Foreign companies doing business in China

To what extent are companies willing to bend over backwards and twist themselves into pretzels to sell their products in China? This depressing article makes it quite clear: they will do anything and everything, even if China’s demands are in clear violation of the WTO. The China market is simply too big and you have to play by China’s rules. Which means your domestic competitors will always gain the upper hand. The government guarantees it.

TIANJIN, China — Judging by the din at its factory here one recent day, the Spanish company Gamesa might seem to be a thriving player in the Chinese wind energy industry it helped create.

But Gamesa has learned the hard way, as other foreign manufacturers have, that competing for China’s lucrative business means playing by strict house rules that are often stacked in Beijing’s favor.

Nearly all the components that Gamesa assembles into million-dollar turbines here, for example, are made by local suppliers — companies Gamesa trained to meet onerous local content requirements. And these same suppliers undermine Gamesa by selling parts to its Chinese competitors — wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.

But in the five years since, the upstarts have grabbed more than 85 percent of the wind turbine market, aided by low-interest loans and cheap land from the government, as well as preferential contracts from the state-owned power companies that are the main buyers of the equipment. Gamesa’s market share now is only 3 percent.

With their government-bestowed blessings, Chinese companies have flourished and now control almost half of the $45 billion global market for wind turbines. The biggest of those players are now taking aim at foreign markets, particularly the United States, where General Electric has long been the leader.

The story of Gamesa in China follows an industrial arc traced in other businesses, like desktop computers and solar panels. Chinese companies acquire the latest Western technology by various means and then take advantage of government policies to become the world’s dominant, low-cost suppliers. It is a pattern that many economists say could be repeated in other fields, like high-speed trains and nuclear reactors, unless China changes the way it plays the technology development game — or is forced to by its global trading partners.

Everyone who works with foreign companies trying to sell into the China market is well aware of this phenomenon. What I think is not so well known outside of China is just how much grief these companies have to go through, the concessions they are forced to make, and the rage they feel even as they continue making speeches and putting out press releases about how committed they are to doing business with China and how delighted they are with their Chinese partners.

This exhaustive article makes the point you’ll never get from the press releases or speeches: that these companies will bow and scrape and kiss ass ad infinitum because they are scared shitless of rocking the boat. Even as their piece of the pie is sliced thinner and thinner, the China market is so immense they simply can’t afford not to be there.

The government’s bullying may be illegal and unfair, but for these companies, lured by the sheer size of the market, there really is no other choice but to submit and bite the bullet. Complain or show even a hint of ingratitude and you’ll risk losing all that precious guanxi you’ve spent so many millions building up. But as this article shows, the joke is really on them. All that guanxi was essentially worthless. There was no two-way street, no mutual scratching of backs. The foreigners are forced to give everything, only to get back less and less. And through it all, they remain “committed to China” and “deeply appreciative of our Chinese partners” and full of praise “for the Chinese government officials who helped make our prosperous partnership possible.”

What a Kabuki dance. What two-facedness. But then, what else can they do?

Anyone interested in learning more about the hoops China’s partners are forced to jump through have to read this book.

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Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.

The Discussion: 35 Comments

Did Chinese gov’t send agents to the West, and put a gun to the CEO’s of those foreign companies and force them to open businesses in China? If foreign companies want to leave China, did Chinese gov’t send agents to their offices in Shanghai and Beijing, and put a gun to the managers’ heads and force them to stay? If not, why moaning about it? Just get the f*** out!

December 15, 2010 @ 8:07 am | Comment

Part of the point of the story is that they are NOT moaning about it, but rather keeping silent despite the breaking of WTO rules. The story is their silence. Read the last few grafs carefully. These companies aren’t moaning at all, even though maybe they should be.

December 15, 2010 @ 8:14 am | Comment

relentlessly pragmatic. gutsy. insightful. great at cards, i’d bet, those chinese.

December 15, 2010 @ 8:14 am | Comment

Noting how western companies do anything to please the Chinese government in order to get access to China’s huge market, and then saying ‘you bad China’, is one way of looking at it. To blame western greed, is an equally valid way of putting things (See http://dailychina.web-log.nl/blog/2010/10/chinas-rise-as-a-result-of-western-greed.html).

