MARCH 1987 - VOLUME 8 - NUMBER 3
C H I N A : T H E L O N G M A R C H T O D E V E L O P M E N T
Bargaining With Beijing
by Leslie Rose
U.S. companies, in hot pursuit of the China market - one billion consumers many of whom have never tasted a Twinkie, let Swanson pre-cook them a t.v, dinner or popped popcorn in a microwave - are offering unprecedented deals.
Last year PepsiCo officials made a $400,000 whirlwind tour of the country to familiarize Chinese officials with PepsiCola. When PepsiCo Chairman Donald Kendall and his entourage flew home eight-days later, they had offered Chinese students scholarships to study management in the United States and promised $100 million in investments over the next 10 years.
In the last five years, Westinghouse - eager to establish a beachhead in the country should the Chinese government need an energy consultant - has sent over 500 Chinese engineers to the United States for schooling.
Although the red tape is overwhelming, the cultural barriers significant, and the logistical obstacles mammoth, the number of U.S. companies throwing caution to the wind and heading to China continues to grow, albeit at a slower pace than in 1985.
"It's the only really important market in the world and an unexploited one at that," says Roger Sullivan, president of the National Council for Sino-American Trade.
But the Chinese, anxious to avoid the cycle of dependency that usually comes when a developing country throws open its doors to foreign investment, are proving themselves savvy consumers.
"The Chinese want the best technology at the best price and terms," says a U.S. Department of Commerce Report entitled Doing Business with China.
They have set stringent guidelines for foreigners who want to set up shop in the country. The Chinese want businesses that will transfer technology and training as well as provide essential foreign currency.
China's economy was devastated when foreign businesses rushed in after its doors were forced open in the 1800s, and the country has no intention of letting foreigners exploit its resources this time around without accruing some benefits. Imports and sales to the domestic market are tricky - to date very few companies have been allowed to sell to the domestic market. Chinese officials have reiterated time and again that as a developing country they cannot afford to spend precious resources on unnecessary consumer items. The Chinese do not want to import products that can be produced domestically. Some imports are slapped with duties of up to 275 percent. And most joint ventures must export at least 51 percent of their products - a difficult job given that production costs can be high.
In the negotiations process the Chinese ensure that the deals they make are in theirr best interest. Contract negotiations can span years and often require foreign companies to make repeated trips to the country as well as repeated concessions.
"Commercial negotiations with the Chinese are more technical, more detailed, and more time consuming than in most other countries," says the understated Commerce Department report.
In many cases, U.S. companies are offering Chinese workers wages and benefits they wouldn't dream of offering in other South-East Asian countries.
Although the Chinese government recently introduced wage reforms, companies are still required to pay a minimum wage that is at least "120 percent of the average wage of the local state enterprise" and all workers must be hired through the Chinese Ministry of Labor. The recent reforms, enacted at the fall of 1986, also give foreign enterprises some flexibilty in the hiring and firing of employees, but on the whole, the Chinese government still acts as arbiter between workers and foreign corporations.
Despite the reforms, U.S. businesses continue to pay salaries that subsidize housing, health care, welfare and other benefits. And Chinese managers expect salaries commensurate with their U.S, counterparts - a precedent most U.S. companies would rather avoid.
"You'd think with China you'd have a lot of cheap labor," says an incredulous China-trade consultant. "That has not been the case."
The Chinese also require foreigners to pay substantial rents for both office space and living quarters. Office space in China can cost twice what it costs in Hong Kong. Small offices can go for $25,000 a year, a two bedroom apartment can exceed $70,000 a year.
The difference in the conditions foreign investors demand is most apparent in South East Asia's Special Economic Zones (SEZs). Foreign investors look to SEZs or Free Trade Zones for a cheap, controlled labor force, and a substantial incentive package. In the history of the Philippines, Taiwan, and South Korea, working conditions have been very poor in these zones and any attempt at improving conditions has been met with quick police action. But in China, not only have labor uprising been few but in its four SEZ's nearly everyone has a color television and the per capita income is one of the highest in the country.
In contrast to the faster, higher profits that come with setting up shop in the nearby Philippines, Taiwan, or South Korea, China doesn't compare. Nor does China offer as many tax benefits and enticements.
But with a potential consumer market of more than one billion, China has the leverage that other developing countries lack. By using that leverage to require higher wages, fewer incentives and more stringent controls over the type of foreign investment they allow in, the Chinese are ensuring that with foreign enterprises comes development.
Although the number of foreign companies investing in China continues to grow, it is unclear whether companies that have long been able to set their own price for investing in the developing world will continue to pay China's price for entering the China market. One thing is certain, however, by demanding a fair return from foreign investors, Beijing is setting an important precedent for the developing world.