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Dance with the Nine-Lives Dragon February 2000 The successes and failures of joint venture enterprises in China. The "old" and "new" China since the economic reforms as well as the opening up of the China economy. A short glossary of frequently used but often mis-used Chinese words and phrases as well as some tips on how one should address each other.
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 "Know Your Enemy and Know
Yourself, Win 100 out of 100 battles."
This sentence, from a 3000 year old book called "The Book of War" by Sun Wu, remains relevant into the New Millennium where more people are finding it applies to more than just military warfare. From the daily life of the individual, to the family, business and governmental organization and even international relations, the concept seems to ring especially true in this age of globalization. Many of those Asian overseas Chinese who might have spent their life-time preaching this concept to their children, students and subordinates, might well have forgotten it themselves, when came to invest and do business in China.
A shocking proportion of those who failed in their investment and business in this reforming and opening-up China during the past 20 years, simply went there with almost no information or preparation at all. The expatriate management teams sent in many cases were outrageously unfit for the cross-cultural environment, mostly lacking in historical and cultural understanding, and lacking experience in adaptability and human relations. After the welcoming rituals and the banquets, most often, these expatriate managers launched into daily propaganda and guerilla warfare with their local counterparts. That is - they got on the losing track from the beginning. Armed with nothing more than their naive desire to capture a lion's share of the market and profit in this country of over one billion population, most of these early investors were simply unfamiliar with the vision and reality of a business mileau that is as vast and as complex as China. From the scattered tales from friends and relatives returning from their visits to China, they learned that China was very poor, and very behind in consumer products and industrial processes. Thus, many of them thought that they could hit it big in China with aged machinery for outdated products. Get a cheap site in China and hire some retired uneducated relatives from the rural home-town to manage it with remote control from headquarters overseas via telecommunication and letters, was the cry. They dreamt of the stream of profits flowing from their China project through their "Old Faithful" relative in charge of the project. If this plan was ever executed successfully, it must have been during the first few years of China's opening up and must have gone bankrupt only a few years later because of the rapid changing nature of the Chinese market. Chinese consumers and the Chinese market for industrial products during the past 21 years must be the most rapidly changing market in the world. While a typical Chinese consumer might be quite pleased with a product 30-50 years behind when they started opening up in 1979, this same person would go for only the latest products today.
During the first couple of years of the opening up in the early 80's , Chinese people's "big dream" of the good life was to own the "Big Three" items. These "Big Three" are also called the "shan-dian", meaning the three electrical appliances - the television set, the refrigerator, and the washing machine. Overseas Chinese brought the portable old black and white TVs back to their thrilled relatives. They especially welcomed the imported "big three" items because during those early years production of these items in China were both inadequate in quantity and admittedly far behind in quality. By the late 80's, ownership of the "Big Three" became very common among the urban Chinese. Then, the "Big Three" took a big change. Toward the early 90's, those "shan-dian" were changed to the wide-screen television set (29 inch or bigger), air conditioner, and motorcycle.
Now if you were a Chinese young man looking forward to finding a bride in any of the big cities, such as, Shanghai, Beijing, Guangzhou, etc., the bride-to-be or her family would check your qualification and your possession of the "New Big Three," that includes ownership of a house or flat (fully decorated and furnished), a highly paid job (preferably with a multi-national company or a foreign joint venture firm), and a reasonably big bank account. On the average, a Shanghainese young man would think of the amount of 300,000 yuan, RMB or more in capital readiness before he could ask an educated, sophisticated Shanghainese girl to take his name. That's why a very large number of the big city young men seek their marriage partners from "outsiders," (wai-di-ren, meaning "out-of-towners").
Both the size and shape of mainland China are very similar to the continental United States. Similarly too, economic development started from the eastern coastal areas. The difference is that in China, scores of big coastal cities and cities alongside the two major rivers each stretching several thousand kilometers plus hundreds of cities with populations of one million people or more, started their reformed economic development here. At the same time the entire North American population during the colonial days was only a few million and the center of development were concentrated on the North Atlantic coast. The pace of the evolution of the North American market and products for consumers and industries was very gradual in contrast to the "crash changing" pace in China from 1979 to 2000.
Like colonial North America, China has scores of big "industrial" and "commercial" centers and hundreds of medium size cities spread across the vast coastal regions and along side its two great rivers - the Yangze, and Huanghe. Each of these centers raced to grab opportunities from the recent opening up and economic reform policies. While competing against each other, they also become markets for each other.
