Category Investing in China

The importance of Guangxi (relationship) when doing business in China

In China, Guangxi (relationship) is a complicated field. A special feature of doing business in China will be that Guangxi (relationship) in China will have to include relationship with the government body, investors, partners and even relationship with your own staff, so when doing business in China, it is important for foreign investors to learn to coordinate with the China government, especially establishing good relationship with government bodies dealing with foreign trade and economic cooperation.

Governmental procedures for foreign investors in establishing investments in China is extremely complicated, thus if one is unfamiliar of the procedures, one will delay his/her business opportunities. Therefore it is important for one to be familiar with the investment procedures before carrying out his/her investment in China. A safer and more appropriate way will be to seek help from local organizations familiar in the same field of business or consultant firms who are able to provide professional advice and assistance. Willpower and patience may be essential for an investor to be successful, however it is necessary for one to require help from professional bodies to ensure that success will be achieved.

Seeking a suitable local cooperative partner can be a shortcut one undertakes when developing the China market. Many investors had established Sino-foreign joint venture, Chinese-foreign cooperative enterprise, etc. as a stepping stone to enter the China market, thus which investment mode to choose one will have to accord with the enterprise’s characteristics and has to be the most suitable for developing the enterprise’s business and assisting its march into the China market. Some investors who had made investments in China for many years proposed to small and medium-sized enterprises to take one step at a time when making investments. They should not be too ambitious initially. It will be best if they establish cooperation with local partners so as to reduce their investment risk. Even though China’s investment environment is constantly maturing, domestic regional developments imbalances still exist, therefore building cooperation with local companies will be the most ideal way to protect foreign investors’ interests and investments.

China’s labour market very much appeals to many foreign investors. This is because on one hand, labour cost is low, and on the other hand, through 20 years of reform, China’s workforce has become matured and their skills have been constantly upgraded, especially in the coastal cities. Educational development is undergoing at a tremendous pace in China, thus it is no longer difficult to hire high quality labour force in China today. Many successful foreign investors have even credited their success in China to their China’s local staff. One big problem that is causing headache to foreign investors is how to maintain good relationship (Guangxi) with the local staff. First of all, top management should cultivate the company’s vision and values into the employees because what the local people are taught under China’s educational system may crash with the foreign management system. Thus only by letting the employees understand the company better can allow the company to function better.

Chinese emphasize very much on courtesy and face-saving. This has to do very much with China’s traditional culture, and courtesy can be seen in every aspect in the business world. Being courteous to government official, cooperative partner and staff is thus essential. Senior president of China’s Siemens Company has rated courtesy as the top importance while summarizing his China’s experiences. Besides displaying courtesy on general commercial affairs, respecting traditional customs and practices is also vital. Chinese people are very hospitable, but their self-esteem is very strong and they pay very much attention on how other people view them and their attitude towards them. This phenomenon can be seen greatly in Northern China, which is associated with ‘face-saving’.

While doing business with the counterpart or partner, it is essential to give face or respect to the partner or the other party, so that in this way strong cooperation can be fostered and the business will be able to grow and last. Many foreign corporations have strict requirements on their staff in their home country, however in China, this management method may backfire. Past experiences have shown that this kind of strict management method may not be suitable for the Chinese’s gentle personalities. Employees’ morale will be affected and they may lose the willingness and motivation to work in the company. Thus handling organizational relationship in China context is a necessary skill for foreign investors to acquire in order to handle interpersonal problems in the Chinese way. It is important for foreign investors to be flexible in their management and be sensitive to China’s culture in order to devise an ideal management system best suited for their companies’ organizational culture.

5 tips to invest and do business in China

1. Have clear understanding of China

It is essential to understand the culture of the country before investing in it. Understanding China is vital as China is a land of vast diversity. As such it is important for the company to understand the culture and the society’s values before establishing operations in China. Only through understanding the culture and values strong foundations can be built and higher chance of success can thus be achieved.

