Doing Business in China - A Practioner's Perspective

University of Denver
Michael T. Byrnes January 22, 2009

Agenda
China Overview China Cultural Traits China - Why Do Business in China China A Rapidly Developing Economy China Elements of a Strategy China How to do Business China Where to go for Help

Overview Geography and Demographics

Geography
Roughly same latitude range as the US Roughly the same size 3 m sq miles High Percentage of mountains and deserts Arable Land 7 % or of US arable land Bounded by 14 countries most have had adversarial relations in the past.

Demographics
Population - 1.3 billion people One Child policy to limit growth, but social impact Population will peak at 1.6 billion in 2030 70% of population located in south and east costal regions 70% of population lives on the land Population and Employment China must create 13 m new jobs each year Population Trends Aging population and declining births Han make up 94% of population 55 different minorities

Cultural Traits

Business Culture
General Principles Relationships Great Family hierarchy Ritual and protocol Risk Taking acceptance of responsibility Trial and Error Initiative Fear of negative reporting

Reading List
The Immobile Empire Alain Peyrefitte The Chinese Looking Glass Dennis Bloodworth Village Life in China Arthur D. Smith 1 Billion Chinese Customers James McGregor Beijing Jeep Jim Mann The Tyranny of History: The Roots of Chinas Crisis W.J.F. Jenner 1587: A Year of No Significance Ray Huang The Call John Hersey

Why China?

Why China?
China a special market
- A market of significant Size - A market of significant Growth - A market of significant Resiliency - A market with increasingly Normal business environment but not without Risk
* Maturization of reforms and opening up * Chinas entry into WTO * Business friendly government policies

- A global market with virtually all major MNCs present - A global low cost manufacturing base - Large reservoir of high quality low cost engineering talent, skilled labor and a developing management pool

China FIE Profitability

Profitability of US Companies
American Chamber of Commerce Survey in May 2008 Over 800 companies from Beijing and Shanghai

74 percent of respondents report either profitable or very profitable Over 37% report they have higher margins in China than globally and another 31% report that their margins are comparable There was a slight decline in profitability from the 2006 - 2007 surveys. Challenges Economic Slowdown Economic Nationalism - Local Competition Labor Cost and Battle for Talent IPR - Market Access

Trends and Opportunities

Infrastructure
* * * * Water Power Transmission/Distribution Mass Transport, Sea and Air Ports and Marine Commercial, Residential, Industrial, Public *Waste Management

Environmental and Energy Efficiency

* Renewable Energy * Clean Coal

Manufacturing -

Global manufacturing base development

* Automotive * Electronics/Telecoms * OEM development

Safety/Security food, mining, industry, residential Services Logistics and Distribution Health and Elder Care - demographics

RDE and Mature Market

Mature Market
* Resource-opportunity balance * Well established infrastructure * More regular operational tempo * Senior leadership * Predictability level high * Cultural conformity * Established brand and reputation * Home turf * Metrics well tested

Rapid Developing Economy

* Scarcity of resources * Undeveloped infrastructure * High operational intensity * Mid-level leadership * High level of uncertainty * Cultural barriers * Underleveraged brand/reputation * Distance * Need modify BU and personnel metrics * Requires pre-emptive investment * Investments in place not need * Core values more critical, but * Core values assimilated normally weak * Boston Consulting Group

Challenges for Foreign Businesses

The need to understand the role of the government The constancy of change
Regulations and Standards Authorities Market conditions

Corruption, IPR and rule of law

Increasing economic nationalism

Managing control and compliance across the board Need to deal with local competition and price pressure Pace and depth of localization The right organizational structure Corporate Engagement

Elements of a Strategy

Operational Requirements
Strategic vision from the top the need to think broadly
- Aggressive Government Relations and Reputation Building - Cost, Product and Management Localization - Pre-emptive investment and Corporate subsidization - Appropriate control structure to insure compliance - Right balance between sales and coordinated operations Manufacturing, R&D, Sourcing and Logistics - Expanded presence and partnering - Significant focus on HR training and development - Common processes and shared facilities and services

Government Relations
Key Objectives
Reputation enhancement Problem/Issue resolution Policy watch and regulatory shaping Direct Commercial Support Where possible align your goals with those of the government

Why Government Affairs?

PRC government plays a significant role in business in China THE PLAN China a command economy The regulatory environment Partners, customers, suppliers, competitors, service providers, and media are controlled by the Party and the parallel government bureaucracy.

GA Targets
Central Government Focus on the macro-level and policy Provincial Government Focus on implementation Industry associations - playing a more and more important role in developing standards and formulating policy. NGOs - they are an emerging and new power in China. They monitor government behavior and the actions of enterprises Think Tanks - universities, State Council Research Centers, Ministry Research Centers. State Media - the Chinese propaganda department provides guidelines to the media

GA Principle - Win-Win
Companies should implement programs seeking a win-win solution to promote a regulatory environment favorable to business objectives

Full Compliance - labor, environment, tax, safety, customs

Provide goods and services that China needs/values Long-term commitment Corporate Social Responsibility

Never complain but constructive dialogue

Issues List - PRC

Standards/Codes/Licenses Labor Contract Law IPR Protection Market Access Customs Procedures Tax Unification Corruption Economic Nationalism Anti-foreign sentiment

GA - Helpful Hints
The Companies senior executive in China should take the lead on GA with strong support from a local team GA should be both focused (ISSUES) and general (REPUTATION) GA is not based on Good guanxi front vs. back door Be a good citizen faithful compliance and community support Remember that GA not only includes the PRC government but also the USG Leverage all resources available Be open to helping others even competitors in some cases Insure the understanding by Corporate executives of the key importance of GA in the China market.

