North Korea Inside Out: The Case for Economic Engagement
China: Pearls, Pitfalls and Possibilities
1. Marketmap How emerging markets change the global economy
04 06 14 22
2011 East Asia’s flashiest China rises China challenges: Complex, yes.
Issue 1 attraction A closer look Compelling, probably.
Inscrutable?
China: Pearls,
pitfalls and
possibilities
2.
3. Contents
04 East Asia’s flashiest attraction
Ready for a journey of a thousand miles? Get to
know the ins and outs of doing business in China.
06 China rises
It’s poised to become the world’s largest economy by
the time babies born today embark on their careers.
14 China challenges: A closer look
As China increasingly takes its place on the world
stage, the government has been cracking down.
22 Complex, yes. Compelling,
probably. Inscrutable?
Tie profit to disciplined, risk-based decision making.
5. “Emerging economies like China, India, and Brazil are
growing at rates that far surpass the developed nations. The
shift in the economic balance of power creates challenges for
CEOs in deciding how and where to invest in facilities, people
and innovation. Companies that understand and capitalize
on the diverging growth patterns of the developed and
emerging economies will be the winners in the years ahead.”
— Dennis M. Nally, Chairman of PwC International
Today’s China has become virtually premium. Due diligence is indispensible,
synonymous with global possibilities. yet elusive. Those in search of
And companies in advanced markets, transparency often find translucency
eager to shake free of mature home turf at best. And intellectual property
to explore the potential of the BRICS1 protection and surer safety standards
and beyond, are making serious forays remain works in progress.
into East Asia’s flashiest attraction.
The resulting environment can be
The intrigue doesn’t stop with Beijing. rife with risk. To assess and mitigate
As China expands its horizons from its these challenges, it’s not enough to
coastal cities to its traditionally rural ask questions. It’s no exaggeration to
interior, opportunities seem as bright suggest that mastering the Socratic
and bountiful as a Chinese Lantern method can become business as usual
Festival in celebration of an autumn for the sharpened business person
harvest. Those eager to rise along with around Shanghai.
China’s growing economy will need
to illuminate their way forward on an The Chinese have long said that a
ongoing basis, or risk costly stumbles journey of a thousand miles begins with
on unfamiliar terrain. a single step. If you’re among the many
who are intrigued by the possibilities
China’s ascension, while impressive, has that can be found along this path, your
not followed a straight trajectory — an first step should include getting to know
insight that often gets overlooked amid the ins and outs of doing business in
the hoopla. Some substantially stalwart today’s China. As you’ll see, China surely
businesses have forged successful beckons with the luster of pearls. But
paths. But the sheer magnitude of their astute entrepreneurs will take measured
operations and depth of their pockets steps to string together a tightly bound
have been significant in enabling strand of high-quality gems.
them to overcome what can often be a
daunting slog through a nascent and Read on to learn more about the
unfamiliar market. rewards and realities of China
today and how best to position your
The challenges are myriad, complex, enterprise to share wisely in the
and often interrelated. The emerging wealth.
government’s role in business life looms
large; the lack of separation between
government and business is the Chinese
way. Business partner pedigrees are at a
1 Brazil, Russia, India, China, South Africa
5
7. “Pearls lie not on the seashore. to continue at a robust clip of about
If you desire one, you must dive 8% a year over the next five years,5
for it.” as prosperity unfolds like a fan,
— Chinese proverb wafting consumption growth through
an economy that will continue to seem
more inspired by Wall Street than the
China has come a long way since
Great Wall — complete with cyclical
embarking on economic reform in
fits and starts.
1978 under Deng Xiaoping. And it
has done so quickly, albeit not always
in a linear fashion. Since the late Among emerging markets, China has
‘70s, its economy has grown tenfold, unleashed performance and prospects
industrialization supplanting agrarian that outpace Brazil, Russia, India, and
trade — not over the course of 200 South Africa as well as up and comers
years, as in Europe, but in three such as Mexico, Egypt, and Taiwan.
decades. China’s cumulative real GDP China’s 10% average growth per year
growth is projected to outpace that of between 1999 and 2009 is highest
developed economies and the rest of among the emerging markets, and
the world by 2015.2 Along with one topped 14% in 2007. Its 2010 GDP
of the hardest-charging income level was second only to the United States,
increases in history, China’s economic landing it ahead of Germany, Brazil,
awakening has resulted in the largest India, Russia, Mexico, and Indonesia.
poverty decline ever.
CEOs responding to our 14th Annual
The interest in China among investors Global CEO Survey liked what they
is a long-term secular one. One saw. Many pointed to China as the
dramatic indication of the global most important country for future
rebalance: China, which in 1980 growth; of the 1,201 CEOs surveyed,
didn’t rank among the top 10 global 39% saw the greatest opportunity
economies by size, looks poised to there, well ahead of the United States
top the United States as the world’s (21%), Brazil (19%), and India (18%).6
largest economy by the time babies China also tops the list as the most
born today embark on their careers in important venue for meeting future
the mid-2030s.3 The current economic sourcing needs, with 37% of leaders
cycle is a major factor influencing surveyed planning to shift sourcing
nearly 85% of CEOs we surveyed to there, primarily inspired by the
shake up their business strategy in potential for cost competitiveness.
recent years.
