The dragon awakens

What foreign investors need to know about doing business in China

Introduction
For many years China was referred to as the ‘‘Sleeping Dragon’’ and with one-third of the
world’s population and a land– mass of over nine and a half million kilometers, the country’s
identification with the powerful mythological creature is easy to understand. However, Hua
Guofeng’s ‘‘Open Door’’ policy, introduced after Chairman Mao’s death in 1976, heralded the
end of China’s long slumber and welcomed in a new era of Sino-Western cooperation. This
became part of Den Xiaoping’s ‘‘Four Modernizations’’ program when he won the country’s
leadership struggle. By 1979 diplomatic relations had been re-established between the US
and China, opening the door for reform.

How to do business in China

Today China is poised to become one of the industrial giants of the 21st century with foreign
direct investment (FDI) reaching 912 billion in 2004. Multi-national companies are flocking to
China for the dual advantages of low labor and development costs and an emerging
consumer market. Some of the world’s most successful electronics and telecoms companies
such as Intel, Motorola, Erikson, Nokia and Alcatel have invested in research and
manufacturing bases in China. Other retail giants such as the US firm, Wal-Mart and the
French hypermarket chain, Carrefour are introducing the Western way of shopping to an
increasingly sophisticated and cash-rich Chinese populace. Carrefour now operates
seventy-three hypermarkets in twenty-nine cities across China and Wal-Mart has sixty-six
outlets. However, as Carrefour’s President for China, Jean-Luc Chéreau points out, doing
business in China is not just a matter of transposing a European business model onto an
Asian culture and hoping for the best. When Carrefour made its first forays into China, the
firm’s executives dreamed of a retail outlet that looked just like the Carrefour stores back
home in France. They imagined a spacious ground-floor location with a big car parking lot
out front. Instead their first Chinese location was a cramped basement with only enough
out-door space for a small motorbike parking area. Chéreau warns that much research, hard
work and relationship building is required to successfully do business in China. Carrefour
had the advantage of an established retail base in Taiwan, which provided an insight into
Chinese preferences and shopping habits before they moved into mainland China. Today a
French shopper walking into a Chinese Carrefour would be surprised to see tanks of live
bullfrogs, turtles and fish in the ‘‘fresh food’’ section. To Chinese customers this makes even
a hypermarket feel reassuringly familiar, albeit in a bigger, brighter, cleaner setting than the
traditional markets.

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The importance of ‘‘Guanxi’’
What lessons have Carrefour and other retailers and manufacturers learned about doing
business in China? The first and most important lesson must be just to go to China. Business
in China can’t be conducted at a distance as the concept of ‘‘Guanxi’’ or personal contacts
plays an essential role in the Chinese way of doing business. Nowhere has the old adage
‘‘It’s not what you know, it’s who you know’’ been so true. In the early years of doing business
in China many foreign firms learned that ‘‘Guanxi’’ meant developing good relationships with
local government officials. This included lots of personal contact, gift exchanges
(particularly gifts in the auspicious colors of red and gold) and never, ever doing anything
that would cause the Chinese to lose face. This seemingly slow process of relationship
building was often frustrating for foreigners accustomed to the fast paced business
environments of Western Europe and the US. However, the businesses exercising the most
patience have been delighted to learn that new factories and retail outlets can sprout like
wheat, once all the hard ground breaking preparation has been done.
Today, multi-national firms agree that the concept of ‘‘Guanxi’’ has been extended to include
relationship building with both local and national officials. It is no longer something which
can be left to lower-level managers but instead requires the negotiating skills of the most
senior executives.

Staff recruitment and retention

Once companies have gained that all-important ‘‘foot in the door’’ the next step is to recruit,
train and retain good staff. The current shortage of skilled workers in China means that
wages have risen faster than the country’s GDP. Therefore, employers must use other lures to
attract and retain skilled labor. Perks such as on-site housing, sports facilities, health care
benefits and extra vacation allowance can help to develop company loyalty, an important
factor in staff recruitment and retention.
While workers are important, developing homegrown executive and managerial talent is also
a pressing concern for foreign firms. Observers estimate that China will require 75,000
leaders capable of functioning in a global business environment within the next ten years.
Currently there are only about 5,000 Chinese executives who fit that profile. Part of the
problem can be traced back to Chinese universities. While business graduates from
Western Europe and the US are able to hit the ground running, Chinese business schools are
not preparing students adequately for the global marketplace. This forces multi-national
firms to divert extra funds toward training and development to facilitate graduates’
transformation from local to global thinkers.
The Chinese government has made higher education a priority, targeting ten key institutions
as future ‘‘world class’’ universities. However, the ghosts of Soviet-style central planning and
the denigration of elitist academia during the Cultural Revolution continue to haunt China’s
university system. One major problem is that only 30 percent of teachers in higher education,
themselves hold higher degrees. Also, the separation of teaching and research during the
Soviet era means that there are few academics with cutting-edge research capability. Today
there are four thousand higher education institutions but many of their 15 million students are
taught by under-educated teachers with little understanding of modern pedagogical theory,
or research supervision experience.
Because Chinese graduates require a relatively long period of professional mentorship, one
observer has suggested that pay increases should follow an ‘‘S’’ curve, with low increases
during the first few years of service, followed by a rapid rise when junior managers and
budding executives begin providing tangible returns for their employers. This would give
young graduates an incentive to consolidate experience and help employers to recoup
training costs. Carrefour provides an example of a firm investing in local management
training as they now employ Chinese managers in two-thirds of their hypermarkets.

