Category Investing in China

China’s software power

It’s a brave new world for China’s software firms as they come of age

WHY China? Even two years ago, Ben Wang had to answer the question every time he tried a sales pitch for software service contracts from overseas clients.

These days, instead of answering the question, Wang asks the questions as he meets executives from scores of companies every month, all keen to outsource software work to his company.

“China is becoming a top destination for software outsourcing,” says Wang, CEO of Beijing-based Beyondsoft Co Ltd. His company, started in 1995 with only four people, now has an army of 2,000 engineers, providing outsourcing services for tech giants such as Microsoft and IBM.

China’s fledgling outsourcing companies are now expanding rapidly, trying to woo multinationals scouting for low-cost information technology (IT) talent. By trying to pry open the US market, they now aim to become international players like their successful counterparts in India.

But they are not the only ones driving China’s IT outsourcing dreams. Leading IT services companies such as US-based EDS and India’s Satyam have mapped out aggressive expansion plans in the nation. Some are even looking at acquiring local players to speed up the process.

“It’s a critical time for Chinese outsourcing companies,” says Wang.

“We will either grow into giants or will be gobbled up by a giant.”

Unlike their Indian cousins, Chinese outsourcing companies usually made their first millions in Japan rather than Western countries like Britain and the US.

In 2006, China’s software outsourcing companies raked in US$1.4bil in revenues, up more than 40% compared with a year earlier.

And 60% of this revenue came from the Japanese market.

Yet, compared with the US and Europe, the Japanese market is still a small pie. According to IT consultancy IDC, North American and European markets accounted for 75% of the world’s US$320bil IT service and outsourcing market. And these two markets are expected to expand more than 60% annually in the coming years, almost twice the speed of the Japanese market.

With the US market firmly in their sights, Chinese outsourcing companies have kicked off an acquisition spree, trying to gain access to it.

In March this year, Beijing-headquartered hiSoft Technology International bought out Envisage Solutions, a California-based IT consulting firm that boasts a client base of biggies such as Novell and General Electric.

Despite their ambition to go global, Chinese outsourcing companies are facing increasing competition in the neighbourhood. As salaries for software engineers keep rising in India, the world’s leading outsourcing giants are now eyeing China’s universities as the new sources of low-cost software talent.

Tata Consultancy Services, one of India’s most powerful IT outfits, established a new outsourcing joint venture in Beijing with Microsoft and two Chinese partners this February.

The company expects the venture to increase its headcount in China tenfold to 5,000 by 2010, and help it become one of the biggest players in China.

Two months later, India’s fourth largest software exporter Satyam kicked off a global delivery campus in Nanjing, capital of East China’s Jiangsu Province as part of its efforts to increase its number of engineers to more than 3,000 by 2008.

“The labour cost in China could be 15% to 20% lower than India’s,” Satyam chief executive officer Rama Raju said during the opening ceremony of the Nanjing centre.

“Besides organic growth, we are also studying the possibility of acquiring local companies to speed up our expansion.”

U.S. recruitment firm Kelly Services taps China mkt

HONG KONG, June 4 (Reuters) – U.S.-based Kelly Services Inc. , the world’s fifth-biggest recruitment firm, said on Monday it was expanding into China by acquiring a staffing company with offices in seven cities in mainland China.
Kelly Services, which is based in Troy, Michigan, said it had agreed to acquire P-Serv, a privately owned company which is based in Singapore but has offices in Hong Kong and seven cities in mainland China, including Beijing, Shanghai and Guangzhou, as well as second-tier cities Chengdu and Suzhou.

It would not disclose how much it had paid for the Singapore company but said the acquisition would enable it to do executive search, middle-management placement and temporary and contract staffing in China.

“We’ve got a number of multinational clients worldwide who are finding it difficult to find talent in China and want to use a recruitment company that has integrity,” Dhiren Shantilal, Kelly Services’ senior vice president for the Asia-Pacific, said by telephone.

A shortage of managerial talent in China has created a tight labour market and foreign companies face difficulty keeping staff amid rampant poaching.

