UNC Kenan-Flagler Insights

Opportunities and challenges for those seeking to do business in China

November 15, 2010 By Heather Harreld

forbiddencityNPR’s Shanghai correspondent Rob Gifford visited UNC Kenan-Flagler to talk about the seismic changes occurring in China. He first went to China as a language student in 1987, reported on the country as NPR’s Beijing correspondent from 1999-2005, and returned as Shanghai correspondent in 2010. He is the author of China Road: A Journey into the Future of a Rising Power. Below is a Q & A with Gifford during his visit to the school.

What are the biggest mistakes people make when trying to do business in China?

The first is assuming that they are going into a level playing field. They are going to a place that is booming, and they’ve seen the pictures of Shanghai and thought, “‘Hey it looks like Manhattan.”

Yet China is just so very different in the way that it functions as a business environment. There are companies that have been in China for a long time that are just now beginning to make a profit. There is corruption and bureaucracy. It is not a level play field. It is not transparent. It is, in many ways, still a developing country. You have to go in with your eyes open.

There is a perception in the West of the inevitability of China’s rise, and the Chinese are going to be competing and taking over the world and we all should just get out of the way. But when you go to rural China, you realize that we have 700 to 800 million people in the countryside participating marginally in the China boom. It doesn’t mean that those 200 to 300 million in the new middle class market are not a new market. But there is a lot of hinterland there that people forget about.

The legacy of communism is there, which can be a real dead weight. There are problems of regionalism and the fact that every Communist member has his own little fiefdom where he controls everything. How are you going to break into that?

What are the greatest opportunities for doing business in China?

For decades, China has been seen as the workshop of the world, and indeed it has been that. The factories of southern China and along the coast have been where everything has been made, and China will continue for some time to be the workshop of the world.

But one of the most important things that has been going on in the last five years is the real consolidation in the cities of the consumer society. Chinese people have been buying stuff for some time now but it is very noticeable how there is a middle class that is consolidating in the cities and really starting to buy stuff.

The story is now shifting more toward consumption. We are seeing it now away from the coastal cities. We’re starting to see wealth trickling inland now. Those cities are still poor by Western standards, but those people are starting to benefit from the boom going on in the coastal areas. It is going to be a real boon for the western companies that are trying to operate into China.

What role has the investment in infrastructure – particularly airports – played in China, and is this a symbol of China’s rising power?

One of the extraordinary things you notice about China is the infrastructure, and the speed of construction. It is amazing.  Even before 2008 China was pouring money in to infrastructure, and it is symbolic of its rise.

But it is important to understand where it was coming from. It is coming from a very, very low starting point. There were very few roads in China. Airports were rudimentary. Nobody flew much until the 1990s.  It has a long way to catch up.

There are some areas where the Chinese are leapfrogging others. In telephony they are not bothering to install fixed line telephones. There are now 700 million cell phone users. In just a few years that has doubled.  It is going very, very fast but there is still a lot of catch up to do.

What are the most striking differences that you have noticed since you left Beijing five years ago and returned to Shanghai to work?

I have noticed are lines of people standing outside the Subway sandwich shops. When I left, Subway was just a classic Western brand trying to get into China. Chinese people don’t traditionally eat bread.  A company like that initially struggled to get into the China market. You don’t eat a sandwich for lunch; you go for a bowl of noodles. Now people in Shanghai are standing in lines at lunch at Subway.

China is becoming much more global. For a long time, China was growing but it was still very Chinese. The cities now are much more like American cities and the workers are much more like American workers. The lifestyle and everything is becoming much closer to how you live in America.

The new middle class is here, and they are eating sandwiches from Subway, and they are buying stuff that we buy and doing things that we do. That is a massive change.

Even though the gap between urban China and urban America has closed what has happened is a massive gap has open between urban China and rural China.

That has to be a focus for businesses trying to get into the hinterland. Socially that is a massive challenge to the Communist Party because those rural people, the farmers, can see on their TV sets what these newly globalized citizens of Shanghai are doing and how they are living. Those farmers are not living that way. That is the biggest challenge for the Communist Party over the last decade.

Some people have said that China has had a “good recession” compared to the rest of the world. What do you think?

A lot of people, myself included, thought that the China boom was great but there would be a real danger if the economy slowed. You see all these people employed in the factories but if a real slowdown comes then we will see problems because they can’t lay off tens of millions of people. Then the crash came, and, in the last two years, tens of millions of people have been laid off from their factories in the coastal cities and they have gone back to the countryside. There hasn’t been a squeak. That shows how strong the Communist Party still is.

The Chinese government is still very much involved in a lot of businesses. It gives a lot of support to the industries it sees as important and strategic.

You notice that the Chinese have had a good recession. They have come out of it reasonably well. Foreign business people say there is growing belligerence or confidence in China.

China has had this perennial inferiority complex about how it has been the weak man of Asia for so long and how it has been an underperformer. Now finally after 170 years of engagement with the West it has gotten to a position of strength. It is perhaps inevitable that Chinese Communist Party officials will be a little more confident.

What are some of the problems associated with contract sanctity and IP that businesses need to know about?

Signing a contract is the beginning of the process in China. You think in your Western way that a contract is the deal, and then come all the extra things and changes that they want. It is very slow to change.

IP is another massive problem – just blatant stealing of whatever it is the new gadget you want to make. Many people partner with other Chinese companies in joint ventures, and some have found that their stuff has been stolen and there is a factory down the road that is knocking off copies of their product.When the Chinese starting inventing stuff that they want to protect, then you will see a change.

How much does the Communist Party interfere with a person’s daily life in China?

What has happened since Tiananmen Square in 1989 is the Chinese government, from the people’s point of view, has done a deal. They basically have said to the people stay out of politics and you can do anything you want. After decades of having their lives convulsed by politics, the Chinese people have bought the deal.

In the old days you lived in a birdcage in China, and they controlled everything you did and where you worked and what you thought. Now the government has lifted the roof and it’s like you live in an aviary and you can fly around and you have a lot more space and freedom.

The deal that the Communist government has done with the people means that you do have space to do business.

But there is still a roof on the aviary, and they can still catch you if they want you. You can’t fly up into the clear blue sky but it is not the police state that is used to be.

From a business point of view, the government is more interested in checking in with your plans or seeing how you do things. There is a certain amount of oversight to see what they can get out of what you are doing in China that as businesspeople you need to be very careful of.

They want to get everything they can out of you being there.

If you have sensitive information about your products or your plans and your factory, you have to be as careful as possible because there are so many instances of people have their IP stolen or their plans to build a new factory scuppered by someone listening in.