2. Understand local business practices

Given China’s distinct culture differences from the rest of the world, understanding China’s business culture is extremely crucial. What works in one’s country will not be applicable at all in China. Understanding how the local people think and their business practices can allow one to engage better and faster with them. Original organizational culture and practices may have to change in order to accustom to China’s practices. Thus flexibility and adaptability is the key for any organization to be successful in China.

3. Acquire local knowledge and establish local presence

Establishing a representative office in conjunction with a strong domestic private sector partner that has access to all necessary information and contacts in their field is the widely practiced formula practiced by foreign firms who already enjoyed success in China. Another way will be through setting up joint venture. Most importantly it has to be the selection of the correct partner. Finding the right partner may require more time, patience and experience but it is never a hassle to spend more efforts in choosing the partner because a wrong partner will definitely guarantees failure. Chinese expertise and local talent must also be incorporated into management or consulted during decision-making since local knowledge is essential as a source of information, access to networks and social and cultural learning, especially in China.

4. Need for establishing business relationships

Guanxi (relationship) is an important element in achieving successful business in China. Top management must learn to nurture close relationships with their local counterparts. This not only helps them to understand the Chinese domestic market, but also creates avenues for help in times of trouble or in need of assistance. Building strong relationships with business partners can aid in mitigating strategic and operational risks.

5. Establish close relations with government officials

Because the China government plays an important role in influencing market movement and administering foreign investments, a strong government relationship remains an important factor to do business successfully in China. Fewer hiccups may be met during paperwork applications or achieving local authorization if a strong relationship with government officials is in place.

How to export to China

Mainly there are 3 ways whereby one can export his/her goods in China:

1. Distribute your goods directly
2. Establish a joint venture
3. Find a qualified agent or distributor with a vast sales network

Before exporting your goods into China or choosing a Chinese partner, it is advised for you to conduct thorough market research and due diligence. Companies should be mindful of possible problems in export rights, regulations and intellectual property rights protection. If the company decides to distribute the goods directly, then it will have to be aware of the distribution rights and understand the licensing process in China.

Distributing your goods directly may be a complicated and time-consuming process as one may not be familiar with China’s business practices and government regulations. Application for distribution rights and establishment of own distribution channels will be difficult. Chances of failure will be higher as a result. Establishing a joint venture will thus be a better option. Establishing cooperation with a local partner can allow you to have faster access into China’s market and with the local partner’s knowledge and experiences of China’s market, your success rate will be higher and goods can be better distributed. Acquiring help from a local partner does give you many advantages in penetrating the China’s market. A side issue to note will be that joint venture usually requires large amount of capital and China’s government may have capital control towards outflow of funds should one transfer his/her funds back to his/her home country. The government will also need to assess the potential economic benefits that it can bring to China, e.g. does it create job opportunities for the local population before approving it.

For small and medium sized companies, the best way to enter the China market is through a reputable or well-known agent or distributor. These companies are located regionally and typically have large sales network. Thus they will be able to have a better understanding of the China’s market and can provide assistance in developing distribution strategies in China and the region. In this way, new products can be launched easier into the market and distribution network can be set up rapidly without any problems dealing with distribution rights and licensing.

Besides all these, the most important step that one must take before exporting his/her products into China will be have a thorough understanding China’s customs, regulations and controls towards imported goods. A sound market entry strategy is also necessary in order to penetrate the China’s market. An assessment of your goods’ strengths, weakness, opportunities and threats can allow you to promote and distribute your products better. Understanding the profitability and marketability of your products in the China’s market is thus vital before exporting your products into China.

Doing Business in China

The Chinese economy is roaring. But what does it take for foreign investors to succeed when doing business there?

Foreign investment in China has surged dramatically in the past few decades—from a few billion dollars per year in the 1980s and early ’90s to tens of billions of dollars per year in the past decade. Despite this, doing business in or with China doesn’t come easily to most Westerners. For those who neglect their homework, failure can come easily. Huge and not readily defined, China is as diverse as its many regions and languages and is currently in the throes of rapid change. Fueled by tremendous economic growth, Chinese people have on the whole become richer. Yet the income gap between the wealthier Chinese, who tend to live in urban areas, and the poor, who tend to live in rural areas, is growing ever wider. And while the Chinese people recognize that foreign investment can help their economic situation, they are also steeped in an entirely different culture than are Westerners.

