Learning the Art of Friendship
Despite a litany of prophecies from renowned economists threatening a new crisis, the Chinese market still remains attractive to foreign companies, and largely unexplored. But what do the Chinese themselves think about foreigners? And what sort of insider tips could be beneficial to foreign players? BRICS Business Magazine discussed these questions with Willie Li, Deputy Head of Nantong Sijian Construction Group – a company with a turnover measured in billions of dollars that built tens of millions of square meters of real estate. He gladly agreed to share his expertise and insights.
Mr. Li, do you believe that the idea of venturing into business in China is still popular among foreign companies? And how have the trends in this area developed over the recent years?
I remember that after the 3rd Plenary Session of the 11th Central Committee of the Communist Party of China (CPC), foreign investors led by overseas Chinese began to invest in mainland China, starting with the processing industry in eastern coastal cities, which were represented by Shenzhen.
After Chairman Deng Xiaoping’s southern tour speeches, the 14th National Congress of the CPC confirmed the aim of establishing a socialist market economy system, which led to the rapid expansion of foreign investment in China. Yangtze River Delta and Pearl River Delta represented the places attracting foreign capital at that time when new technology was introduced and infrastructure and service industries began to pick up.
In 1997, the same year that I first came to Shanghai, the 15th National Congress of the CPC established the diversified-ownership economy, allowing for the shareholding system to exist alongside a mixed economy. That was a golden time for foreign capital expansion.
In 2001, China joined the World Trade Organization (WTO). This gave rise to a fair, just, and open market competition environment. Thereafter, foreign funded enterprises were able to enjoy the same treatment as national enterprises; discrimination and restriction in market access were eliminated.
The past decade brought rapid economic growth and an increase in per capita income. The driving force of overall foreign investment shifted from the original low cost to the current high consumption market. Thus, foreign investment in China gradually moved from the general manufacturing industry to consumer goods and service industries. Even in the manufacturing industry, foreign capital has shifted toward high and new technologies.
Recently, the State Council officially approved the establishment of the China (Shanghai) Pilot Free-Trade Zone (FTZ). This is an innovation in the economic opening up model, and incentivizes companies in high-end manufacturing, processing, trade, and warehousing logistics to locate themselves in the FTZ. If successfully implemented, this initiative would allow foreign capital to enter industries that used to be monopolized or had a high approval threshold. We think this will bring us new business opportunities.
Nowadays, an increasing number of foreigners are coming to invest in China. Especially in recent years, I have seen more and more foreign investors and less and less usable land in Shanghai.
Over the past few years, I have to say that there have been plenty of changes to overseas investment here in China. That is due to many factors such as government policies, cost, development of local private companies, and an economic decline in investors’ home countries. There are several major changes. Firstly, since the beginning of reform and opening up, family companies and specialized companies in niche areas have replaced Fortune 500 companies and industry leaders as main investors. Secondly, investment purpose has shifted from seeking low cost labor to seizing the market. Thirdly, more investment has gone to technology-intensive enterprises instead of labor-intensive enterprises.
The recent 3rd Plenary Session of the 18th CPC Central Committee confirmed further reforms, established the reform leading group, and expanded transformation so that China’s economy will see further development. And we learned of the ‘Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform.’ The 35-year history of reform and opening up has proven that the market in China is enjoying a strong growth trajectory. Furthermore, the middle class, which numbers over 300 million, will keep growing. This could be a huge consumption and talent market. China aims to double its 2010 per capita income by 2020.
How would you describe the specific requirements and idiosyncrasies of doing business in China? Is there anything an entrepreneur should keep in mind when entering the market?
If you want to invest in China, you need to rely on government authorities – especially the CPC and government leaders’ guidance and support. To better understand the market, you need to make friends; nothing can beat you if you have friends who are always behind you. You could hire professionals, liaise with local government authorities, maintain communication with upstream and downstream firms, and join relevant industry associations. You will benefit significantly from bringing along excellent cultural ideas, technologies, and resources, and combining them with China’s current conditions. Picking up bad habits here will lead to nothing.