Market growth has long been China’s
China has surpassed Japan as the golden goose, as the country’s workers
second-largest economy in the world, grow increasingly capable of buying
behind only the United States.4 In the the goods and services that were once
near term, China’s growth is projected
5 Building a presence in today’s growth markets, The experience of
privately held companies, PwC, 2011
2 Building a presence in today’s growth markets, The experience of 6 Prospects in emerging markets drive global CEO confidence to pre
privately held companies, PwC, 2011 financial crisis levels and 14th Annual Global CEO Survey, Growth
3 The World in 2050, PwC (January 2011 update) Reimagined, PwC, 2011; created in cooperation with the Economist
4 The World in 2050, PwC; View, issue 13, Doing business in a Intelligence Unit (EIU). The findings presented in the main report
changing China, seeking similarities, respecting differences, PwC, are based on a survey and analysis conducted in 2010 by the EIU on
2010-2011 behalf of PwC.
7
8. designed solely for other markets the selling of goods and services as
and demographic groups. The their top opportunity in China. By
transformation is readily apparent, comparison, the other BRICS hover
and businesses large and small have around the 40% mark. Business
noticed. The experience of one leaders are eyeing emerging markets,
international hotel illustrates the countries such as Colombia and
transformation; Starwood Hotels Argentina, which represent a second
& Resorts Worldwide opened the wave of overseas markets, to a lesser
Sheraton Great Wall in Beijing in 1985 extent, with about 20% of company
to serve Western travelers seeking leaders venturing into countries
familiar surroundings in China. At the such as Mexico and South Korea, or
time, less than a decade into China’s contemplating it.
economic awakening, the only local
Chinese nationals who could be seen Doing deals: Robust times
around the facility were staff members. for China
Today, local Chinese visitors comprise
60% of the Sheraton’s guests. China’s recent deal market might
remind one that it is, after all, the
country that invented fireworks.
Private companies, too, want in on
Deal volume in China shot up more
the action. More than 60% of the 158
than 15% and deal value rose nearly
non-financial private company leaders
30% in 2010 as compared to 2009.
PwC recently surveyed say they’re
In contrast, US deal volume around
already doing business in China or
that time remained relatively flat, with
are considering such a move, citing
deal value edging up less than 10%.7
7 Ten minutes on doing deals in China, PwC, 2011
IMF Projections for percentage of GDP growth, September 2011
10% 9.5% 9.5%
9.0%
8.1%
7.8%
8 7.5%
6
4.2%
4.3% 4.1%
4 4.1%
3.8%
4.0%
3.4% 3.6%
2.5%
1.8%
2 1.6%
1.5%
1.5%
1.1%
0
2011 2012 2013
China
India
Russia
Brazil
South Africa Source: IMF World Economic Outlook September 2011 Estimate
Note: World Bank forecasts are frequently updated based on new information and changing (global) circumstances.
United States http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/EXTGBLPROSPECTSAPRIL/0,
Euro area contentMDK:20370107~menuPK:659160~pagePK:2470434~piPK:4977459~theSitePK:659149,00.html
8
9. World Bank : GDP Contribution by sector: China's rapid industrialization
60%
48% 47% 47%
50 46% 46% 46%
45%
43%
40% 41%
38% 45%
40
33% 32% 33% 41%
32% 39%
30% 29%
35% 35%
30
28% 27%
27%
24%
20 22% 22% 22%
20%
15%
10
12% 10%
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Agriculture
Industry
Services
Source: World Bank Database http://data.worldbank.org/indicator
We’re seeing an evolving global and Asia’s largest private equity (PE)
domestic M&A picture, with China at market resides in China — and it’s
the forefront of change. Amid a flurry in a state of flux. PE transactions
of inbound and domestic deals, critical there grew to 580 in 2010, an increase
sectors such as auto parts, cement, of more than 65% over the previous
and metals are coalescing around year, with more than two-thirds
numerous smaller enterprises. At the initiated by domestic funds. Almost
same time, Chinese companies are half of the funds raised by private
acquiring resources through megadeals equity were in Chinese currency, the
in Africa and South America and renminbi (RMB) with yuan the basic
expanding globally into sectors such unit. It’s a significant challenge,
as automotive and chemicals. but some foreign funds are teaming
with Chinese municipal governments
We also see a trend toward a growing and private entities in RMB funds to
number of joint ventures (JVs) formed further penetrate the market. China’s
in China; companies are increasingly market holds significant ‘dry powder’;
using local partners’ market knowledge the emergence in RMB funds has
and relationships with customer fostered substantial fundraising,
and the government to adapt to fueling continued upward pressure
an ‘in China, for China’ strategy. on deal valuations.
Multinationals should recognize that
local partners need a distribution
network to realize market penetration
and intellectual property (IP) to
enable them to appeal to the local
consumer base.