In matters of business, the differences are sometimes subtle, sometimes not—but either way, they can have a considerable impact. NEWSWEEK’s Laura Fording interviewed Peter Liu, cofounder and chairman of WI Harper, a U.S.-based high-tech venture-capital firm, whose goal is to bring Silicon Valley and Chinese—as well as Hong Kong and Taiwanese—businesses together. The interview was conducted by e-mail. Excerpts:

NEWSWEEK: What is most on Chinese government officials’ minds these days?
Peter Liu: The potential impact of rising unemployment, especially in rural areas of China. Also some of the white-hot growth sectors, which may be leading indicators and contributors to a possible hard landing: real estate, raw materials such as cement and steel and, of course, commercial lending.

I’ve heard that the chances that a foreign business will fail in China are high—that it’s easy to invest there but much more difficult to bring the money back home. Why?
In general, this is true. Most foreign companies are handicapped by a lack of cultural understanding and patience to see [their projects] through. The most difficult thing is finding the right and trusted partner with shared interests in China. Often senior executives in these foreign companies underestimate how complex and frustrating doing business in China can be at times.

People are investing in computers and telecom. What other areas have the potential to do well in China?
Semiconductor, fabless IC design and outsourcing service sectors can be high-growth areas. Outsourcing and technology-enabled service companies, especially, will see high growth, given China’s unique features. Often cutting-edge technology isn’t what wins the day in China; rather, it’s practical applications which can address an immediate need and are directly or indirectly linked to the mass consumer. We are less enthusiastic about enterprise [software companies] such as ERP, CRM, as they tend to have very, very long sale cycles and [a] high level of customization. The investment horizon in the West is normally two to five years, but in China, it is five to eight years.

Do larger companies have advantages over smaller start-ups when doing business in China?
To certain extent, yes, as larger companies tend to have the provincial [or] central government’s support. But this is changing as smaller start-ups, equipped with foreign capital and better senior-management teams, become more and more competitive. These types of companies can change strategies quickly to better align themselves with the rapidly evolving technology-market conditions in China.

What are the some of the major obstacles encountered when doing business there?
Lack of a complete legal framework, lack of a viable and proven exit strategy and a channel for venture-capital investors, lack of strong corporate governance and, still, a lack of quality and experienced local managers with international and well-rounded skill sets.

Can you give some examples of how cultural differences affect relationships between Chinese and American businesspeople?
One example is the issue of currency [revaluation]: the more Americans push, the more difficult it is for the Chinese government to agree. There is clearly a lack of cultural understanding from Americans, if you put aside all the economic reasons for and against a revaluation.

Are products made by American companies too expensive for most Chinese people to afford?
In general, the answer is yes. American companies simply can’t compete with China on manufacturing-based operations. In my mind, there are three things American companies can do to survive: 1.) Have a China strategy and find manufacturing partners in China. 2.) Innovate and differentiate with cutting-edge R&D at the same time. 3.) Localize product lines or services with local partners.

What is the typical reaction of the Chinese government to foreigners trying to do business in their country? Do they welcome it? Do the Chinese people welcome it?
The short answer is yes and yes. The Chinese government, both at the central and the provincial level, welcomes foreign investments in China and often has many preferential taxation treatments and better regulations to promote it. As for Chinese people, foreign investment often results in more jobs and they certainly are in favor of that, as well.

I’ve heard businesspeople say that the legal system in China is not particularly supportive of foreign business. What’s your take?
The legal system in China still has a lot of room to improve in general, not that it is particularly unsupportive of foreign business. In general, our take is: proceed with caution and work with trusted partners to prevent or lessen the chance of legal matters down the road. A company can only increase its odds of succeeding in China by doing that and doing it early to prevent an unhappy situation from happening at all. If such an unhappy situation happens, China is rapidly improving its legal and mediation system. But the process of taking legal actions in China is very long and painful, still.

