A Closer Look at China:

When Mr. Jeff Immelt (Chairman & CEO, GE) spoke at Harvard last week in front of a capacity crowd in Burden Auditorium, he outlined his views on the near term economy and GE’s future prospects. I remember that he mentioned China as being part of the big picture of GE’s focus on growth overseas.

China has been on everyone’s mind for many years indeed. China claims one of the longest histories of any civilization, passed through the passage of time for the last 5,000 years. But is it the modern China that makes waves in the global community?

Is China a Big Deal?
For those who have yet to set foot in China, these are some vital statistics you may want to take note of: a geographical area of 9.6 million square kilometers; population of 1.3 billion; 56 ethnic groups; GDP of US 1.15 trillion (2001) and, an average of more than 7% GDP growth over the past five years.

Naturally, one would consider China to be one of most powerful economic growth engines in the world going forward. And the size of its domestic consumption makes it a very attractive market for goods and services. With China entered into the WTO as a member nation, it is hard to resist the temptation of this “land of promise” for business ventures.

Take the words of Harvard business professor Richard Vietor: “China is big deal.”

What Really Matters?
Based on its size as a nation (and consumer market), China matters. But that is the common mistake of just looking at China’s size alone. One should not forget to consider China as a modernized and competitive nation. Even historically, one should put its critical mass in the right perspective. Failure to do so can be an expensive and time-wasting venture.

There are many ways in which China could be studied. I will only attempt to address some of broader issues, of which those who aspire to succeed in doing business in China should be aware. There are four basic aspects of China that must be understood in the 21st Century.

First & foremost, China Can Say NO! China’s nationalism is as high as it has ever been. Clearly, with the fast development of social and economic reforms, China has strengthened its power as a nation and attained the status of a major global player. Chinese people are fully aware of this and take their new status with great pride. As a result, matters that concern national pride and territorial issues (such as Taiwan) will elicit not only apparent but strong reactions from the Chinese and should not be taken lightly.

Second, China has transformed itself into a high growth society with significant levels of consumption of modern goods and services. But at the same time, it has also created great demand for energy supply in support of its fast-paced infrastructure development and industrialization and national projects. Shortage of energy will become a strategic issue that could hamper China’s national and economic development going forward.

Third, the “hollowing-out effect” on Asian’s developing countries. A post WTO China inevitably attracts capital, services and talents away from these countries into this huge “land of promise.” In the short-term, this syndrome could constrain the growth or recovery of some of these countries.

Fourth, to ensure continuous social and economic reforms and progress, the Chinese government has determined to emphasize political and social stability, making the strong social security system a cornerstone for success.

Areas of Concerns & Sensitivity
For China, being outstanding in economic development comes with concerns and sensitive issues. Understanding of the following issues would allow foreign investors to be more sensitive to the Chinese government’s current situation. Also, these areas of concern could be new opportunities given that solutions are needed. They are:

1. Squeeze in power/energy resources in support of different (at times, competing) demands for economic, industrialization and infrastructure developments across a vast landscape.

2. Uneven wealth distribution and different pace of economic development caused the polarization between the coastal economic zones and the inland. This could develop into serious social instability if not managed. Hence, the development of in-land provinces and the Northwestern China are on the agenda of the government.

3. China needs a robust social security system to be a cornerstone of continued progress. Without that, the reform of State Owned Enterprises (SOE) would lose its steam. Millions of people are hinged on to thousands of SOEs in China, many with obsolete knowledge and skills. Further lowering of tariffs under WTO agreement would kill many SOEs that are no longer viable in a deregulated market. The time is running short on this issue.

4. Separatist movement in the Northwestern China including Tibet, Qinhai, Xinjain and Inner Mongolia. This is also of historical and political sensitivity (since the Qin Dynasty), the Taiwan issue being part of this major consideration. Should Taiwan (a territory of China) be allowed to declare independence and if so, what about the rest?

5. Need to be ready for international standard capital market system. With deregulation of industries including the financial services sector, the function of the capital market (in China) has to be fully developed, albeit at a gradual pace and with sufficient risk management.

The SOE in China
To a large extent, the reformation of SOEs in China has been successful in terms of downsizing, corporatization, privatization, succession process and in particular, attracting direct foreign investment. To date, there are about 200,000 foreign direct investment companies in China with a total investment of US$924 billion.

However, to achieve a significant breakthrough in transforming SOEs into economic powerhouses is a great challenge. The following “informal” categorization of China’s SOE is definitely an interesting perspective for those who are seeking joint venture partners in China.

1. Category-One SOE. These are either the strategic industries (e.g. energy supplies, major agriculture, shipping or aerospace industries) or highly successful SOEs. They have the great potential to become the Pepsis or Microsofts of the East. These SOEs (not as many as you would expect) are manned by high caliber officials and returned talent from overseas. They themselves are very critical and highly selective about joint venture partners.

2. Category-Two SOE. SOEs that can be further streamlined, restructured and transformed into capital intensive and technologically competent businesses. They are keen and selective in joint venturing with foreign partners who can transfer skills and technologies. These SOEs are often manned by MBAs. Some are trained in overseas.
3. Category-Three SOE. The majority of SOEs, these stick to obsolete systems, ineffective methods and hardened mindsets, and are confronted by serious capital, skills and productivity problems. Some come with long-term liabilities and are heavily subsidized by the government.

It is noteworthy that with the privatization of some SOEs and rapid personal wealth accumulation, the private-owned businesses in China have grown in number and size. With a careful eye, these are potential joint venture partners to consider.

In Conclusion – Should You Invest in China?
I believe Jeff Immelt already got the answer, like many others. The million-dollar question truly is, “Do you only see the huge market and jump right in or have you taken its critical mass in the right perspective?”

Different answers will give you different results!

October 7, 2002
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