Speaker interview: James McGregor

Doing business in China? Here are some insights from James McGregor, author of One Billion Customers, former bureau chief of Wall Street Journal, with over 20 years experience of doing business in China.

Hear more from James on the risks and rewards of pursuing an Asian growth strategy when he talks about the shift from West to East on Day 2.

Questions by Katharine Morton, Deputy Editorial Director, EuroFinance.

Q: What is the biggest mistake foreign companies make when moving into Chinese markets?

A: Naiveté and impatience. Foreign companies too often become captivated by the size of China’s market and the speed of its economic growth. So they expect to come into China and ramp up their business very quickly. They also all-too-often buy into the notion that China is a mysterious and difficult place to understand, so they hand over their business to Chinese partners who will tell them anything they want to hear. Often they conduct very little due diligence on the market and their prospective partners. In China, as with anywhere in the world, you must do your homework and due diligence before you make any investments. In fact, when entering the China market, one should do more research and due diligence than they would elsewhere. You can’t hand your business in China over to a partner and expect to run it by remote control from home. If you want to build a business in China, you need to move to China, roll up your sleeves and build it step by step.

Q: When will the China bubble burst - or are the Chinese authorities really that smart?

A: Chinese authorities are extremely smart. They are under no illusions about their economy and industrial systems. They know where their strengths and weaknesses are, and which problems are coming at them the fastest. Having said that, the government doesn’t have the level of control over its economy it once did. The Chinese economy and marketplace are simply too big and too complex for the government to control. There are also many interest groups in China who have differing opinions on economic policy. There are tycoons who don’t support further reforms because they have made money under the current system. There are entrepreneurs who are feeling squeezed out by State Owned Enterprises (SOEs). There are government entities that want to retain power and economic clout through direct control of major actors in the marketplace. China is way too complex to talk about it in terms of whether or not the bubble will burst.

Q: What is the risk for US and European MNCs that their current joint venture partners could become their competitors after gaining know-how?

A: China is determined to build ‘national champion’ companies that can compete in the global marketplace against the world’s leading multinationals. At the same time, there has been a re-emphasis on retaining state ownership in key sectors. Many of the companies that are favoured to ‘go global’ under current Chinese policies, are either majority owned by government entities or substantially controlled by state entities. The sectors where China has stated it wants to retain ‘state domination’ include automotive, chemical, construction, electronic information, equipment manufacturing, iron and steel, non-ferrous metals and science and technology. Those designated to remain ‘largely in state hands’, include aviation, coal, defense, electric power and grid, oil and petrochemicals, shipping and telecommunications. China’s wide array of subsidies available to SOEs and its ‘indigenous innovation’ policies have caused multinationals concern about their own technology coming back at them in the global marketplace at reduced prices.

Q: Foreign businesses think getting access to China is being made increasingly difficult by a protectionist government. Are they right?

A: China’s ability to maintain high growth while the West experiences financial meltdown has convinced China’s leaders that now is the time to become more assertive in requiring foreign companies to exchange technology for access to the Chinese domestic market. China’s new ‘indigenous innovation’ industrial policies help Chinese companies create their own intellectual property and proprietary product lines. The problem is that the policy calls for creating new intellectual property through ‘co-innovation’ and ‘re-innovation’ of imported technologies. The policies explicitly warn against blindly importing foreign technology without plans to transform it into Chinese technology. As a result, leading global technology companies are concerned that “indigenous innovation” could be a blueprint for massive technology theft.

Hear more from James on the risks and rewards of pursuing an Asian growth strategy when he talks about the shift from West to East on Day 2.