What about piracy? I’ve heard it’s a huge problem in China. Is there any way to curb it?
Yes, piracy remains a huge issue, and it will NEVER go away. Instead of taking a combative and rigid attitude, one should find innovative ways to make sure the maximum benefit can be generated, given this environment. In order to operate in China, the issue of piracy needs to be taken into consideration as part of the core business strategy and dealt with in a practical way. Look at Microsoft as an example of not dealing with the issue right and now suffering from declining market shares year after year. We try to assist U.S. companies, for instance, in dealing with piracy issues. For instance, Hollywood can share their experiences with their Chinese [counterparts]. Then they can try to understand the professional way to project intellectual property. By doing so, government can support their act to balance the piracy issues between Hollywood and China.

Any advice for someone who has an idea for starting a business in China, or a business relationship with someone in China?
Be practical, set realistic and achievable goals, work with TRUSTED partners, and most importantly have a long-term view and BE PATIENT. “Patience, Patience and Patience.”

Airbus plans China assembly plant

Airbus signed a framework agreement with the Chinese authorities on Thursday to build its first aircraft assembly plant outside Europe, at Tianjin in eastern China.

It also agreed a preliminary deal for its biggest single order from China, for 170 aircraft, which could eventually be worth about $14bn (€11bn) at list prices, before heavy discounts.

Airbus, a subsidiary of EADS, Europe’s leading aerospace and defence group, is seeking to extend its industrial operations beyond its European base in France, Germany, Spain and the UK, and has made China a priority target both for increased sales and industrial co-operation.

It has failed to make much progress in breaking into the Japanese market, where Boeing, its US rival, has an entrenched position both in sales and as an industrial partner, and the European group is seeking to develop a counterweight presence in China.

Thursday’s deals provided a temporary respite for EADS and Airbus from the prolonged crisis triggered by mounting industrial and management problems, including the costly two-year delays in early deliveries of the A380 superjumbo and a recent €4.8bn profits warning.

Airbus said it had signed a framework agreement to assemble its successful A320 family of single-aisle, short-haul jets at a plant in the coastal city of Tianjin, east of Beijing. The plant is expected to be located in the huge Binhai development zone, which China’s government expects to rival manufacturing centres such as Shanghai and parts of the southern Pearl River delta.

Airbus said it would begin assembling aircraft in China in early 2009 with the aim of increasing production to four a month by 2011.

Louis Gallois, co-chief executive of EADS and chief executive of Airbus, said the aircraft sections for the A320 would continue to be produced in Europe but would be shipped to Tianjin for final assembly.

The Chinese consortium involved in establishing the plant will be led by the Tianjin Free Trade Zone and will include China Aviation Industry Corporation I (Avic I) and China Aviation Industry Corporation II (Avic II).

Olivier Andries, Airbus executive vice-president strategy, said Airbus would hold a 51 per cent stake in the joint venture and would appoint the general manager. It would invest €100m-€150m. “The main rationale in starting assembly is to build our presence in the Chinese market,” he said.

The deal was signed during a visit to Beijing by French President Jacques Chirac, France’s president, and still needs formal approval by the EADS board and Beijing.

It was supported by a general terms agreement for China to buy 150 A320 aircraft. Beijing also backed Airbus plans to develop the A350XWB, a new family of long-range, medium-capacity jets, by signing a letter of intent for 20 aircraft.

Separately Airbus said it had signed a firm contract for the purchase of 65 Airbus A319 aircraft with Skybus, a US lowcost, startup airline based in Columbus, Ohio. The airline is aiming to start operations in early 2007.

Ford to double China procurement

Ford is set almost to double the value of components it buys in China this year, becoming the latest global carmaker to tap low-cost Chinese parts producers to cut costs.

