October 31, 1997
The lure of the great China market has captured the attention of foreign investors throughout history. After a background report by Tom Bearden, Elizabeth Farnsworth talks with the president of Sprint International and two experts on how foreign companies are making inroads into China.
ELIZABETH FARNSWORTH: And joining us now, Andres Bande is president of Sprint International, which is involved in a joint venture to offer telephone service in Shanghai; Greg Mastel is senior international economist at the Economic Strategy Institute, a Washington think tank; his book, "The Rise of the Chinese Economy," was published this year; and Stanley Lubman is an attorney who has represented clients doing business in China for 25 years. He also teaches Chinese law at Stanford Law School. Thank you all for being with us.
Mr. Bande, you've just signed--or Sprint has just signed a big deal with a Chinese company. Tell us about it.
ANDRES BANDE, Sprint International: Well, we actually signed a deal in the city of Tanging to provide telephone service last year, and we're executing it now. The system is up and running, and this is a very important system because it's the first competition against the monopoly of China. The deal we did was with China Unicom, which the alternative provider of telephone communications in China. The second deal is an MOU we just signed for Shanghai.
ELIZABETH FARNSWORTH: An MOU?
ANDRES BANDE: A memorandum of understanding to sign a deal hopefully by the beginning of the year, which would mean that we would provide also alternate service against the government monopoly in the city of Shanghai, so these are the two things we're doing, both in the wire land side, providing telephone service.
ELIZABETH FARNSWORTH: So you go into Shanghai--let's say if it works out in Shanghai, you'll go in and you'll build telephone poles, you'll put up wires, and you'll be competing directly with the government phone service?
ANDRES BANDE: Correct. Through China Unicom, which is the license alternate providing China by the Chinese government. That's the idea.
ELIZABETH FARNSWORTH: How difficult has it been to do this for you?
|Doing business with the Chinese government.|
ANDRES BANDE: Well, it's--negotiations are lengthy. One of the things to note in negotiate a deal in China is that the protocol in China dictates that U.S. and foreign companies have to usually negotiate through interpreters. And negotiating through interpreters is a difficult thing because a lot is lost in the translation and also it's more lengthy. Secondly, the federal government approvals that you have to go through in order to get the process executed, the Chinese are extremely careful about this process, and thirdly, it's more lengthy than in other countries but it can be done, and it's being done by many telephone companies presently.
ELIZABETH FARNSWORTH: Mr. Mastel, how do you see overall, looking at the whole situation now, the opportunities for American business in China?
GREG MASTEL, Economic Strategy Institute: Well, that's never the context here. For the last five years investment in China, foreign direct investment, has been growing at nearly an exponential rate. Last year--I mean, this year it's still increasing. The actual investment is still increasing, but for the first time the contract of investment is declined, which means in the future there will be less investment in China. I think that reflects a change in business viewpoints on China for probably a decade--or nearly a decade. There was almost a gold rush mentality that most U.S. companies, most Western companies had to be in China if they're going to be competitive. Now, more and more they realize that being in China has its cost. It's hard to negotiate. Some of the partners are tough to deal with. The government has a lot of regulations, and so I think that this is reconsidering China, and thinking about investing in other markets elsewhere in Asia, maybe Mexico, so China has lost some of its luster. It's still a good market for many, many companies, but also many companies had sobering experiences there.
ELIZABETH FARNSWORTH: Do you think it was hyped before, and this is a more realistic way of looking at it?
|The gold rush mentality.|
GREG MASTEL: I think it was almost a gold rush mentality. As an economist I can tell you five years ago when the gold rush was at its peak, it's hard to understand exactly why there was so much enthusiasm. It's a good market, a great market for some companies, but there are other good markets in the world--India, Mexico--which didn't get as much attention. I think now businesses are reconsidering, thinking that maybe they overinvested a bit in China.
ELIZABETH FARNSWORTH: Mr. Lubman, is that your experience? You've been negotiating for a lot of companies in China.
STANLEY LUBMAN, Stanford Law School: (San Francisco) Yes, for one thing there was some hype, but I think a lot of Americans hyped themselves. Also, had they looked more closely, even 20 years ago, 15 years ago, they would have seen--they would have understood the essential factors in the Chinese investment environment; first, policy, which has been changeable; secondly, law, there wasn't very much when Americans and others started invested in 1979, under an enormous amount of law, but it's very general, and it is interpreted and applied by officials locally with a great deal of discretion that is virtually uncontrollable. Thirdly, there is political decentralization, so that there are really--there's not really one China.
There are many Chinas and each of them may be interpreting national policies and laws quite differently, sometime contrary to Beijing's intent. Fourth, there is practice, which is very difficult to ascertain, since most agencies don't public their interpretations. And finally there's the contract that is, as others have observed, difficult to negotiate and about which both sides may have very different expectations. That's a tough--that's a tough environment in which to accomplish positive results.
ELIZABETH FARNSWORTH: Tougher than other similar countries, I mean, any country you could say had these five factors too, but is it just that much tougher in China?
STANLEY LUBMAN: Well, it's tougher for one, yes, because the Chinese economy and Chinese society are undergoing--have been undergoing extraordinary transformations since 1979. The China that I visited 25 years ago doesn't exist anymore, at least in the big cities. So that there's been a great deal of change that's been going like--for instance when Americans and other foreign investors were encouraged to come--the argument was that China had a planned economy, and now China's--the planned sector of China's economy is smaller than the non-state sector. That's just one of the many structural changes that have been going on. So it's been very much a moving target for investors to try and follow.
ELIZABETH FARNSWORTH: Has this been true, in your experience, Mr. Bande? You've been involved in China with other companies too. Has the changing situation made it especially difficult?