Kelly’s clients include Intel Corp. , the world’s top chip maker, which has operations in second-tier cities Chengdu and Dalian. Shantilal said Kelly hoped to expand into three more second-tier cities in the next six to eight months.

He estimated that revenues earned by recruitment companies in China amounted to about US$2 billion in 2006 and would probably reach US$3 billion in 2008.

Foreign recruitment firms have been eying expansion in China since Beijing last year partially relaxed restrictions on investment in the sector.

In February this year Chicago-based Hudson Highland Group Inc , the world’s sixth-biggest recruitment company, acquired a Chinese IT recruitment firm to better serve its multinational clients.

Who from the West is doing well in China?

BEIJING–Every American company wants to expand into China, but so far none that has is doing that well. Baidu, the Chinese search engine, has a huge lead over Google. Amazon bought a growing local online bookseller to get its business going, but customer service and other issues caused sales to slow.

So what do people here think of U.S. companies? I decided to ask the CNET staff in China and here’s what they said:

Apple: The iPod, although it costs a lot by local standards, is very popular, particularly with young consumers. Still, Steve Jobs has never visited China and that rankles people. The view is that he just views China as a market. The iPhone could do well, although it’s expensive. Phones that imitate some of its style are already coming out.

Microsoft: Like Americans, Chinese consumers aren’t really fond of the big M. For one thing, the software is expensive. A legal copy of Windows XP costs around 1,000 RMB (or $130). That’s a monthly salary for some people. Plus, the Chinese think the Zune is ugly. MSN, however, is somewhat popular. The diplomatic overtures that Microsoft has made–Bill Gates inviting China’s president to his house and Microsoft’s investments in local companies–have helped.

Qualcomm: it’s the place everyone wants to work. What? Qualcomm employees get their own offices and the offices are located in the Kerry Center, Beijing’s most prestigious address. China Mobile and pretty much any other wireless company is a premier landing.

Google: If you can’t land a job in cellular, Google will do. Google, however, isn’t succeeding as many thought it might: the search giant only has about 30 percent of the market. Baidu came from nowhere by offering search for MP3s, which then helped them in other areas. Google needs to expand its services. Google’s hiring of Kai Fu Lee, heralded in the States as a significant event, hasn’t had much of an impact here. Most people shrugged at the name.

YouTube: Everyone knows the Google division, but it’s not so popular. It’s not in Chinese. Besides, video sites have cropped up like mad.

Yahoo: The company is kind of marginal, even though Jerry Yang is Chinese. People instead wanted to know if Americans knew much about Robin Li, founder of Baidu.

Dell: Dell has done well here, but now it has a reputation for poor customer service and low quality. But the prices are low. Dell also didn’t do great PR here on the battery recall: the average buyer thinks the problem was Dell’s notebooks, not Sony’s battery.

American TV: Bring it on. 24, Lost and Prison Break are all big and viewers know how to get around government restrictions. Such restrictions may loosen up, however. The government is contemplating plans that would let racier content in legally, but only for certain age groups.

Sony: Good products, but expensive.

IBM: Boring. We truly do live in a global village.

China gets 10.2% more FDIs in first 4 months

CHINA’S foreign direct investments jumped 10.2 percent in the first four months of this year, as the nation’s lower costs and market attracted a steady inflow of funds.

The amount of FDI totalled US$20.4 billion from January to April, the Ministry of Commerce told a press conference in Beijing yesterday. April saw a FDI flow of US$4.5 billion, up 5.5 percent from a year ago, the ministry said.

“Foreign direct investments into China have kept steady since last year as the nation shifted its focus to the quality instead of quantity of foreign funds (investments),” said Liang Futao, an analyst with Shenyin & Wanguo Securities Consulting Co.

He said the monthly FDI is around US$5.2 billion on average.

Investors are now being encouraged to pump investments to other sectors, including high-end manufacturing, research and development, services, agriculture and environment protection, Li Zhiqun, an official with the foreign investment department of the ministry, said earlier this year.

