By: Gilbert Van Kerckhove
        Senior Advisor to the Jiading Industrial Zone
        Adviser to the Belgian Minister of Foreign Trade

The following text was given to the management team of Jiading Industrial Zone on 20 November 1999 to serve as a guideline for a half-day (lively) discussion on how to improve the environment in the Zone to better attract and serve foreign investors.

Introduction

The following comments are not intended to be a complete analysis and neither a full set of guidelines. The text serves as a guideline for the 2 1/2 hour presentation; further examples and clarifications will be added.
Some observations may seem negative but they are necessary to understand the present climate and how to come up with answers and solutions.
I hope Jiading Industrial Zone can use some observations to improve its position as a successful magnet for foreign investment, increased employment, higher revenue for the local government and the development of an efficient industry that can face with confidence the upcoming membership of China to the WTO.

The land of unhappy JV.

No, it is not China. It is a comment on India, an independent democracy since 1949 with a population of 900 million.
Despite so much negative press about investment, let's not forget the following rough figures in US$ of foreign investment in 1998: China 45; Thailand less then 10; India 3 billion. China remains a very important country in the world. At the end of 1998, China introduced US$ 267.45 billion of foreign investment from 170 countries and regions.

The decline in foreign investment

In the first half of 1999 all indicators of foreign investment showed a marked decline from a year earlier. Not all observers agree on the cause; some regard it as an evidence that foreign investors have become reluctant to invest and China is less interested in foreign investment. Others explain it though the impact of the Asian crisis, shifts in international capital flows, international mergers and acquisitions (non-existent in China). Whatever interpretation, one fact is clear: less foreign investment.
A lot of so-called investment is also actually reinvestment. In Shanghai this year, 45% is reinvestment, up from 30% last year. While it can be considered as an indication that foreign investors are in for the long haul, it also results in fewer completely new industrial sites. Positive for Shanghai is certainly the fact a substantial amount of investment is a result of many companies setting up here their China or Asia headquarters: that should be good for Jiading too, and at least an argument to lure investors to the Shanghai region.

What is wrong in China?

Today there is a marked reservation on investing and doing business in China. The recent success of the discussions between China and the USA are certainly a boost of confidence but many foreign observers remain cautious and certainly expect the membership to the WTO to bring benefits very gradually.
Investment is going down. Furthermore foreign companies are under pressure from their head office who is tired of waiting in vain and finally wants to see some profit. Many expatriates are being forced to accept lower salary packages and many are simply asked to return home. The excuse of "localization" of the staff is widely used but not the major reason. The cost of an expatriate is too excessive and not justified in view of the poor profitability. I do not always agree with the decisions of foreign companies but unfortunately it is a fact today.
Complains are many: high costs, many restrictions for trade and distribution, unfair treatment and competition, absence of a genuine legal system ("law in China is a joke"), continuous copying of products, cheating by Chinese "partners", widespread corruption, loss of investment, high risk with low returns.
Some foreigners feel China only wants to grab foreign money and technology, does not like to see foreigners making money or taking control. Chinese don't want to admit foreigners could do a better job. When a FIE becomes too successful, China is unhappy and starts making life difficult for the FIE (as well to other private entrepreneurs).
Unfortunately, complains are often true. The Chinese Government is aware and tries it best to improve the situation. But finally the local government is the one to carry out the needed changes - and many simply refuse to follow the instructions from the central government - so far away.
Ten years ago foreign investors had nearly to "beg" to be able to invest. Now thousands and thousands of projects are being promoted by numerous "industrial zones" who all promise incredible returns and a golden future. But foreign investors are tired of the very poor quality of the projects offered and the poor track record of so many "special zones". Getting somebody interested to visit or discuss with a Zone is very difficult. Most of my foreign friends simply refuse to attend "Investment Promotion Seminars" and when they do, most of the brochures and project lists are thrown away.
Unfortunately, the good Zones suffer from the general bad image and must find a way to break away from the other Zones who perform badly. It is not easy but it is certainly possible. Some keys for success are:

• The Zone is the partner, consultant, protector and friend for the FIE.
• Transparency of the administrative procedures and fees
• A real one-stop office for information, decent documentation in decent English (The main Jiading brochure is well done with excellent English)
• The rule of Law - both for FIE and Chinese parties
• The Zone works closely with all relevant authorities, with the full support from the local government who intervenes in difficult situations
• The Zone assists to chose the best way to set up operations, helps and gives recommendation for the approval process, including for Beijing involvement
• The more profit for the FIE, the more employment for the people, the more taxes for the government, social and economic progress for the next century.
• Find innovative ways for promotion and presentation

It is also important to note a Zone cannot solve ALL issues as some are beyond its control.
The policy of Jiading not to offer projects is good in my opinion. With the WTO and an improved understanding of China by foreign companies it is better to simply let them select their activity and operation mode. More and more companies want simply to find a good place to do what they want to do. Period. Give the farmer the land and let him grow what he wants.
Jiading can further improve its brochures (in English), include a shortlist of "Why you should chose Jiading", what type of companies can fully take advantage of its special strong points; Jiading can try to improve its "PR" by organizing different activities while saving expenses on other traditional promotion activities.

