What It Takes to Do Business in China

CHINESE mythology tells us that its most important god, ``The August Personage of Jade,'' lives in a heavenly palace guarded by Wong, a ferocious bureaucrat. Armed with a stick, clad in armor, Wong the doorkeeper admits some but rejects many.

Investing in China today is like getting past Wong: China's riches may be heavenly, but to realize them, foreign investors must overcome some high hurdles.

Since 1987, America's vanguard companies have had some difficulty realizing profits. Today's investors may have to wait until 2001 or later before they realize a significant yield.

Planting seeds

During a recent visit to Shanghai, our trade mission visited several businesses, including the Pacific department store - one of three in this financial capital. The ultramodern, six-story building with more than 1 million square feet, looked as if it was transplanted from midtown Manhattan. During our tour, the general manager said that the store's products - from jeans to perfumes to watches, all highly priced - were Western brands admired by the 300,000 Chinese who entered the store daily!

``How many buy?'' I asked. ``None,'' he said proudly. He added that Pacific was ``planting seeds'' in the consumers' minds. ``While they're developing some disposable income they might consider buying our products at some future date,'' he explained.

Think of it: By 2001 Pacific's investors - from Taiwan and Hong Kong - might make a profit. The other two stores are willing to take a similar loss.

Certainly, money can be made in China if investors enter carefully.

The only intelligent way to go in is through an experienced joint-venture partner or through one of the Hong Kong business organizations that have Chinese- mainland representation. The long-term view is the only one to take unless you have a specialty that the Chinese need and that will yield an immediate financial return.

Study in contrasts

The Chinese are a study in contrasts. They're very proud of what they've built and they see growth opportunities for the future. But they're not quite sure who is going to fill all those new airports, buildings, and expressways.

The new China ``West,'' Shenzhen, brings to mind the Wild West of the 1800s. Many Taiwanese, Japanese, French, German, and United States businesses are setting up shop there because of its proximity to Hong Kong and the ability to build businesses from the ground up. It's an impressive undertaking: The skyline reflects at least 20 major skyscrapers of 50 or more stories each. Tenants include such companies as Merck, AT&T, Mobil, J&J, and United Technologies.

China, too, has rich farmland. Close to three-quarters of the population lives in rural villages; 70 percent are farmers. So it comes as no surprise that consumer goods, with the exceptions of food and textiles, have lagged behind heavy industry. This lag also stems from outdated technology, a shortage of highly trained engineers and technicians, waste and inefficiency in production, and an outdated, railroad-based transportation system that can't handle current demand.

So Chinese companies are looking first and foremost for investment capital; then technology, training, management knowledge, and equipment. The Chinese that we met - from the mayor of Shenzhen to deputy mayors of Shanghai to governors of the financial district in Shanghai - all are eager to lure firms that are willing to risk capital and, within five years, build a positive image and franchise among consumers. That capital, furthermore, is at great risk because outside the country, the Chinese monetary unit has no value or foreign-exchange standing.

Businesses that already exist with Chinese management and/or Hong Kong participation are a far more intelligent and less risky way to enter: You have some assurance that your partner is going to be trustworthy and will be able to repatriate profits.

Inflation threat

Economic reforms and improved living standards are being pursued vigorously in China so that the Communist Party can retain its power. Industrial production is growing at about 12 percent a year. Now the danger is inflation spurred by greed.

Investors should be aware of the hodgepodge of controls and free-enterprise zones. To say anyone controls them - much less inflation, which was running at a 20 percent clip in the first quarter - is a misnomer.

Such new cities as Shenzhen enjoy a certain independence from Beijing, so everyone makes the best deal possible. A part of the population in and out of government wants to get rich fast, which is a real danger in an overheated Chinese economy.

Prices are set by local councils consisting of top officials, separate from anything that comes from Beijing. In essence, they have their own fiefdoms, not unlike feudal lords of yesteryear. So a major city can have three or four levels of government that affect what a company charges for its services.

Shanghai is the largest city in China, one with the longest business relationships, and sophistication not found in other centers of commerce. On the other hand, Beijing, as the political center for China, is rife with all kinds of political maneuvering that only distracts business.

Ten or even five years ago, foreign companies that entered China were greeted with open arms because the country wanted some show pieces.

AIG, the insurance giant, for example, went into Shanghai in 1985 in a $200 million construction project to build a modern hotel and commercial office space. It took the firm close to three years to set up a massive construction site in the center of Shanghai; the real estate cost virtually nothing and it came with a 10-year lease, which is now being extended. These operations all revert to the Chinese in 15 years.

Today the Chinese appear much more sophisticated about investments and which incentives they're prepared to provide. The country's ``Golden Projects,'' for example, involve major initiatives in the development of a national information infrastructure and AT&T's multimillion-dollar joint venture in equipment, technology and network planning demonstrate their serious intent.

These deals were long in process. Today, many companies knock on the golden door; however, it's going to take a considerable amount of time, effort, and money trying to get into China, and considerable patience to succeed. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.

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