China’s continuous opening-up, a booming consumer market and lower costs continue to serve as magnets for foreign investments, even if the government has curbed funds heading to industries with high pollution, low energy efficiency and lower added value, industry officials have said.

Intel Corp, for instance, will spend US$2.5 billion to build its first computer-chip plant in China’s Dalian in Liaoning Province in the northeast, its first in Asia too, the US chip maker said earlier this year.

Caterpillar Inc, the world’s largest maker of earthmoving equipment, also opened a plant in eastern China’s Jiangsu Province.

Foreign-invested companies had more than 300,000 factories in China by the end of 2006, according to a report this month by HSBC Holdings Plc.

The second round of Sino-US strategic economic talks, set for next week, is expected to benefit long-term investment relationship between the two nations as topics of market opening and others will be addressed, Liang said.

Rising FDI also fueled the nation’s record foreign exchange reserves which have topped US$1.2 trillion, more than a fifth of the world’s total, industry officials said.

China’s FDI rose 4.5 percent last year to a record US$63 billion, according to the ministry.

Total FDI has surpassed US$700 billion since China accepted funds from overseas investors, Commerce Minister Bo Xilai said in March.

U.S. staffing companies in China see chance for profits

By Nick Zieminski

China may have plenty of man power, but it could also use some help from Manpower.

U.S. staffing company, Manpower Inc. , is one of a number of business recruiters putting emphasis on the world’s most populous country, where a rapidly developing economy is driving the demand for engineers, finance professionals and technology specialists.

China’s growth rates of about 10 percent per year, which already makes it the world’s No. 4 economy, pushes companies to develop leaders at a faster pace than most other countries.

A McKinsey & Co. study estimates that, within five years, China will need 75,000 executives who have either Western technical skills or language ability — ideally, both. Only about 5,000 are in the work force now.

“The challenge is not in finding 500 or 1,000 people to man the factory. The challenge is in finding leadership skills and functional management skills,” said Iain Herbertson, president of Asia-Pacific for Manpower, which has 350 consultants in 11 Chinese cities. About half its contracts are for information technology workers.

For now, the numbers are relatively modest. Of Manpower’s $4.4 billion in second-quarter revenue, the “other” segment — which includes China, Japan and Australia, as well as Mexico — reported sales of $577 million. Its operating profit of $15 million was about 9 percent of Manpower’s quarterly total.

But the segment is among the company’s fastest growing. Within three to five years, Manpower will have a staff of 1,000 to 1,600 in mainland China.

New rules this month allowed foreign companies to own a controlling stake in their local joint ventures if they set up shop in Pudong, the fast-growing financial center in Shanghai.

The move is part of a broader relaxation of rules, which should help draw more companies to China, and will enable Manpower to expand its range of services, Herbertson said.

“Our business is more than doubling every year,” Herbertson said in a telephone interview from Shanghai.

Monster Worldwide , which this year raised its stake in ChinaHR.com to 45 percent, may take majority control of the venture by 2008, though the unit is currently losing about $2 million per quarter.

“We don’t expect it to be (profitable) because we are at the beginning of the beginning,” said Marcel Legrand, Monster’s senior vice president of strategy and corporate development. “Profit is not of great interest to us in that particular market — it’s about an investment.”

ChinaHR has about 600 staff and 4 million resumes on file, but those numbers will grow as more Chinese go online, Legrand said.

Monster, parent of the world’s largest recruitment Web site, followed customers like Procter & Gamble , L’Oreal , and Hewlett-Packard to China, which fits with a goal for international operations to account for more than half of its revenue by next year.

That global expertise, including serving multinationals in other markets, is what differentiates companies like Manpower and Monster from their smaller competitors.

“We can bring to China the best of what happens in Brazil, or what happens in Korea, and they can help us export their best practices,” Legrand said.

This week, Monster hired a former Nike Inc. executive, Tony Balfour, to head its Asia-Pacific operations.

He will have competition.

Rival job site Careerbuilder.com on Wednesday said it was entering the Chinese market in an exclusive deal with human resources company 51job Inc. , to link to each others’ sites and sell job postings and access to their resume databases.

