Inc023

As Originally Published in Inc. Magazine

Growing Business by Going Global
Market intelligence on People’s Republic of China.
From: Inc., Sept 1993 | By: Hal Plotkin

IN THE CHINA SHOP

How big must a company be before it considers setting up operations abroad? Not very. Tiny Conveyant Systems Inc. has gobbled a 3% slice of the enormous Chinese domestic market for digital private-branch-exchange (PBX) products, thanks to its 60% ownership position in Tianchi Telecommunications Corp., in Tianjin, China. With only 16 employees, Conveyant Systems, based in Irvine, Calif., seems an unlikely match for China’s burgeoning market. Nonetheless, the small distributor of PC-based telecommunications gear is stealing some thunder from its larger, better-known competitors, such as Northern Telecom, Alcatel, Siemens, and AT&T.

Conveyant Systems’ Joe Leonardi says his willingness to cut a generous deal over licensing rights, back in 1986, was the key to nosing out the big guys. The 53-year-old founder and president stitched together a complicated joint venture with Tianjin’s local municipal government, the state-owned postal and telecommunications authority, and a local economic-development group. For fiscal year 1993, the venture’s 90 Chinese employees will produce about $10 million worth of PBX equipment in a 22,000-square-foot factory located in Tianjin. And China’s businesses, starving for communications equipment, eagerly devour 90% of that output.

The news wasn’t always so good, though. In its first year, Tianchi Telecommunications’ sales fell far short of targets. But Leonardi fought back with a truly revolutionary idea. He proposed a commission structure for the Chinese sales force. Responding to his Communist partners’ demands for recognition of every employee’s contribution to a shared goal, he agreed to provide incentives to the factory workers as well, and sales of PBXs took off. Now the company’s 12 sales offices stretch from the Heilongjiang province in the northeast to the Guangdong province in the south.

From Joint Venture to Controlling Interest
As part of its economic-reform program, China recently began permitting wholly foreign-owned enterprises — an approach that has grown in popularity. The number of such concerns swelled from just 18 in 1986 to more than 1,800 in 1990. Still, a joint venture is helpful and often necessary. Like Leonardi, most foreign entrepreneurs do business in China through joint ventures by providing capital, technology, or global-marketing savvy. Leonardi credits his business’s smooth operation to his well-placed Chinese partners. “The power never goes off, we always have running water, and we always have fuel to heat our building,” he notes.

Currently, 3,000 Chinese businesses are authorized to deal with foreigners, and the Chinese government has also designated more than 300 “open cities,” in which residents are free to conduct business with foreign traders and investors.

Resources: The National Technical Information Service of the U.S. Department of Commerce (800-553-6847) offers more than 40 modestly priced reports on doing business in China, including the 1993 edition of Country Marketing Plan: China ($19.50). The National Trade Databank (800-USA-TRADE) provides information on how to use the Commerce Department’s free database, which includes up-to-date commercial reports from U.S. embassies in China.

Market Niches
There’s a long-cherished fantasy that you could easily make an enormous fortune if you could sell just one pair of shoes to every man, woman, and child in China. But that dream remains on hold. Protectionist measures make tapping into China’s domestic consumer market an elusive goal for most foreigners. But there are opportunities to participate in a variety of government-driven economic-development plans designed to build up China’s domestic infrastructure. “Understanding the customer is the key,” says Leonardi. Combing through turgid government plans to identify real and ready markets is worth the effort. “Just counting feet is pretty naÏve,” Leonardi says.

Resources: The Office of China, Hong Kong and Mongolia of the U.S. Department of Commerce (202-482-3583) offers free advice. The nonprofit U.S.-China Business Council (202-429-0340) offers an excellent for-members-only list of market opportunities. A year’s limited-services membership is $700 for companies with sales of up to $10 million. Larger companies pay a membership fee that ranges from $2,000 to $12,000 a year.

Currency Exchange
Buying Chinese currency can be easier than selling it, but it all depends on market fluctuations. China’s government discourages the repatriation of profits, in part, by limiting the amount of hard currency available through the currency-swap exchanges. Currently, sellers of renminbi (RMB, “People’s Currency”) recoup roughly half their original hard-currency cost. But businesses like Leonardi’s joint venture require a pool of hard currency to buy computer chips and other parts and equipment from outside China. So the company’s Chinese customers are obliged to pay for 25% of their purchases in hard currency. Not long ago, Chinese authorities indicated that there is a long-term objective to scrap the swap meets and make the RMB freely convertible, but the government hasn’t announced a timetable for the implementation of such a plan. “Businesses would be wise to make contingency plans to balance their foreign exchanges,” advises Richard Brecher, director of business-advisory services at the U.S.-China Business Council. He says it may take as long as seven years before the anticipated reforms are enacted.