9
10. Canada 1.14
United States 1.14
United States 1.31
Caymen Islands 5.50
British Virgin Islands 6.12
China’s 2010 inward/outward Foreign Direct Investment (FDI)
by country (in US$ billions)
Inward FDI to China
Outward FDI from China
Source: China FDI.govcn http://zfxxgk.dongying.gov.cn/gov/jcms_files/jcms1web46/site/art/2011/1/18/art_2
*Not including banking, securities, and insurance
*Above figures include FDI done through free ports including Virgin Islands, Caymen Islands, Barbados, Mauritius
For multinationals whose sights While Chinese investors have been
are set on long-term growth in providing capital to gain access to
China, indigenization is crucial. global markets, Chinese businesses
Business models must be adapted to and their partners are thinking more
accommodate a dual perspective: creatively about mutually beneficial
one, the traditional multinational arrangements. For example, some
context (focused, for example, on Western companies are making
shareholder value and corporate inroads into China’s domestic market
citizenship), the other, the domestic by providing Chinese businesses with
Chinese view. To grasp the latter, an entree into the global marketplace.
businesses must cultivate an Some observers see outbound Chinese
understanding of and respect for investors gearing up to acquire
the views of a number of Chinese sizable stakes in Western markets, but
stakeholders, including central Chinese investors going abroad face
and local governments, suppliers, steep learning curves in executing
customers, employees, and and integrating their acquisitions, a
universities. Success will be largely development that closely parallels the
predicated on their ability to fuse Japanese history of investing in the
business-as-usual with business- United States.
as-usual in China, which can be
distinct, but not necessarily mutually Despite inroads, some investors
exclusive, approaches. question whether China remains too
economically nationalistic to truly
10
11. United Kingdom 1.64
Netherlands 0.95
Luxembourg 3.21
France 1.24
Germany 0.93
Korea 2.69
Japan 4.24
Taiwan 6.70
Hong Kong 38.51
Myanmar 0.88 Hong Kong 67.47
Singapore 1.12
Singapore 5.66
Australia 1.70
seek such relationships, as many deals Thanks to its strong export platform, since the economy began opening
still flounder far short of success. China is already a preferred up a few decades ago, is spreading
Others view these disappointing forays destination for the relocation of global from the coastal regions to the
as part of the country’s economic manufacturing facilities. It’s also second- and third-tier cities inland,
growing pains rather than investment cited along with the United States and where lower-cost labor and property
isolationism. Through any lens, India as among the most important are still the norm. In fact, some
China’s economy delivers significant future sources for products and raw 60% of the Chinese government’s
opportunities; their realization requires materials by participants in PwC’s 4-trillion-RMB stimulus package
foreign investors to identify mutual CEO survey. And although the cost has been allocated to developing
touch points for strategic growth while of manufacturing there is rising as transportation, affordable housing,
identifying, managing, and cutting risk. Chinese workers enjoy higher wages and rural infrastructure in the central
and a growing consumer footprint, and western regions, according to
Where the industry action is the export platform remains the most some estimates, yielding significant
appealing opportunity in China among opportunity.8 Foreign investors
China’s admission as a full World in heavy industries such as steel
the private company leaders we polled.
Trade Organization (WTO) member manufacturing are eyeing inland
This factor is now being challenged
in November 2001 spawned a boom China’s immensely rich stock of iron
by China’s rapidly growing domestic
period for foreign investors in sectors ore and other natural resources.
markets.
such as distribution, logistics, financial
services, and telecommunications,
Amid China’s increasingly invigorated China is also casting its eyes beyond its
as well as a customs duty cut.
market, the country’s robust own borders. In the past decade,
manufacturing base, building steadily 8 View, issue 13, Doing business in a changing China, seeking similari-
ties, respecting differences, PwC, 2010-2011
11
12. China’s presence in Africa alone since the early days of the 20th century.
has spread across the continent, And it did so in the fast lane. A decade
from Angola to Zimbabwe and ago, the United States consumed twice
beyond, including business interests as much energy as China. But several
in energy, mining, infrastructure years of double-digit growth rates in
development, and financial services.9 China and the recession’s deeper dig
It’s also emerging as a prime investor in the United States accelerated this
in energy around the world, notably dynamic. (On a per capita basis,
green energy, standing alongside the China remains at about one-third
United States as a global cleantech of the Organisation for Economic
leader, aggressively backing emerging Co-operation and Development
industries in the hope of boosting its [OECD] average.)
economy, environmental performance,
and brand. While China’s increased energy
demand is not largely a reflection of
China’s economic climb, with consumer behavior, the country’s recent
its inherent reliance on energy- dominance of the automotive sector
intense industry and infrastructure is. China has grown into the world’s
development, thrust it past the United largest automotive market, with sales
States as the world’s largest energy surpassing the United States in 2009
consumer in recent years — a position and more automotive assembly plants
the homeland of Henry Ford had held than any other country. Automotive
CEOs are revving their engines in
9 For more information, please see China and India go to Africa, New
Deals in the Developing World, Foreign Affairs, published by the Coun-
cil on Foreign Relations, by Harry G. Broadman, March/April 2008
12
13. response to opportunities there, with some businesses looking toward these
64% naming China as important to less-conspicuous destinations for more
their business growth, well above the affordable manufacturing support.
global average. PwC expects that some Malaysia, with its history of British
80% of global growth in the sector rule and law, has drawn interest
by 2017 will come from emerging among those wary of one of China’s
markets — 34% from China.10 perceived Achilles heels: less stringent
IP protections, particularly in the
As China’s economic rise continues, technology field, where IP risks remain
Far East neighbors such as Malaysia, a paramount concern.