At executive recruiter Heidrick & Struggles International Inc. , Asia-Pacific operations had faster revenue growth and highest profit margins than either the United States or Europe. The region accounts for 10 percent of total company sales, and China about a fifth of that.

Since rules are different depending on the services offered, Heidrick owns 90 percent of its Chinese joint venture, said Kevin Kelly, who heads Heidrick’s European and Asian operations, adding that consumer goods, technology and industrial companies are its main clients.

Financial companies, including investment banks, will need experienced staff starting in 2008, when new rules take effect under China’s commitment to the World Trade Organization.

Heidrick’s China operations are expected to double within three years, and the company is recruiting Chinese-speakers in the United States and Europe for positions there, Kelly said.

“European and U.S. markets are more mature, so everyone sees China’s huge potential for developing or expanding their businesses,” Kelly said.

METSO PAPER: Metso Paper to establish a new service center in Guangzhou China

Metso Paper, Inc.

Metso Paper to establish a new service center in Guangzhou, China

Metso Paper will establish its second Service Center in China. The
center, which will be located in Guangzhou, Guangdong province, will
provide advanced machinery maintenance and process development services
to the pulp and paper making industry in southern China. The value of
the investment is close to EUR 10 million.

The new greenfield Service Center will be operational in 2008. In the
beginning, the center will employ 40 service professionals – recruiting
of personnel is already ongoing.

The Guangzhou Center will feature a fully equipped roll service workshop
providing rolls, roll covers as well as mechanical roll maintenance for
all makes and sizes of pulp and paper machines. In addition, the center
will offer a full scope of spare part and mill site services.

Establishment of the new Guangzhou Service Center is a natural
continuation to Metso’s commitment to serve the Chinese pulp and paper
industry locally. In line with this, Metso Paper is also strengthening
its existing service operations in China. The Wuxi Service Center that
was opened in Jiangsu province in 2001 will double its roll service
capacity by opening an extension in October 2007.

In 2003, Metso Paper established a logistics center in Wai Gao Qiao,
Shanghai, to support fast deliveries of spare parts and consumables.

To serve the growing paper, board and pulping equipment market, Metso
Paper also has a production plant in Shanghai with 500 employees, and
a 1,100-strong manufacturing joint venture in Xi’an.

During the last ten years the Chinese pulp and paper industry has made
substantial investments in new machinery and technology. Metso Paper has
been involved in many of these projects, and is currently the leading
technology supplier to this industry.

Metso is a global engineering and technology corporation with net sales
of approximately EUR 5 billion. Its 25,500 employees in more than 50
countries serve customers in the pulp and paper industry, rock and
minerals processing, the energy industry and selected other
industries.
www.metso.com

Siemens’ China Healthcare Project Answers Clinton Global Initiative

Siemens will invest a total of US$10 million over the next five years to achieve sustainable improvements in healthcare in rural areas of China.

The project is a Siemens contribution to the Clinton Global Initiative to support poorer regions in threshold countries.

An agreement on the project was signed by Siemens and the Shaanxi Bureau of Health. Zhang Huaixi, vice chairman of the Chinese People’s Consultative Conference; Dr. Richard Hausmann, president and CEO of Siemens China; Dr. Siegfried Russwurm, member of the executive management of Siemens Medical Solutions; and Dr. Bernd Ohnesorge, president and CEO of Siemens China Medical Solutions, all took part in the signing ceremony held in the Great Hall of the People in Beijing.

“All people, regardless of their status or origin, should have access to high-quality healthcare. This is an important prerequisite for a peaceful and just society. We are especially pleased when leading companies like Siemens provide their competence for such efforts,” commented Zhang Huaixi.

With the help of pilot projects, a pool of valuable experience will be built up for giving people in rural regions of China better access to high-quality healthcare. In this project, Siemens will focus on developing tailored solutions to meet the specific needs of local healthcare organizations.