Resources: The Bank of China (212-935-3101) provides a daily update on currency-exchange rates.

Now in its 38th year, the biannual Guangzhou Trade Fair is China’s biggest foreign-trade event. Last spring’s fair hosted 2,700 Chinese businesses interested in foreign trade and generated nearly $6 billion in joint-venture contracts, mostly for the export of Chinese goods. Don’t ignore the hundreds of smaller, regional, industry-specific trade fairs. Joe Leonardi personally trundles his company’s booth from province to province. “What you get in China depends on who you are and who you know,” he says. He brings his own interpreter to these events to ensure that he both understands and is understood. “There is simply no substitute for the personal touch,” he says.

Resources: China Council for the Promotion of International Trade/China Chamber of International Commerce (202-244-3244) provides a list of trade-promotion offices in the United States and China.

Hard Questions and Answers about Doing Business in China

Is it proper for U.S. entrepreneurs to do business in China?

The fourth anniversary of the Tiananmen Square uprising — this past June 4th — was marked by demonstrations at Beijing University, and there were reports of disturbances elsewhere in China. Earlier this year, Levi Strauss & Co. severed its relationships with 30 contract sewing and finishing houses in China owing to what the company termed “pervasive violations of basic human rights.” (Still, the company continues to purchase fabric from Chinese suppliers.) And U.S. customs officials have seized Chinese imports upon learning that the goods had been produced by Chinese prison laborers. Here are two opinions to consider:

Joe Leonardi, founder and president, Conveyant Systems Inc.:

“The best way to improve the human-rights situation in China is through increased business ties. There is now a much wider bandwidth of information available in China, and information is what leads to change. It’s impossible for the state to censor what comes across a fax machine.”

Ignatius Ding, chairman, Communications Committee, Silicon Valley for Democracy in China (408-446-2011):

“Simply doing business in China is not enough. U.S. companies must press the Chinese government for meaningful political reforms, including the protection of basic human rights. Without such protection, U.S. companies will continue to endure chaotic conditions and will suffer financially from the unresolved human-rights issues that will likely cost China its most-favored-nation status after July 1994.”

Stats:

The People’s Republic of China

Population: 1.2 billion. Ninety-five cities have more than 1 million people. Five cities (Beijing, Shanghai, Tianjin, Shenyang, and Wuhan) have more than 4 million people

Official language: Mandarin is the common written language throughout China, but there are many mutually unintelligible spoken dialects

Education: Compulsory through 6th grade. More than 4 million people are university graduates

Unemployment: 2.3% in 1992, according to official Chinese government figures

Gross domestic product: The International Monetary Fund estimates China’s GDP at $1.66 trillion, making it the world’s third-largest economy

Inflation: Nationwide, soared to 14.1% in the first quarter of 1993 (15.7% in major cities)

Joint ventures with U.S. and other foreign companies*: U.S. companies have invested in more than 2,000 projects in China, with a combined contract value in excess of $6 billion. The United States is the third-largest foreign investor in China, behind Hong Kong and Taiwan, and just ahead of Japan. In 1992 a total of 48,764 new foreign direct-investment projects, worth $58 billion, were initiated in China

Total merchandise imports (U.S. included)*: $80.6 billion in 1992, up 26.4% from 1991

Currency: The Foreign Exchange Certificate (FEC), a convertible scrip, was introduced in 1980 to control foreign-currency transactions. Recent market reforms now permit foreigners to use RMB, the nonconvertible local currency, for approved business transactions. Last July the U.S. dollar was trading officially for around 5.7 FEC and for RMB 8 to RMB 9

*All figures are estimates, in U.S. dollars.

Hottest U.S. Exports
In 1992 the United States sold $7.5 billion worth of goods to China, up 19% from 1991.

Aircraft and parts:

Imports from the U.S., 1992 $2.1 billion

Projected expenditures, 1993-2013 $40 billion

Computers & power-generation equipment:

Imports from the U.S., 1992 $1.2 billion

Projected expenditures

for computers, 1993-1996 $4.3 billion

for power generation, 1993-2018 $40 billion

to $100 billion

Telecommunications and electric machinery:

Imports from the U.S., 1992 $464 million

Projected expenditures, 1993-1998 $29.7 billion

*Source: Statistics from the U.S.-China Business Council, based on data from the U.S. and Foreign Commercial Ser-vice; China’s State Statistical Bureau and Ministry of Foreign Economic Relations and Trade; and the Aerospace Industries Association

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