by Andrew Hupert
Is it worth the effort and investment for foreign firms to do business in China? The answer depends on who you are and what you want from the market – and that’s a problem.
I spent a month in China trying to answer the question, “is it still worthwhile for Westerners to try doing business in China?” The international business press has been focusing on Beijing’s prosecution of the infamous Anti-Monopoly Law and use of national security claims to restrict foreign firms’ access to China’s burgeoning middle-class markets. Overseas readers of the WSJ and Forbes could easily get the impression that foreign brands are being chased out of China on a tide of xenophobic resentment and anti-foreign fervor – but it’s simply not the reality on the ground.
Chinese Consumers Vote with their Wallets
Starbucks and other global brands are more popular than ever – or anywhere. What’s more, there don’t seem to be any local competitors learning even the most basic lessons about marketing or customer service. The most striking feature of Shanghai’s popular malls (and I’m talking about middle-class Xu Jia Hui – not super luxe Plaza 66 or IFC Mall) is the popularity of Western and even Japanese products. The Xinhua news agency and CCTV may claim to be defending the Middle Kingdom’s cultural integrity, but Chinese consumers are voting with their feet and shelling out premiums for the same brands as shoppers in NY, London, and Sidney. The Harvard Business Review may love the Xiaomi story, but Shanghai shoppers are still lining up for iPhone 6.
Beijing Bureaucrats and Shanghai Shoppers: Two Trains Running – Right at Each Other
The gulf between official industrial policy and consumer preference raises more questions than it answers. There are two trends running head-on towards one another, and it’s not going to end well. State policy is more conservative and inward-looking than it has been in ten years – yet Chinese consumerism is more ardently internationalist than it’s been since the 1920s. For now the Chinese economy is comfortably ignoring the growing incongruence of a protectionist bureaucracy governing a consumer society – but eventually those two trains are going to start closing in on one another.
There are 3 possible outcomes:
- The New Foreign Devils. Beijing doubles down on the dangers of Western cultural influence. Growing – and increasingly direct – pressure on international businesses attempting to access the Chinese market. Expect to see more penalties and fines for Western firms doing “business as usual” – like GlaxoSmithKline’s half-billion dollar tag for corruption. Unequal standards for foreign and local firms will eventually make China the pre-glasnost Soviet Union of international markets. On the surface, both MNCs and CCTV will pretend that an open economy exists, but in reality Western firms will start viewing China as an expensive niche market with prohibitive unofficial hurdles that will preclude most commercial efforts. Black markets develop for international goods in coastal cities, while Chinese with money continue to head for the exits.
- The Element Fresh Effect. Large MNCs will restricted and over-regulated, but under-the-radar entrepreneurs of all stripes and colors permitted to flourish as long as they do the right thing (i.e.: follow local laws and don’t command too high a market share). The official line will soften with gentle admission that SOEs can’t compete or execute on party goals. “We want a Chinese Starbucks at some point, but aren’t getting it any time soon and yes – we know it.” This is the pragmatic option for a CCP that acknowledges that the Chinese masses can live quite happily without a free press or democratic governance – as long as no one messes with their green tea Frappuccino’s or iPads.
- Beijing declares victory and we all get on with business like it used to be. MNCs are still held to more stringent regulatory standards, but the headlines will be about big fines for corruption or food safety – not arrests over national security. Visa policy returns to pre-2012 standards. CCTV stops fretting about the foreign bands’ corruptive cultural influence – and starts worrying about the expanding waistlines of Burger Princelings.
Whatever the outcome, the only thing we know for sure is that Beijing will move according to its own logic, for its own reasons. It is becoming commonplace for casual China-watchers to talk about the inevitability of the Party bowing to market forces. The fact is that Beijing believes – still and always – that China is vital to the World, but that the World means nothing to China. That is not about to change any time soon.