For example, the farmers in the rural Jiangxi and Sichuan raise their pigs and chicken with animal feeds made from soy bean meal from Harbin, corn from Jilin or Henan, fish meal from Shandong or Zhejiang, and then ship the pork and chicken to Beijing, Shanghai, and Hong Kong. Then, with the money earned these farmers would purchase the clothing from Shanghai, shoes from Wenzhou, cosmetics from Guangdong, electrical appliances from Jiangsu, and spend their holidays in Kunming, Xian, Beijing or Hainan. Those who earned their money from corn and soybean meal in the north, in turn celebrated daily with seafood from Zhejiang and beer from Qingdao plus white liquor from Sichuan and then buy the PCs made in Beijing or Shanghai for their companies and for their children. The skyscrapers in Beijing and Shanghai, could be getting their aluminum frames from Xi'an, or Guangzhou to use with the float glass from Shangdong and being installed by the workmen from An-hui or Sichuan. Travelling around in Xiamen across the Taiwan Strait from Taiwan, you are likely to be driven by one of the thousands taxi drivers from Henan in the cars made in Tianjin or Shanghai.
In the "spear-head" coastal cities the property prices, rents, wages, and the business services are very near the levels in other Asian economic center cities. In the more remote inner regions where similar costs are only a fraction of the coastal cities and then in the even more remote regions a small fraction of the average, a coastal wage could bring relatively comfortable good living. China, unlike other recent Asian economic tigers, has several layers of cushions against rising costs that are usually brought by economic development.
The significance of this vast land of 9.6 square kilometers and 1.2 billion consumers is that the fanfares of the economic reform and opening up of China since 1979 has, thus far, impacted mainly in the coastal, eastern plain, and the river basin areas which account for approximately 40% of the population but consist of only less than 7% of the total land area. As the coastal "spear-head" cities developed their industries and commerce, the inner and remoter cities and regions served as the second strings and back ups to support the front runner with raw materials and work force. The densely populated Southwest and sparsely used Northwest of China are yet to enter the main stream of this surging economic tide. While Northwest China is known to have vast mineral resources, Western China has a geological structure similar to the oil rich Middle East-Arabian subcontinent and has already begun tapping its vast petroleum and gas resources underground. The Great Southwest of China from the mountainous Sichuan , Guizhou, and Qinghai to the "Rooftop of the World," Tibet still resemble America's Golden West and Alaska in terrain and untapped natural resources.
The thousand year old fine skills of stitching and sewing among half a billion rural Chinese women are finding new uses in electronic circuit board and chip making, jewellery, toys, and fashion garment factories. The factories built for arms and tanks during the "cold war" era are now making typewriters, printing machines, televisions, refrigerators, air conditioners, motorcycles, aluminum and glass, automobiles and even airplane parts.
By the time the tide of current economic development reaches the innermost and the most remote regions in China and thus bring up the costs of production factors - land, labor, etc., the Chinese government will no longer have to worry about it because the entire country would have already developed itself into the biggest market in the world with a quarter of the world's population, speaking and writing the same language! China could effectively control the markets for 25% of the world's population without sending any gunboats or landing any soldiers in foreign lands!
In comparison, the recent new economic tigers of Asia are very small in size and population. For example, one or two large bottling plants may be sufficient to serve the thirst for Coke or Pepsi of the entirety of South Korea, Taiwan, Hong Kong, or Singapore. One or two float glass factories could produce more than enough flat glass for their construction needs. One or two major producers in the major product areas such as beer, automobiles, television or electrical appliances, cement, or construction and steel would be more than adequate. In China, as at the end of 1998, there were 30 bottling plants for Coke or Pepsi, a dozen major float glass manufacturers, several dozen major producers in cement, steel, automobiles, appliances, 1,500 beer factories plus approximately 7,000 beverage factories, directly under the Ministry of Light Industry alone.
Several products that were in short supply only a few years ago, such as cans for beverages, synthetic leather, VCD players, motorcycles, etc. have become several times oversupplied during the past years. Printing machines that were generally imported items for those new Asian economic tigers are locally manufactured from formerly military equipment factories. Even the Chinese Olympic gold medal winning sharp shooters used sporting rifles and guns made in China. All these should serve as a serious notice to those who are considering doing business with China or investing in China. China is a gigantic market but by no means a piece of cake.