If you say greed has nothing to do with companies wanting so bad to go after the big renminbi bucks, than what you’re basically saying is, is the system’s fault. In this case, the world capitalist system that everyone is forced to adopt. But then, who invented this system? Exactly.

So there’s a lot more to the let’s blame China (again) view here. The western world should start thinking about their own part in this matter (and in a lot of other matters too) as well.

December 15, 2010 @ 8:20 am | Comment

I definitely blame the companies’ greed and hypocrisy, as well as China’s stacking the deck. Follow the link to the book at the end – it’s all about foreigners’ greed. And I thought I made it pretty clear that this can only happen when foreign companies are lured by the China Dream, a dream of a vast China marketplace. I.e., greed.

December 15, 2010 @ 8:23 am | Comment

But that said, all companies have to be greedy to some extent. They all want to sell their wares. The problem is, China has no trouble selling its stuff in the US, where we usually abide by the rules of the WTO. But for foreigners selling in China, it’s a whole different ball game, and that is fundamentally unfair. So yeah, there are two sides to this story, businesses thirsting for greater sales (especially in a contracting economy) and willing to sell out for profits, and the outrageous bullying from a government that gives all the advantages to homegrown Chinese companies.

December 15, 2010 @ 8:28 am | Comment

Sad to say, for once I agree with HX. No point bitching about it and writing scathing screeds on the inequities companies face when trading with China. If we don’t like it, we don’t have to do it. Simple really.
Make the stuff at home – if China wants it, it can buy it. If it copies the stuff, fine, update and then they have to buy more. The west has more than just opium that the Chinese covet this time…..

However, if one uses that X more carefully in the ballot box next time, maybe things could change…

December 15, 2010 @ 8:47 am | Comment

A big part of this post is about the two-facedness of these companies, making speeches and issuing press releases that are pure BS as they do anything and everything to win profits no matter how humiliating it may be.

But. But. Does China have the right to shred the WTO agreement, and do companies, or the media, have a right to protest when the rules they thought were in place are totally perverted? Getting into the WTO was the biggest event for China prior to its winning the 2008 Olympics. Was it all a joke? Do countries have to honor their commitment to the rules when China sells in their countries, but agree to abandon them when they try to sell in China. Just asking….

December 15, 2010 @ 8:55 am | Comment

“A big part of this post is about the two-facedness of these companies, making speeches and issuing press releases that are pure BS as they do anything and everything to win profits no matter how humiliating it may be.”
Well, a few CEOs have been heard to mention that working in China wasn’t all sweetness and light….and they do have to try and stay in there – hoping it’s all worth the hassle in the end…

As for China joining the WTO – everyone bends the rules slightly (slightly…heheheheh…). China got the Olympics on the back of promises – none of which it kept. Everyone knows what China say is not what China do – why act surprised? And if China can break the rules seemingly with impunity, what’s to stop the whole shebang going belly up and we all returning to the 30s (as more than one paper commentator seems to mention)? If China gets away with it, why not the US or Europe (not that they’ll Persil white in this regard either – ask Africans about subsidies).

For all the editorials, greed is at the root of the problem – on both sides. Westerners are selling their family silver for the sake of a few short term pennies, China is killing the goose that lays the golden eggs for the sake of short term advancement (advancement it could have gotten prior to the events ALL Chinese seem to harp on about).

December 15, 2010 @ 9:40 am | Comment

Agreed that greed is at the root of the problem, on both sides. I am not sure I agree that China is killing the goose that lays the golden eggs. It’s demanding that foreign companies hand over their golden-egg-laying geese (to continue the metaphor, rather sloppily)- their intellectual property and technology – and handing them over to Chinese companies, which wouldn’t be tolerated if it were any country but China. And as long as these companies keep kowtowing China benefits. The companies benefit too, but must compete on a drastically un-level playing field, and one that under the rules of the WTO is simply illegal.

