Brazen piracy lies at the heart of the latest trade fracas. President Clinton has threatened tough sanctions against $1.08 billion worth of Chinese goods unless Beijing starts cracking down on knockoffs of U.S. software, movies and music. Corporate America, bruised but wiser from a decade of rough-and-tumble capitalism in the Middle Kingdom, has lined up nearly unanimously behind the administration. There’s more at stake than nearly $50 billion in annual bilateral trade. Washington and Beijing are just beginning to sketch out their relationship for the 21st century – taking into account geopolitical needs and human-rights concerns, military cooperation and commercial opportunity. Complicating those efforts is the lingering question of who will succeed Deng Xiaoping, China’s ailing paramount leader. U.S. officials fret that President Jiang Zemin, a likely heir, may try to secure his position by standing up to America. A power struggle could cripple the Chinese bureaucracy, killing deals in the works or hurting existing ventures.
The trade dispute highlights just how difficult it still is to do business in China – even 15 years after Deng kicked off economic reforms. U.S. companies must contend with a primitive infrastructure and a gridlocked, state-run distribution network. Managers can expect to spend an inordinate amount of time finding, training and keeping key personnel. China’s legal system offers little or no protection to trademarks, patents or even contracts. McDonald’s recently got evicted from its largest Beijing restaurant, near Tiananmen Square, only two years into a 20-year contract. Counterfeiting – of everything from CDs and laser discs to running shoes and soup – has become “the drug running of the ’90s,” says a Microsoft executive. Customers sometimes disappear when the bill comes due. “Among the tough characters, there’s a sense that “We know this is a dirtball kingdom and we’ve been eating s— for a thousand years’,” says the managing director of a public-relations firm in Hong Kong, who got stiffed by clients in the mainland. " “So what are you gonna do to us?’ "
The tariff tensions also mark the start of a new era for Western investors in China. By pressing for the protection of intellectual-property rights, Washington is finally getting tough with Beijing. The same impulse lies behind the administration’s efforts to force a more open and “transparent” economy as China’s price of admission to the World Trade Organization.
American companies may have to toughen up, too. China has one of the fastest-growing economies in the world (chart). But it’s a mistake to view its 1.2 billion people, earning an average of $490 per year, as natural consumers of all U.S. goods. The most successful corporations see China as a series of potential markets to be won over, inches at a time. They view themselves not as capitalist missionaries, but as providers of much-needed technology and foreign exchange. Every new player, says Michael Boccio, general manager of Husi Food Co. Ltd., a Western-owned supplier of beef to McDonald’s in China, needs to answer one question – “Can I sell my product here?” Smart businesses have learned several other basic lessons as well. Here, a survival guide:
“I describe China as like Europe,” says John Farrell, president of Coca-Cola’s China division in Hong Kong. “Every region has distinct groups. You need local knowledge to get by.” In Shanghai, Coke executives cut a deal with the local investment commission; in Xian, they worked with a coal- mining company with capital and management expertise; in Tianjin, they developed a soft drink with the Ministry of Light Industry. (Coke now sells 135 million cases in China per year.) Procter & Gamble zeroed in on sections of booming Guangdong province, designing soaps and detergents adapted to local water conditions. They then used the same methodical approach to move into new regions. P&G’s China sales now total $400 million – and should grow to $2 billion in five years.
Westinghouse Electric created its own middlemen. After winning contracts for steam turbines in the early 1980s, the company brought more than 800 Chinese engineers to the United States for training in the new technology. “A substantial number of those 800 are quite prominent and have gone on to bigger and better things,” says Frank Bakos, president of Westinghouse’s power-generation business. Prior relationships, he adds, can be “a tiebreaker.” Last year the company won a $140 million contract to supply two steam turbines to a new power plant along the Yangtze River.
Procter & Gamble has been all three. Notorious for halting shipments to U.S. retailers if payments are a few days late, P&G has reportedly allowed Chinese customers a two-month grace period. Sometimes it accepts barter payments in jade, gold or tobacco. Del Monte moved quickly to quash piracy – even though it does little business in China. Acting on a tip by American tourists who’d bought a crude knockoff called Jia Long cream-style corn, Del Monte contacted Guangdong officials and raided the factory. Inside they found 50 people working under a leaky roof and a cloud of flies, hand-ladeling corn from rodent-nibbled burlap bags and pasting on labels that mimicked the Del Monte logo. “We wanted to make this a precedent for other counterfeiters,” says Tom Hoffmann, the firm’s trademark counsel.
The temptation to make a quick buck in China is as old as the clipper ships that once clogged the treaty ports. In those days, there circulated the story of a Yankee who bought a wooden ham that a local had painted and covered with real fat. He discovered the deceit when he baked the ham and it went up in flames. These days, doing business in China isn’t much different – you don’t quite know what you have until it’s been tested by fire.
As China’s economy soars, foreigners pour in big money – hoping for big returns.
Foreign Direct Investment 1990 $3.4 (IN BILLIONS OF U.S. DOLLARS) 1993 $27.5 Direct Investment by U.S. Firms 1990 $456 (IN MILLIONS OF U.S. DOLLARS) 1993 $2,063 GNP 1990 $364.0 (IN BILLIONS OF U.S. DOLLARS) 1993 $581.0 GNP Growth Rate 1990 5.0% (IN PERCENT) 1993 13.4% Trade Surplus with the United States 1990 $10.4 (IN BILLIONS OF U.S. DOLLARS) 1994 $30.0