If you can get ahead and excel in technology, management and marketing, then the market can be yours. For example, Johnson and Johnson is now a very enviable household name in China. Kang-se-fu, the name that made instant noodles from more than 70 processing lines, started by an "outsider" from Taiwan, has dominated China's market from the modern tower apartments in Beijing to the rural remote mountain huts in Guizhou. Volkswagon produces cars for 80% of Shanghai's taxis. National has registered in Chinese consumers' memory as "the best" in electrical appliances. Wang Wang, a glutanious rice flour snack maker from Taiwan, turned a lot of unpaid import orders into a flying start in the Chinese market and proceeded to operate 37 profitable factories throughout China within 4 years. There are now well over 100 outlets each for McDonalds and Pizza Hut in China. Nokia, Ericsson, Honda, Buick, Sony, Glaxo, Phillips, Pierre Cadin, etc. have all booked up the memory spaces in the Chinese consumer's mind for brand recognition.
There are many casualties among the early entries into China. Among them, the French automobile manufacturer in Guangdong who was never able to sell more than a very small fraction of its designed and planned capacity. The plant was sold to the ultra eager Honda, who became an instant popular name among Chinese car buyers. A German beer manufacturer in Wuhan called it quits after a string of losing bottom line performances and sold its plant to an American beer maker who then proceeded to become the No. 1 beer seller in China - Budweiser. A major Japanese department store chain announced its plans to build over 1,000 outlets in China, only to sell out its shares to its Chinese partners a few years later due to its own financial problems. Taiwan's largest food manufacturer with billions invested in a dozen projects in China, simply could not catch up with the local market leaders. It announced a halt to new investments while shaping its existing operations in China. A Thai manufacturer of animal feeds in Jiangxi sent several teams of "senior" executives from its headquarters to perform the tasks of daily fighting with local partners, and did not start production after 4 years of investment. Then, with the change in its expatriate management, it got off to a flying start, and then fell flat on its face again due to some very unwise decisions by its foreign directors to meddle in the consistencies of product quality.
Some of the earliest investors in this opened-up China could well boast great business volume making age-old products in China in the beginning, only to get stuck with a warehouse full of unsaleable products few years later because of Chinese consumers' rapidly gaining information and rapidly changing preference toward newer and better products. A motorcycle joint venture in Shanghai was making very enviable profits with product designs that were almost half a century behind the market outside. The local Chinese buyer would have to deposit a bag full of cash with its local distributor and go home to wait for notification when a vehicle could be made available to him. Recently, when confronted with the state of art manufacturers at the top end of the line and the rural industrial production of the ultra-cheap models, it was left with no markets. A local Chinese health potion manufacturer who featured the first well made TV advertising spot was awarded with national success in its product. Then as other followed suit with better TV advertising and similar products, it found its market share substantially taken away.
At a recent conference in Bangkok, an investor with a sizable project in Southern China said that 40% of the Japanese investors in China had been dissatisfied, and were withdrawing their projects from China. In fact, that would mean 60% of the Japanese investment projects in China succeeded-a very outstanding performance indeed. A Taiwanese business magazine reported 70% of Taiwanese investors in China failed. Investors from Thailand suffered an even higher percentage of failures. WHY? In fact, those Japanese investors should be congratulated for their high degree of success. Of the number of foreigners being awarded the title of "Honorary Citizen" by Shanghai government, over 60% are Japanese!
Looking at the score card above, we could immediately link the chance of success in doing business in China to the degree of sophistication in production and management. The Japanese who rushed into China in force only after 1994 were overheard saying: "Let those Southeast Asian overseas Chinese firms set up 10 to 15 years ahead of us, we will catch up with them within a few years because we are better prepared." True to their word, the most common causes of failure among the early investors in China, was the lack of understanding and preparation. Lack of market research, unprepared management teams, and complete lack of local information and adaptability in management has caused countless loss of time and expenses and "barking up the wrong tree." Sony's chairman was frequently quoted as saying that: "We are not interested in what is being sold in the market today or tomorrow, but we are looking ahead 10 years." In China, the winning consumer product companies are literally forced to ceaselessly continue improving both their products and marketing methods in China in order to remain viable. Here, the frenzied changing pace of consumers' preferences makes it extremely foggy to try to look 10 years ahead. Those who have succeeded and grew, thus far, had to make 3 to 5 years of product and marketing improvement every year, just to catch up with the market and the consumers. Those in the mobile telephone industry can testify to this effect.
