Business in China: Risks and Opportunities (Chatham House talk)

27 %
73 %
Information about Business in China: Risks and Opportunities (Chatham House talk)
Business

Published on October 23, 2014

Author: JerryGordon68

Source: slideshare.net

Description

My talk on business risk in China at Chatham House on 23 October 2014.

The audio can be heard as a podcast here: http://jeremygordon.podbean.com/e/business-in-china-risks-and-opportunities-chatham-house-talk

1. Business in China: Risks & Opportunities Jeremy Gordon Author of “Risky Business in China” Chatham House 23 October, 2014 @RiskyBizChina / #RiskyBizChina *Listen on PodBean* http://jeremygordon.podbean.com/e/business-© Jeremy Gordon

2. “It’s getting harder for foreign companies to do business there... I really worry about China…I am not sure that in the end they want any of us to win, or any of us to be successful.” (Jeffrey Immelt, GE CEO, 2010). “China is just too risky”. (Paul Bisaro, Actavis’ CEO, 2014). “Current sentiment is that business risk is as high as it has ever been” (Risky Business in China) Why is there so much negativity? What can businesses do about it? My view is that rapid and fundamental changes to China’s political, economic and social environment have changed the nature of opportunities and risks for international business in China. There are certainly opportunities, especially in emerging sectors, services and around consumption and outbound investment. But for many established players, it is the risks that grab the attention. It is not all bad news – nothing in China is ever black and white – but the risks need to be managed. Businesses need to understand and adapt to the new reality of doing business in China – grasp the opportunities, but avoid getting burnt!

3. Good Dragon. Bad Dragon. © Jeremy Gordon © Jeremy Gordon

4. The dragon cliché is a well worn one! Blame Napoleon, not me: he said something like: “when the sleeping dragon awakes, it will shake the world”. The dragon is certainly awake. And some parts of the corporate world are certainly shaking! But what does the dragon represent? What do we mean when we talk about China? To western eyes the dragon is a dangerous threat. To Chinese eyes it is a positive power. We start from different perspectives and so, although we see the same thing, we can draw very different conclusions… From one side China is one of the great cultures and the source of world-changing inventions. It is a positive power that has lifted hundreds of millions from poverty. It is also the driver of global economic growth. From another it is an aggressive, strategic threat. A massive polluter, an infringer of intellectual property, and a state controlled by a mysterious Communist Party. Of course China can be both positive and negative. And it can have positive and negative implications that can change over time. Look at the economic benefits for Australia of China buying its coal…and the potentially devastating impact new environmentally-friendly (but exporter-unfriendly) tariffs may have. Coincidentally helpful to local coal producers. And may be interesting leverage in the FTA that has been 10- years in the making. There are many companies that have lost the battle with China – obvious ones being the likes of Yahoo, Google, Facebook and Twitter, which are seen to be incompatible with China’s strict censorship policies. Others like LinkedIn, which censored users globally - not just in China - perhaps go too far the in the opposite direction in their desire to appease. But end up losing support elsewhere. There are also contradictions at the human level. In the book I reference the case of Keith Darby, a British property developer in Hainan. He planned to benefit from the high-level guanxi of his local partner (China Resources Enterprises) but, after a dispute, found that he was powerless to fight against that same powerful network of interests.