Vietnam, Cambodia, Bangladesh, and
Thailand all stand to prosper. Already,
Indonesia, Malaysia, and Vietnam
have been prettying themselves up for
small and mid-sized businesses with
loosened permitting and property
registration and more fluid credit
information sharing. At the same time,
China’s rising labor costs have
10 PwC Autofacts, March 2011
60 years of strategy
The Twelfth Five-Year Plan, recently endorsed by the National People’s Congress, lays out economic, social,
environmental, geographic, regulatory, and legal strategy. The plan looks to these strategic industries to provide
8% of GDP by 2015 and 20% by 2020:
• Alternative energy
• Next-generation information technology
• High-end equipment manufacturing
• New materials
• Clean-energy vehicles
• Energy conservation and environmental protection
• Biotechnology
According to the current vision, the China that emerges over the next five years will embrace a ‘softer’ side of the
growth agenda, with a commitment to issues such as social equality, environmental consciousness, and resource
availability. The plan looks to:
• Lessen discrepancies between coastal and interior regions
• Target 7% economic growth (versus prior 7.5% goal)
• Enhance social infrastructure
• Increase and spread wealth
• Cut reliance on exports and boost household consumption
• Balance growth and sustainability
13
14. Growth and change glass. Once the jet lag dissipates, savvy Transitioning markets,
in today’s China business leaders will awaken to a new intransient rules and roles
world of cultural, operational, and
Rapid growth and change can have Like its climate, tropical in the south,
regulatory realities. Many investors cite
its drawbacks. Just ask any teenager. subarctic in the north, China is a land
challenges in navigating a general lack
Or take a closer look at today’s China; of dramatic contrasts. The nascent
of transparency, an unreliable legal
beneath the shimmer of economic nature of China’s role as a global
system, industrial policies that can be
metamorphosis, vigor, and burgeoning economic power means its financial
skewed in favor of local businesses,
opportunity, we also find that the markets are still young while its banks
and concerns about corruption and IP,
underpinnings of this new paradigm are still working through rebalancing
which is a characteristic challenge of
remain unrefined in many respects, issues. Maintaining social and economic
emerging markets generally.
as does the understanding of many stability is a top objective of the Chinese
who are looking to do business in any government and its officials in the
emerging market. China presents its Much of this reflects the reality that current transitional environment.
own distinct challenges. These needn’t China’s economic strides have been
be deal-breakers. But neither should a hemispheric hybrid, incorporating
China’s one-party government (the
they be ignored. Western economic ideals alongside
Chinese Communist Party or CCP)
steadfast loyalty to China’s political,
wields substantial influence as
historical, and cultural roots. As we’ve
For those who would seek their fortune the country’s leading corporation,
seen, the resulting entity has been
in a land where time runs 12 hours regulatory, and pricing body. It’s a
spectacularly effective in pushing
ahead of any given New York minute, degree of influence that may present
China into the major leagues of
the adjustments don’t stop when a challenge to many Westerners
economic expansion — a rapid
you reset your watch. Operating on striving to develop positive
transformation that can belie the
the other side of the world can be as
implications of governmental
puzzling as a trip through the looking
involvement and influence in
business affairs.
14
15. workingrelationships with local exercise authority over the direction rife with potholes for the uninitiated
stakeholders in markets while of investment money, targeting the and raising questions even for
remaining in compliance with regions and industries deemed ripe those who have experience. Many
anticorruption laws, engendered by for development. While this has corporations and their legal advisors
policymakers intention of creating presented challenges for some foreign struggle to determine the right balance
clearer separation between government companies, others have been successful between the appropriate deference
and commerce. in recognizing it as an opportunity to guanxi on the one handand anti-
to collaborate with local players and corruption regulations, such as the
Because the notion of privatization in develop mutually beneficial China FCPA, UK Bribery Act, and the OECD,
China doesn’t jibe with the assumptions strategies that are aligned with Chinese on the other. For example, although
of businesses accustomed to operating stakeholder interests. expense reporting for such forays as
in mature markets, success will hinge business meals remains a fundamental
on the ability to understand the gov- It’s not what you know practice, Chinese government officials
ernment’s role and China’s operating might not want their names recorded
Yes, of course, it’s who you know. But
environment while remaining poised on such documentation. And some
in China it’s also what you don’t know,
to keep operations clear of corruption companies look the other way in the
or know enough about to ask what
through assiduous risk management. interest of building the relationship.
you need to know. That’s why it makes
sense to strive for a real understanding
The government’s reach is evident in No one wants to alienate one’s
of Chinese culture and the way
potential investment restrictions, which business associates. But the prospect
business there gets done. ‘Guanxi’, the
are far broader than those seen in the of the hammer falling from a foreign
notion that cultural differences can be
United States and other developed investor’s home country anti-bribery
bridged by building and maintaining
nations. China’s legal and regulatory law liability is hardly appealing either.
relationships can be a two-way street
framework enables its leaders to
15
17. Corruption crackdown, laws governing taxes, labor practices,
regulatory renovation exports, trade, and the environment.