December 15, 2010 @ 9:55 am | Comment

Isn’t today’s golden egg just tomorrow’s omelette? My mobile phone is not even 5 years old, yet would any young student I work with even take it for free? No way! Too old!
They buy today’s technology – they got to make sure they know how to develop it to tomorrow’s technology. As far as I know, this is the country that until very recently (if they have stopped…) still made a 1938 BMW…..

December 15, 2010 @ 10:02 am | Comment

“The government’s bullying may be illegal and unfair, but for these companies, lured by the sheer size of the market, there really is no other choice but to submit and bite the bullet”

Actually they can just, not come to China. You said it yourself, they only got 3% of the market… you think 3% marketshare, and ultimate financial ruin (when your customers and their ilk start competing against you) is ‘irresistable’ to Foreign companies? How naive.

Most companies are relegated to Hong Kong, and to the Mainland they say, “When you get a real legal system, give us a call.”

December 15, 2010 @ 10:52 am | Comment

I am visiting Japan this week and am paying 10 US dollars for an apple. At least in China foreign companies have a chance to do business. When do you think foreign fruit growers will sell their produce in Japan?

WTO rules are biased in favor of developed countries. They force countries to open their consumer electronics, media, entertainment, financial, retailing, etc, markets where the developed countries are more competitive, but allow trade barriers to protect the agriculture industry where developing countries have an advantage.

One more point. Companies like Apple (the company, not the fruit) or Intel don’t seem to worry much about Chinese competition, even if they are quite committed to the Chinese market. If your technology isn’t that advanced, it is natural for other people to acquire it.

December 15, 2010 @ 11:00 am | Comment

I was most taken aback by this paragraph near the end of the article:

“The provincial government of Ontario in Canada now wants to take a page from China’s playbook by trying to require 25 percent local content for wind energy projects and 50 percent for solar power projects in the province. The Japanese government responded by filing a W.T.O. complaint against Canada in September, asserting that Ontario was violating the W.T.O. prohibition on local content requirements. By contrast, Japan has never filed a W.T.O. complaint on any issue against China, for fear of harming diplomatic relations with its large neighbor.”

It’s not just companies that are lying down, it is entire governments.

December 15, 2010 @ 11:06 am | Comment

It’s fascinating to watch the marriage of convenience between China and western corporations slowly unravel- in a horribly predictable sort of way. China wants to relive the 20th century- only America’s this time, not its own. And it’s not going to do it with foreign companies in the driver’s seat. That clashes with the whole resurgence of national greatness and all.

I must admit that China has been very adept at luring in lick-smacking, starry-eyed corporations from the world over, but how the latter didn’t see China’s nation-building strategy and imaginary line between state and capitalism as an ultimate brick wall to their quest for greed is beyond me. Oh wait, yeah, greed. I just answered my own question.

But I also think that China is nearing the limits of its now increasingly blatant “thanks for the tech, now fuck off” strategy. You don’t want to piss off trading partners with piles of natural resources you will probably need.

Oh wait, that’s why China is all over Africa like a cheap whore.
Oh yeah, that’s why China is building up its military like there is no tomorrow.

Oh, and that’s why countries like Canada and Australia are, rather than fighting back, content to distort our economies to the extent that we are little more than pits of rock waiting for the Insatiable Growth Machine ™ to jam its funnel into us and suck us dry.

Greed, it’s a bitch! And wow is it coming home to roost.

December 15, 2010 @ 11:13 am | Comment

The exploitation of labor in less developed countries has been the key to short term profits for many (mostly Western) companies. Labor is cheap because there are few, if any, safety and health standards that are actually enforced, no collective bargaining, no disability insurance, no product liability, etc., etc. If companies (and their get-rich-quick shareholders and Wall St. analysts) would get their heads out of their collective short-term posteriors, places like China, Bangladesh, Mexico and others could be exploited. By shutting their eyes to the problems on the ground and valuing their our profits over the safety and health of laborers from other countries, they are guilty of the worst kind of exploitation.

Having said that, I actually agree with Red Star, that they should just the “f” out. As consumers we do not need any of the stuff we import. As manufacturers, companies whose intellectual property is being ransacked deserve it for their sheer stupidity. They should never, ever agree to local content and information/technology sharing demands. Those are nothing more than “legalized” theft and extortion.