Foreign-funded enterprises are often exposed by the media for problems related to quality, tax evasion, and illegal employment. For instance, Foxconn employees jumped off a building and Honda employees went on strike. These incidents led to suspicion of labor systems in foreign-funded companies, which had a negative impact on them. Foreign investors need to keep these things in mind and make sure preventive measures have been taken and company systems are improved. They need to establish a good corporate image along with strong corporate social responsibility.
Talking about laws, how difficult is it for a foreigner to start a business in China?
As for the legal aspect, I’m not an expert in that field, so I am unable to give professional advice there. In general, foreign investors should abide by Chinese laws to avoid difficulties. What is more, they will need support from higher level local and central governments. This will avoid the phenomenon in China: ‘I can’t make you successful, but I can make you unsuccessful!’
Overseas investors are mostly from countries with better social and legal systems. Perhaps they think there will be no legal risks as long as they do not violate the law. In fact, legal risks can be caused by many complex factors such as changes to the legal environment, unexpected events, the actions of third parties, other external factors, and illegal employee behavior.
Some foreign companies have no legal professionals to recognize and respond to these legal risks. Or misunderstandings occur because of differences in culture, laws, etc.
Some foreign enterprises continue using their own management system after entering the Chinese market, and that has legal risks as well. Improper management styles with Chinese employees or improper handling of issues can also lead to other legal risks. Here, stability is of overriding importance, and people tend to protect vulnerable groups when dealing with labor disputes.
My suggestion is to hire consultants and lawyers with experience in China so as to avoid legal risks. In addition, as things can be lost in translation, it is quite important for contracts of any form to make clear which language shall prevail in the event of a dispute.
As for foreign investors in China, my advice is to make their corporate social responsibilities clear, establish a good corporate image, and enhance legal risk prevention measures.
Which regions of the Chinese market are more attractive for newcomers?
For newcomers, it would be easier to invest in the Central and Western regions, while in the Eastern part it is more difficult. The Central and Western parts of China are underdeveloped and quite in need of investment, so policies are more favorable and the market there is more promising. In the East, it is very well developed; the market entry threshold is high, with fewer preferential policies and less of a demographic dividend. In first and second tier cities, there is an abundance of information and talent. There are government services, simplified procedures, and many consulting companies. Investors should seek advice as much as they can, according to the characteristics of the industry. They could speak with successful foreign investors in China, and learn about best practices.
The investment environment now is much better and has greater opportunities. Government authorities welcome newcomers and provide a friendly business environment and effective guidance to help these newcomers in the right direction. However, there are still many areas that need increased investor input, like protection of IPR, bridging the gap in language, culture, and ways of thinking, as well as dealing with flexible market conditions.
Investment costs are rising for those who want to start a business here. Foreign companies without unique, competitive products and services will find it difficult to establish themselves in the Chinese market.
What industries in China are the most popular among foreign investors and businessmen? And what industry is suffering from not enough foreign investment?
The most popular is definitely the service industry. But I have also seen a lot of investment in the manufacturing industry, like in machinery, auto parts, electronics, and others like pharmaceuticals, food, daily necessities and others related to people’s livelihood. Additionally, more foreign-funded restaurants and department stores are coming to China. But we hardly see any foreign capital in municipal facility construction, real estate, financial investment, energy, communication, etc. It seems that no overseas capital has come to elderly care yet. Some industries are government-monopolized, but with better policies, foreign investment could also gradually penetrate these industries. This is mainly affected by government policies and personal connections. It should be said that this trend did not go through big changes in the last 15 years, but I believe more sectors will gradually open up.
Localization is an absolute requirement if you want to invest in China. Localized thinking, business models, and cooperation models are all necessary. People must have a clear understanding of the investment environment in China if they want to do business here. Nowadays, China is no longer a country that welcomes low-end manufacturing or
labor-intensive enterprises. Companies whose secret weapon is still low costs are not suitable for China anymore
My advice is to refer to our new administration’s related regulations, especially information about the 3rd Plenary Session this year and CCTV news. All of this will give investors a better understanding of the latest policies and trends, and increase the possibility of seizing opportunities.
What does the Chinese market expect from foreign businessman?
Foreign investment is one of the three engines of China’s economic development and will definitely win respect and support. Investment by overseas entrepreneurs is very welcome here, especially by local government officials. It is especially welcome in development zones. Those government officials will provide support and guidance, coordinate between companies and the local authorities, and assist with tax breaks. A sound investment environment will bring economic benefits and encourage a good employment environment. I think this is long-term friendly and will lead to mutually beneficial cooperation.