Siemens will initially outfit a number of pilot hospitals with diagnostic equipment, beginning with the first facility in Luochuan County in Yan’an, in the Shaanxi Province. This equipment will include ultrasound and x-ray systems as well as computed tomography imaging systems. Not far away from each rural hospital, Siemens will equip six urban health centers with x-ray and ultrasound systems. Siemens will maintain the technical infrastructure once it is in place.

The project, headed by China’s Ministry of Health, is part of the Clinton Global Initiative, which brings together key figures from politics and business, as well as wealthy individuals and philanthropists, to jointly tackle challenges faced by societies

Baxter aims to increase staff, investments in China

Baxter International Inc. will be stepping up its investments in China, hiring an additional 200 workers a year as part of a larger strategy to increase its international business, the company told analysts recently.

Baxter generated 56 percent of its sales from international operations last year.

Baxter’s international sales increased by 6 percent last year, to $5.8 billion. The firm’s total sales were nearly $10.4 billion.

The company also has more employees outside the U.S. Currently, about 1,500 of Baxter’s global workforce of 45,000 are in China.

Baxter has 18,500 workers in the U.S.

Baxter is not a traditional pharmaceutical company that makes pills and tablets. Rather, it makes money on medication delivery devices, genetically engineered blood therapies and dialysis medicines.

The emphasis on China did not get as much attention as Baxter’s overall plans announced last week to increase spending on research and development and to give consideration to acquiring companies in the $100 million to $500 million range.

However, many analysts have taken note of Baxter’s international plans in notes they have written in the week following the March 14 analyst meeting.

In particular, Baxter sees China as a growth market because dialysis rates are low, particularly for peritoneal dialysis, a form of in-home therapy.

Baxter, which sells intravenous systems, also sees a huge opportunity in medication delivery.

China is a country that still has hospitals that make use of glass bottles as containers for solutions and medications, instead of the plastic bags commonplace in U.S. health facilities.

“The company is investing in new low-cost products, clinical studies and marketing activities to position itself for faster growth in these countries as they come to appreciate the benefits of home dialysis,” said Ben Andrew, an analyst with William Blair & Co. of Chicago in a report he issued last Friday, two days after the Baxter analyst meeting.

The Deerfield-based medical products giant sees markets such as China, where per-capita spending is growing 10 percent or more annually, as critical to achieving a sales growth rate of 7 percent to 9 percent over the next five years.

John Greisch, corporate vice president and president of Baxter’s international operations, said fast-growing economies such as China’s are also expanding health insurance coverage of their citizens and increasing reimbursement to providers of medical care.

By comparison, the number of uninsured in the U.S. is rising while increasing numbers of workers are paying more out of pocket for their health benefits.

Baxter’s sales from China were about $150 million last year.

The company expects them to grow about 25 percent a year and approach $500 million annually by 2011.

51job: Set to Capitalize on China’s Evolving HR Market

Ashish R. Thadhani (Gilford Securities) recently sent a note to clients raising his price target for 51job, Inc. (JOBS) based on the Company’s strong Q406 results. Key excerpts follow:

* Investment Conclusion. After incorporating stepped-up S&M – funded by lower G&A and near-term taxation — we are maintaining our estimates: 2007 GAAP EPADS at $0.60 on net revenue of $100 million (20% YoY growth and up from our prior $99 million projection); and 2008 GAAP EPADS at $0.80 on unchanged net revenue of $122 million (22% YoY growth). Due to the late Chinese New Year, our 1Q07 assumptions reflect a shorter peak recruiting period of five weeks vs. eight a year ago. We are raising our target from $26 to $28. In 12-months, this would correspond to 35x forward GAAP EPS of $0.80. Our recommendation is backed by an EV of $344 million or 20x forward earnings plus continued purchases by CEO Yan. We also point out 1) recent newspaper alliances in the U.S. should validate the 51job online/offline model to maximize local reach; and 2) 2007 is expected to be the last year in investment mode for rival ChinaHR.com, which remains much smaller and less profitable than 51job.
* 4Q06 Results. GAAP EPADS of $0.09 vs. $0.08 a year ago on net revenue of $20.8 million (23% YoY growth) matched our $0.09 estimate on net revenue of $20.1 million. Non-GAAP EPADS of $0.14 vs. $0.10 also met our $0.14 expectation. 51job posted positive variances in print advertising revenue and G&A expenses – offset by gross margin and S&M spend. Non-operating interest, subsidies, forex and tax variances offset each other. Revenue was driven by online recruitment services, which advanced 37% YoY to 34% of the total. Operating income of $2.6 million (12.6% margin) was right in line with our estimate of $2.5 million (12.5%). Other highlights included diminished seasonality (-4% QoQ) and clear market leadership based on online postings, traffic quality and pricing — despite competitor claims to the contrary. Metrics showed growth in print advertising page-count (+33% YoY from a depressed level) and lower revenue per page (-14% in dollar terms due to seasonal promotions and city-mix); and moderating growth in the number of employers using online services (+30%) with steady revenue per employer (+5%). Net cash climbed to $111.3 million (~$3.90 per ADS) from $104.5 million on September 30.