December 15, 2010 @ 2:08 pm | Comment

If I were the ruler of a country with a significant technology gap, masses of unemployed graduates and a potential huge market, I would be doing the same.

December 15, 2010 @ 2:38 pm | Comment

China isn’t just another country. Both in terms of market size (a factor endlessly referred to) and in terms of the primacy of politics, it’s a special case.
And it’s for the countries that do business with China to fix their policies.
It’s perfectly legitimate – and necessary – to highlight the issue as is done here. But if China’s authorities see no need for new decisions, they must be made abroad.
It takes two to tango, and it’s for both sides to make sure that their rights under the WTO regulations are respected.

December 15, 2010 @ 4:03 pm | Comment

Working in patenting I see the other end of this – Japanese, US, EU companies making large numbers of patent applications in China and enforcing them. On that basis I simply cannot understand the comments about China ‘not having a legal system’.

In fact, in at least the area of IP, it’s got a legal system about as good as can be expect of a third world nation – which people keep forgetting is what China is. China is just as bad at enforcing IP as it is at preventing prostitution, corruption, and the drug trade – no more, no less.

According to at least the clients I worked for (including Sharp, Panasonic and others) it is most definitely worth making the modest investment necessary to apply for patents in China, despite the difficulties with enforcement. Whilst there is a ridiculously low limit on damages that may be awarded in patent infringement cases, the injunction can still be obtained and enforced – and this is the most important thing. Moreover, the term of a patent is 20 years, ten-fifteen years from now it is likely that IP enforcement in China will have improved significantly.

Yes, it is ridiculous that the developed nations allowed China to join the WTO under conditions which allowed China to accede to developed nation status under the WTO WAAAAAAAAAAYYYYYYYYY before they were in any state to enforce TRIPS. Look at Russia – twice the per capita GDP of China and still not in the WTO, this is where China would be if the nations that had rushed to bring China into the WTO had wanted China to be ready to meet the terms of WTO membership.

The motive for allowing China into the WTO was short-term greed – and what do you know? To an extent, it has paid off – the horror stories you read above not withstanding. Just like the other commenters above have said: if foreign companies really had wanted to keep from making these exploitative deals, then they should not have made them. This is the bottom line.

December 15, 2010 @ 5:19 pm | Comment

I think China is winning… but from a historical/British perspective it’s right that they should – we drove much harder bargains when we were in the position of power 150+ years ago.
The fact that it’s the greed of Western companies that is feeding Chinese power is somewhat ironic/poetic… depending on where you were born!

December 15, 2010 @ 6:13 pm | Comment

Google has been the only western company to take HongXing’s advice and have the sense to get the f*** out. The only companies that can do business in China profitably are those with something China hasn’t got and which it desperately needs – and cannot steal. Yes, the resource companies such as RTZ. Even then, the Chinese government will do everything it can to neutralise them. Arrest their staff on bribery charges, and vilify the companies as ‘western jackals’ intent on holding China hostage through unreasonably high [ie market] prices.

December 15, 2010 @ 9:04 pm | Comment

Even as their piece of the pie is sliced thinner and thinner, the China market is so immense they simply can’t afford not to be there.

What happens when these Chinese competitors start exporting more and more? Then companies like Gamesa will lose their international market share, facing cheaper products that still do the job.

A better question is whether these companies CAN afford to continue doing this. They could easily be sowing the seeds of their own destruction (in terms of losing money, not having to close down) in the future.

December 15, 2010 @ 9:27 pm | Comment

@Raj – Presuming that what these companies were doing was inventive or innovative in the first place, they can enforce their IP against Chinese competitors who are actually copying their stuff, both inside and outside China.

It’s only if what they were doing was not actually inventive, or if they were stupid enough not to register their IP in China or elsewhere (perhaps taken in by this mantra that IP in China is ‘worthless’), that they should worry about Chinese companies doing exactly what they do but at a lower price.

It seems that what is being objected to here is competition and stiff contractual terms per se than any actual infringement. Here’s a tip: if the contract isn’t any good, don’t sign it.