First, our market aspires to entice overseas entrepreneurs to bring more high-tech processes to China. These could include more techniques that promote our rapid development such as biological, medical, and environmental protection-related technologies, as well as the introduction of lifestyle-related designs, e.g., clothing, food, and art. The Chinese market will absolutely hope for the localization of foreign-invested enterprises, which could retain their advanced overseas management style while integrating into the Chinese culture.
What business partnerships is China looking for? What are the criteria for an ideal foreign partner setting up a business in China? Do you have any real-life examples?
As for what business partnerships China is looking for, I think people from different industries will have different opinions. Generally speaking, it would be best if both sides could fulfill their obligations and take advantage of their own strengths. Objectively, foreign companies have corporate management expertise as their advantage, or hold a certain valuable core technology. On the Chinese side, our strength is a full understanding of the local market, support and assistance from government authorities, and personal connections.
As far as we are concerned, what I expect is a long-term strategic partnership. The main criterion is that you must have great products. Take one of our projects as an example, the George Fisher project in Suzhou – from Suzhou Industrial Park to Kunshan, from Phase I to Phase IV, from new projects to expansion projects – we have maintained a long-term, friendly cooperation based on trust.
As for the ideal overseas partners, I am lucky that my clients are all wonderful. There have been disputes, misunderstandings, and moments when we could not stand each other, but we always have mutual respect and mutual support. Our differences and disputes were resolved based on long-standing friendships and we remained friends afterwards. I think the luckiest thing for me is to encounter this kind of precious cooperation.
The foreign companies that I’ve worked with always communicate with full transparency and strive for mutual trust. Even if it is just a bid, they will clarify that it does not necessarily mean they will give the project to us. Also, they never consider themselves superior to us. What they expect is to complete a project by working together. From the very beginning of the bidding process, counterparts from both parties start to sit down and discuss how to proceed and how to solve problems through joint efforts, as well as how to optimize schemes. During the process of cooperation, both sides are on an equal footing. I believe that is the most important aspect – only a project done with your whole heart will be a good project. Similarly, only the partner that works with his whole heart is a true partner.
What is the attitude among Chinese businesses towards foreign managers? Do they welcome business competition of this sort?
With constant in-depth reform of China’s market economy, our business community has become increasingly open and free. It should be said that the Chinese business community, myself included, welcomes foreign managers to complement us or add to our tech and capital strength. We like this kind of fair and healthy business competition; it will bring more vitality and momentum.
It should be said that the pressure coming from healthy competition is the driving force of development, so the business community here will not object to some healthy competition. As for the overseas executives, we always respect them. Their advanced expertise and self-motivation are worth learning. In this golden time for the Chinese market, I’m convinced that excellent business models will be created through mutual respect of Eastern and Western cultures to finally reach a common ground.
China is a hospitable nation – as our proverb goes: ‘Isn’t it a delight to have friends coming from afar!’
What is the definition of success to a foreigner on the Chinese market?
The best entrepreneurs should be those whose companies have earned a good reputation, and become high quality companies that contribute to social and human development. Only after that will society begin to see who is running those businesses. No matter if it is a foreign or a domestic company, the biggest success comes from mutual benefit and cooperation.
Success means profits for the company, making good friends, and long-term development. Success should mean becoming leaders among overseas entrepreneurs in China. Both the overseas and the domestic sides should be humble and seek mutually beneficial cooperation rather than defeating the opponent, which causes severe damage to both sides. Both sides should remain both competitors and friends, and seek joint progress by enhancing each other’s strengths. Nowadays, why not spend the time that you used to find enemies to think about how to find good partners and start creative cooperation strategies, and then bring excellent service to consumers?
The Chinese market entices overseas entrepreneurs to bring more high-tech processes. These could include more techniques that promote our rapid development such as biological, medical, and environmental protection-related technologies, as well as the introduction of lifestyle-related designs, e.g., clothing, food, and art
Chinese culture values hard work, courage, wisdom, and hospitality. We welcome competitors who are also friends, and we wish them success and mutual progress.
