The Great Transition

Key ideas from the Harvard Business Review article by Kenneth Lieberthal and Geoffrey Lieberthal

The Idea

Foreign firms’ opportunities in China are astounding—but so are the perils. With China now in the World Trade Organization, foreign businesses can—for the first time—pursue the Chinese domestic market. And it’s worth pursuing. China’s dazzling economic growth shows no sign of stopping. And thanks to improvements in China’s infrastructure, workforce, and regulatory environment, multinationals (in particular) have unprecedented opportunities to lower their costs and reap new regional and global competitive advantages. But doing business in China is more dynamic and complex than ever. A sampling of the perils: • The Chinese leaders who negotiated the WTO agreement consulted very little with those most affected by it—industrial ministries, provinces, and cities where foreign competition could threaten local business. Result? Few localities are prepared to implement WTO obligations, preferring instead to stimulate local economic growth and reduce foreign competition. China’s intellectual property protections, for example, are often impossible to enforce. • Constantly changing regulations, bureaucracies, and reporting relationships—and continued government involvement in commerce—hamper business planning. • China’s newest leaders must handle competing demands among China’s shaky banking system, health and other public services, environmental needs, and cash-strapped local governments. Managing these risks is particularly critical if your firm has already entered the China market and is beginning to more fully establish its brands, cultivate markets, and expand geographically. Use the following guidelines to leverage the opportunities—and manage the risks.

The Idea in Practice

Nest your China effort within your whole organization.

Business-unit autonomy doesn’t work well in China because the government treats corporations as single entities. Show “one face” by establishing a first-rate country office that participates in all new-venture negotiations, national-level government relations, and strategic planning for the China effort. Establish a corporate identity that highlights compatibility between your company’s goals and the country’s goals. This identity can help you obtain critical licenses and regulatory decisions.

Tailor strategies for the national level and each locality.

Chinese localities differ in the quality of their government and workforces, experience with international business practices, regulatory environment, consumer tastes, and domination by state-owned or private enterprises. Identify differences in each locality and develop the expertise to lobby government at every level—for example, persuading local governments to bring criminal charges against trademark violations.

Be wary of joint ventures.

Joint ventures—formerly the only way to operate in China—are can present problems for foreign venturers. Government officials often promote ailing Chinese companies as venture candidates, and most Chinese firms want to dominate their local markets and then take profits out rather than reinvest them. Consider establishing an independent legal entity—a wholly foreign-owned enterprise (WFOE)—which can provide management control and better protection of intellectual property rights.

Limit the risks of operating in China.

Hire or develop experts who can penetrate the Chinese system enough to recognize when social tensions are growing, understand internally contested issues, and devise strategies for moving critical regulatory decisions forward. Remember that no place is safe from natural or political disaster—so don’t put all your company’s resources for critical operations into China. Keep one sensitive part of your production processes outside China, to prevent pirating. Periodically assess the risks of your China operations so you can quickly move some operations elsewhere if necessary.

Avoid irrational exuberance about China.

Like items in a shop window, China’s attractions are changing over time. Each opportunity carries different investment and management implications. Rather than rushing to plant the flag, sort through the operational consequences of your different efforts. Pinpoint why you want to do business in China, where to locate there, and what might best be done elsewhere.