5. Welcome? © Jeremy Gordon

6. So China is complex. But is it welcoming? And on what terms? The picture is a light-hearted record of one of my visits to the Forbidden City in the mid 90s. It was not my first meeting with a Chinese official – that was anything but auspicious! I was in the army in Hong Kong and boarded a suspected smugglers boat only to be confronted by an armed Chinese officer who had already taken things under control! Things might easily have escalated – and it is worth remembering how different things were. My 1st planned China trip was abandoned due to (let’s call it) red tape – on the British side. Luckily my meetings since then have been generally less dramatic…if not less stressful! In the 1990s the open door policy was in full swing. China was welcoming to the manufacturing investment and industrial machinery my company was providing at the time. But it was less welcoming to the foreign pharmaceutical companies, banks, and insurers on whose behalf we were lobbying for market access. Manufacturing businesses, while welcome, still had to export much of their production so that local competitors would be protected. This was of course long before China’s 2001 WTO accession. But even now there are challenges over market access. Last year China was found to be in violation of WTO rules in relation to restrictions around rare earth exports (again on supposedly environmental grounds). We were allowed through the door, but once inside we had to play by the local rules. What we were doing was still new. As were the rules. And it kept changing, so there was some flexibility in the system as different approaches were tested and as experiments in reform were tried out. Who you knew really mattered, as people made the rules, and those rules were often hard to find out about. Luckily my chairman was well connected, with friends in high places – so we had an advantage. At times it might have seemed that Beijing was not looking (like the guard on the door). But perhaps they (and he) were just re-writing the rule book…which is now being generously applied! China is welcoming to those it wants or needs to host, but the open door is also an exit, and anyone who breaks the rules or overstays their welcome might be pushed through it or, if they stay, made to pay – as GSK and others have found out to their cost.

7. Then… © Jeremy Gordon

8. So how did we get to this point. A quick look into the past might help provide some context. This is one view of China that was taken in 1991 in Dali, Yunnan. It could have been 1881! At that time “foreign devils” like me were a rare sight. I even made some Chinese children cry! For which I can only apologize… Dali was a 15-hour bus ride from Kunming. It is now a 40 minute flight from Kunming’s Arup-designed international airport to Dali airport. In a short space of time China has moved from rural agriculture, to urban industry and services. From basic roads and slow buses, to modern airports and high-speed rail. International businesses have played a role in planning and designing the infrastructure that drives modern China, but while they would like to see more access, local interests maintain a local advantage.

9. …Now © Jeremy Gordon

10. Now things are very different – this picture was taken in Dazu, near Chongqing in 2012. The young girls ran across the car park with smart phones and shouted “hello” in English. They are confident, educated, connected, tech-savvy consumers with aspirations to “the Chinese dream”, and not a little nationalist pride. They live in Chongqing, on some measures the biggest city in the world, with 30 million people, around 3,000 new urban residents a day, and with massive development plans, including the Liangjiang New Area. (Ref. Bo Xi Lai and Neil Hayward). The progress has been palpable. But on the flip side China is still challenged by many issues, including wealth disparity, environmental degradation, an ageing population, rising health costs and slowing growth. The many parallel and challenging transitions have included China’s move: • From a closed to open economy – though it could open further • From state to private enterprise – though the state still has a key role • From production to consumption – as costs have risen along with incomes • From rapid to slower growth – the new normal, with new challenges • From exports and investment to domestic consumption • From anything-goes to anti-corruption Where it will go next, and how, is a key question.

11. One Dream? © Jeremy Gordon

12. All that change and development presented itself at the Beijing Olympics in 2008 – China’s grand coming-out party! I was in Beijing before the Olympics for an event with a big foreign bank, including, ironically, a private dinner in the Forbidden City. I noted the “One World One Dream” slogan, also ironically beside the defences of the Great Wall. It made me think of Jim Mann’s Beijing Jeep – about the troubled beginnings of one of the first JVs in China – which talked about sharing the same bed but different dreams. Something that become a cliché on a par with Napoleon’s! I also recalled a GW visit with some of Hong Kong’s business leaders before the 1997 handover. It taught me that China was not just complicated for foreigners, but also for compatriots from Hong Kong…and that power and money do not always work. Our pre-arranged access was denied by a young gatekeeper. A property magnate, a textile king and a transport boss tried stern requests, negotiation and (I wont say “bribery”!), but to no avail. Regulations were regulations (and the gate-keeper was risk-averse and driven by a different set of assumptions and desires), so we had to wait for the big boss to issue instructions. On one level perhaps there is “one dream” – the same one held by Olympic athletes, Chinese and foreign firms – to win! The question is whether there is a level playing field on which to compete, and whether the rules are the same for all the competitors…