Bad Chinese, good foreigners

Certainly NOT!!
Unfortunately foreigners are also often to blame for the lack of success: their choice of a JV partner, dealing with the authorities, treatment of their Chinese staff, selecting of their foreign staff, unrealistic expectations for profit and market penetration. I could give many examples but it is not the main issue here. Sometimes I wonder "when foreigners will stop always repeating the same mistakes".
If some foreigners lose patience with their Chinese partner - so do Chinese with their foreign partner. Problems exist on both sides.
Today many foreign companies avoid a JV and prefer a WOFE. Actually the problem is not the very existence of a Chinese partner - often the choice was wrong from the start as well as the way of working together. A recent study even suggests the partner should not be in the same activity - makes sense.
The Zone can certainly help the FIE to correct their mistakes by offering more detailed assistance, directly or through recommended consultants. Establishing a reputation as a "good consultant and advisor", helping the foreign partner to succeed is certainly a good strategy.
A few days ago I discussed with three different foreign companies (one Belgian, two American) operating in Waigaoqiao. They were unanimous in their praise for the Zone and the close co-operation they receive. It proves successful FIEs exist!

Costs - profits

More foreign invested companies in China had reduced profits in 1998. Of 100,922 FIEs, only 34% made profit - 65.5% lost money.
In the past, market potential, abundant natural resources and cheap labor were some of the main reasons to invest. Now, foreign investors insist on qualified workers and staff, better infrastructure, efficient management, the rule of law (and enforcement), trading & distribution rights. And production at competitive prices. And profit.
Often high-quality products (not consumer goods) manufactured in China are more expensive then manufactured in Europe or the States. Once WTO will be effective, even JV will have a hard time facing up to imports. Why? Isn't Chinese labor cheap? Yes. But China is very expensive. Unfortunately foreigners often realize it too late, leading to wrong feasibility studies and disappointment.

Often foreign companies look at the cost of certain items that they consider as key indicators in their operation costs, feeding it into their standard spreadsheets:

salaries of workers, administrative and management staff (also overlooking the changing salary structures due to the introduction of a new social security system)
price of raw materials
price of land and buildings
utility costs
efficiency of the workers (often overestimated)

Only later they realize they missed the overall picture. Their partner insists on more staff then needed, efficiency turns out to be much lower, construction costs of the facilities increase due to unexpected and mostly unfair duties and levies. Approvals turn out to be more complicated, time consuming and - costly. Some government bodies refuse the approvals until certain unplanned "expenses" are taken care of. Mysterious but "normal" fees come up during operation. Supply of raw material is irregular in quality and delivery time, extra transport fees are requested. And so on.
The central authorities are fully aware that levies on enterprises must be cut and have issued several circulars to stop illegal charges. State Councilor Wu Yi recently stressed the importance of the issue. But still local authorities are reluctant to obey: the illicit payments are often their much needed - and traditional - source of income.
Jiading can improve the situation by making a clear list of all legal fees and levies. It should also make sure other "excesses" do not happen. A real example is, forcing the company to pay US$ 1,000 for the annual newspaper of the fire brigade in order to secure the fire prevention approval. A firm attitude from the Zone is important, but often the local government should intervene to avoid abuse from a host of "bureaus", depending on the zone it can be the power bureau, the environmental bureau, the fire brigade, etc.
In short, the Administration of the Zone should be on the side of the investor, protecting his interest through transparency in costs and fees and avoiding abuses.

Example: Suzhou Industrial Zones

The Zone set up by the leader of Singapore with the help of the central authorities is considered a serious flop. The local authorities set up a separate zone and took away a lot of investment. Even assurances of Jiang Zemin did not help and Singapore is now withdrawing gradually after suffering serious financial losses. It is an example that shows that working too much with Beijing and not enough with the local government can lead to very serious problems.
Lee Kuan Yew, the former Singapore leader, has admitted the mistake. But unfortunately it leaves a bad impression on investors.
It does not apply to Jiading directly but the case underlines: the need for a coordinated local government; the need to help the foreign investor understand how and when he should keep a correct balance between the different levels of authority in China. This is particularly true in getting the approvals for the FIE: there is no advantage in trying to skip certain approvals - locally or at the central government. Sooner or later the issue will come back as a serious problem.
Sometimes a foreign company tries to set up manufacturing of a certain product without carefully checking for an eventual blessing from Beijing: it might work at first but suddenly Beijing can come out with national restrictions and practically putting a stop to the operations.

