touchring
8th October 2007, 07:00 PM
http://money.cnn.com/magazines/fortune/fortune_archive/1987/07/06/69224/index.htm
THE CHINA BUBBLE BURSTS The Western dream of a billion customers is fading fast. Still waiting for those masses to earn some money, companies are being worn down by corruption and rip-off prices.
(FORTUNE Magazine)
By Louis Kraar REPORTER ASSOCIATE Alan Farnham
July 6, 1987
(FORTUNE Magazine) – WESTERN business's romance with the People's Republic of China is over. A Peking conference sponsored by Chinese advertising officials on how to crack ''a market with more consumers than America and Europe combined'' was nearly canceled this spring for lack of registrants. Three or four years ago it would have been packed with Western executives. Most companies have made the jolting discovery that a big, booming Chinese market is a long-term hope at best and increasingly looks like a myth. Despite flirtations with the techniques of capitalism, the People's Republic clings to a creaky Communist system that is incompatible with a market economy. China is still little more than an ambitious Third World country: backward, bureaucratic, and greedy. The Chinese are carrying the ''buy low, sell high'' watchword to extremes. Short of foreign exchange, they are, for example, pressuring international suppliers to sell power plants below cost. They are trying to barter coal at inflated prices in exchange for locomotives. Many Western companies are quietly thinning out personnel or even closing offices in China because of the outrageous prices charged for basic services. Says an American executive: ''Peking is the only city I know of that's more expensive than Tokyo.'' Wages for Chinese employees are extremely high by local standards, though workers do not benefit. A Western company typically pays a government bureau $286 a month for a driver. The driver gets just $36 of that. And then there is what the Chinese politely term hao cho. It means literally ''nice benefit from a business deal''; in reality it translates into payoffs. Profitability is proving elusive, even for those taking a long view. The Western partners of the few joint ventures that are making money find it maddeningly difficult to get their profits out. Though China needs almost everything and has grand five-year economic plans, its buying power is limited. Says John M. Stitch, general manager of Texas Instruments Asia: ''Companies got hypnotized by the notion of one billion consumers, but a lot of Chinese don't have electricity and aren't going to buy computers.'' Adventuresome companies that set up manufacturing plants in China are finding that low productivity and bureaucratic meddling wipe out any cost advantages they might have expected. Though Chinese factory workers take home less than $50 a month, many more of them are needed to get the job done than in neighboring Asian countries. Unrealistic pricing of raw materials also sabotages projects. Beatrice wanted to make orange juice concentrate in Canton but gave up after China offered the most expensive oranges in the world. As a result of the spreading horror stories, China is not getting the flow of foreign capital that its leaders expected. Egypt, among other countries, has attracted more investment than the People's Republic in the last five years. New commitments dropped 48%, to $3.3 billion, last year. U.S. companies have signed agreements to invest a total $1.7 billion in China -- about 1% of U.S. investment in East Asia. Even that modest figure is exaggerated. Most American commitments are for hotels that eventually revert to state ownership, oil exploration (which has turned up no significant discoveries), and deals that may yet evaporate. Total American equity in Chinese manufacturing ventures is at most $50 million, equivalent to General Motors' investment in a single joint venture in South Korea. China trade is no bonanza for the U.S. either. Two-way trade with China last year came to a mere $8.4 billion -- about the same as with Singapore, which buys more from the U.S. than China does. THE JAPANESE are even more cautious about investing in China. They are eager to sell cars and color TVs there, but they do so mostly by exporting from Japan. The biggest investors are Overseas Chinese, mainly from Hong Kong, who use personal relationships and perseverance to get around the country's onerous restrictions (see box, page 89). Chinese bureaucrats celebrate business agreements with effusive toasts to ''friendship and mutual benefit.'' Then, when the Western chief executive has gone home to announce his deal, the Chinese partners usually explain to those left behind that ''our authorities want to make a few small changes.'' Those revisions, says Michael J. Moser, a China business specialist in the Hong Kong office of the U.S. law firm Baker & McKenzie, often turn out to involve everything agreed upon in hard-fought negotiations. Even if bureaucrats leave the contract relatively intact, the Chinese joint venture partners often bend or ignore the details. Remy Martin thought it had an exclusive deal to make a wine called Dynasty in Tianjin, then found that its joint venture partner, a government enterprise, had launched a rival Chinese brand with grapes from the same vineyard. Despite closely drawn joint agreements, unilateral interference by the Chinese is common. Government officials arbitrarily removed the general manager and his deputy from Parker Seal Co.'s joint venture making industrial seals in the eastern Chinese province of Hubei. Peking keeps promising to improve business conditions, but delivers little. Borg-Warner, among others, has simply shelved its Chinese plans. The company was negotiating joint ventures to make plastics, pumps, and auto components but has decided that it could not earn money under China's tough and erratic terms. As U.S. Commerce Secretary Malcolm Baldrige put it to Chinese officials recently, foreign businessmen ''need some certainty so they're not just flying blind.'' A lot of the Western disappointment with China, of course, springs from unrealistic expectations. Says Thomas Tucker, president of Asia-Pacific operations for General Electric: ''Many of our divisions thought China was going to bring a great increase in sales, and that didn't happen. The whole U.S. saw China that way. There was bound to be a let-down.'' GE, in fact, has done relatively well in China, selling more than $500 million of aircraft engines, power equipment, and locomotives over the past seven years. Lately though, says Tucker, even GE's sales have come to ''a sputtering halt.'' Adds Michael Moser, the Hong Kong lawyer: ''The people who are saying that it's awful now are the ones who thought China was going capitalist.''
