- Published on Monday, 08 September 2014 13:37
by Andrew Hupert
Last week we talked about China realities. The ultimate conclusion was that while the Chinese business environment isn’t fair, it’s still the best game in town in terms of growth and opportunity. As a China negotiator and decision-maker, you have to decide early – go all in or get completely out for good. China is a terrible place for half-measures.
Two types of China myths. China bear and Chinapologists.
Chinapologists are the China experts who support and spread the orthodox China party line. You can usually spot them because they tend to preface every statement with, “I’m not supporting the Chinese party line but…” and then they proceed to do so. When a Chinese person does this it’s pretty easy to spot them as either 50 Cent Army (paid posters on online chat and BBS sites, who are alleged paid half a mao – or fifty cents – for each pro-government entry) or direct beneficiaries of Chinese policy. It has become common for Westerners living in China for a long time or hoping to curry favor with bureaucrats or officials to actively defend Chinese policies that many Westerners consider unfair or discriminatory. Sometimes these Chinapologists feel they are winning points with decision-makers who will soon repay the favor; sometimes they got to this position via a slippery slope of defending elements of Chinese business or society that they genuinely believe in- but ended up completely in the China camp; and sometimes they are merely mouthing politically correct positions in public while take a much more realistic stance in private or with paying customers. However they may have come to act as apologists for the Chinese bureaucracy, their arguments usually fall into one of three main categories:
- The Chinese business environment is a fair game and all private firms – Chinese as well as Western – face the same set of laws and policies. “Things have changed in China,” you will hear, “and now there is rule of law. All firms are subject to the same regulations, and the Western firms you read about running into trouble are all, in fact, guilty.” While this isn’t factually wrong, it is extremely unrealistic and misleading. The key is how the bureaucracy chooses to enforce the existing laws – both in terms of who gets targeted and how they are prosecuted. Western companies like Apple, Samsung and Mercedes are portrayed as enemies of the people in the state media apparatus – complete with prime time news reports, commentary, and even televised coerced apologies. It has become accepted fact (or at least a well-publicized concern that enforcement of commercial laws is highly politicized – with Western firms being cast in the role of “enemy of the Chinese people”.
- China is justified in pursuing high-profile, deep-pocketed multinationals because it is the only way to level the playing field, enable Chinese firms to climb the technology ladder, and ensure the future prosperity of the Chinese people.
- Other governments are even worse to A) their own businesses and/or B) foreign firms in general and/or C) the Chinese in particular. Examples are cited – the treatment of Huawei in the US market, restrictions on the sale of dual-use technology, CFIUS enforcements, WTO anti-dumping charges and allegations of a pervasive anti-Chinese bias in Western society. While these charges aren’t necessarily all baseless, they are simply irrelevant. Unfortunately, shifting blame and looking for even bigger faults elsewhere has become a global phenomenon that is rapidly replacing logic and rational thought.
The Chinapologist route leads to bad decisions. You end up trusting the wrong people, falling down the Guanxi rabbit hole, and giving up real assets now for the vague possibility of repayment latter. Chinapologist logic makes Western negotiators too conciliatory, appeasing, and accommodating. You sacrifice too much and get nothing in return.
The China Bears.
The problem with China bear arguments is that there are elements of truth to the individual parts, but the unified story flies in the face of reality and common sense. The bears want you to believe that China is an unsound business decision. They will tell you that China is on the verge of macro-collapse, that Western companies can’t make money in China, and that the Chinese people have a deep seated hatred of foreigners. You can find specific instances to support all of these theories – but taken as a general set of rules for basing business decisions, they are just ludicrous.
China bears have three basic arguments.
- China Inc. never gives a white guy an even break. The main problem with this argument – that non-Chinese firms can’t succeed in China – that that the empirical evidence points to the opposite case. International companies – Microsoft, Mercedes, and Toyota are getting into trouble because they are making too much money. One of the big threats facing Western firms in China is the ALM – Anti Monopoly Law and claims of price-gauging. Chinese markets tend to be quite accepting of foreign brands – often assuming that the quality and safety levels are higher than locally-produced competitors.
- Chinese business has such a huge structural advantage because of adverse regulation and enforcement that it’s pointless to even try. While Chinese firms have come on strong as major competitors in the last two decades, that probably has more to do with commercial factors than regulatory causes – at least for now. The international companies have made it big in China are the ones reinvesting and growing – and that simply wouldn’t be the case if they felt the structural impediments were insurmountable. Adverse regulations tends to be a macro-issue that weakens the hand of Western firms in general, but doesn’t seem to be making individual Chinese firms any more competitive in the long term. In fact, there are strong reasons to think that government interference designed to hamstring Western competitors is going to hamper Chinese firms’ ability to make themselves more competitive.
- China is about to collapse anyway, so even if you do well in the China market, a slack tide lowers all boats. China bears still love this argument, even though their patron saints like Gordon Chang and Nouriel Roubini have quietly edged away from past years’ calls for the Chinese economy to implode. It may happen, but the same logic applies to the US, the EU, Japan, Brazil, Russia, etc.
The danger of listening to China bears is that, just like the Chinapologists, they lead you to make terrible business decisions. The bears are more insidious, however, because their advice is couched in traditional risk-management language. The bears will convince you to take half-measures, follow inappropriate Western best practices, and destroy trust with defensive contracts and bad HR policies. These are the lawyers and the gloom & doom pundits who will make you so concerned about protecting yourself against downside risk that you close yourself off from the possibility of unlocking opportunity
You’ll end up starting – and walking away from – businesses that more committed competitors will exploit and grow.
Defense – Listen to the lawyers, but also listen to the marketing department. Weigh the possible risks against real opportunities. Avoid half steps and limited investment that only end up with you training your own competition.
Bottom Line – China eats bears, but once you start kowtowing in China it becomes your established role. As in most other places, extremist views make for easy sound bites but terrible decisions. Check your business plan and executive team to make sure you are getting a balanced view – and making decisions based on long term goals and real-time assessment about the business environment.