Corruption can cause business
aspirations to fizzle like fireworks China’s own anti-bribery law, based
in a monsoon. Investors need to on Article 16 of the United Nations
remain attuned to FCPA and Convention Against Corruption,
UK Bribery Act restrictions, along recently took effect when The
with local anticorruption regulations. Standing Committee of China’s
A significant segment of China’s National People’s Congress passed an
population is involved in governmental amendment to China’s Criminal Law.
activities, which can increase the This criminalizes bribery of officials of
potential for both local an home public international organizations or
country bribery violations. foreign government officials by Chinese
individuals and companies.
While corruption can undermine
any business environment, how The development reflects an ongoing
it’s perceived is subject to cultural evolution, coming in the wake of
translation and transformation, China’s WTO accession a decade ago
much like attitudes toward diversity and creating an ongoing impetus for
or smoking. As China increasingly investors to remain nimble and able
takes its place on the world stage, the to adapt their operations and structure.
government has been cracking down. By 2007, China had enacted its own
antimonopoly law, which took effect
the following year and is enforced
Reform efforts have met with mixed
by the Ministry of Commerce (mergers
results, but in recent years, the
and acquisitions); the National
government has gone so far as to
Development and Reform Commission
execute public officials convicted of
(anticompetitive conduct pertaining to
bribery, embezzlement, and abuse of
pricing); and the State Administration
power. Chinese officials haven’t shied
for Industry and Commerce (other
away from punishing corporate players
anticompetitive conduct). More
perceived to have bent or broken such
recently, the US Department of Justice’s
laws. High-profile arrests of foreign
(DOJ) Antitrust Division signed a
employees accused of bribery and
memorandum of understanding with
IP infringement have raised flags for
those agencies as a nod to ongoing
businesses around the world as to
communication and cooperation.11
where the lines are drawn when it
comes to acceptable versus criminal
commercial behavior in China. Enhanced regulatory guidance for
M&A activity in China can be
challenging for investors, even as
Once viewed as lagging in regulatory
it brings increased transparency to
reform relative to its growing global
decision making. Some see the new
importance, China has lately embraced
guidance on China’s national security
a more stringent anticorruption stance.
reviews as a parallel to the Committee
Along with anti-bribery regulations,
on Foreign Investment in the United
companies operating in China need
to remain in step with numerous 11 US Department of Justice, http://www.ftc.gov/opa/2011/07/
chinamou.shtm
17
18. States, a multiagency national security abuse. And completing the necessary
group that reviews transactions that paperwork by Chinese standards is
could result in control of a US business no panacea. That’s because the onus
by a foreign person. for requesting business tax invoices,
known as ‘fapiao’, remains not with
China’s tax authorities are also the business service provider, but with
moving to tighten the enforcement the consumer, injecting the process
and consistency of related policies. with considerable variance and
Tax policy perks, such as tax holidays vulnerability. In the last decade, Beijing
and reduced income tax rates, have introduced cash incentives to induce
served the government’s aim to attract more consistent and reliable reporting
foreign investors. These investors also and boost tax revenue. But corrupt
are protecting themselves from picking practices persist; it’s not unheard of for
up sellers’ tax liability amid fallout such documents to be forged, or even
from anti-tax avoidance measures, crafted on a street corner. As such,
which often requires intensified due home country enforcement agencies
diligence and the ability to demonstrate often look upon this paperwork with a
legitimate business operations among healthy dose of skepticism.
special purpose vehicles that are
sometimes used to mask tax avoidance. Where piracy meets progress:
Intellectual property rights
An often unreliable business tax and wrongs
documentation system poses another As China’s business environment
challenge. While the system is heavily continues to undergo transformation,
bureaucratic, it’s also subject to we can expect an ongoing parade
18
19. of regulatory shifts, some of which boost enforcement, seeking to raise Despite progress, improvements
will gain better traction than others. awareness of IP issues among the public often remain insufficient for many
Regardless, the pace of change will no while expanding the State Intellectual multinational corporations (MNCs),
doubt be brisk, at times sudden, with Property Office (SIPO), State Copyright which should focus on IP value
considerable implications for business Bureau, and similar agencies, and management strategies to preserve IP
operations; it will be crucial to stay assigning IP protection roles to other value by leveraging the core operations
tuned in to the changing tides and state organizations. of the enterprise.13 We see a trend
tuned up operationally. toward sector-specific risk profiles to
But such strides have often come with determine an appropriate level of entry
Perhaps nowhere are China’s crossroads setbacks and caveats. According to the into China. If the decision is made to
between old and new, public good and US DOJ, a WTO dispute settlement enter the market, companies need to
private profit, more evident than in its panel found that some elements of ensure their understanding of the legal,
attempts to rein in IP infringement. China’s intellectual property rights commercial, and stakeholder interests,
(IPR) regime are ‘inconsistent with particularly as they relate to the
China began shoring up its IP protection its obligations under TRIPS’.12 And government. They also must maximize
enforcement efforts, passing patent, software, entertainment, and consumer the use of the company’s existing IP
trademark, and copyright protection goods groups report ongoing — and protection laws and practices and
laws in the early 1980s, shortly after often high-profile — piracy incidents. pursue both commercial solutions and
Deng Xiaoping unleashed economic legal remedies, for example, through
reform. That was followed two decades Violations continue to outpace enforce- such means as local IP co-development,
later, in 2001, by China’s WTO acces- ment. Lack of government agency bimodal product strategy, and minority
sion, along with refinements to IP laws coordination hampers efforts to quash cross-ownership.