Noteworthy developments

December 2006. In an SEC filing, Recruit Co. disclosed an increase in its holdings to 5.1 million ADS equivalents (18% ownership stake).

November 2006. CEO Rick Yan reported additional market purchases totaling 317K ADSs at an average price of $16.04 between November 13-22. This activity took his ownership to 8.6 million ADS equivalents or 30% of the total. Separately, the class action lawsuit against 51job and its officers, which followed a 4Q04 EPADS shortfall, was dismissed.

September 2006. CEO Rick Yan reported market/private purchases totaling 818K ADS equivalents at an average price of $14.57 during the 30 days ended September 13. This activity took his ownership to 8.2 million ADS equivalents — well above what is covered under the agreement with Recruit.

August 2006. 51job announced an exclusive partnering agreement with CareerBuilder.com (owned by Gannett, Tribune and McClatchy), under which the two sites will have links that provide job posting and resume access.

June 2006. Mr. Charles E. Phillips, Jr. – President of Oracle (ORCL) – resigned from the board citing personal reasons. Mr. Phillips had served as a director for two years.

April 2006. In a private transaction, existing shareholders comprising management and Doll Capital Management [DCM] sold to Recruit Co. the equivalent of 4.2 million ADSs (or 15% of the total) at $26 each (47% market premium). Recruit holds a three-year option to purchase an additional 25% stake from these shareholders at the higher of two prices: 1) floor of $26 per ADS – as long as JOBS does not drop below $10 at the time; or 2) 15% market premium with a $51 cap. If exercised, management ownership would decline (from 50% before April 2005) to 35% and that of DCM (from 25%) to nil. Separately, 51job entered into a business alliance with Recruit that will explore new information service opportunities in China. Founded in 1963, privately held Recruit is the leading provider of HR services in Japan. It also provides information services across diverse businesses such as learning, real estate, automobiles and coupons. In fiscal (Mar.) 2005, Recruit operating income exceeded $1 billion on sales of $3.5 billion.

October 2005. 51job signed a letter of intent to purchase a $14 million service and headquarters complex in Shanghai, which it began occupying in late-2006… July 2005. The Chinese government changed its currency policy. Over time, anticipated Renminbi appreciation should translate into higher dollar-denominated operating income, offset by near-term currency translation losses.

May 2005. Shareholders approved a $25 million stock repurchase program over a 12-month period. In 2H05, 51job repurchased 686K ADSs at an average price of $13.65.

February 2005. Monster Worldwide acquired a 40% stake in rival ChinaHR.com for $50 million – or 9x 2005E revenue of $14 million (up 100% YoY and 70% online). At the time, ChinaHR.com had 3.2 million registered users and 480 employees in 10 major cities. In 1Q06, Monster increased its ownership to 44.4%. It acquired shares from existing holders for $20 million, implicitly valuing ChinaHR.com at $450 million. Monster expects to assume full control of this subsidiary in early-2008. Financial backing by Monster has not altered the competitive landscape materially. However, 51job does anticipate heated competition until such time that ChinaHR.com – which is likely to remain unprofitable through 2007 – becomes directly answerable to public shareholders.