13. Changing Risk & Opportunity ©iStock.com, georgeclerk

14. Earlier I noted Jeffrey Immelt’s words about China not wanting foreign firms to win. That was in 2010. But the environment for foreign firms had already started to change. I remember blogging in 2006 about a comment from the head of the NBS, Li Deshui, who warned of the impact of “malicious acquisitions” by foreign firms : “If we allow the free development of malicious acquisitions by multinational companies, the autonomous brands and innovative ability of China’s national industry will gradually disappear”. There were (and still are) also accusations of foreign firms evading taxes and of mistreating Chinese consumers. Companies such as Apple, McDonalds and KFC, among others, have been in the spotlight. Immelt’s words also followed big problems for Rio Tinto in 2009, which woke many people up to the risks of the market, not just of being penalised for breaking the law, but of the difficulty in getting access to arrested employees (even foreign ones), and for the longer-term business implications. GSK’s problems in 2013 should perhaps not have been such a shock – as the sector is well known for being corrupt, and as the anti-corruption campaign and reform of the healthcare sector made it an obvious target. But many were surprised that senior and well-connected foreign executives were arrested. There was also a complicated back story, but it brought due diligence and business risk into sharp focus for those that might have ignored the implications of the Rio Tinto Four…. Another risk reminder was Caterpillar’s $500m 2013 investment write-down following an accounting fraud in China. Accounting fraud and due diligence failure is not new in China – cases of Chinese listed companies had already been uncovered by the likes of the sort seller Muddy Waters. And it is an open secret that many Chinese firms keep more than one set of books (the record as far as I am aware is 12!) That was the context of the Actavis decision to pull out because “China is just too risky”. And the risks are real. Not only commercial ones – also political. SOEs have been guided away from big foreign IT and consulting firms; there have been accusations of hacking and IP theft, and a raft of AML actions against foreign firms (which have accounted for 80% of recent fines). In an era of slower growth, rising costs and greater competition, these things can have a big impact. And can lead to cut corners and more risk taking as supply chain “efficiencies” are found and as desperate people fight for contracts in underhand ways.

15. Changing Strategy ©iStock.com, trait2lumiere

16. Earlier I noted Jeffrey Immelt’s words about China not wanting foreign firms to win. That was in 2010. But the environment for foreign firms had already started to change. I remember blogging in 2006 about a comment from the head of the NBS, Li Deshui, who warned of the impact of “malicious acquisitions” by foreign firms : “If we allow the free development of malicious acquisitions by multinational companies, the autonomous brands and innovative ability of China’s national industry will gradually disappear”. There were (and still are) also accusations of foreign firms evading taxes and of mistreating Chinese consumers. Companies such as Apple, McDonalds and KFC, among others, have been in the spotlight. Immelt’s words also followed big problems for Rio Tinto in 2009, which woke many people up to the risks of the market, not just of being penalised for breaking the law, but of the difficulty in getting access to arrested employees (even foreign ones), and for the longer-term business implications. GSK’s problems in 2013 should perhaps not have been such a shock – as the sector is well known for being corrupt, and as the anti-corruption campaign and reform of the healthcare sector made it an obvious target. But many were surprised that senior and well-connected foreign executives were arrested. There was also a complicated back story, but it brought due diligence and business risk into sharp focus for those that might have ignored the implications of the Rio Tinto Four…. Another risk reminder was Caterpillar’s $500m 2013 investment write-down following an accounting fraud in China. Accounting fraud and due diligence failure is not new in China – cases of Chinese listed companies had already been uncovered by the likes of the sort seller Muddy Waters. And it is an open secret that many Chinese firms keep more than one set of books (the record as far as I am aware is 12!) That was the context of the Actavis decision to pull out because “China is just too risky”. And the risks are real. Not only commercial ones – also political. SOEs have been guided away from big foreign IT and consulting firms; there have been accusations of hacking and IP theft, and a raft of AML actions against foreign firms (which have accounted for 80% of recent fines). In an era of slower growth, rising costs and greater competition, these things can have a big impact. And can lead to cut corners and more risk taking as supply chain “efficiencies” are found and as desperate people fight for contracts in underhand ways.