to comply with the Agreement on Trade IP abuse, and regional enforcement
Related Aspects of Intellectual Property inconsistencies create an environment Indeed, from IP to JVs, the ability to
Rights (TRIPS). in which some areas offer relatively identify solid business partners is a
stringent IPR protection while others critical challenge. Unwary investors
More advances followed. In 2007, remain relatively lax. who choose poorly can find themselves
China signed onto further global in a league with the wrong crowd,
initiatives, including the World This is an area in which the would-be setting up the venture for failure and
Intellectual Property Organization seller must be wary. Patent and copy- jeopardizing their brand and bucks.
(WIPO) Copyright Treaty and WIPO’s right infringement, piracy and coun- Affirming partner integrity is a critical
Performances and Phonograms Treaty. terfeiting, and product diversion can and challenging endeavor in China,
It’s also involved in organizations cost you dearly in the marketplace and where gaining a foothold in the market
such as: in the media. Chances are your IP is depends on high-touch, high-stakes
your most valuable asset, as a source business relationships. Though success
• Paris Convention for the Protection of revenue outright or as the basis for can ride on the ability to tap the right
of Industrial Property competitive advantage. As such, it partners, outdated or elusive financial
must be carefully cultivated and tightly and ownership data can compromise
• Berne Convention for the Protection otherwise seemingly thorough due
guarded. Protecting these assets against
of Literary and Artistic Works diligence, making it tough to assess
unauthorized use and finding trustwor-
• Madrid Trademark Convention thy potential partners will be crucial to intermediaries, agents, JV partners,
maintaining a successful IP strategy and and other liaisons on whom so much
• Universal Copyright Convention
running a successful business in China. can depend.
• Geneva Phonograms Convention
Along with these global IP protection
efforts, the government has also 12 US Department of State, 2011 Investment Climate Statement,
Bureau of Economic, Energy and Business Affairs, March 2011, 13 Redefining Intellectual Property Value, The Case of China, PwC,
worked to curb violations and http://www.state.gov/e/eeb/rls/othr/ics/2011/157258.htm 2005
19
20. The made-in-China brand: The The issue came to international
drive to revive damaged goods notoriety when, in 2005, tainted
Product quality is not an issue reserved Chinese-manufactured drywall made
only for those with IP concerns. its way into post-Hurricane Katrina
Although China has moved closer construction projects on the US gulf
to mature market comfort zones in coast, at a time when many eyes were
some crucial ways, US and EU leaders cast upon the devastated region.
recently expressed concern that China’s More was to come. In 2007, toxins were
efforts to shore up product safety have found in other products made in China,
not gone far enough. In response, including wheat flour, frozen fish,
China recently announced plans to and toothpaste. The flour,
tighten regulations, stop defective contaminated with the industrial
and dangerous exports, and soothe chemical melamine, made its way into
potentially trade-defeating doubts.14 pet food, reportedly killing thousands
of dogs and cats worldwide.
China’s consumer-protection officials
vowed in 2010 to hold Chinese As if all of this wasn’t damaging enough
manufacturers accountable for product to the made-in-China brand, numerous
safety, to work with its counterparts 2008 recalls amplified trade jitters
in advanced economies to set safety further when toys exported from China
and testing standards, and to keep to the United States were found to
dangerous materials such as lead out contain dangerous amounts
of products made in China. of lead. Again, the timing may well
have exacerbated trade tensions; just
as the global economy had started
14 The Wall Street Journal, October 2010, http://online.wsj.com/article/ to sour, it seemed that even toys
SB10001424052702303891804575576272885290234.html
20
21. try to address the matter by keeping an Regardless of which measure one looks
Pinyin: A method by which arms-length relationship with suppliers at, these indices should not be viewed
Chinese ideograms are and assessing quality only on the as having great precision, but rather as
transcribed as Roman-style back end. But sheer volume and gaps assessments of orders of magnitude;
words. that enable Chinese vendors to evade they tend to be correlated with one
such controls increasingly erode the another and paint a picture of China as
effectiveness of these reviews. a country that has been improving but
could sow apprehension and doubt.
remains at a comparatively low level of
The impact was significant, as toys
When proper due diligence has been good governance overall.
associated at least in part with Chinese
performed, greater collaboration
manufacturing comprise 80% of the
with vendors can increase supply chain TI, which publishes an annual
US kid market.
transparency, accountability, and Corruption Perceptions Index (CPI),
quality. Many companies are now uses survey participants’ insights to
That year also saw alarming reports trying to build: identify public sector corruption hot
that melamine had surfaced in
spots, scoring countries on a scale from
baby formula made by more than
• Greater supply chain visibility so they 10 (very clean) to 0 (highly corrupt).
