By
Gilbert Van Kerckhove
President of BLBA Shanghai
Resident Director ALSTOM East China
Adviser to the Belgian Ministry of Foreign Trade
Adviser for Songjiang Industrial Zone

Presentation made during a dinner of the Belgian Luxembourg Business Association (BLBA - Shanghai) in the Hotel Equatorial (Shanghai) on 18 June 1999.

The following text is an edited version of the original slides of the presentation but the content itself has not been changed - to reflect the opinion at the time of the presentation (and check today if we were much off-track!).
The content is a simplified and adapted version of an earlier 45 min. presentation on "Modern Enterprises Management" given during the "99 China Private Enterprises Science & Technology Strategy for Next Century Forum", held in Shanghai on 22 May 1999 in the Hotel Nikko Pudong.
About 400 delegates of Chinese private companies attended. G. Van Kerckhove was the only foreign speaker.

PRESENTATION MATERIAL

IS THE WORKING ENVIRONMENT FOR PRIVATE COMPANIES IN CHINA GOOD?
    NO
IS THE ENVIRONMENT IN THE WESTERN WORLD IDEAL?
    NO
CAN CHINA IGNORE WESTERN MANAGEMENT SUCCESS?
    NO
SHOULD CHINA STUDY AND BLINDLY COPY WESTERN MANAGEMENT STYLES?
    NO

Success factors for private companies

• ANYONE WITH TALENT AND ENERGY HAS ACCESS TO FINANCIAL RESOURCES
• FINANCING IS AVAILABLE: THERE IS CONFIDENCE SERIOUS PROFITS ARE POSSIBLE - IF THE CHOICE IS RIGHT
• COMPANIES ARE STRONG BECAUSE THEY ARE GOOD - NOT BECAUSE THEY ARE PROTECTED
  

applying modern management concepts in a hostile environment is meaningless

"The Western World": is it really so fantastic?

THERE IS NO "PERFECT" ENVIRONMENT

Examples of present difficulties in some "advanced" countries

• "The Misery Index" - the burden of all combined taxes

France 186
Germany 146
Japan 135                (Forbes - Dec. '98)
UK 109
USA 90

The "Misery Index" corresponds very well with unemployment.
More taxes - less potential profit - less room for private initiative.

• Over regulated labor market in Germany prohibits the growth of service industry - if the government would relax regulations the new service sector could wipe out unemployment.
• "A terrible place to do business. The owner of a business is a villain to be punished at all costs". Where? France!
          "Even the chefs are leaving France" (Forbes Nov. '98)
• France: new law limits the workweek to 35 hours; police raids offices to see if executives work too much - and take the companies to court
• Some European countries check if executives take their computer home to continue working.
• The economy in Japan is still controlled by old-style bureaucrats, Yakuza, giant money-losing banks (US$ 117 billion problem loans) who all leave little room for private initiative, foreign competition and keep invisible barriers to trade - WTO or not. Useless mega-projects are used to pump up the economy artificially.

BUT!

• In spite of other problems, the USA is the country where entrepreneurs can start from nothing and achieve anything. What could Bill Gates become in Japan, Germany, France? Without the right "GUANXI" sure not better than a "salaryman"
• In Europe, UK and Holland are ahead in giving business the opportunity to grow - and unemployment to decrease

China - issues:

• Unemployment will remain a concern
• Private companies are necessary to boost the general economy
• The Central Government has started to fully appreciate the role of the private sector and to give it more means to grow
• Private enterprises are seriously discriminated by local authorities, the tax administration and banks; they face many obstacles to develop freely across domestic borders and into new industrial and service areas
• existing laws and regulations are not appropriate to defend the interests of private firms and entrepreneurs
  
  Chinese private companies and foreign companies are often facing similar difficulties

China - progress:

• The Government is preparing laws to protect the interests of private firms and improve tax administration ("Wholly Owned Enterprise Law")
• In '97 the private sector contributed 7% of the total industrial and commercial tax, created 3.53 million jobs and reached output of US$ 102 billion; China counts now about 1 million private firms
• In '98 in Zhejiang Province 91,000 private firms exported US$ 1.2 billion
• Shanghai counts 99,000 private firms employing 900,000 people with an output of US$ 1.68 b. (1998); Shanghai will encourage private firms to become partners with overseas companies under new relaxed rules
• Since 1999 some private companies were granted licenses to handle foreign trade
• Courts are starting to defend the interests of private entrepreneurs regarding ownership rights of factories

How can Chinese private companies improve and help China to become more advanced, economically and socially?

Ideas & comments from a "foreign observer", keeping in mind:

• Analyze how other "advanced" countries work and are successful
• No blind copying - no "foreign teaching"
• Adapt to the particular conditions of China
• To be a topic of reflection on some key issues

 Increased foreign contact & co-operation

• Technical and commercial exchanges to learn and improve quality and efficiency;
• Companies need to grow stronger in an open market to stand up to world competition, without artificial government protection (WTO!!)