Do many foreigners achieve success? Do you have any data about the amount of businessmen who come to China with the idea of setting up a business and were ultimately successful?
It should be said that the majority of foreign investors here are successful, significantly contributing to the development of our local companies and serving as good references for us. But I am unable to provide any specific data on this. Many companies from Japan, Europe, and America that I have worked with have strong growth trajectories. I also know of many companies that were successful here, but were not as successful in other countries or even their home countries.
Of course, entrance into the Chinese market does not guarantee success. That requires smart leadership, localized development strategies, and excellent management.
I also know of some foreign-funded companies that have been in China for more than a decade without any significant business expansion. They themselves are aware of this problem, but suffer from failing to find the right people or are unable to make the right decision at the right time.
Do you have any advice that you would give to a businessman who decided to enter the Chinese market?
At present, resources have been quite stable and mature in China’s first and second tier cities. Foreign entrepreneurs could first get to know local enterprises through various platforms, and then exchange ideas with each other. This will help solidify plans and goals.
My suggestion is that you be strong in both technology and personality – you need to make friends and broaden channels, you need to establish partnerships, and you need to maintain good relationships with government authority leaders.
Localization is an absolute requirement if you want to invest in China. Localized thinking, business models, and cooperation models are all necessary. People must have a clear understanding of the investment environment in China if they want to do business here. Nowadays, China is no longer a country that welcomes low-end manufacturing or labor-intensive enterprises. Companies whose secret weapon is still low costs are not suitable for China anymore. Plus, the investment environment here is flexible and fast changing, which requires a quick response and flexible strategies.
In addition to exclusively foreign-funded enterprises, they could also consider joint ventures. This would help them more quickly learn about the Chinese mentality and integrate into the Chinese business culture. Their business could expand into the Chinese business partner’s channels while they provide the Chinese partner with technical support and management improvement. Thus, both sides could benefit from one another and develop simultaneously.
If it is about large-scale enterprises, they’ll talk about cooperation through formal negotiations; if it is about small-scale or personal business, I would suggest that both the foreign and Chinese parties start cooperation with a specific, early-stage project. Then, according to resources, a joint venture investment could be considered after a mutual understanding is established.
After joining the WTO, China’s economy has continued opening up and integrating into the international economy. Thus, it has become easier for foreign capital to flow into the Chinese market. In addition to the ever-popular secondary industry, foreign funds could also flow into the financial and securities sectors, as well as other industries. As the Chinese market continues to mature, what follows is improved regulation and increasing labor costs, environmental protection, and other requirements. All this requires foreign companies to enhance their strengths and discover real opportunities.
The key is to combine the best elements of foreign cultures with China’s, and to develop by seizing opportunities in an emerging economy with a huge consumption market. It is now or never!
In your opinion, are there any cultural stereotypes about China and the Chinese work ethic that you would consider harmful?
Ten years ago, Chinese laws were not well developed. As there were a lot of market opportunities, business owners might have resorted to some questionable methods to maximize profits, both for their personal gain and for the survival of their companies. In recent years, with the gradual improvement of market mechanisms, the investment environment has become increasingly friendly. But currently, there are still some phenomena that need to be improved – for example, serious corruption. The market is not well regulated in some places – people do not always abide by the law and law enforcement is not strict enough, monopoly is a serious problem, and there are collisions between Eastern and Western cultures.
For instance, many Chinese corruption cases involve foreign-funded companies like the bribery incidents of Siemens, Lucent, Rio Tinto, and Avon. All these cases have shown that foreign companies boasting strict management can actually be hard-hit by bribery, just like in the GSK bribery incident that occurred recently. I think all of these incidents have reflected the aforementioned problems and defects.
Foreign companies have to be extremely careful if they hire local Chinese executives, as some individuals have terrible professional and personal ethics, which will harm the whole company’s interests. Those companies have to be aware that some government authorities are difficult to deal with, have unreasonably high thresholds, or that people there can be quite arrogant and unfriendly.
But China’s current anti-corruption initiative is stronger than ever before, so the market will improve with better regulation, as the current trend shows. With further economic opening up to the world, Chinese and foreign companies will be better, and Eastern and Western cultures and management philosophies will be better integrated. I believe foreign investors will grow and thrive in this healthier environment.