January 2005. 51job pre-announced a 41% shortfall vs. 4Q04 EPADS guidance due to unprecedented revenue softness in late-December. The sudden (post-IPO) slowdown was attributed to a shift in budget allocations to earlier quarters of the year – borne out in 4Q05 – and moderation of overall demand from ~70% YoY growth.

September 2004. 51job raised net proceeds of $76.8 million from its IPO at $14 per ADS.

Investment Thesis

51job is enviably placed to capitalize on the rapidly evolving market for HR services in China – by applying a proven business model across its vast labor force (5x U.S.). Compared with traditional job search channels such as referrals and fairs, pioneers like 51job offer significant reach and speed advantages. Favorable demographic drivers include GDP growth (~10% in recent years), Internet usage (ranked #2 behind the U.S.), an aging workforce and increasing private, urban and service sector employment. iResearch forecasts that the total recruitment market in China will increase from $570 million to $1.26 billion in 2005-10, implying 17% compound annual growth. During this period, the online recruitment segment is expected to advance from $100 million (18% of the total) to $570 million (45%), or 42% compound annual growth. Superior positioning includes: premium brand/pricing; a comprehensive online/offline offering; wide geographic presence (25 cities); large direct sales force (over 1,200 representatives); and unmatched job seeker database (access to more than 11 million resumes for professional, clerical, industrial and hourly jobs). EPS visibility stands to benefit from top-line, profitability and taxation drivers. Specifically, ramp-up of online subscriptions (from single-digit penetration of client budgets at present); a scalable model offering 30%-plus operating margin (excluding share-based compensation); and initiatives to avail of tax incentives.

JOBS is suitable for aggressive investors. In our opinion, principal risks include the following:

* Deterioration of economic conditions in China, slowing of hiring activity or a “hard landing” scenario.
* Competition from ChinaHR.com and Internet portals could pressure future profitability by way of lower pricing and/or higher marketing expenses.
* Rapid online migration could result in cannibalization of offline revenue.
* Despite recent improvement, 51job has an inconsistent execution record.
* Uncertainties in the PRC regulatory and legal system, particularly laws governing foreign ownership and licensing/operation of HR and Internet business entities. Note that 51job is incorporated as a holding company in the Cayman Islands.
* Disruptions such as spread of the H5N1 virus or a recurrence of SARS, political unrest, breakdown in relationship with a major publishing/distribution contractor, etc.
* Influence of Recruit Co. and current management over all matters requiring a shareholder vote.
* Correction in the U.S. markets.

How to talk business in China

Reviewed by Michael Jen-Siu

Tim Cole, a magician from Las Vegas, Nevada, met me in a Beijing coffee shop about two years ago and said he had been cheated out of US$127,000 because his Chinese business partner canceled several performances in violation of their contract. The partner also stuck Cole with the trans-Pacific shipping bill for the show equipment, he told me.

His story followed a series of interviews I had done with the

owners of a Hong Kong engineering company that lost a large hotel to court receivership in Dandong, northeastern China, because the Dandong partner tried to pass off its own loans on the Hong Kong side.

I remember these two cases because they go against the overwhelming majority of China business news stories, which generally follow China’s fast-track investment deregulation and the natural flood of foreign businesses entering an anticipated record- sized consumer market. But the magician and the engineering firm showed paperwork to prove that they had been cheated despite the hype.

The Chinese Negotiator, a topically overdue book published this year, suggests that the magician or the engineering firms might have misunderstood their Chinese counterparts when they agreed to do business together. Maybe Cole or the engineering firm upset their local partners during contract negotiations, I started to imagine. Maybe they didn’t even have a solid enough deal before business began.

Authors Robert March, a negotiator and consultant since 1985, and Wu Su-hua, an entrepreneur for 25 years in Taiwan and Australia, provide 280 pages of tips on how to negotiate with teams of stoic chain-smokers who don’t say what they’re thinking. They tell foreign companies to negotiate according to a 12-step process and to pick a team with refined social graces and a taste for Chinese food. They explain why foreign teams must come to the table as a unified front but with a clear leader and every other member assigned non-conflicting responsibilities to avoid the appearance of uncertainty or risk spilling sensitive details too soon.