ANDRES BANDE: Well, let me make two points. First of all, about the gold rush mentality. Indeed, a lot of companies rushed early in China and got disappointed, but my view is that those companies that rushed into China and got disappointed didn't have a long-term vision. They were more the type of short-fused American corporation--you know, quarterly profits and so forth. And in our field--telecommunications--I think most telecom--large companies would agree that you've got to have a strategic global vision for China. If China is going to build 20 million lines, telephone lines a year, and is going to have 500 million lines say in about 10 years, and this will be kind of--lines of the world--I mean, this has important repercussions for international traffic and communications. So, indeed, you have to have some strategic patience too, and I would say that the idea that most companies have the solution is not accurate. I think at least in our sector--telecommunications--companies continue to be very vibrant about the prospects. Now, to address your question, indeed, there are some specific difficulties, but, you know, some of the difficulties are in the strategic regulatory aspects of doing business, but one thing you have to--
ELIZABETH FARNSWORTH: You mean going to the ministry and seeing what regulations you have to comply with?
ANDRES BANDE: Correct. And getting approvals and getting people to be more proficient in our American legal way to see things and so forth. I mean, there are gaps there, but, you know, one thing they demonstrated--the Chinese--they've got an enormous capacity in absorbing western technology. They have a love for gadgets, computers, Internet, cellular phones. It is really a very quick adaptation to our technology.
ELIZABETH FARNSWORTH: Let me just ask you before we move on, in the city that you have already begun operating in--
ANDRES BANDE: Yes.
ELIZABETH FARNSWORTH: --how is your competition with the state monopoly going?
ANDRES BANDE: Well, we're still going through some approvals before we get the system all plugged in and ready to go, but we were able to develop the system and we're kind of waiting two months to start operations.
ELIZABETH FARNSWORTH: With the problems people still think it's worth it. Do you think that this will just continue now at the level that companies are currently investing in China, perhaps less than the boom period might have indicated, or do you expect this to arise now incrementally in the period ahead?
|Who "holds the cards?"|
GREG MASTEL: I don't think there will be a dramatic decline. I think it will probably remain about stagnant. But there's been a fundamental change in the balance of power. Five years ago China held all the cards. They were very smug about foreign investment; they set the rules, set the conditions; and they pretty much dictated those foreign companies. Now foreign companies find themselves in the position of being courted by the Chinese government to invest in China, and China is a lot more liberal in some sectors in terms of the conditions it imposes on foreign investors. So foreign investors have gained the upper hand, at least in some sectors, in dealing with the Chinese government, and that fundamentally changes the picture in China. It could be more positive in the future because people are less enthusiastic about getting in, and they're willing to make a good investment and take time to do it.
ELIZABETH FARNSWORTH: Do you see any patterns in the companies that are doing well? Are there certain fields in which companies especially work out the problems more easily?
GREG MASTEL: Well, I think there are two. I think companies that go to China to take advantage of low labor costs have done very well because China is a great low labor cost market. I think those secondary companies that go to China take advantage of consumer products that China's ready to buy, like Procter & Gamble, which has done quite well selling soaps and detergents, do very well in China. Companies that go to China, though, to invest, to make things, and sell things in China that the Chinese consumers aren't yet ready to buy--CD players--sometimes are disappointed. The time frames end up being longer than they anticipated, but, again, some of those companies still think there's a good future in China.
ELIZABETH FARNSWORTH: Mr. Lubman, the recent problems with the Hong Kong stock market and all the problems in the Southeast Asian economy have an effect on China. Will they also affect the American investment going into China?
STANLEY LUBMAN: I don't really think so. I think there are some factors operating that are more important than the dislocations in Southeast Asia. I think it is Americans going up the learning curve, and I think the remark just now that Americans have very often been too impatient and focused on short-term earnings prospects is quite accurate, has been in my experience. I think it's also a question of Americans learning more about the opportunities and distinguishing between say infrastructure, which is terribly important and needed by the Chinese, and other low-cost, low-tech industries in which the opportunities are not quite so extensive, so I think it's a question of disaggregating some of the very complicated factors.
ELIZABETH FARNSWORTH: Mr. Lubman, do you--all the companies you deal with--are there certain companies that it just is more--it's easier to get in than other companies?
STANLEY LUBMAN: Oh, I think the major multinationals that have high-tech products that are well known to Chinese have an easier time than getting in, although they may have some of the same difficulty, certainly in staying. For example, staff costs; the International Finance Corporation, which is the private lending arm of the World Bank, has estimated that four times more staff time and costs are needed to run a joint venture in China than in Pakistan, 80 percent more than in South Africa. It's just--management styles are very different and business cultures are very different, and it's usually the companies that have the deepest pockets, the greatest patience, and that have also done the most homework; they're not all necessarily the same--that can get in and stay for the long haul.
ELIZABETH FARNSWORTH: How about getting managers, people there to help run your company, is it hard?
STANLEY LUBMAN: Yes, it's a very difficult problem. For one thing--
ELIZABETH FARNSWORTH: I'm sorry, Mr. Lubman. I was actually asking Mr. Bande about that. Sorry. Go ahead.
ANDRES BANDE: Well, certainly, you know, there's quite a lot of talent already in China and people are coming to the states, getting their MBA's, getting their degrees. Hong Kong is a tremendous pool of talent, that you can draw, as well as Taiwan. I really do not think our industry we see shortage of talent. We can get those resources, but of course in some modern technologies we will have to use exported personnel, at least for the first few years.
ELIZABETH FARNSWORTH: Anything to add on the management situation?
GREG MASTEL: Well, I think that is one of the fundamental problems in China, but it's getting better. As you say, the Chinese are getting more educated; they're getting more up to speed with how this is done. So I think in some sense it will be better for the teacher.
ELIZABETH FARNSWORTH: Okay. Thank you all very much for being with us.