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 Ethical issues
Some European firms are still hesitant about investing in China with outdated ideas about
sweat-shop conditions and child labor abuses. While it is true that some Chinese factories
fail to meet European health and safety or efficiency standards, managers are usually open
to suggestions for improvement if they can see the benefits for themselves and their workers.
For instance, one European investor described his dismay at an initial visit to a Chinese
supplier where he found parts piled on the floor. However his suggestions about organizing
parts and storing them on easily accessible racks was welcomed when he demonstrated
how an improved system could increase efficiency and reduce damage to components.
Working hours and child labor are both regulated in China and foreign employers are
required to pay an additional 30 percent to 50 percent above the wage bill in social costs.
Foreign firms must also provide meals for employees, and in some instances,
accommodation.
Corruption has been a problem in the past with some local officials turning a blind eye to
firms circumventing safety standards or producing counterfeit goods. Tackling corruption is
now on the government agenda in China, although observers say it will take more than the
recent ‘‘be honest’’ campaign to change attitudes and practices. Experienced foreign
investors suggest taking a cautious yet pragmatic approach. Tactics such as only releasing
information on a ‘‘need to know’’ basis, rotating suppliers and frequent visits to Chinese
manufacturers help to promote honest and transparent business practices.

Awakening dragon belches fire and smoke

An emerging worry is the ecological impact of a fully industrialized Chinese society. Higher
industrial output coupled with rising consumer expectations will make a significant impact on
global carbon emissions. The discussion of these issues is beyond the scope of the current
review but the problem merits consideration by both the Chinese government and Western
investors.

The way forward

While Western investment was initially confined to the first tier coastal cities, foreign firms are
now moving inland to second and third tier cities as well as to smaller towns. Construction
and production costs are lower and investment in the country’s interior dovetails with current
governmental policy. Many of the big electronics firms have already re-located to Chengdu
and other manufacturers have opened factories in Hefei, Wuxi and Wuhan. Where
manufacturers lead the way, retailers follow and Wal-Mart now trades in Nanchang and
Changsha. However, transport and logistics networks are still poor in the interior of the
country and companies tend to retain their headquarters and financial services in the more
sophisticated first tier cities.

Conclusion
Doing business in China involves many challenges but also provides many rewards.
Challenges include cultural misunderstandings, consumer diversity, and the vast size of the
country. However, China is a unique business environment. As Jean-Luc Chéreau says, he
reluctantly agreed to invest three years of his time in China, but twelve years later he and his
wife love the country and have no desire to return to Europe!

Comment
This review was based on the four articles cited in the reference list. All were interesting and
well-written providing information on various aspects of successful business investment in
China. Sarah Chan and Gu Qingyang’s paper which focused on investment migration into
China’s interior provinces enjoyed the benefit of an ethnic Chinese perspective. Both authors
are academics at Singapore’s Nanyang Technological University. Ian Bergman who asked
whether China was the ‘‘promised land’’ is an associate lecturer in Business Studies with the

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 OU and has business connections with China. Ian’s article highlighted some of the risks of
doing business in China and provided advice to make the process easier. Andrew Grant, a
Keywords: Director at McKinsey’s Shanghai office provided a current perspective on Chinese industry.
International investments, Andrew’s article explored questions such as whether guanxi is still important and if Chinese
Consumerism, manufacturers can move from imitation to innovation. Peter Child works for McKinsey’s Paris
Culture, office. His interview with Carrefour boss Jean-Luc Chéreau was very interesting as it
China provided a human perspective on doing business in China.

References
ACE website (2006), available at: www.acenet.edu/AM/Template.cfm?Section=Home&TEMPLATE
=/CM/ContentDisplay.cfm&CONTENTID=11822

Bergman, I. (2006), ‘‘Is China the promised land?’’, Engineering Management, Vol. 16 No. 3, pp. 38-41.

Chan, S. and Qingyang, G. (2006), ‘‘Investment in China migrates inland’’, FEER, Vol. 169 No. 4,
pp. 52-5.

Child, P.N. (2006), ‘‘Lessons from a global retailer: an interview with the president of Carrefour China’’,
The McKinsey Quarterly, special edition, pp. 70-81.

(The) China Business Review website (2006), available at: www.chinabusinessreview.com/public/0309/

wal-mart.html

China-profile website (2006), available at: www.china-profile.com/history/hist_1970s.htm

Foreignaffairs website (2006), available at: www.foreignaffairs.org/19800301faessay8261/ross-terrill/

china-enters-the-1980s.html

(The) George Washington University website (2006), available at: www.gwu.edu/, nsarchiv/
NSAEBB/NSAEBB66/

Grant, A. (2006), ‘‘What executives are asking about China: from entry to execution’’, The McKinsey
Quarterly, special edition, pp. 24-31.

Mongabay website (2006), available at: www.mongabay.com/igapo/world_statistics_by_area.htm

US Department of State website (2006), available at: www.state.gov/r/pa/ei/bgn/18902.htm

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