It takes full commitment, feet on the ground and specially devised plans to succeed on China. China is not a free for all "money bag". It is not an extension of Hong Kong or Southeast Asia. It is not a magnified picture of San Francisco China Town. It is not the newly found "Land of the Queen." It is not a new settlement in continuation of the American West. China is a country, one of the largest in the world, with one of the longest recorded histories in the world, and the largest population in the world. More importantly, it is a developing country with strong leadership, hard working and intelligent people plus a habit of proud self-reliance. Some rough statistics from the recent months might serve to guide those who are already doing business in China and those who might be in the near future. China as of the end of 1999 has 8.9 million registered internet users, 100 million PCs, nearly $800,000 million US dollar equivalent in aggregate savings plus well over $140,000 million US dollar equivalent in foreign currency reserves. It imported over 100 million cases of fresh bananas a year. The GDP per head in Shanghai as of the end of 1999 was $4,700 US dollar equivalent.
This one says "Follow the custom, when entering the village, and follow the coast line when entering the port." The first part is really an equivalent of the western saying: "When in Rome, do as the Romans do." The latter part is also not hard to understand because bumping into the banks or hitting the underwater rocks would certainly affect the navigation. All these lead us to our opening sentence which could have been expanded: "Know your own competitive edge and weakness, and to understand your host country, China, and the way things there work. Then proceed to succeed in 100 out of 100 ventures in China.
Addressing: The Deputies: In any Chinese government agencies and companies, deputy heads are customarily addressed as if they are the heads. For example, the deputy mayor would be addressed as the mayor. The deputy party secretary would be addressed as the secretary. The vice-chairman of the board would be addressed as the chairman. The deputy managers would be addressed as the managers. The Ladies: The ladies are generally addressed as "Miss" or "xiao-jie" even when they might be older. In the case of the wives of the persons known to you then you should address them by the title of their husband, such as, Mrs Chang, chang-tai tai ("tai tai" means wife), Mrs. (wife of the) Mayor, shi-chang-fu-ren. ("shi-chang" means Mayor, "fu-ren" means wife.) The Lao's: "Lao" means old, respectfully. Chinese people habitually and respectfully add the word "lao" in front of the title of the person to show respect for their elder or senior status. For example, "lao-liu" is a respected address for the older or senior Mr. Liu. "Lao-tai-tai: for the eldery women means the "respectable elder lady". The Xiao's: "Xiao" means small or younger. Generally the younger persons are addressed by their last name with a prefix "xiao," for example, "xiao-tang" means the young Mr. or Miss Tang. Seating: At banquets or meetings, the seat that is directly opposite to the main entrance is the "biggest" seat that is reserved for the most senior person or the host of the occasion. There are times the Chinese host would offer this "big seat" to you. It is advisable to insist in not sitting on that "big seat" when you are not the host or the most senior of the group. Alternatively, the "big seat" could be left open or two seats equally spread from that center point made for the host and guest to show a mutual high degree of respect. Starting a Banquet: As the host, you must make sure that everybody has their liquor or beer glass filled, then raise your chopstick to invite everybody to start eating. You must pick the first food, or the guest will wait for you. You could courteously make your first pick and put it on the plate of your most senior guest and his deputies or their wives before putting any onto your own plate. Doggie Bags All Chinese restaurants in China are equipped with containers for leftover food. You could quietly order your secretary or your aide to handle that while you are sending off your guests. Useful Glossaries: Yan-jiu: Yan Jiu (pronounced ian- jiu) means research, studying or consideration. Typically, when presenting the Chinese counter part with an idea that they cannot immediately decide on, they would ask for time to yan jiu, that is, study or consider, the idea. Jokingly, yan (pronounce ian) also means cigarette, and jiu means liquors. Therefore, when asking for time to "yan-jiu," some of the local or foreign counterparts would misunderstand that the person or the official was asking for cigarettes and liquors, or in other words, entertainment or bribes. Make sure that you read the body language and the circumstances to arrive at the correct "yan-jiu" understanding. Mei-you-wen-ti: Mei-you means does not exist, wen-ti means problem. Generally it means "no problem." However, be very careful to double check whether the absence of problems really means approval, agreement or passage. Alternatively, your Chinese friend might use the phrase, "wen-ti-bu-da". Bu means "not" and Da means big or significant. Generally wen-ti-bu-da means "no big (major) problems". However, in the daily usage, it is usually used to indicate the existence of some problems. Piset
Wattanavitukul | Piset Wattanavitukul is Managing Director of P. W. Consultants specializing in Investment, Management and Trade in and with China and Human Resource Development in Shanghai and Ningbo.
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