Bill Ford, executive chairman, said in Beijing on Thursday that the group aimed to source $2.5bn-$3bn worth of parts from China, up from $1.6bn-$1.7bn last year.

Mr Ford’s comments are the latest indication that Chinese component makers, which have long been keenly competitive on price, are now also meeting the quality levels required by multinational carmakers. Chinese manufacturers’ labour costs are about 5 per cent of those in Germany and 20 per cent of rival factories in eastern Europe.

Ford’s announcement follows Volkswagen’s move this year to raise the value of its Chinese parts imports from $100m in 2005 to $1bn. DaimlerChrysler is also sourcing more from China.

Analysts said General Motors was poised to follow suit, although the company would not comment on Thursday.

Goldman Sachs estimates that Chinese net exports of car parts will rise from $5.4bn in 2005 to $21bn in 2010 as Chinese products become more accepted overseas.

China still imports large volumes of more technologically sophisticated parts such as gearboxes and steering systems but it has become a big exporter of tyres, wheels, electronic components and glass.

Yale Zhang, analyst at the Shanghai office of CSM Worldwide, an industry consultancy, said the quality of Chinese-made components had improved thanks to increased competition and pressure from multinational carmakers that had established operations in China. The US, European Union and Canada asked the WTO last month to open a formal investigation into the tariffs China levied on foreign-made components.

China’s Spending on Research and Development Growing Faster than U.S.

While the United States still has a bigger share of the global R&D market, second-ranked China is gaining ground.

U.S. companies are falling behind on research-and-development spending, while their Chinese counterparts have upped their investments in recent years, according to a new report.

The study, conducted by R&D magazine and Battelle, a Columbus, Ohio-based research firm, could spell trouble for small businesses that benefit from local R&D activity.

This year, the United States is responsible for 32.4 percent of global R&D, but that number is down slightly from 32.7 percent in 2005, and is expected to drop to 31.9 percent in 2007.

China ranks second for most dollars spent, and while it’s only responsible for 13.4 percent of the world’s R&D, Battelle projects that number will rise to 14.8 percent in 2007. The percent changes may be small, but on a global scale, they translate into large figures — R&D magazine reports that global spending on R&D topped $1 trillion in 2006.

“There still is a considerable gap, but it’s closing,” Jules Duga, a senior Battelle research scientist and co-author of the report, said in a statement.

Chinese growth has been fueled by the liberalization of Asian economies and the ongoing development of a highly educated, technology-oriented population, according to Battelle.

The report explains the results in terms of an evolution in international competition: After the global arms race subsided, focus shifted to a “hands race” for lower-cost manual labor. Now shifting once again, the world is entering a “head and brains race” for technological advancement.

Falling behind in the “race” could have a negative impact on small businesses in the United States. Earlier research has shown that small-business formation and growth is directly linked to local R&D.

A 2002 study published by the Small Business Administration showed that communities with larger amounts of university R&D activity are home to more start-ups, and those companies significantly benefit from R&D during their early stages of growth.

This is due in large part to a “spillover effect” of knowledge and technology to the surrounding area.

The SBA research found that there is generally a two-year lag between the year of R&D expenditure and the spike in the launch and growth of new firms, during which the spillover takes place. That means that universities, government laboratories, and corporations need to consider changing trends of today in order to protect the vitality of small businesses in the future, according to the SBA

“These challenges can be accommodated only by long-term strategic investment and will,” Duga said.

Microsoft expands R&D team in China

SHANGHAI, China — Microsoft is planning to boost its R&D division in China by hiring 500 new engineers.

The recruits will join a team that has doubled in the last year to about 1,200. Within three to five years, Microsoft plans to increase its staff to 3,000 workers and invest $100 million in an effort to make China one of its core R&D bases.

The expanded staff will focus on mobile communications and embedded systems, Internet applications and services, digital entertainment and servers. Everything from basic research to product development will be conducted here in cooperation with local companies.

Yaqing Zhang, president of Microsoft’s R&D group in China acknowledged that many Chinese engineers are still inexperienced, especially in managerial ability. Hence, half of the new recruits will come from overseas or from within the electronics industry, instead of from China’s growing pool of job-seeking graduates.

