Why Now Could Be The Best Time To Enter The China Market

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The conventional wisdom this month for American companies and investors in China has been: “Whoa! Risk!” U.S-China relations are in a low ebb this year, and raids on foreign consulting and due diligence companies – not to mention a new spying law — have many businesspeople worried.

Yet the editor of a new book highlighting the strategies of successful American entrepreneurs in the country sees potential opportunity. “Now could be exactly the right time to go into China because you’re going get the best deals,” long-time China hand and former president of the American Chamber of Commerce in Shanghai Ker Gibbs told Forbes on Wednesday.

“Post-Covid, China’s economy is struggling. They are hurting for investment, they’ve spent an enormous amount of money on zero-Covid. Testing entire populations every three days puts a big hit on government budgets. Local governments are in a good position now to offer incentives to companies that are still willing to invest, said Gibbs, who is currently an executive in residence with the business school at the University of San Francisco and a member of the National Committee on US-China Relations.

The book, “Selling to China: Stories of success, failure, and constant change,” has eight chapters written by foreign business leaders who have been based in China, and offers tips for entrepreneurs and businesses still willing to explore commerce in the world’s No. 2 economy.

Prior to AmCham Shanghai, Gibbs worked in Asia over for more than two decades, mostly in banking and technology businesses. He spends about half the year at this home in San Francisco, and the other half in Shanghai. Edited interview excerpts follow.

Flannery: What was the motivation for the book?

Gibbs: The discussion about China has become entirely consumed by national security and other very contentious topics. Those issues are important, but it’s a mistake to ignore the commercial side of this relationship, especially since it’s been so mutually beneficial over the last three or so decades. Our goal with this book is to encourage readers not to be uni-dimensional in their thinking when it comes to China.

With this book we are saying: “Let’s not forget about the commercial side of this relationship. Let’s come back to commerce and make sure we include issues that exist in that realm as well.” The motivation is to bring commerce back into the conversation.

Flannery: When did you start the book?

Gibbs: I started writing immediately after stepping down as president of the American Chamber of Commerce in Shanghai in December of 2021. My goal was to continue the AmCham mission, which is to provide information out about the market and help companies become successful in China.

There are people in China and in Washington, D.C. who say the time for engagement is over. We disagree with that. We think, especially because of the problems between our countries at the national security level, this is exactly the time we really need to raise our voices about commerce. This is very much a pro- engagement book. We’re not going to apologize for that.

This is a new version of China, there’s no question about it. The risks are high and the challenges are different. Many of us are not happy about the direction China seems to be heading, turning inward and putting more emphasis on self-sufficiency. Beijing unfortunately has a very different relationship with the West than it did before. But that doesn’t mean the business opportunities simply go away.

Ironically, now could be exactly the right time to go into China because you’re going to get the best deals. Post-Covid, China’s economy is struggling. They are hurting for investment. They’ve spent an enormous amount of money on zero-Covid, and local governments are ready to make deals that can bring in more tax revenue.

That could include real estate deals — buildings or locations that might not have been available before. If you bring investment, creating jobs and tax revenue, they may be able to make real estate available to you, or offer a deal that might not have been available before. Say for example you’re a luxury brand and you want a beautiful historical building for your flagship store. That might have been impossible before, but with youth unemployment as high as it is, those kinds of decisions look different now. There could be great opportunities in certain industries, and for those who take the time to understand the risks

Flannery: How is the book structured?

Gibbs: All the authors are C-level executives of foreign companies operating in China. This isn’t the definitive book about China business, which would naturally have to include both foreign companies and domestic companies. This is just about foreign companies. Also, I insisted that the authors be unencumbered, with the authority to write what they want without seeking approval from their companies or boards. Nobody would be interested in reading corporate talking points. All the authors had to be free to express their own opinions and views.

I deliberately picked authors that I knew would have a diversity of views. Some are China-born, others are not. Both groups of authors make cultural observations, but you can see a difference between what the foreigners have to say from what China-born people have to say when they address the questions like guangxi (relationships), mianzi (face) and those kinds of things. Mark Fischer, an American who ran the NBA in China, has some interesting things to say about China and team sports, pointing out that China’s Olympic team actually does much better in individual competitions. There are reasons for that.

The chapters are not necessarily in a particular order, except for the first three. The first one is mine. I lay out what the book is about and why we wrote it. And then I start with a discussion of some of the legal issues, because that is so important.