Example: Tianjin Economic Development Zone (TEDA)

Though comparatively small it is worthwhile to mention some aspects of its success, as perceived by some foreign companies:

• rising exports and GDP despite the Asian crisis
• US$ 11 billion in foreign investment, and growing - many MNC
• aggressive promotion
• progressive administration, reputation for cutting red tape, no-nonsense approach to business
• Motorola: after an extensive China-wide study, final choice for TEDA; further investment, confirming its earlier choice
• helps at the central government to get the initial approvals but also to secure further approvals for expansion of the operations and markets
• investor surveys to regularly check what can be improved, with subsequent action
• elimination of many administrative fees except for those imposed by the government
• guaranteed and steady supply of utilities - few "blackouts"
• good transportation facilities (road, plane, rail, harbor)
• Tianjin is rich in human resources with well-trained workers
• salaries of white-collar workers are 40 to 50% cheaper than Beijing and one third of Shanghai
• attention to give comfortable living conditions for expatriates

Jiading can use similar arguments!

Example in Europe: UK

After a period of serious difficulties when the UK was often considered as the worst place to do business, the country went through a thorough transformation and succeeded in becoming one of the most favorite places in the region for investment and to set up headquarters for multinational companies.
Some of the reasons:

• transformation of the workforce into a highly skilled team
• state of the art Information Technology
• flexible labor laws
• law international labor cost
• cheap telecom
• many possibilities for financing
• a fair legal system with proper enforcement
• Intellectual Property Rights respected
• easy registration of patents (a serious problem in China)

WTO - some considerations

• Some expect after WTO either a gradual relaxation & adjustment of the RMB or even a strong devaluation (10%, others 20%). It could be a way to adjust foreign trade after WTO entry. Also, as other measures from the government to boost the economy have failed, a devaluation is a possible "last resort". Others predict a stable (unchanged) exchange rate; some even suggest a revaluation. Personally I continue - since two years - to favor the status quo.
• Higher investment, higher imports expected.
• Customs duty to be relaxed but over several years (22.1 to 17%; 9.4% average by 2005).
• One of the most important aspects considered is the improvement of the rule of law. Being part of the global economy it will help to build acceptance and enforcement of the law. It will however take time for provinces and rural areas to implement a fairer treatment of business and stop the view that "law in China is a joke". Many international lawyer companies (already close to 100) are setting up office in China. With WTO they will contribute to a better legal system and an effective enforcement of court decisions.
• Some foreigners however fear China will - again - bend the rules to its own advantage, limiting a true impact of international rules under WTO. Thus China will have to prove its respect to law, IPR and abolition of trade restrictions.
• The biggest impact in the near term could be in the financial sector, allowing foreign banks to do RMB business with local companies after WTO + 2 yrs, and with Chinese individuals after WTO + 5 yrs. It will force the Chinese banks to accelerate their structural reforms. It will finally give better access to credit - now a very serious shortcoming. Entrepreneurs cannot get money and often have no other choice then to resort to illegal ways to get credit. Until now, Chinese banks have enormous amounts of bad loans (50% non-performing) after continuous lending to loss-making SOE and are overstaffed. In the near term a more serious credit crunch is expected as most banks are still afraid to lend to anyone and the changes will be very slow.
• Some other key points of the agreement:
  telecom: 49% foreign share in operations, later 50%
  foreign investment in Internet possible
  foreign distribution systems and direct sales
  foreign repair and maintenance services
  elimination of Chinese export subsidies for farm products
  no more textile quotas in 2005
• US companies to benefit:
  commercial banking; auto and aircraft manufacturing; farming and food processing; electronics; investment banking; money management, filmmaking; insurance; telecom operators
• US companies to lose:
  textile companies (serious reduction in employment is expected)
• US companies "waiting to see the real result": software companies
• FIEs must continue to localize, to cut costs, to reduce overheads, increase profitability, improve quality in order to stay competitive against the influx of direct imports from other international companies. They will be subject to a mounting pressure.
• In some ways, foreign companies already present here may face more problems then newly arriving competitors. Examples are GM and Volkswagen.

Go To Top 
Back To List
strategy4china