More important, The Chinese Negotiator shares scores of subtle, example-rich insights about Chinese versus non-Chinese psychology in language that brilliantly transcends stereotypes. These lessons could help almost anyone get along in any Sino-foreign environment, whether as a negotiator, a boss or a common employee. The authors point out that overlooking these subtleties during a contract negotiation can quietly offend the Chinese side, which in turn might sign with a competing foreign firm or plot revenge against the offending party.

March and Wu note, for example, that Western negotiators bristle too obviously when deals don’t come together soon enough and do not see how non-business chats over alcohol can improve later negotiations. Chinese, for their part, are as flexible as street-market vendors, take a shared-destiny view of joint ventures, and may look to an absentee boss far removed from the negotiations for serious contract decisions, even after deals are struck at the table. They also subconsciously use any of 36 classic Chinese war stratagems that promote deception, secrecy and elaborate mind games to get what they want.

The book’s top lessons, threads that bind one chapter to the next, are that interpersonal trust must precede business, that the Chinese value a harmonious negotiation atmosphere (despite their own poker faces), and that negotiations can last much longer than foreigners expect – though we’re never told exactly how long. Another piece of repeated advice: foreigners should avoid talking too much about business in opening negotiation rounds so the parties first get to know each other personally.

The Chinese Negotiator leaves one big red elephant in the negotiating room. That’s the profound influence of China’s government. Almost every day of my seven years in China, as a reporter or a colleague or a teacher or just someone in the street, I met with the nationalism of modern Chinese people. Much of their distrust, resentment or superiority toward foreigners stems directly from the government’s relentless teachings in school or through media that Chinese are historically superior people victimized by foreigners.

The government promotes especially strong anti-Japan sentiment and the questionable idea that ethnic Chinese inside and outside China are all the same except that outside they’re lucky to be rich. Before 2000, it was legal to overcharge foreigners at government tourist landmarks. These prejudices are not checked at the negotiation-room doors. Local courts normally back the Chinese side in any dispute, another sign of us-versus-them nationalism. And because of China’s non-consultative policymaking and lack of public participation in government, many laws touted as business-friendly via government-run English-language media are vague, redundant and even contradictory.

Cole or the Hong Kong engineering firm might have blundered in their negotiations, but they could easily have been cheated out of sheer resentment, or fallen into the red through a legal gray area. The Chinese Negotiator might have noted the state’s formative role in Chinese psychology and advised companies on how to reach sound, cheat-resistant business agreements that have the flexibility to withstand undulating local laws on key matters such as currency conversion and patent protection.

Key foreign countries are also missing from the book. Most of the advisory anecdotes feature firms from developed Western countries, but what about growing powerhouses such South Korea or Russia, where business cultures differ, likewise stereotypes held by the Chinese? And if I were a sole proprietor magician or hotelier, rather than a company with a big staff, I’d want to know how to negotiate against a complex Chinese organization without hiring a team. Is there a network of negotiators for hire?

Finally, The Chinese Negotiator could further explore China with a few more anecdotes from the book’s namesake. Experienced contract negotiators at the foreign-affairs offices of state companies or the poker-faced Chinese bargainers who quietly evaluate their foreign counterparts across a table might tell revealing stories about what it’s like on the home court.

Influential Chinese people do not always open up to foreign writers, but some will talk, especially if contacted through personal connections. Chinese sources also might offer details on how they arrange room, board and meeting venues for the negotiators – and who pays for it all. Maybe we would learn that some Chinese publisher is about to release “The Foreign Negotiator”.

The Chinese Negotiator: How to Succeed in the World’s Largest Market by Robert M March and Wu Su-hua. Kodansha International, February 2007. ISBN-10: 4770030282. Price US$24.95 hardback, 280 pages.

Michael Jen-Siu is a wire-service reporter living in Taipei.