Every business has to consider the legal environment in which they operate, and surround themselves with advisors they can rely on. Don Williams (of Hogan Lovells) addresses some of the challenges that foreign law firms face in China and points out how there is unfair competition among legal firms. Foreign law firms are taxed differently from local firms, and that’s problematic from a fair trade point of view.

In the next chapter, I asked Jean Liu (senior vice president of EF Education First) to talk about government relations. This is also extremely important for all businesses operating in a place like China. She happens to come from the education business, but the relationship between business and local government is fundamental to success in the China market and different from how we operate here in the United States.

If you ask businesspeople here in the U.S., “How do you interact with local government?” many of them will say, “We stay as far away from the government as we possibly can.” That’s our system. It’s free enterprise, and we want a light touch from our government. All of our states are different, but in general we want as little government as possible.

China is completely different, and that’s a shock to foreign businesspeople when they go over to China for the first time and see that. Government officials will tell you what you can or can’t do.

That may seem unfair or restrictive, but given the role they play in the economy, that’s actually helpful. They can save you from wasting a lot of time and resources if what you’re trying to do doesn’t fit their plan. If you accept that the government is there to guide you and let you know what’s likely to be successful and what’s going to be a non-starter, then local government is a good place to start.

A s an investment banker, I did that all the time. I did a lot of deal sourcing by going to the party secretary because he was able to tell me which businesses are successful, which ones aren’t, which ones are likely to be for sale and which ones wouldn’t be. The party secretary knows who’s doing well, who’s paying their taxes, and exactly what’s going on. That’s an important point that Jean Liu makes in her chapter, but it’s a recurring theme in several chapters of the book.

Flannery: What then are some of the highlights of the individual chapters?

Gibbs: Kenneth Yu, the former managing director of 3M, makes a lot of good points about government interaction, but he also describes how even a company the size of 3M needs to approach the China market with some flexibility. He explains how they would pivot away from markets that were not available for whatever reason and embrace markets that maybe weren’t in the plan but an opportunity exists.

That’s a hard thing for a lot of large companies to do, because strategy decisions tend to be made at the headquarters level. This is, again, a recurring theme: there is natural tension between headquarters and operations in the field.

American businesses have generally done well at localizing management. They have not done as well at localizing decision-making. Those are actually two different things. You have situations in which local managers are not empowered, and decisions have to keep going back to headquarters. That’s a problem. The need for decision-making flexibility that creates more flexibility for local actions is an important lesson from the book.

Bryce Whitwam (a long-time advertising executive in Shanghai now pursuing a U.S. Ph.D.) has a chapter filled with great advice, especially for consumer marketers. Foreign brands entering China face formidable competition from local players that are committed to the market and make long-term investments. Western brands need to take the time to understand Chinese consumers and drive a highly local relationship to compete. Starbucks, Nike, GM, and Apple have all done that well, according to Whitwam. More good advice in that chapter: think small and target niche markets, and grow your business from there.

Flannery: What do you make of the reported raids on U.S. companies involved in due diligence work?

Gibbs: The business environment has changed dramatically in recent years. We need to adjust, but we’re getting a confusing mixed message. China has always been an opaque regulatory environment in many ways, but these recent actions are something else entirely.

It would be helpful to know more about what the authorities were looking for. What did they find? If we don’t know what the problem is then we can’t know what we need to avoid. Local authorities in China need to understand the degree to which we depend on service providers like Bain and Mintz Group and others. It’s difficult to operate in any market, especially China, without having service providers to guide you, whether it’s law firms or business consultants or people who are doing due diligence,. They are an important part of our business ecosystem. When you start picking that apart, you’re going to have people that are very hesitant to operate in the market.

This is something that everybody is concerned about. It’s obvious that we don’t have the full picture, which makes people nervous. I don’t think this is going to drive people out of the market necessarily, but it will affect their behavior. You’re going to see businesspeople being much, much more cautious.

See related posts:

U.S. Business Group Seeks China Clarity On Rules, Warns On New Investment After Raids

Strained U.S.-China Relations Are Worrying Businesses In Both Countries

IMAX CEO Rich Gelfond Sees China Recovery, Global Gains

Shanghai Xintiandi Billionaire Developer Sticks With Winning Formula, Linking Old And New

@rflannerychina

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