....................... http://money.cnn.com/magazines/fortune/fortune_archive/1987/07/06/69224/index.htm
The difficult to crack nut...
THE CHINA BUBBLE BURSTS The Western dream of a billion customers is fading fast. Still waiting for those masses to earn some money, companies are being worn down by corruption and rip-off prices.
(FORTUNE Magazine)
By Louis Kraar REPORTER ASSOCIATE Alan Farnham
July 6, 1987
(FORTUNE Magazine) – WESTERN business's romance with the People's Republic of China is over. A Peking conference sponsored by Chinese advertising officials on how to crack ''a market with more consumers than America and Europe combined'' was nearly canceled this spring for lack of registrants. Three or four years ago it would have been packed with Western executives. Most companies have made the jolting discovery that a big, booming Chinese market is a long-term hope at best and increasingly looks like a myth. Despite flirtations with the techniques of capitalism, the People's Republic clings to a creaky Communist system that is incompatible with a market economy. China is still little more than an ambitious Third World country: backward, bureaucratic, and greedy. The Chinese are carrying the ''buy low, sell high'' watchword to extremes. Short of foreign exchange, they are, for example, pressuring international suppliers to sell power plants below cost. They are trying to barter coal at inflated prices in exchange for locomotives. Many Western companies are quietly thinning out personnel or even closing offices in China because of the outrageous prices charged for basic services. Says an American executive: ''Peking is the only city I know of that's more expensive than Tokyo.'' Wages for Chinese employees are extremely high by local standards, though workers do not benefit. A Western company typically pays a government bureau $286 a month for a driver. The driver gets just $36 of that. And then there is what the Chinese politely term hao cho. It means literally ''nice benefit from a business deal''; in reality it translates into payoffs. Profitability is proving elusive, even for those taking a long view. The Western partners of the few joint ventures that are making money find it maddeningly difficult to get their profits out. Though China needs almost everything and has grand five-year economic plans, its buying power is limited. Says John M. Stitch, general manager of Texas Instruments Asia: ''Companies got hypnotized by the notion of one billion consumers, but a lot of Chinese don't have electricity and aren't going to buy computers.'' Adventuresome companies that set up manufacturing plants in China are finding that low productivity and bureaucratic meddling wipe out any cost advantages they might have expected. Though Chinese factory workers take home less than $50 a month, many more of them are needed to get the job done than in neighboring Asian countries. Unrealistic pricing of raw materials also sabotages projects. Beatrice wanted to make orange juice concentrate in Canton but gave up after China offered the most expensive oranges in the world. As a result of the spreading horror stories, China is not getting the flow of foreign capital that its leaders expected. Egypt, among other countries, has attracted more investment than the People's Republic in the last five years. New commitments dropped 48%, to $3.3 billion, last year. U.S. companies have signed agreements to invest a total $1.7 billion in China -- about 1% of U.S. investment in East Asia. Even that modest figure is exaggerated. Most American commitments are for hotels that eventually revert to state ownership, oil exploration (which has turned up no significant discoveries), and deals that may yet evaporate. Total American equity in Chinese manufacturing ventures is at most $50 million, equivalent to General Motors' investment in a single joint venture in South Korea. China trade is no bonanza for the U.S. either. Two-way trade with China last year came to a mere $8.4 billion -- about the same as with Singapore, which buys more from the U.S. than China does. THE JAPANESE are even more cautious about investing in China. They are eager to sell cars and color TVs there, but they do so mostly by exporting from Japan. The biggest investors are Overseas Chinese, mainly from Hong Kong, who use personal relationships and perseverance to get around the country's onerous restrictions (see box, page 89). Chinese bureaucrats celebrate business agreements with effusive toasts to ''friendship and mutual benefit.'' Then, when the Western chief executive has gone home to announce his deal, the Chinese partners usually explain to those left behind that ''our authorities want to make a few small changes.'' Those revisions, says Michael J. Moser, a China business specialist in the Hong Kong office of the U.S. law firm Baker & McKenzie, often turn out to involve everything agreed upon in hard-fought negotiations. Even if bureaucrats leave the contract relatively intact, the Chinese joint venture partners often bend or ignore the details. Remy Martin thought it had an exclusive deal to make a wine called Dynasty in Tianjin, then found that its joint venture partner, a government enterprise, had launched a rival Chinese brand with grapes from the same vineyard. Despite closely drawn joint agreements, unilateral interference by the Chinese is common. Government officials arbitrarily removed the general manager and his deputy from Parker Seal Co.'s joint venture making industrial seals in the eastern Chinese province of Hubei. Peking keeps promising to improve business conditions, but delivers little. Borg-Warner, among others, has simply shelved its Chinese plans. The company was negotiating joint ventures to make plastics, pumps, and auto components but has decided that it could not earn money under China's tough and erratic terms. As U.S. Commerce Secretary Malcolm Baldrige put it to Chinese officials recently, foreign businessmen ''need some certainty so they're not just flying blind.'' A lot of the Western disappointment with China, of course, springs from unrealistic expectations. Says Thomas Tucker, president of Asia-Pacific operations for General Electric: ''Many of our divisions thought China was going to bring a great increase in sales, and that didn't happen. The whole U.S. saw China that way. There was bound to be a let-down.'' GE, in fact, has done relatively well in China, selling more than $500 million of aircraft engines, power equipment, and locomotives over the past seven years. Lately though, says Tucker, even GE's sales have come to ''a sputtering halt.'' Adds Michael Moser, the Hong Kong lawyer: ''The people who are saying that it's awful now are the ones who thought China was going capitalist.''
....................... http://money.cnn.com/magazines/fortune/fortune_archive/1987/07/06/69224/index.htm
The difficult to crack nut...