Why Invest in China?

Hillman, Wertheimer, Yeap

Outline

• Background– Culture– Political System– Managerial System– Entrepreneurship– Financial Systems– The Investment Process

• Investment Factors– Strengths & Weaknesses– Opportunities & Threats

• Conclusions & Discussion

Background

Diamond Model

Financial Systems

     

Managerial Systems Entrepreneurship

 

   

Political Systems

     Culture

 

Political System: Economic liberalization with limited political reform

• Constant state of flux & tension between reform and status quo– Desire to continue successful economic reform: stated objective

to become “socialist democracy”– Trying to maintain tight control over political sphere: liberalization

only to maintain power and popularity– Recent transition to fourth generation leadership – Hu Jintao &

Wen Jiabao

• One-party rule by CCP– Executive, national & regional government are all appointed;

with 9 person politburo as focus of power– Local officials are selected by popular election– Complex layers of bureaucracy pervade commercial and private

life: role of SOEs and “units” versus growing private sector– Politics and commercial activity are tightly intertwined

Source: Economist Intelligence Unit – Country Report 03/04

Political System: Economic liberalization with limited political reform

• CCP leadership faces key challenges:– Maintaining & managing strong economic growth, in

face of changing urban population and disenfranchised rural poor

– Managing unprecedented social & political change with losing power base: how much freedom can be allowed?

– Increasingly internationalization of economy forces China to be more outward looking in their foreign policy, as well as meeting WTO obligations

• Foreign investors need to navigate changing and uncertain environment– Continued economic liberalization should make doing

business easierSource: Economist Intelligence Unit – Country Report 03/04

Culture:

Modern façade can cover strong cultural differences Key Cultural Differences:• Community & group harmony

– Strong agrarian roots• Hierarchical with emphasis on relationships

– Confucian heritage• Holistic and circular analysis

– Pictographic language– Educational emphasis on rote learning

• Wariness of foreigners – Emphasis on family & personal connections– Unreliability of “rule of law”

Source: Harvard Business Review (10/03 – “The Chinese Negotiation” Graham & Lam

Culture:

Modern façade can cover strong cultural differences Successful business negotiations requires

understanding of underlying factors:• Guanxi – Personal Connections

– Social network capital & long-term reciprocity

• Zhongjian Ren – The Intermediary– Personal links to establish “trust” and dialogue

• Shehui Dengji – Social Status– Formality and hierarchy counts

• Renji Hexie – Interpersonal Harmony– Build relationships over extended periods

Source: Harvard Business Review (10/03 – “The Chinese Negotiation” Graham & Lam

Culture:

Modern façade can cover strong cultural differences Successful business negotiations requires

understanding of underlying factors:• Zhengti Guannian – Holistic Thinking

– Evaluate each aspect of deal as a whole versus sequentially

• Jiejian – Thrift– Aggressive haggling over price

• Mianzi – “Face” or Social Capital– Making the person look good or not look bad

• Chiku Nailao – Endurance, Relentlessness– High degree of preparation & long bargaining

sessions

Source: Harvard Business Review (10/03 – “The Chinese Negotiation” Graham & Lam

Managerial Systems

Use local knowledge to manage staff and risk

Source: “The Great Transition,” Lieberthal and Lieberthal, Harvard Business Review, Oct. 2003.

• Vital to establish local country management with strong senior staff, to coordinate activities and show a united face for the company

• Understand management goals of the partner in a joint venture– JV company often looks to expand labor force

• Hire managers who can interpret and understand internal issues and devise strategies

• Avoid sharing sensitive technology and data – Chinese are good at pirating ideas

Managerial Systems

Who is the ideal China manager?

Source: “The Great Transition,” Lieberthal and Lieberthal, Harvard Business Review, Oct. 2003.

• During initial entry, an entrepreneurial manager – creative and flexible – experienced with international startups

• During development, a strong senior manager– good ties to home base, communication skills

• During a global integration, a global manager – comfortable working across business divisions

Managerial Systems

Staffing the Chinese organization

Source: "Guide to Doing Business in China(2003 Edition),” tdctrade.com

• Employees are found through two avenues: – job fairs – recruiting agencies

• Placing want ads is less common and requires local government approval

• Employees are usually hired with contracts – terms can be determined individually or collectively

EntrepreneurshipEntrepreneurship suppressed by communism, more

successful at small-scale enterprises

Source:

Financial SystemIncreasing liberalization but still volatile and high-risk

Source:

Investing in ChinaA how-to

• Get guanxi: show respect, network extensively, avoid jewelry and white items

• Pick a production region: find a location geared toward manufacturing, engineering, or sales

• Pick a distribution region: find a location based on internal distribution or export

• Hire staff that can manage the local initiative• Guard intellectual property

Sources: Hong Kong Trade Development Council; BusinessWeek

Investing in ChinaWhere to go?

Source: adapted from BusinessWeek via Mike “Don’t call me Norton” Coppola

Investment Factors

Strengths

Weaknesses

Opportunities

• Be conscious of regional differences when making investment decisions

• Look beyond low-cost manufacturing for competitive advantage:– Engineering and product design capabilities– Enhanced language skills for service sector: data

analysis, software development• How you organize and manage your investment

is crucial to your success– JVs versus WFOEs– Right managerial personnel– Strategy varies with phases of invesment– Need to be flexible

Threats

• Unstable political situation could spill over into commercial sector

• Structural inefficiencies plus overheated economy– Banking sector particularly vulnerable

• Intellectual property issues– Difficult to enforce across all regions, despite WTO

conditions

• Rise of domestic players in key sectors make domestic market more competitive

Conclusions