with China.

China, as we see now, is a hugely attractive place in which foreign companies want to invest because the purchasing power is strong and the market is expanding as more and more people move into the middle class.  We can see that businesses entering China are focusing more on the dollar signs than on the regulations and quality perceptions.  There are hurdles to overcome, but China’s economic benefits often outweigh the risks as with most of the companies we visited.  However, we do not think that China can ever become and remain #1 in the world business arena if its people begin to speak out against the government and demand more autonomous rights in society. Furthermore, the perception of China needs to completely change from the current one of high pollution and low IPR and product quality if it ever wants to gain the credibility and status of a fully developed nation.

A Successful Balance

Before coming to China we learned about the cultural climate, the history of the country, and the varying laws and business practices—mostly through the eyes of Americans.  Being here, speaking to different company executives and experiencing the culture, doesn’t seem as different as I first expected.  The people may laugh at us for not understanding the language or for eating the vegetables raw instead of putting them in the stew pots, but they try just as hard to get us to like them as we do to acclimate.  The Chinese want us to see their country as one of rich history, of innovative people, and of promising growth.  As Lin Ran discussed today at UPS, the government wants to have national champions in every industry and wants Chinese companies to have the opportunity to expand around the world.  Yuanfen Flow hopes to use these government motives to help entrepreneurs and start-up companies build successful foundations and sustainable life cycles.  The difference is, however, that while the government wants to increase domestic consumption, it may be driving out the foreign companies that are bringing in capital and useful (and innovative!) technologies.

As we debated the Indigenous Innovation policy in our International Law class, we found many Chinese sources that felt they were justified in utilizing and/or modifying foreign technologies or ideas; having served as a platform for cheap manufacturing for so long, many Chinese feel like they deserve some type of “reimbursement”.  Unfortunately, this deters many foreign companies from entering the Chinese market, partly because they don’t want to share their technologies, and partly because they are afraid of losing their competitive edge through piracy and copyright infringement.  On the other hand, when thinking about is as Ford does, many Asians that want high quality, prestigious goods don’t want copies anyway—they want the real thing.  Companies like UPS see more of an issue with the government’s preferential treatment of domestic companies, but Lin Ran also suggested that American and European governments also put restrictions on foreign companies.  The line seems to be a little more blurry than what many of us originally expected.  The domestic market needs time to mature, but how much time should they be given without putting foreign companies at a substantial disadvantage?

On a different note, another strong feature that foreign companies can bring to the Asian markets is one of corporate social responsibility.  Companies like Starbucks, The Home Depot, and UPS set up programs to foster goodwill and volunteering and to provide monetary support for citizens in need.  Countries like China have generally followed the notion that the government is solely responsible for taking care of its people, not each member of society individually.  As the government facilitates the growth of domestic companies, and therefore the domestic economy, perhaps people will realize a new sense of social accountability—a way of helping the people help the people, so to speak.  While this is something that may have stemmed from Western business practices, it can be just as useful as the Chinese practice of building relationships should Western companies begin adopting such principles.  Learning from each other is an essential part of developing a successful global economy, which perhaps lead to the question: What features of each will lead to a balanced system?

It’s a Small World After All

After the first couple of days on the other side of world, we’re definitely starting to shed light on this phrase… It really is a small world, and one that is becoming increasingly flatter as globalization continues to increase.

We’ve now visited five different companies here in Shanghai: Ford, Continuum Innovation, Citi Group, US Commercial Service, and Shanghai Bosun Capital Advisors.   It’s quite interesting how we are starting to notice some common themes woven throughout China, just as we studied back home, that manifest themselves in different ways in the various industries we have experienced.

Many of the issues that we discussed in detail in our Asian Experience course have been verified by several presenters thus far.  One evident concern is the rapid urbanization that China is experiencing as the population continues to shift from rural to urban areas , which has a profound impact on the financial industry, as it brings about a significant increase in the middle class — projected by some to be 45-50% by the year 2030.  This will lead to wealth creation and the growth of onshore liquid assets, as well as inspire a need for greater wealth management resources.  We’ve also come to understand the threat of rising inflation and China’s need to control it in order to maintain moderate growth (target rate of inflation is 4%).

We’ve also obviously been discussing China’s position in integrating into a global economy and its need to leverage its global footprint, though China is certainly not without dilemmas going toward this goal.  China’s export-heavy economy and low consumption needs to be refocused to become more consumer-centric and to achieve a better balance of imports to exports.  This will have to come with increased income and encouraging spending — in line with China’s plan for scheduled increases in minimum wage over the next several years.  Pollution is another tough challenge that China faces, that we can now speak to first-hand.  Being the #1 emitter of fossil fuels, China will have to make the move toward cleaner energy, especially in order to improve the health of its citizens.  However, we cannot assume that it is impossible for China to overcome these types of problems — it has lifted over 300 million of its people out of poverty in the last 30 years.

It will be intriguing to see over the next two weeks how the remaining business presenters view these and other issues, especially as we continue to see companies from more industries and in other cities in China.  Stay tuned for more from our visits to Qingdao and Beijing!