20 manufacturers in China, where
can understand the cost structure for For compliance decision-making and
it sickened thousands of children
themselves and better assess vendor risk assessment purposes, entities often
and even resulted in some fatalities.
quality and integrity up front assign a threshold risk level, typically
Although this threat didn’t cross
• Collaborative, not arms-length, 4 or 5 on TI’s CPI scale. Some
borders, it did nothing to burnish
relationships in which they work companies have broken the rankings
China’s image as a trustworthy
closely with vendors to improve down even further, identifying
producer and partner.
quality and cost efficiency; for corruption as rampant in countries
example, providing more favorable that score 0 to 3 and presuming a high
A spokesman with China’s likelihood of experiencing corruption in
Administration of Quality Supervision, contractual terms for vendors that
provide greater transparency countries that score between 3 and 5.
Inspection, and Quarantine recently
cited international standards as a • Increased traceability for sectors, In the 2010 CPI ranking of 178
means of mitigating these concerns. such as auto parts, in which quality is countries, China scored a 3.5 and
At the same time, the onus could of higher importance ranked 78th, tying with Colombia,
simultaneously be shifted away from
With these measures in place, we see an Greece, Lesotho, Peru, Serbia, and
regional determinations, which can
emerging trend toward the transfer of Thailand. Although this placed China
stir up disparities and hike costs —
accountability for maintaining supply in the bottom half of the index, it
never welcome circumstances and
chain integrity to vendors. This is demonstrates a marked improvement
less so in a volatile economy with
distinct from the arms-length approach, since 1995, the first year TI produced
unpredictable demand.
as the focus is on enlisting vendors’ help the survey; at that time, China scored
in improving transparency and opening 2.16, finishing next to last, sandwiched
Shoring up supply access to the production process. between Indonesia (1.94) and Pakistan
chain integrity (2.25).15 For the sake of comparison,
Vendor and supply chain integrity Alphabet soup in Pinyin the United States ranks 22nd with a
issues have emerged from the margin spells ‘anticorruption’ 7.1 rating, while the United Kingdom
squeeze on Chinese vendors based ranks 20th with a 7.6 rating.
China’s growing significance as a player
on input cost inflation and pressure
with global deal appeal is reflected
from Western buyers for higher pricing, EIU’s ratings, which date back to 1982,
not only in emerging regulatory vigor,
which has accelerated amid the show similar improvement in China’s
but also in an improved showing in
economic slowdown. legal and regulatory risk profile since
assessments conducted by international
2002, especially with respect to fair
organizations such as Transparency
This is often more of a systemic competitive practices and prompt and
International (TI), the Economist
problem that requires a systemic Intelligence Unit (EIU), and The
solution. US companies frequently World Bank.
15 Transparency International and the University of Goettingen
21
22. EIU’s assessments are fair judicial proceedings.16 However, has increased imports, access to some
based on information this analysis also indicates ongoing sectors remains an uphill climb because
related to numerous risk concerns about contract disputes, of government restrictions in the high-
corruption, and corporate governance. tech industry, petroleum, and certain
indicators, including:
mineral resources that are crucial to the
The organization’s business risk country’s manufacturing base; foreign
1. Security: armed conflict, terrorism, companies can face challenges in
framework scores 180 countries
violent crime and unrest, organized setting up direct subsidiaries in
on a scale of 0 to 100, with 0 being
crime, kidnapping and extortion these industries. At the same time,
least risky, in an effort to quantify
business profitability risks. The current the government might seek an
2. Political stability: social unrest, EIU analysis, for example, deems ownership stake.
disorderly transfer of power, Switzerland as presenting the lowest
excessive executive authority risk with a score of 10; Somalia is Similarly, The World Bank, which rates
3. Government effectiveness: excessive assessed as holding the highest risk countries on ease of doing business,
bureaucracy, cronyism, corruption, to profitability, at 83. ranks China 91 out of 183 economies
human rights abuses in its 2011 report.17 Note that a more
4. Legal/regulatory: investment China falls somewhere in between, nuanced picture of China’s commercial
protection, contract enforcement, with an overall score of 46, reflecting environment emerges when one
fast and fair judicial process its improved business climate, considers its scores on specific elements
substantial social change, and complex of doing business there as shown to
5. Macroeconomic: recession, inflation, bureaucracy. Specific risk ratings for the left.
currency, and interest rate volatility China include a 60 in regulatory risk
6. Foreign trade/payments: capital and a 55 in political stability risk on In contrast, Hong Kong is ranked
controls, trade restrictions, the higher (riskier) end; and, on the second, while Singapore earns the
discriminatory tariffs lower (safer) end of the risk scale a top spot and the United States is
7. Financial: availability of local 47 in infrastructure, a 38 in tax policy, fifth, based on a set of regulations
financing, liquidity of local markets, and a 36 in foreign trade and payments. affecting nine stages of the business
bank risk EIU’s findings reflect advancements life cycle, from getting started to
in business law that are undercut by closing up shop and pivotal points
8. Tax policy: tax rates, predictability, socioeconomic changes that could in between: managing construction
and transparency, risk of retroactive threaten stability; rapid infrastructure permits, registering property, obtaining
taxation advances; and high tax rates relative to credit, protecting investors, paying
9. Labor market: trade union power, international levels. Although China taxes, cross-border trading, and
labor unrest, right of free association contract enforcement.