China-ASEAN FTA necessary and beneficial

Upon entering the 21st century, the Chinese Government made timely diplomatic-strategy re-adjustments and started to push for better relations with its neighbouring countries, seeking mutual trust politically and co-prosperity economically.

As part of the effort, the process of bringing about a China-ASEAN (Association of Southeast Asian Nations) Free Trade Area (FTA) is being driven ahead.

As an arrangement for mutual benefits, the bidding for the FTA is powering the all-around economic co-operation between China and ASEAN that, in turn, works as a stabilizing factor for the region.

Since the 1990s, the integration of regional economies has had strong momentum a hallmark of accelerated economic globalization. Regional economic organizations such as the European Union (EU) and the North American Free Trade Area are acquiring increasingly important positions in the world economy. On the other hand, free trade agreements, those signed between developed countries in particular, are posing a serious challenge to both China and ASEAN because the preferential tariff rates granted to each other by free trade agreement members erode the economic and trade advantages enjoyed by developing nations.

China joined the World Trade Organization (WTO) in December 2001 after more than a decade of painstaking negotiations. As a result, the focus of the country’s foreign trade and economic strategy began to shift to regional economic co-operation.

China’s WTO membership means that the country’s economic development will become increasingly responsive to the world economy.

At the moment, regional economic integration is picking up speed and China would risk being marginalized if it did not join this process.

If China failed to embrace regional integration, it would find its global competitiveness significantly diminished.

Fortunately, involvement in regional economic co-operation constitutes a new focus of the nation’s overseas economic strategy.

In the meantime, the economies of the ASEAN members started recovering in 1999 from the ravages of the 1997 Southeast Asian financial crisis, which dragged on the once fast growing economies of the member states. Coincidentally, while ASEAN rose out of economic stagnation, the Chinese economy entered a phase of high-speed development.

Doubtless, Chinese demand helped facilitate their economic growth. In light of that, the nature of ASEAN’s economic recovery recommended a strengthening of relations with China.

It then became obvious that pursuing a China-ASEAN FTA was a wise strategic option beneficial to both sides.

In November 2002, therefore, the Chinese and ASEAN leaders signed the Framework Agreement on Comprehensive Economic Co-operation between China and ASEAN and decided that a China-ASEAN FTA would be set up in 10 years. The process of establishing the China-ASEAN FTA was thus set in motion.

Starting on January 1, 2004, the two parties began implementing an Early Harvest Plan (EHP), cutting tariffs on more than 500 products, as part of the effort to facilitate the birth of the FTA.

The Chinese and ASEAN economies complement one another as shown by the results of the EHP. ASEAN’s tropical fruits and China’s apples, pears, cabbages and potatoes are competitive respectively. The China-ASEAN FTA plan has already produced good initial results.

At the Eighth China-ASEAN Summit convened on November 29, 2004 in Vientiane, capital of Laos, the two parties signed a package of agreements on trade in goods and dispute settlement, laying down foundations for standardizing tariff cutting and resolving disputes.

Starting from July 20, 2005, China and ASEAN began to cut tariffs on more than 7,000 products, which marked the coming of the phase of substantial tariff reduction between China and ASEAN in the run-up to the establishment of the FTA.

The Framework Agreement on Comprehensive Economic Co-operation between China and ASEAN has helped advance bilateral trade, with the China-ASEAN trade volume crossing the threshold of US$100 billion for the first time in 2004 and hitting US$130.37 billion the next year.

In addition, the two sides have been co-operating closely in direct investment, services and technology, which has also yielded significant results.

From the point of view of regional economic integration, the future Asian economic integration should be based on a more extensive and more economically powerful regional co-operative entity, of which the China-ASEAN FTA is a vitally important component.

Once founded, China-ASEAN FTA will be the largest FTA in Asia, the most populous FTA in the world and the biggest FTA in the developing world. The China-ASEAN FTA is expected to accelerate the trend of regional integration in Asia and, in turn, will have positive impacts on the world economy.