December 15, 2010 @ 10:43 pm | Comment

I’m really sorry if this sounds naive and off topic but here’s an example from my personal experience. I don’t know much about China but I do know about work and wanting to succeed. As I was reading this article it seemed to me that ‘China’ is presented like a state of mind- a state of mind we must be conscious of if we are to engage in meaningful work in this world.

I’m a student of ceramics and our class often invites master craftsmen to come give demonstrations of their unique techniques. They also come with finished products for us to buy. This is a large part of how accomplished ceramicists make their living. After the demo the students often work for the rest of the semester on what the masters demonstrated. Indeed, our annual Christmas sale is full of knock-offs of the masters, selling at 1/4 of the price. The masters know that the students will imitate them but they don’t care because their own work continue to evolve. So even if a student is able to make a perfect replica of the masters’ work, the masters would have moved onto something else. Ceramicists who mechanically do the same things even if their technique is extraordinary, don’t sustain a following for very long. The student, if he wants to become a master in his own right, must develop his own style and continue to evolve from there. I think the first and foremost important thing is genuine passion in what one is doing. I know of a few ceramic artists who jumped too quickly into the business, got caught up in the numbers game lost their passion for the art and gave up the business.

I have a co-worker whose nieces met the violinist Issac Pearlman back stage and they asked him to sign their violins and he wrote “Practice Slowly”. I think that’s a beautiful (and hopefully not merely sentimental) reminder of how to keep sight of what it takes to go the distance without burning out.

Again I’m sorry this isn’t directly related to the post but I do have a fascination with China and I think this fascination has to do with the whole dynamic of meaningful work and success. Reading the article made me feel demoralized and I realized it was the lack of meaning in the work for a company caught up in China where it becomes a dwindling numbers game.

December 15, 2010 @ 10:52 pm | Comment

I have to agree with HongXing — and add that by the mid/late-1990s enough was known about China’s poor record of honoring contracts and otherwise defrauding partners that there can be no sympathy for firms crying foul now.

December 16, 2010 @ 2:07 am | Comment

I still have to make the point that this article isn’t about firms crying foul, it’s about them being silent. Let’s look at the article’s close:

“You cannot be called a winner if you are the leader for three or five years,” Mr. Li told the Chinese executives. “You can only stand on the top line if you are the leader for 100 or 200 years.”

The Chinese presidents sat quietly and respectfully, chins down. Senior executives from the foreign manufacturers — including Vestas, G.E. and Gamesa — sat alongside them, staring straight ahead in stony silence.

This is the media reporting on the treachery of doing business in China, especially if you come in with a technology China doesn’t yet possess. The point of articles like this is to point out an injustice. If it were about these executives all whining, I’d say they should pack up and leave. The real story is their submission, without complaint, even though they know China is riding roughshod over the WTO regulations.

December 16, 2010 @ 2:21 am | Comment

Doesn’t really matter if the tech transfer results in a fierce competitor five years down the road. The CEO needs to boost his stock price *this quarter* so that he can cash out his stock options.

December 16, 2010 @ 2:39 am | Comment

@Richard – The question then is: why should I care? Even if the insistence on transferring technology was in violation of the terms of the WTO agreement, the companies involved still had to sign on the dotted line when transferring their tech. It’s not like it was stolen – they could always have said no. Instead they decided to agree to harsh terms – this was their choice.

And yes, the US has in the past imposed tariffs which also breached the WTO terms. Japan has also been accused of breaching the WTO terms, as have France and Italy. I mean come off it, China is a third-world country – one which should not have been granted developed nation status under the WTO until much later. That it was allowed to accede to developed nation status so quickly was a farce, and if companies entered the Chinese market because they believed that the WTO terms would be met in ‘full’ (whatever that might mean) they have only their own cupidity to blame. Fortunately, I do not believe that anyone entering the Chinese market has actually been that stupid.

Let’s be clear on this – the WTO agreement is not a charter of rights, you are not granted any enforceable rights by the agreement itself, there is no court to which you, as a private citizen, can appeal on the basis of the WTO alone. Whilst countries can apply to the WTO court for a licence to similarly breach the terms of the WTO in response to another country’s failure to meet its obligations under the treaty, this is not something which private citizens, companies or corporations can do.