 Improve internal management

• avoid the typical Asian "family business" - hire good outsiders
• delegate responsibilities and allow a minimum of initiative
• reach employee satisfaction through an innovative mix of reasonable salaries, acceptable social security system and attractive fringe benefits - a soft replacement of the former "DANWEI" system
• decisions should be based on sound analysis and hard facts; many firms, going around and around "for the best deal", in the end get cheated because they rush into last minute "super deals"

Improve people skills

• foreign language: a serious effort is needed to reach levels as in Singapore - China has to communicate with the outside world to promote and defend itself
• computer skills: levels are still very weak compared to western needs
• training in management, marketing, sales, quality control and others should not remain "for foreign companies only"

Presentation of the company

• Most firms still have very poor presentation both in content and form and are not suitable at all for international contacts
• Chinese firms should understand: clear financial and organization data also should be provided
• A particular effort is needed to create web pages suitable for the international market

Financing

• At present China does not yet have a real banking sector that can efficiently support the industry and commerce in general
• Foreign but also Chinese banks now request transparency in the financial presentation of the companies; only hard data and not some political or philosophical blabla will make a real banker or investor sit down and look into a possible loan
• Companies should ask (serious) accounting firms to help them audit and structure their finances and try to get a rating agency (first Chinese, later international) to evaluate their credit worthiness
• Venture and risk capital needs to be created in China to allow new ideas to become reality; China itself has one of the highest savings rates but capital is not efficiently used.
• Realistically evaluating future sales and profits, backed up by reliable data are increasingly necessary to convince investors.

Information technology

• According to specialists *, China is not ready for the Y2K problem
• 66% of Chinese companies will experience some computer failure
• only 15% of governmental and commercial organizations tested and fixed their systems
• A big problem is 96% of the software used is said to be pirated and software vendors refuse to help in this case
• Email and WWW offer tremendous possibilities that are already partially tapped by Chinese firms but still need to be further explored:
  • Chinese firms join the "Asian Sources Online" (4,000 manufacturers); trading fairs will lose its monopoly to market goods
  • you can find the presentation of the mayor of Zhoushan on the WWW - and much more, but not enough in English
  • the website for the Kunming Horticulture Expo in May was a success but also showed its shortcomings.

  [* Gartner Group and others]

Issues that could affect the business environment:

• Foreigners worried about "new barriers for foreign companies" (foreign exchange, retailing, telecommunications,...) (Dec. 1998)

• Foreign banks & credit rating agencies (Standard & Poors, Moody's) adapt a careful attitude towards China - getting Chinese companies listed or obtaining loans becomes more difficult (Jan. 1999)
• The Central Bank announces plans to set up asset-management companies to take over the bad debts of the four major commercial banks - minimum estimate is US$ 120 billion (Jan. 1999)
• "China Economic Times" admits 47.35% of foreign invested companies in Shanghai reported losses in 1998 but warns overseas investors of mistakes: more advanced products, understand China's different regions, poor choice of foreign managers (Jan. 1999)
• A Swiss study lists the most expensive cities in the world for foreigners: Hong Kong (2nd), Beijing (3rd), Shanghai (5th) (March '99)
• Investors feel the apparent low cost of workers is offset by many hidden "overheads", some illegal or unreasonable. The Central Government has started to prohibit illegal taxes and levies affecting both Chinese (private) and foreign firms; further improvement is needed to lower the total operating costs of companies.
• "Profitless Investors Pulling Out" - study of A.T. Kearney: "After two decades investors can no longer tolerate low returns". (April 1999)
• During a seminar in Beijing, foreign banks, law firms and companies express concern China could become a less attractive place due "to increasing domestic debt, decline in foreign investment, lack of financing, delay for China to enter WTO". (May 1999)
• Inflation: dropping for 19 months in a row. Good as it proves China was and is right not to devalue the RMB. (May 1999)

What Chinese entrepreneurs should do!!!

• upgrade their management skills & lead their companies' expansions under the market economy
• clearly understand global economic development, international financial operations in particular, so as to survive among world competition
• to study international financing, enterprise mergers, trading of property rights, the stock market, firms going public at overseas exchanges, foreign investment and financial turmoil - items ignored in the past
• prepare for challenges and fierce competition after they are separated from the government, otherwise they will be defeated by the market
• in addition to import of advanced technology, to introduce advanced management methods to improve efficiency
• to understand that using foreign investment to renovate enterprises is an important part of Chinese economic policy

No, this is not from a "foreign specialist" but:

By Mr. Zhang Yanning, chairman of China Enterprise Management Association
addressing a seminar in Shenzhen in January 1999 on the topic of "Using Foreign Investment to renovate State-Owned Enterprises (China Daily - January 19, 1999)

CONCLUSION

Problems exist everywhere and are there to be solved (our job)
Some doubt China can succeed where so many others failed and at a time they see so many difficulties:

LET'S WORK TOGETHER AND PROVE THEY ARE WRONG!

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