The author is a researcher with the Economic Research Institute under the Ministry of Commerce.

HONG KONG — The elusive China Dream is fast becoming reality for many US companies.

US corporate profits in China passed $2 billion the first six months of 2006, up more than 50% from the first half of last year, according to the US Bureau of Economic Analysis. US companies are on pace to earn more in China this year than they earned there during the entire 1990s, notes Joseph Quinlan, chief market strategist at Bank of America.

The government numbers are consistent with private surveys: 81% of companies belonging to the US-China Business Council, a lobbying group, reported that their China operations were profitable. More than half said profitability in China matched or beat their worldwide profit margins, according to a recent council survey.

In 1999, the US State Department found that just 57% of US firms were profitable in China.

Equipment manufacturer Caterpillar cited strong growth in China, among other things, last week when it reported a 21% increase in third-quarter earnings. Like most US companies, Caterpillar doesn’t report China revenue and earnings separately and won’t talk about them in any detail.

But a telling sign of China’s importance to the company: Over the past 2.5 years, Caterpillar has doubled its China workforce to 5,000, says Jim Dugan, the company’s spokesman in Beijing.

“Just about any place you go in China, there are road and railroad and construction and energy projects,” Dugan says. “Those are all fields where we play ball.”

‘Business is good’

Starbucks, which already operates more than 190 stores in 19 Chinese cities, doesn’t break out its financial performance in China. But spokesman Eden Woon says, “Business is good. We are accelerating our growth.”

Not all successful US companies in China are household names: Greif, a Delaware, Ohio-based maker of industrial packaging, says profits are strong and growing in China, a market it entered five years ago when it acquired a competitor already operating there.

For centuries, Western businesses have cast covetous eyes at China, a dream market with the world’s biggest population, now 1.3 billion. And it’s virtually untouched by modern marketing. But their visions of profits, dating back to Marco Polo and before, usually came to nothing. They’ve been dashed by war, political turmoil, corruption, bureaucracy and grinding rural poverty.

“Time and again,” journalist Joe Studwell wrote in his 2002 book, The China Dream, “China has failed to fulfill the promise that foreigners ascribe to her.”

But now, China’s economy, which began opening to foreign investment and trade in the late 1970s, is booming, expanding at about 10% a year.

Living standards have improved in urban centers such as Beijing, Shanghai and Shenzhen, creating a middle class — and opportunities for US firms from Starbucks to General Motors.

From 1999 to 2004, according to statistics compiled by the American Chambers of Commerce in Beijing and Shanghai, the number of broadband lines rose to 31.7 million from 2.2 million.

Automobile ownership rose to 22 per thousand Chinese from one per thousand. Cellphones surged to 111 per thousand Chinese from three per thousand.

Learning how to do business

China’s entry into the World Trade Organization in 2001 made it easier for foreign companies to operate there. The WTO deal required China in 2004 to start letting foreign firms distribute their goods without first entering into alliances with state-owned Chinese partners, which often siphoned profits and stole technology. These days, more US companies are going it alone profitably without Chinese partners. The percentage of American Chamber members operating as joint ventures in China slid from 78% in 1999 to 27% in 2005.

US companies have learned how to do business in China. “Companies have gained experience from the early years,” says Robert Poole, vice president of China operations at the US-China Business Council. “They trained people, established management systems, built reputations for their products.”

US firms still face problems in China. Good help is hard to find. Theft of intellectual property is rampant. Competition is fierce as young Chinese companies try to take on more-established Western firms. Greif, for instance, reckons it has 400 competitors in China. But for now the profits are rolling in, and US companies are confident about the future: 97% told the US-China Business Council that they were optimistic about their prospects in China over the next five years.

“When the economy is growing this fast, profits will increase,” says Studwell, founder of the China Economic Quarterly. “At the same time, foreign firms have learned hugely from their mistakes of the 1990s.”

Courtesy of USA TODAY