Part eleven in a series
“China is more capitalistic than any capitalist country.”
Amy, an employee at a jewelry booth
in Beijing’s pearl market, strings
together a strand of pearls after
striking a bargain with a shopper.
Roger Perkins of Cooper Industries told us that early on our trip. You’d have to see it to believe it, perhaps—but I’ve seen that firsthand several times on the trip, most dramatically at the silk and pearl markets. It happens on the scale of global companies, too.
“China is pragmatic,” says John Chen of Prometric, a company that specializes in testing and surveying. “When it wants to be capitalistic, it’s capitalistic. When it wants to be communist, it’ll be communist.
Chen likens China’s approach to situational management: different situations require different management approaches.
China needs the influx of cash that capitalism provides in order to continue to fuel its burgeoning economy. But at times, the country’s top-down dictatorial style allows things to get done that otherwise couldn’t happen in a democracy.
“India, for instance, is the most democratic country in the world,” Chen points out by way of example. “Everything gets debated to death and nothing ever gets done.”
In China, the government might say, “This row of apartment buildings needs to get demolished so we can put in this new highway,” and then it gets done, no argument. “For the good of the many, the individual makes sacrifices,” Chen says.
That seems pretty heavy-handed to most Americans, but to the Chinese, it’s been that way for five thousand years. “Chinese history has always been ruled by people, not by laws,” Chen says. “When the emperor is wise, everyone benefits. When you have a bad emperor, everyone suffers.”
Chen is one of several business executives who’ve spoken to us since we’ve arrived in Beijing. Most of what we hear expands on the things we heard in Shanghai, but the extra depth sheds a lot of new light.
“Everything in China is difficult, but everything is possible,” Chen tells us. “While regulation exists, there’s also flexibility because so much is left to interpretation.” That’s the upside to the central role individuals play in running the country.
The Chinese even have a word for it: Guanxi. It means “connections.” In America, relationships come about as the result of business deals, but in China, businesses deals come about as a result of relationships.
The system, as one might expect, is ripe for abuse, which creates headaches for companies used to Western business practices. So says Derrick Reilly, a partner with financial services company PriceWaterhouseCooper.
“If you don’t find fraud, then you’ve gotten it wrong,” Reilly says. “Businesses have to plan for it.” PWC recommends to its clients that they address it in their risk management plans. Chen echoes a similar sentiment.
Jaime FlorCruz, CNN’s China correspondent and one of the most senior journalists in the country, says corruption has always been part of the government culture.
“It’s a matter of life and death for the Communist Party to curb corruption,” FlorCruz says. According to a survey done in December and February by the American Chamber of Commerce in China (ACCC), corruption remains one of the most significant problems facing foreign companies doing business in China.
Businesses also face the challenge of protecting their intellectual property (I.P.). The same ACCC study cited it as another top business challenge.
The widely held belief is that China is a nation of copiers, and it only takes a trip through the Silk Market and its booths of knock-off products to reinforce that stereotype. But FlorCruz says, “China aspires to be more than a nation of copiers.”
Seventy-two percent of the business surveyed in the ACCC study said China’s enforcement of I.P. laws is ineffective. And enforcement is the key, says Matt McKee of the law firm Lehman, Lee, and Xu. He contends that China actually has good I.P. laws that are, in many cases, better than international standards.
For many years, though, China was so desperate for economic activity that it looked the other way on I.P. issues. “A black market was better than no market,” McKee says.
“If you’re the mayor of a city, and there’s a factory pumping out copies of a pirated movie, what’s more important,” McKee asks: “the thousand jobs that the factory has created or protecting the intellectual property rights of a big Hollywood studio that’s not putting any money into the local economy?”
But recently, Chinese companies have been stung by I.P. infringements. As more Chinese companies have trouble, McKee predicts the Chinese government will take a more active role in enforcing its intellectual property laws. “Now that it’s in the Chinese interest to enforce the laws, we’ll see stricter enforcement,” he says.
My overall impression is that the Chinese business climate makes things chaotic for Westerners. “It’s difficult but not impossible,” McKee says.
The key, according to McKee, is for companies to “gain China-knowledge,” to learn about Chinese culture and how business gets done in the country. It seems like common-sense advice, but Western companies frequently underestimate its value—much to their regret.
“In the U.S., there are generally understood practices to protect profit margins,” Chen adds. “In international markets, the ground rules are different…. Because the market is so competitive and so open, it forces innovation.”
Most of that innovation comes from the foreign companies because that’s one thing the Chinese educational system doesn’t emphasize. However, Reilly says he’s begun to see a shift lately as more Chinese get educated abroad and then return home to China for work.
For now, U.S. companies that operate with flexibility are generally benefitting quite well from China’s competitive environment. “U.S. companies are winning in China,” Chen says.
China, too, is benefitting from the innovation boom.
China isn’t bound by legacy infrastructure, such as
highways, bridges, and power grids, as it expands.
In America, for instance, we’re bound by “legacy infrastructure.” We have to build on what already exists, whether it be the highway system or a type of technology.
Developing countries like China can leapfrog legacy infrastructure because the infrastructure didn’t exist in the first place. They can learn from the trials and errors of developed countries and put the best, newest ideas into place right from the start.
“Companies bring the newest technology when they come into China,” says Chen.
State-of-the-art infrastructure improves China’s ability to move goods and services throughout the country. Foreign and domestic manufacturers have an easier time moving products to and from new manufacturing bases and consumer markets.
“A lot of China’s achievements stand side by side with a lot of challenges,” says FlorCruz. “Many of those challenges are unintended consequences of their economic reforms.”
The reforms—a bottom-up approach—were launched by Communist Party Chairman Deng Xioping beginning in 1979. “In China, we will let a small group of people get rich first,” he said. Those people would then fuel economic growth through investments, job creation, and contact with the West.
China still struggles, generally with great success, to continue to master the learning curve.
From multinational corporations to small shops like
this one in Beijing near the Lama Temple to
individual street vendors, capitalism is alive and
well in China.
But as capitalistic as China is, it’s important not to forget China is also still a developing country, and it has lots of room—and energy and desire—for continued improvement. By 2025, some economists predict China will have the biggest economy in the world.
It seems that a good infusion of capitalism was just what communist China needed.