17. Testing Times

18. So times are testing. The trouble is that too many of us have fixed perspectives and we tend to see things in black and white, clichéd snapshots, just like in the example of the Chinese dragon. Try this quick test, which popped up in my social media stream the other day (along with many other HK related posts!)… It’s just for primary school kids in Hong Kong. Can you see the pattern? It baffled me! The answer depends on the ability to change position. Instead of looking from the outside in, we need to look from the other side before it makes sense…numbers of the car parking spaces – just upside down. Many of the things foreign firms worry about when looking in make perfect sense to Chinese looking out. Many of our assumptions – for example about the rule of law, contracts, audited accounts and codes of conduct - cant simply be transplanted and expected to flourish. We need to adapt out thinking and be ready to move when that car starts driving towards us!

19. The New Reality © Jeremy Gordon

20. Some things, like the Great Wall, never seem to change, but beyond the obvious landmarks the change is everywhere. We are facing: • Rising costs, squeezed margins and cut corners that result in bribery scandals, toxic supply chains & product recalls • Slowing growth to under 7.5%, with harder-to-reach targets • Increased competition, especially from Chinese firms (the top challenge reported by USCBC), and pressure for unfair advantage • Increased scrutiny from regulators and the media, especially in relation to foreign firms (and corrupt officials) In response we need: • Genuine engagement at multiple levels, and more understanding of the challenges faced by both sides (not just opportunities!) • A strategic review with risk as a core component • A move beyond compliance box ticking, with balanced corporate values that align with individual rewards • Vocal localisation for the long term and for the local good International businesses need to align with policy and to understand that while the door may still be open, the defensive wall is still there! For many businesses the issue is now not how they should judge the Chinese dragon…but whether the dragon will judge them to be good or bad for China!

21. • Twitter: @RiskyBizChina • LinkedIn Group: Risky Business in China • LinkedIn: https://www.linkedin.com/in/jgordon • Email: jg@ChinaBusinessServices.com Order “Risky Business in China” http://www.amazon.com/Risky-Business-China-Diligence-Consultants/dp/1137433213 @RiskyBizChina #RiskyBizChina

Add a comment

Related presentations

Boat chandlery

Boat chandlery

October 26, 2014

http://ecommerce-for-business.com/shackles-boats-theboatonlinestore/ We offer a ...

http://vendere-su-internet.com/shackles-for-boats-from-theboatonlinestore/ Moori...

Silver bar!

Silver bar!

October 21, 2014

Pretty similar to gold bars are these silver slabs. Silver is considered as the mo...

Gold coin prices!

Gold coin prices!

October 21, 2014

If you are an investor of gold bars and coins, one of the major things that you ou...

CyberSecurity's social media stats for one week as of Oct 21st 2014

CyberSecurity's social media stats for one week as of Oct 28th 2014

Related pages

Archive » Business in China: Risks and Opportunities ...

... in a recent talk at London’s Chatham House: ... and risks for international business in China. ... China: Risks and Opportunities (Chatham House ...
Read more

Business in China: Risks & Opportunities | Jeremy Gordon ...

Business in China: Risks & Opportunities ... and risks for international business in China. ... risks-and-opportunities-chatham-house-talk a ...
Read more

Business in China: Risks and Opportunities (Chatham House ...

My talk on business risk in China at Chatham House on 23 October 2014. ... Business in China: Risks and Opportunities (Chatham House talk) from Jeremy Gordon
Read more

» Risky Business In China| China Business Blog

This was a key message from “Risky Business in China ... in a recent talk at London’s Chatham House: ... Business in China – Risks and Opportunities ...
Read more

Chatham House: Rising powers

Chatham House: Rising powers. ... This talk will introduce the key arguments in CEO China: ... Business in China: Risks and Opportunities.
Read more

Jeremy Gordon (Author of Risky Business In China. A Guide ...

... Jeremy Gordon has worked with government departments, financial institutions and major corporates on strategy, risk and business dev... About Jeremy ...
Read more

Sustainable Energy Security: Strategic Risks and ...

... and Chatham House have ... Security: Strategic Risks and Opportunities ... that details the risks and opportunities for business. ...
Read more

International Affairs Think Tank | Chatham House

Chatham House, the Royal Institute of International Affairs, is an independent policy institute based in London. Discover what we do, ...
Read more