10. Infrastructure: port facility quality 16 Building a presence in today’s growth markets, The experience of 17 Doing Business 2012,
18 Making a Difference for Entrepreneurs, A Copublication of The
privately held companies, PwC, 2011
and reliability, air transport, World Bank and The International Finance Corporation, 2011
19 Doing Business in Hong Kong, PwC, 2010
distribution, utilities, the Internet 20 http://www.gov.hk/en/about/abouthk/facts.htm
Transparency International Corruption Perceptions Index 2010
Overall corruption score (1 = highly corrupt 10 = very clean)
Overall ranking (178 countries surveyed)
54 S. Africa 4.5
69 Brazil 3.7
78 China 3.5
High
87 India 3.3
Medium
Russia 2.1 Low
22
23. The ‘World’s Hong Kong has actually been ranked A Special Administrative Region of
Freest Economy’ the ‘World’s Freest Economy’ for the People’s Republic of China, Hong
nearly two decades in a report issued Kong was under British rule from the
annually by The Heritage Foundation. mid- 1800s to 1997, when China took
A regional business hub with over sovereignty under a ‘one country,
international business chops, Hong two systems’ model. The Basic Law,
Kong simply could not be any closer the Hong Kong Special Administrative
to China geographically, linguistically, Region’s constitutional document,
or culturally. As such, it’s a great place ensures that the political situation
from which mainland investors can will remain in effect for 50 years;
enter regional and global markets. individuals’ rights and freedoms are
The Hong Kong government embraces based on the impartial rule of law
a policy of ‘market driven with minimal and an independent judiciary.22
government interference’, in which
foreign investment is welcome. It’s
devoid of policies protecting local
industry against foreign competitors.21
China's overall ease of doing business ranking of 91,
the World Bank rated China as follows in these categories
Ease of doing business: 1 = easiest; 183 = most di cult
More challenging aspects of doing business in China
Dealing construction permits 179
Starting a business 151
Paying taxes 122
Protecting investors 97
Accomplished in China with greater ease
Enforcing contracts 16
Registering property 40
Trading across borders 60
Getting credit 67
23
25. “Deep doubts, deep wisdom; Anticorruption starts at the top with
small doubts, little wisdom.” the board of directors and senior
— Chinese proverb management. These efforts also
demand support by rigorous internal
and external communication and
Are you ready to take a bite of the
ongoing monitoring. A risk-based
pomegranate? You can enjoy the
approach to your anticorruption
fruit without choking on all those
program can help steer program focus
small seeds — if you can tie profit to
and maintenance on an ongoing basis.
disciplined, risk-based decision making.
Be sure to perform enhanced due
Seven ways to protect your
diligence before you head for the
reputation, from your home base to
airport. Independent business
the streets of Beijing and beyond:
intelligence collection and stepped-
up due diligence gives leaders critical
1. Prevent, control, and contain information to sharpen risk-based
direct and indirect losses related decisions. It also shows regulators
to corruption. that the company takes its commitment
2. Choose your partners wisely and to integrity and corporate governance
protect your intellectual property seriously.
like a mother panda.
3. Remain aware of local, regional, and Addressing anticorruption, home-
jurisdictional quirks and nuances. country regulations and related
provisions means increased
4. Keep a watchful eye on operating collaboration across the risk,
model efficiency when navigating compliance, finance, operations,
the challenges of sustaining profits IT, HR, and business development
amid pressure to salvage margins. functions. It also means building
5. Bring local Chinese talent into the and maintaining an understanding
business and bring your leadership of international anticorruption
to the streets. frameworks, monitoring how policies
and enforcement are changing, and
6. Bring your market savvy: Know your
assessing the implications for business
customers and partners in China.
strategy. Leading Multi-national
- Know their income levels, their corporations (MNCs) have successfully
cities, provinces, and towns. developed and implemented strategies
- Know whether they work for or to reconcile Chinese commercial
with the government. practices and FCPA requirements.
- Understand how they do business. China is not inscrutable. But if you
7. Be a model of unflinching business don’t ask the right questions, of your
ethics on the world stage. operations and your aspirations, of
your partners and your prospects, you
The first step: safeguard your won’t successfully complete the journey
operations from corruption with that began so hopefully with that first
a thorough review of economic step. When it comes to corruption and
opportunities and a risk analysis. corporate crime, strive to be a rat — the
kind described by the Chinese zodiac:
wise, perceptive, focused on the big
picture, exercising good judgment, and
poised to solve problems proactively.
25
26. Acknowledgements Managing Editor Designer
Issue 1
of Marketmap Jacqueline Corliss,
Harry G. Broadman US Studio
Contributors and Authors
Beverly Barna
Denise Messemer
Ewa Knapik
Alan Chu
Curt Moldenhauer
Clare Allenson