Localization
Cost Structure
* MNC cost structure = harder to compete * Threat is indigenous competition * Never get too indigenous - nor do you want to

Product - Need for a Development Center

* Develop a product that meets market cost and functionality fit * Develop product for China that serves as a benchmark for global cost * Develop and support product/services to meet needs of the local market

Management Localization means local, with a

continuing need for selected expats

West/Northeast Geo-Strategy
Focus on developing markets in Chinas interior
Leverages PRC Government drive to develop the interior US$150 + billion to be spent on infrastructure 2006-2011 Power distribution Environmental - WWW and pollution reduction Transportation - Light rails, subways, airports Natural Resources - Coal Mining, Oil & Gas, Pipelines Local governments are highly receptive to foreign investment and presence Ability to use government relations to develop business opportunities Relatively low level of competition

 Partnering with local firms will in some cases be necessary and now in many cases feasible * Local firms especially private firms - increasingly
understand the win-win logic of commerce * Local firms have a significant home court advantage in cost, contacts and in understanding the market

Positioning for Growth Partnerships

Focus on:
* * * * * Intellectual rather than physical capital Engineering and Manufacturing Firm that have licenses Channel enlargement but never easy Private firms that demonstrate good management

Support Opportunities
China Help Desk

Where to Get Help

US Foreign Commercial Service Chambers of Commerce US, Beijing, Shanghai Law firms International and local Quality Brands Protection Committee (QBPC) Industry Associations such CCPIT China Council for the Promotion of International Trade Consultants - TAX, Government and Media

Contact Information
Michael T. Byrnes
Senior Advisor - Yuan Associates (Beijing)
* Government Relations * Business Start-up

Senior Advisor Amer-China Partners (Beijing)

* * * * Due Diligence Background checks, vendor vetting IP Investigations Dispute Resolution E-mail: mtbyrnes@sprynet.com

TEL: 401 243 4511

Thank you. Questions?

30

Common Errors
Irrational Exuberance Trust but no verification Failure to take proper legal and financial precautions Acceptance of this is the way we do it in China Worry about offending Chinese hosts Believing in Friendship Not getting the home office on board Failure to recognize the cultural/systemic differences between China and the home market Not establishing company culture and values Not knowing when to say NO

Chinese Government Structure

National Peoples Congress

State Council

Central Committee of the CPC

Peoples Political Consultative Conference

Central Military Commission

A Functional Perspective
Macro Controls Sector Management Public Affairs Law Enforcement National Security

NDRC

MoF

MoLabor& Social Sec MoEd

SAIC AQSIQ

MoFA

MOFCOM

MoC

MoD PSB

PBC

MIII

MoCulture Customs

General Adm. Sport

SDA

Government Affairs The Environment

Time-consuming to find the right officials in a PRC agency, association, or think tank and ensure those officials have relevant information. Government officials have little incentive to share information across departments. Government affairs executive must have several meetings on the same topic within one agency. Meeting senior-level government officials is much more difficult than in the past, and companies should not expect to make courtesy calls with senior government officials. Successful government affairs programs must ensure that the company delivers a uniform message to government officials about who represents the "face" of the company

Government Affairs The Environment - II

In the past, the Chinese government only heard a small number of voices. But now they hear more and more voices - trade associations, domestic business, media and NGOs. The question is whether you want to have growth by relationships or growth by policies. Relations are important but they are not enough. You must work with the Chinese government to stimulate the growth environment Corporate reputation versus issues management. Every company has issues, but it is better to proactively build corporate reputation than be seen to be responding to issues. Corporate reputation is your insurance policy

Government Affairs Crucial for Business Development

For MNCs government relations operate on the national, provincial and municipal levels
Critical purchasing influences
Focus on provincial and municipal levels Enlightenment of government officials at all levels

Administrative and organizational function

Navigate the branches of government influential to industrial growth Improve the overall conduct of business through education of Rockwell Automation management and employees

Monitor and influence changes in policy and regulatory environment

Focus at national level Especially crucial in tax, customs, and WTO implementation Business opportunity watch Standards, electro-mechanical - networks - safety

The How To
The Role of Guanxi - particularly the belief that a company must rely on someone with connections to achieve its goals--make it difficult for companies to conduct government affairs effectively. The successful government affairs professional in China places greater emphasis on interpersonal, communication, analytical, and critical thinking skills than on personal relationships or contacts.

Negotiations China Style

Anything is possibleeverything is difficult and remember - the negotiation is never done Know the Objective know the other side Understand and set limits dont be anxious dont get involved in a pure price discussion Explain your position be clear be direct - make concessions reluctantly stress shared responsibility/gain Dig in or flex - dont get emotional decide before hand where to give Always support your team no public disagreement Always have your own interpreter BE PREPARED TO WALK AND TO LOSE/WIN

Cultural Traits
General vs. Specific Man vs. Law Guangxi and relationships Group vs. Individual core group is the family Family vs. Common Good Intuitive vs. Scientific Hierarchy vs. Matrix clean chain of command Form vs. Substance - issue of FACE Face vs. Results Shame vs. Guilt Order vs. Chaos Hustle vs. Planning Concrete vs. Abstract impact on services Indirect vs. Direct Backward looking/conservative vs. Forward looking

Government Relations - Structure

REPUTATION/POLICY SHAPING: The center merits the most attention ISSUES: The lower levels of government require and merit the most attention, not the least
State Council Ministries

Regional/Provincial

Local & Municipal