Now I, personally, look forward to a world-wide version of something like the EU treaty, which gives private citizens the right to pursue a government which has failed to properly implement EU treaties, directives, and regulations through their own national courts, an , if they do not get satisfaction there, in the EU courts. Such a treaty would grant the citizens of signatory countries the right to sue countries for non-implementation off their own bat. The WTO as it stands does no such thing.

December 16, 2010 @ 3:04 am | Comment

But that’s the point, FOARP. Companies do what they have to do. If that technology transfer – created in countries other than China, and to quite an extent paid for by the taxpayers (R&D subsidies, universities, etc) is too easily handed over, it matters to me, as a citizen of my country.
Therefore, I think it is good when these things are highlighted once in a while. Business may not care. Politics should.

December 16, 2010 @ 3:57 am | Comment

FOARP, the only reason I put up this post is because I think the article gives a fascinating perspective on what foreign companies have to go through when they do business with the next big economic superpower. As justrecently said, these things should be highlighted once in a while. My heart does not go out to these companies, as this was all their choice, both the choice to enter China to begin with and to submit to government pressure along the way. But I find the story of what they’re going through to be incredibly interesting, and it tells readers a lot about how business in done in China.

December 16, 2010 @ 4:13 am | Comment

@Justrecently, Richard – Perhaps it is growing up in the Britain of 80s, in the aftermath of the previous Labour government’s disastrous policy of trying to ‘national champions’ that has always made me quite dubious of state corporatism. Certain American politicians may believe that “what is good for GM is good for America”, but certainly do not think it is the job of politicians (or for that matter, royalty) to be salespeople, advisers or what have you to national firms. I cannot ever conceive of a situation in which I would agree with the idea that what is good for Rio Tinto, or British American Tobacco, is necessarily good for Britain.

As such, I’m happy to let British companies that make bad deals stew in their own juices without government intervention, so long as the bad deals they make do not threaten Britain with a financial meltdown (but when has that ever happened?). I do not expect the British government to jump in to prevent them. I assume that whatever IP they transfer in the course of such deals is IP that they own and can dispose of as they wish. Yes, some companies have gone to extremes to edge out their competitors by agreeing quite severe terms – but this is their own business.

Interesting? Well, perhaps. But not really surprising.

@Craig – Your point about continued innovation is quite right. If the Chinese firms which receive IP from foreign firms do not have the capability to do their own innovation, then not much is being conceded. And, if Chinese firms can innovate then they may not need foreign firms. It seems the great strength of foreign firms operating in China is therefore their know-how – no surprise there.

December 16, 2010 @ 7:19 am | Comment

It seems in this business/industry realm, the Chinese way is again diametrically opposite to the way in many other countries. In most countries, in most cases, if there is something wrong with the system, you raise a stink until something is done to fix it. The time when you stop shining a light on injustices is when you no longer give a damn. However, in China, one has to do the opposite: if you want to preserve your guanxi and preserve the privilege to use it to continue to hand your ass over on a platter, you have to keep your lips zipped in the face of gross injustice, or in China’s case, open flaunting of the WTO; you only raise a stink when you no longer give a shit, as in Google. Those realities are definitely opposite. That would suggest that one side has it ass-backwards. Whichever side one determines that to be would likely depend on one’s perspective.

December 16, 2010 @ 1:17 pm | Comment

It sounds like doing business in China is like working for a boss from hell- kind of like the movie The Devil Wears Prada where those in power don’t stick to the rules and the upstarts must bend over backwards to fit in. In China is there a silver lining for these companies? Do most (some, a few) eventually figure out how to thrive? Richard – how do you advise your clients?

December 18, 2010 @ 7:38 am | Comment

Craig, it’s tough. A lot of them ultimately thrive by sticking to it and profiting from the sheer volume of sales, like General Motors, which operated at a loss in China for years and spent billions on the guanxi thing. Eventually, over the decades, it proved worth it, but getting to profitability was hell.

December 18, 2010 @ 12:15 pm | Comment

So much for ethics.

December 29, 2010 @ 9:51 am | Comment

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