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.”